Understanding productivity and how to boost it

The productivity cycle resembles the colour wheel, writes Michael Pascoe, with an almost infinite number of components blurred by shades of grey and bound by red tape.

Productivity is the new black in policy circles. It’s also the old black and the future black. And a fair bit of the new white, orange, green and whatever other colour you might think of.

From treasury officials and central bankers to business leaders and economic commentators, any talk about the future of the nation will include a lecture on the importance of productivity growth. Even politicians talk about it – whether they understand it or not.

What’s driving the focus on productivity is the inconvenient fact that we’re going to have to rely on it to maintain our current standard of living, let alone improve it.

The easy days of windfall resources profits are behind us. Now we have to lift our performance across the board.

Most of the commentary – especially from the conservative side of politics – tends to decry Australia’s productivity growth rate. Our productivity report card is constantly marked: “Could do better if tried harder”.

Yet I suspect we are actually in the early stages of quite a sharp lift in productivity growth, a lift most of talking heads are yet to recognise.

I am in the privileged position of travelling around a lot of the country, talking and listening to people working in many different fields.

Whatever else is happening in different regions and industries, there tends to be one constant: people are working smarter and harder, achieving more with less, or achieving much more with innovation.

Businesses are looking for an edge, a better way of doing whatever they are doing, getting more bang for their invested buck, because the blow torch of competition is on their collective belly.

I realise I’m not telling any small business person anything they don’t already know: the pressure is constantly on just to survive, let along prosper.

As I regularly tell audiences, necessity is a great mother of productivity.

A collection of colours arranged in a semi-circle placed on a floorplanProductivity improvement can take many forms. Buying a better widget machine that makes widgets faster and more reliably obviously boosts productivity, but so can something as intangible as improving worker moral, so that greater care is taken of the widgets, resulting in fewer breakages.

On a national scale, productivity is actually rather hard to measure. The Reserve Bank, for example, is wary of attributing too much credence to the productivity figures from one or two quarters as it takes time for the figures to settle down and provide a guide to how much more productively we’re working.

That said, there has been a nice lift in labour productivity this decade – not as good as the growth rate of the 1990s, but better than the lazy boomtime of the first decade of this century. It’s one of our under-sold success stories.

But labour productivity is only one part of the equation, the overall 'multifactor productivity' isn’t so flash. We’ve been lacking the necessary investment in new machinery and infrastructure to operate more efficiently.

This varies widely for different industries. At one extreme, mining is enjoying workforces are leaner. Higher unemployment in an industry tends to focus minds much more effectively than a shortage of labour during booms.

By pure coincidence, I recently attended two very different conferences that both had lessons about productivity growth.

One was for doctors using expensive specialist equipment. They were exhorted to try to see one more patient a day – given the capital tied up in the equipment, one more patient through the system becomes a productivity gain.

The other conference was for an aspect of the supply chain. Talk turned to the need to keep replace and maintain forklifts – yes, it costs money, but not as much as the downtime when a machine fails. And the newer forklifts are supposed to do their jobs better anyway.

The bottom line is the necessity of a holistic approach to the business’ productivity growth – effectively conducting an audit of the business. It may not be a matter of work ethic or equipment that can be improved, but the order in which work is done, or even realising that some work should not be done – that it’s not worth doing or could be outsourced, allowing key personal to get on with what can add the most value.

Arguably the great Australian retail success story of the past decade has been the revitalisation of Kmart – a chain that three different lots of management wanted to close down but were stopped by the lease penalties they would have incurred.

It’s the stuff of retail legend now that Kmart’s owner, Wesfarmers, took the radical step of appointing Guy Russo as CEO - someone with no shop experience and who had only ever worked at McDonalds.

Michael PascoeThere were many facets to how Russo turned Kmart around, but part of it was very quickly working out what was not worth stocking, what was taking up space for no return. By identifying core strengths and concentrating on them, the chain’s productivity was quite quickly lifted.

The same imperative for lifting national productivity applies to improving the productivity of an individual small business: lifting living standards in a competitive world.

And, as the former head of the Productivity Commission underlined in his farewell speech, national productivity is all about what happens in each individual workplace anyway.

Governments can help or hinder to the extent of red tape they might impose, or the infrastructure they do or don’t build, but in the end, it comes down to the relationship between individual employers and employees, the willingness of employers to invest in the most effective equipment and the skills of the workers.

Michael Pascoe is one of Australia’s most experienced and thoughtful business commentators with more than four decades in newspaper, broadcast and online journalism.

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