The productivity gap: A way forward

What can the UK do to improve its output to compete with the rest of the
world? Personnel Today investigates, and finds that with a bit of hard work, we
could easily spark a revival, by Nic Paton

The militant downing his tools for yet another tea-break may be an image
consigned to the history books, but, nearly a quarter of a century after
Margaret Thatcher came to power, the ‘British disease’ of poor productivity and
low skills still stalks the land.

By the Government’s own reckoning, UK productivity lags behind that of the
US by 42 per cent, France by 14 per cent and Germany by 7 per cent.

Working practices have certainly changed immeasurably since the bad old days
of the late 1970s, but the fact remains that management failings, a skills gap,
red tape and a lack of long-term thinking and investment all drag British
competitiveness down. By some estimates, poor productivity deprives the
Treasury of about £111bn a year.

HR cannot solve the problem of low productivity by itself – business,
politicians, economic circumstances, even the country’s infrastructure, all
have to play their part – but it does have a central role to play.

The Chartered Institute of Personnel and Development (CIPD) argues that the
marginalisation of people management is a key hurdle that British business must
overcome if it is to improve productivity.

According to the CBI and TUC, better work organisation, more effective
management, a culture that encourages innovation and employee involvement, and
more focused training and development, all lead to high-performance workplaces.

And yet, until now, the role of HR has been largely ignored. Less than one
in five organisations implement the kind of high-performance work practices,
such as flat structures or autonomous team-working, that have enabled the US to
surge well ahead in the productivity stakes since the mid-1990s. Much of the
direction in the UK has come from politicians, academics and think-tanks more
interested in looking at macro-economic solutions, rather than the evidence sitting
within many successful businesses.

Effective HR practices are a formula for raising productivity – they help to
create confident managers who can inspire, innovate and promote
high-performance team-work, and motivated, skilled staff, who understand what
the organisation is trying to achieve, and their role within it.

Active HR creates productive workers, and it is time that the Government and
certain business leaders recognised this. Personnel Today has been listening to
all the talk on raising productivity, but it is now time for action.

Our White Paper is essential guidance for organisations and the Government
on raising productivity. We welcome your views, and once we have consulted with
readers, we will submit all suggestions to the Department of Trade and Industry
and relevant representative bodies.


The problem – poor management leading to unmotivated, uncoordinated work,
compounded by badly focused training and a long-hours work culture

A while back, John Purcell, professor of human resource management at Bath
University, was visiting a potential client who had middle management problems
within his organisation.

"He was talking about his high-flyers," says Purcell, "so I
asked him how he would describe the others. ‘Donkeys’, he said."

It is this sense of hierarchy in British business – the top talent lavished
with care, attention, training and development, wile the rest are left to get
on with it – which lies at the centre of the UK’s productivity issues.

Trade and industry secretary Patricia Hewitt may have raised a few hackles
last October when she described the average British manager as lagging
"well behind the rest", but she did have a point.

Last May, for instance, the Council for Excellence in Management &
Leadership (CEML) reported that current management and business leadership
development was ‘dysfunctional’. It found that the UK’s economic performance
was being held back by a shortage of appropriate and practical leadership

Critically, when Porter outlined the reasons behind the gap in his report to
Government last month, upgrading the skills of the country’s low and middle
managers was, rightly, at the top his list of priorities.

Purcell, for one, believes there has been a failure of frontline management
– those at supervisor and junior manager level who perhaps are not on the
career track, but are at the heart of any organisation’s productivity.

Managers are too often promoted to management because they are good at the
technical side of their jobs, but are then offered little training and guidance
in the softer skills of motivation, leadership and appraisal. They are often
vulnerable to bullying and office politics.

The point, however, is not how many managers there are or how much money the
UK invests in them, but what direction management is going in, and whether the
right sort of people are coming out the other end, argues John Philpott, chief
economist at the CIPD.

"MBAs, for instance, may be of practical benefit, but are they linked
to the organisations which the students are working for?" he asks.

A lot of management training is individualistic and aimed at the high end,
rather than geared towards team-work and shared perspectives, or how to improve
teams across the business.

There need to be fewer, but better, managers, stresses Steve Harvey,
director of people, profit and culture at Microsoft.

"A lot of British companies have grown up quite hierarchically. People
see management as a reward for years of service," he says.

At Microsoft, internal statistics show that its UK productivity gains are
significantly higher than in Germany, France and even the US, with the reason
being down to "drive, people and vision", he argues.

And research by the Economic and Social Research Council in December
concluded that organisations that involved, empowered and invested in the
development of their employees outperformed those that did not. However, the
majority of employers failed to pursue such positive policies.


– HR must understand what its
organisation needs in terms of management, education, training and development
at all levels, and then secure senior management buy-in for change.

"People management is not really recognised as a vitally
important skill for line managers," suggests Purcell.

"What we need is a much more focused, targeted HR strategy
for middle and junior managers."

– Ensure the message that modern, consensual management
techniques lead to productive staff, is understood throughout the business.
Managers need to be convinced they are no longer working in a command

Andrew Donovan, head of HR for the Westinghouse Electric
Company, the European fuels business of BNFL, says: "Managers can do
something and haul the workforce with them. But as soon as they move on to
something else, it relaxes back like a spring. So part of management is making
them walk with you. That is a big role for HR in developing managers."


The problem – a poorly directed educational system, a lack of investment
in workplace training, and a decline in vocational training, have led to low
skill levels, particularly on the ‘shopfloor’

Closely linked with the failure of management is the UK’s much-cited skills
gap. Indeed, the CEML in its study last May said that management skills were
"in short supply from the top to the bottom of organisations",
despite a rapid expansion of formal management education in the past 20 years.

At all levels, from the shopfloor to the boardroom, worries abound about a
lack of skills and the effect on productivity. Porter’s report in particular
flagged up the need for more investment in labour force skills.

France and Germany, he insisted, have a big legacy of skills in the
heartland of their workforce, particularly in manufacturing and engineering.
Whereas the UK has too big a pool of relatively low-skilled workers.

Part of the skills problem is historical, argues The Work Foundation’s
deputy director of policy research Andy Westwood. Many of the unskilled or
semi-skilled jobs of the past have simply gone.

Similarly, the decline of vocational training and the current unpopularity
of science and subjects such as engineering in favour of ‘soft’ courses such as
sociology, psychology or media studies, is blamed.

Despite its aim to expand vocational training, the Government’s intention to
introduce differential fees for universities and courses could simply deter
more students from studying such subjects, the Engineering Employers’
Federation has warned.

At graduate level, the UK by and large stands up there with its competitors
– and spending by employers of around £35bn a year is about on par. The big gap
is found at the bottom end of the jobs’ market, argues the CIPD’s Philpott.
"Some 20 per cent of the workforce is deficient in basic literacy and
numeracy," he estimates.

Too much training is focused at management level, and lower down,
organisations are often more prepared to change a production line or process to
match a person’s skills, rather than the other way round.

Employers are critical of the inappropriateness of the skills that
school-leavers and university graduates possess.

"We spend the first five or six months turning graduates into something
our clients will pay for. There is a gap between what universities
produce," complains LogicaCMG’S group HR director Ian Taylor, echoing what
could well be a comment in many boardrooms across the land. High-performance
teamwork is needed to tackle the productivity gap, and education needs to
support this way of working, he says.

Microsoft’s Harvey points out that at junior schools much of the learning is
team- oriented, but this disappears as children get older.

Two years ago, the Government set up the Learning Skills Council (LSC) to
take responsibility for the funding and training of over-16s in England. At the
same time, it scrapped the 70 or so National Training Organisations and
replaced them with a single Sector Skills Development Agency.

The primary achievement of the LSC so far, Westwood argues, has been to give
employers much greater leverage to get skills back on the agenda.

The establishment of staff training pilots giving small firms 150 per cent
replacement costs of individuals going on level 2 training, has also been a
valuable step forward.

"What they have done has vastly changed the infrastructure on the
supply side, and made sure employer voices are there," says Westwood. But
he adds that with this comes an onus on industry. If things don’t improve,
ministers could look to impose statutory training agreements within sectors.

Porter believes industry and government need to collaborate more with the
universities and technology schools to create a better flow of education,
knowledge and skills. Dynamic competitive economies, he said, have clusters of
these institutions mostly financed by the private sector.


– HR should conduct skills audits
within their organisations and act on the findings. Training needs to be tied
in with business aims.

"Everyone spends money on training managers to manage, but
who spends money on training employees on how to behave? You must have the
right people in the first place," explains Harvey. "A lot of people
get into their organisation and forget that they are still learning , because
they are so busy doing."

– Improve HR’s own skills, at both a strategic and
transactional level.

"Culturally, HR has to get away from the ivory tower. It
needs people who are prepared to get their hands dirty," says Alan Bailey,
head of communications and change management at Xchanging.

Innovation & short-termism

The problem – short-sightedness by
investors, the City and management, leads to a culture of short-termism, and an
unwillingness to innovate and invest in research and development

The stock market is notoriously impatient and rarely admits to being wrong.
For example, would many City analysts (and there were many at the time) now
admit to being part of the crowd urging Siemens in the late 1990s to follow the
Marconi route and dump heritage for sexy, high-tech investments?

A lack of spending on infrastructure, research and development can seriously
hold companies back, concedes the CBI.

Long-term investment in innovation – again a key Porter demand –
infrastructure and plant all require a stable economic background. But the
unrest of the 1970s, the painful reconstructions of the 1980s and critically,
the boom and bust of the early 1990s, still cast a long shadow over British

"For the last generation, we had one of the more unstable economies in
the world, and that led to a tendency to a short-termist approach. In the past
10 years that has come round, but at the same time, manufacturing has been
under increasing pressure," says the CIPD’s Philpott. "Manufacturing
is the wellspring of innovation, but we have a long tail of

Quite rightly, the US has a world-class reputation for investment in new
working practices, technology and machinery. While the UK is home to some of
the great innovators, it has a reputation (with a few exceptions) of being
unable to turn thinking into successful commercial reality.

Quality and innovation exist, but the rate at which they happen is much
slower than in Canada, Sweden and Taiwan.

Some of this goes back to the education system, and the need to bring on the
right numbers of scientists and engineers.

Organisations are also often hamstrung by the belief that even if they did
invest in equipment, the workforce would not have the skills to make the best
use of it.

Professor Shaun Tyson, professor of HR management at Cranfield School of
Management, suggests we need a culture shift in training. "In Germany,
they value education and training enormously. Unless you are well educated and
trained, you do not have any status," he adds. Which brings us back to
Porter’s point about the importance of institutions, such as universities,
acting as centres for research and development.

Technology is consistently two to three years ahead of the way that people
use it, says Microsoft’s Harvey. "We are constantly sharing tips and
tricks. The impact can be phenomenal. We spend time just calling out things to
those around us," he says. The company spends £5bn a year on research and
development, and ensures that all staff have shared calendars, contact
databases to spread information.


– Position HR at the centre of
improving communication and employee involvement, and research the implications
of different types of work practices

"Business strategies have been coming down in terms of
time horizons – now they’re around two to three years. But a lot of the things
HR is doing – reward schemes, graduate recruitment and so on – are being done
on much longer timeframes. Businesses need the confidence to work in the
long-term," says Tyson.

– HR needs to champion new thinking throughout the
organisation, ensuring functional boundaries become blurred and acting as a
catalyst of change

"HR needs to demonstrate that it is beyond the HR function
itself," says the CIPD’s Philpott.

Red tape

The problem – employers are having
to spend too much time and money sorting out the red tape surrounding new
regulations at the expense of getting their businesses into better shape

Few would dispute that red tape is a burden on businesses. Over the past
five years there has been a wave of new legislation on businesses, with no end
in sight. This year alone, there’s the removal of the working time opt-out, the
advance of the Agency Workers Directive, the introduction of the Employment Act
and new discrimination laws.

The Institute of Directors last year estimated the recurrent annual cost of
the employment regulations introduced in the past five years could be as much
as £6bn, with the costs rising as regulations actually come into force.

The British Chambers of Commerce, meanwhile, calculates the cost to British
business of increased regulation has risen from £5bn since January 2000, to
£15bn in May 2001.

What’s at issue, however, is how much of a drag on productivity this extra
burden is. Philpott of the CIPD, for instance, points to the fact that, as much
of the new regulatory framework has emanated from Europe, France and Germany do
not have much less regulation than the UK.

Higher tax and national insurance do play their part, but are not a major
factor, he argues, with a lack of investment in capital and R&D more the

He adds that employment laws per se may be less of a barrier to productivity
than restraints on planning or environmental regulations, for example.

"We have had 20 years of a relatively light approach to regulation. Now
we have a huge tide coming in on us and it is difficult to absorb it in one
go," he says.

Michael Porter does not view the UK as an over-regulated economy. He
believes more regulation promotes innovation and has called for increased
price-competitiveness to open up rivalry and force the development of
high-value products and services. The UK must ask itself why new business
start-ups are less likely to survive here than in the US and Europe.

For employers, the DTI too often stands for ‘desperately tying up industry’,
with captains of industry bemoaning the department’s enthusiasm for red tape,
both European and home grown.

"Employment law and some of the ways things are now moving are not
necessarily to the benefit of organisations. Some of the employment tribunal
rulings are rather strange," says BNFL’s Donovan.

The Government’s focus on public sector investment has led to a 0.5 per cent
fall in productivity, argues Patrick Minford, professor of economics at Cardiff
Business School, with growth in public sector spending proving unproductive so

"HR people tend to be in larger firms, which do not have such a problem
with these things, but a lot of the burden and costs are falling on smaller
firms. All that happens is they just do not take risks for fear of ending up in
court," he says.

Higher capital allowances would help profitability and productivity, argues
the EEF’s Peedle.

The TUC and CBI have, in turn, called for a more stable tax regime and an
increase in long-term investment – for example, on the country’s transport


– More focus by the DTI on supporting

"The frustrating thing is that the DTI talks about how
industry should become more productive, and then it imposes more and more
regulation on a wider range of areas," says LogicaCMG’s Taylor.

– Better implementation of policies, both by the Government and

"One of the most important things that came out [of
research with the CIPD] was not the existence so much of a given set of
policies and practices, but the way line managers brought them to life,"
says the University of Bath’s Purcell.

Personnel today’s productivity white paper

The following are 10 action points for organisations and

1          Recognise that effective HR – which
encompasses recruitment, training reward, job design, job quality and
communication – is vital to tackling the productivity gap

2          Ensure that HR
strategies aimed at improving productivity are in tune with the organisational
goals, and that their effectiveness is measured

3          High-performance
team-working is the key to raising productivity, and needs to be supported by
training and reward structures

4          More research
is needed on the links between good people management and productivity

5          Managers need to have access to better
training and development which is focused on the needs of their role and their
organisation – particularly in the middle and junior ranks

6          All companies should carry out skills
audits and act on them, with particular attention to lower ranking staff.
Again, training must be tied to business aims and goals

7          Employers need
to further develop their psychological contract with staff, ensuring that both
managers and workers are motivated

8          HR must be the
catalyst for improving communication, employee involvement and planning

9          The DTI must
work harder to minimise the pain of red tape and improve how it implements regulations

10        HR must champion
and remind organisations of the need for long-term thinking and investment, and
the critical role of innovation in improving productivity


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