HR directors must get a grip on productivity

The Government is strong on the need to improve the UK’s productivity, and
with this being a key indicator of the recovery and future health of the
economy, productivity is fast becoming this year’s buzzword. But a lack of
reliable and up-to-date information has confused businesses and economists as
to where the UK stands in comparison with the rest of Europe.

A recently-launched Deloitte European Productivity Index attempts to fill
this vacuum. By gathering data from the Purchasing Managers Index, a clearer
picture emerges of how productivity has changed. This is done by comparisons
with the previous month’s data, broken down by industry sector and major
Eurozone country (UK, France, Italy, Germany). It is the first time data of
this kind has been available, but what does it say about the European business
environment and the challenges for HR directors?

The latest index shows European productivity is improving at its fastest
rate in at least six years, and that Germany has had the strongest levels in
the Eurozone for the past two months. Difficult economic conditions in recent
years caused high unemployment in Germany as firms cut costs. But strict laws
mean its labour market is more rigid than in most European countries. Despite
economic recovery and demand for goods and services, employers are reluctant to
recruit without more economic certainty, which accounts for the burst in

In the UK, the situation is somewhat different. Productivity is rising here
too, and for the past five years its growth has been above the average Eurozone
rate. But, as the economy improves, the UK is seeing a higher demand for staff
by employers voicing concerns of skills shortages in some high-demand areas.

This raises particular challenges for HR directors, because of the pull
between firms maintaining healthy productivity while raising their headcounts
in a tightening labour market. But to keep productivity healthy while headcount
is rising, they must focus on the total cost of employment and rising staff
retention rates, otherwise the cost of replacement will erode productivity

Employment costs can be considerable, sometimes making up to 70 per cent of
the overall spend. But there are often ways to cut them, such as by ensuring
reward and benefits schemes are tax efficient. HR admin costs, such as payroll,
can also be controlled with shared services or outsourcing arrangements.

As the economy improves, higher staff turnover rates are inevitable.
Retention strategies must be reviewed to ensure the most valued talent doesn’t
choose to leave. Training budgets were an easy option to cut when market
conditions were hard, but the focus must now be on developing staff by giving
them access to the career progression they demand.

Understanding the mechanics of productivity will help firms beat the
competition. As the UK economy recovers and firms experience more demand, HR
can help businesses maximise their profitability by maintaining productivity at
a healthy rate.

By John Connolly, Chief executive and senior partner Deloitte

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