Economists across the world are both puzzled and concerned about an apparent dip in long term productivity growth. Their worries are giving rise to frequent business news editorials about the issue. It matters because the long term advancing wealth and prosperity of nations can only be based on improved productivity. If we can make and provide more output value, using the same amount of inputs, by superior methods and ingenuity, we gain.
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The issue of declining productivity growth has become so perplexing that some economists are re-examining the measurement system itself. They wonder if significant amounts of economic value are simply not being captured. Perhaps the “stuff” we create today in Facebook pages or customer experiences is so ephemeral that it eludes conventional measurement and valuation. However I’m not sure they have to tear up the counting rule book to find the causes.
Here are some ideas as to why we might be seeing a lack of productivity growth in business, based on observations of business behavior, particularly in the context of technology investment. Technology is a form of capital we most often associate with productivity growth, so it’s worth reviewing.
1. CEOs have not focused hard on productivity in recent times.
Our most recent CEO survey placed productivity and efficiency in 11th place, in a category list of CEOs top priorities. I know that might sound surprising to some, but what they are really looking for is growth. If they think there are easier short term ways to get top line or bottom line growth without investing in productivity, they may take those simpler paths. Financial engineering with low interest rates and global tax optimization, taking the same operating model to emerging markets, or taking chunks out of other players margins via disintermediation are all examples of ways to make financial results progress, without really investing in underlying productivity. Also, in the years since the banking crisis and great recession, many businesses could grow by just soaking up cheap labor. High unemployment rates made human workers low cost and flexible. Globalization made remote, low cost labour increasingly accessible. None of that is an incentive to invest in complex, expensive new machines.
2. The new technology pathways to productivity are confused.
In the late 20th century we all became very adept at using the lens of business process management to convert ever more powerful computing into higher business efficiency. Techniques such as BPM and Lean Six Sigma became well codified, teachable and repeatable methods. But the new crop of Internet and digital technologies often eludes that simple conversion method. How do we convert “social” or “mobile” or “cloud” into productivity? On a craft basis, a relatively few gifted leaders and business architects may be able to do so intuitively. But we lack abstracted general theories and codified methods to fuel repeatable productivity engineering practice on a mass basis. Digital era technologies are capable of creating momentous improvements in productivity but we don’t yet have a BPM equivalent for social, or a lean equivalent for Data Science. Simply put – management science methodology is lagging behind technology advance.
3. We lack measures for intangible value creation and intermediate work product.
Imagine a marketing creative team slaving over a fizzy drink re-branding exercise and then executing it via social media. Customers are delighted. They believe in the product more and their consumption experience is enhanced. What kind of additional value was created and how was it measured? Was it just more SG&A overhead? Or did we deliver more customer value output? So much of our modern advanced economy operates in these more abstract value areas. And what about all the email that flowed between the people involved in the re-branding? It would be nice if we could simply say more email processed means more value outcome, but everyone knows its not that simple. It’s sad but true that today’s CEOs can’t be sure if email, our oldest and most mature collaboration technology, is a net contributor or a net inhibitor of productivity in their organisations.
Until IT professionals come up with structured repeatable methods for taking the new digital era technologies and converting investment in them into productivity – CEOs will tend to drag their heels. They will often prefer to leave cash on balance sheets or even give it back to shareholders rather than invest it internally in what seem to be high cost, high risk, vague outcome, craft projects. However the new management technologies, experiments, proofs and methods we need, can only be evolved creatively inside real world companies like yours by people like you. There is no secret Silicon Valley lab that will solve it all for us.
As GE CEO Jeff Immelt said to 6000 CIOs at our Symposium last year:
“… I urge everybody … to look at yourself in the mirror and ask … “What role have we played to make productivity really take off and continue the way it should?” Clearly, the tools in the 1990s worked … but we need to find the next big driver.”
I believe we are on the cusp of a new period of productivity focus. Recent political shifts, lower unemployment and a switch of direction for interest rates will compel business leaders to take a fresh look at the problem.
However, much of the new technology enabled productivity will come to us in a different form this time. Instead of using information technology to improve the way we make traditional products and services, we will use digital technology to fundamentally remaster our products, services and business models. We won’t just be trying to figure out how to make the old things more efficiently; we will design new kinds of things altogether. Autonomous vehicles, e-cigarettes and voice interaction intelligent assistants are examples. Taking digital to the core of of our companies and what they make, could be a source of radical productivity improvement.
Digital to the core is the name of our book that explores some of these and other themes. It is available now in all formats: print, e-book and audio-book.