The meaning, measurement and importance of productivity to UK firms

Summary of research from the CIPD Winter 2018 Labour Market Outlook

In 2014 the CIPD surveyed human resources leaders on the meaning, measurement and importance of productivity. This culminated in the report Productivity: Getting the best out of people. Since this time UK productivity has barely moved. We therefore revisited the questions to explore how far employers have internalised the national productivity challenge.

Business awareness of productivity

Respondents were asked if productivity is a term often used when discussing performance, and half do so. However, while productivity is a term familiar to employers in most manufacturing and production firms (71%), the term is used by just 18% of Education employers. In part this is because productivity is a term more commonly used in business: it is often used by 57% of private sector employers, compared with 36% of public sector employers and just 16% of voluntary sector employers.

Productivity measurement

Businesses employ numerous measurements and KPIs from financial ratios to measures of customer satisfaction. Measuring productivity is easier for some than others and we find large differences by industry. It is much easier to measure the value of a car that is openly traded in the market than a teacher’s lesson. This probably explains why only 51% of education sector organisations measure productivity compared with 72% in manufacturing and production.

Businesses that use the term productivity often when discussing performance are much more likely to also have measurements for productivity.

Is productivity a priority?

Improving productivity is a middle-ranking priority for employers. However, objectives that are more common, such as managing costs or improving quality of service, are likely to improve an organisation’s productivity.

The proportion of employers that said improving productivity was a priority varied by sector, with 41% of private sector employers prioritising it compared with 28% in the public sector and just 10% in the voluntary sector – which is not surprising, as voluntary sector employers are less likely to use the term in the first place.

Perhaps businesses are not prioritising productivity because they do not perceive it to be a weakness. When asked what their productivity performance was relative to their peers, 88% believed their organisation to be average or above. Taking out the ‘don’t knows’ (5%) leaves just 7% of employers who believe their organisation to be below average. Few employers believing they are below average could be a recipe for inertia.

The importance of people management

In 2018 the Office for National Statistics published the results of a survey of 25,000 businesses in Great Britain looking at structured management practices and productivity. The study reinforced earlier findings on the link between management practice and productivity and noted:

‘Among the four broad management practices categories, we find that practices relating to continuous improvement and employment management – such as those relating to promotions, performance reviews, training and managing underperformance – were most correlated with productivity.’

The ONS research suggests that increasing the quality of structured management practices, particularly those relating to the management and development of people, could boost firm-level productivity and help tackle the long tail of underperforming businesses in the UK.

High-performance working practices and productivity

 Given the ONS research we also looked at the prevalence of key formal people management and development practices, also known as high-performance working (HPW) practices, and their links to firms’ attitudes to and awareness of productivity.

Naturally some practices, such as having an equal opportunities policy (70%), are more prevalent than others, such as Investors in People accreditation (17%). But, for every single HPW practice considered, organisations that said they have HPW practices in place were more likely to say they are measuring their productivity.

Conclusion

Many employers live and breathe the language of productivity, but many do not. There is a strong call to action here. The challenge is to convince employers and employees that productivity isn’t a distant academic concept, but something within their reach. To do this we must continue research into firms attitudes and awareness of the issue. What are the barriers real or perceived to the firms in which productivity is not a priority, and that neither measure nor use the term? We must then trial real interventions in businesses. The finding that management practices and, in particular, people management practices, may hold the key gives businesses of all sizes and industries a place from which to start. One example of such an intervention is The CIPD’s People Skills Two project. Building on a successful pilot in 2017, the project is putting HR consultants into small businesses to improve the capability to develop good people management practices. With robust evaluation, projects like this develop our knowledge of how to tackle the productivity challenge.

Jonathan Boys
Labour Market Economist at the CIPD
j.boys@cipd.co.uk