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Phil Wallace

Productivity: It isn’t just what economists say it is…

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Productivity and the UK’s problem with it compared to other economies is becoming a favourite subject for politicians, economists and commentators. But there’s little evidence of it becoming a hot topic in boardrooms or a key focus of management and workforce meetings in the workplace.

Although Productivity issues for UK manufacturing were highlighted by Make UK (previously EEF), in their 2018 report “Unpacking the puzzle: Getting UK Manufacturing Productivity back on track”, there remains a limited amount of information from UK manufacturers themselves about how productivity is discussed and assessed within firms, and the factors that contribute to productivity success and failure.

We are addressing this deficit in a project that explores the productivity realities in UK manufacturers: “Unlocking the productivity narrative in manufacturing organisations”  This is a collaborative project with colleagues at the Universities of Aston (Professor Ben Clegg), Bristol (Professor Palie Smart) and York (Professor Peter Ball), funded by the ESRC via the Productivity Insights Network We are examining what (if any) ‘productivity narratives’ are shaping ideas in UK manufacturers at workforce, management and boardroom levels today.

What do UK manufacturers really think about productivity? Do employees understand what productivity means and how they might affect it? Are people within manufacturing firms actually talking about in their boardrooms and shop floors? And, if they are, are they talking about the same thing as the economists and politicians? These are the questions we are seeking answers to.

We also want to give a voice to manufacturing companies – to let them tell us not just what they think about productivity but their experiences of it. What has helped or hindered? Where do the future challenges lie and what support is needed to address these?

All of our team are founding members of the EPSRC Manufacturing Futures group and have spent years working with UK manufacturers to improve their operations.  Much of the focus that we have seen over the last 20-plus years has been around efficiency – reducing waste by using approaches such as lean, six sigma, re-engineering – rather than productivity. Efficiency and productivity are often confused – but they are not the same.  This was highlighted by Mankins, in his 2017 Harvard Business Review article “Great companies obsess over productivity, not efficiency” , which suggests that in the current economic climate, it is not enough to focus on shrinking the input (and doing the same with less). He argues:

“At a time when so many companies are starved for growth, senior leaders must bring a productivity mindset to their business and remove organizational obstacles to workforce productivity. This view differs substantially from the relentless focus on efficiency that has characterized management thinking for most of the last three decades, but it is absolutely essential if companies are going to spur innovation and reignite profitable growth.”

This limited information about how productivity is viewed and discussed within the firm constrains our understanding about what is really happening in firms and, in turn, limits how we might improve productivity success.

We have the opportunity to explore these issues and address this lack of firm-level perspective by asking employees to tell us their views. We are finding out how different levels of the firm hierarchy perceive productivity and view their role in its improvement. The voices of those actually doing the work are key, something emphasised recently in Jonathan Boys’ blog about the CIPD Winter 2018 Labour Market Outlook report, where he highlights the variation in awareness and perception of productivity, and calls for us to “continue research into firms attitudes and awareness  of the issue”

So what are we doing in our project to make this happen?

We are speaking to employees from the shop floor to the boardroom in four key UK manufacturing sectors: food & drink, automotive, aerospace and pharmaceuticals, hearing what they really think about productivity – how is it viewed, does it matter and what factors influence its success and failure?  As part of this, we are giving manufacturers the opportunity to:

• Highlight their key concerns to policymakers.

• Suggest what is needed to identify future challenges.

• Discover what other companies are doing to improve productivity.

• Learn about what support is available to support productivity.

• Participate in forums for industry and Government to inform Government policy

We are also engaging with a number of stakeholders from industry and economic development organisations such as Make UK, Be The Business, CBI, IET and Scottish Enterprise, and hosting a series of round table workshops bringing together industry and policymakers.

By the end of the project, we want to provide a much-needed firm-level perspective about how productivity is viewed and measured, the factors that drive, constrain and enable it, and the future challenges that UK manufacturers face.

We will share our findings with industry and policymakers with the aim of influencing the productivity conversation by recommending how we can more accurately reflect productivity in UK manufacturing, leading to a broader consideration of productivity and alternative measurement metrics. We also want to highlight the challenges faced by companies and the improvements needed to the support provision

If you are interested in finding out more about the project, or in sharing your views with our team, please contact us.

Professor Jillian MacBryde and Dr Helen Mullen
The University of Strathclyde

Jillian.MacBryde@strath.ac.uk
Helen.Mullen.100@strath.ac.uk

Puzzle Cube

Getting People In Place To Sustain Productivity Improvements

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The productivity puzzle is often couched in complex statistics, endogenous and exogenous variables, and the variety of policy levers that might or might not impact on our national wealth. It is at least clear that there is no simple silver bullet. The Productivity Insights Network is gathering new insights on the different components of the puzzle.

At City-REDI, we successfully bid for small project funding to revisit a programme which had tested different ways to engage employers in the productivity debate and ways to improve management skills and workplace practices. The UK Futures Programme (UKFP) was run by the UK Commission for Employment and Skills (UKCES) from 2014 until its closure in 2016. The UKFP tested innovative ideas with industry to test ‘what works’ in addressing workforce development and productivity challenges. UKCES co-invested £4.4m over two years in 32 projects across five so-called ‘productivity challenges’, each focussed on a specific labour market problem hampering productivity and growth, including Progression pathways in the retail and hospitality sectors and Developing leadership and entrepreneurial skills in small firms through anchor institutions.

A short-term evaluation, published in 2016, identified a series of policy implications arising from the UKFP, but small project funding from the Productivity Insights Network offered an opportunity to explore whether the projects had sustained success over the longer-term and if so, how and why.

Our evaluation study comprised interviews with ten project leads, taken from the Retail & Hospitality and Local Anchor Institutions challenges and further interviews with beneficiary or partner employers in five of those projects. Interviews were conducted between October 2018 and January 2019.

Sustained activity, in some form, was found in nine of the ten projects examined. This was not at the same scale or intensity as during the funding period, but:

• some courses remained available;

• tool-kits developed during UKFP were available and marketed to a greater or lesser extent; and

• learning was being transferred to other programmes.

People and relationships were at the core of sustained activity. We found high levels of staff churn in the Retail & Hospitality sectors which impacted on continuity of learning. More sustained staffing within local anchor institutions enabled products or ideas to take root. The evaluation pointed to the importance of different types of people:

Project Champion – the strategic lead, usually the idea generator within a business or intermediary organisation;

Project Manager – the operational lead, usually funded by the UK Futures Programme and usually no longer in place when funding ended;

Managers at all levels in a business are critical in the sustainability of a product or idea by ensuring it is embedded in firm strategy, ethos and practice;

Project Pioneers – ‘testing’ was a fundamental requirement of all projects in the UK Futures Programme. In most projects ‘Project Pioneers’ were involved in the early testing or early adoption of a product or service and who sometimes were also used to help with wider dissemination of changes in practice.

Not all four needed to be in place for sustained activity, but it was clear that each group played an important role and weaknesses were apparent in the absence of any one of these groups of actors.

For example, in one case a Project Champion maintained an ambition and ability to apply for other funding even though there was not a Project Manager in place after the initial funding ended to enable continuous development in the meantime. In another case, while new improved recruitment practices were still in place, turnover of Managers and Pioneers led to questions as to how embedded the change was: Had it impacted on organisational culture? Did new Managers really understand the purpose of the practices introduced?

People also played a fundamental role in the initial engagement of employers. Trusted local anchor institutions adopted a relational approach to engagement of individual businesses. Small employers were persuaded to consider their leadership skills by larger firms. Project Champions could galvanise employers where there was a mutual benefit – for a sector, for a local area, or in a supply chain relationship. Pre-existing local relationships and reputations were critical in initial and sustained engagement.

But relationships also needed funding. Without the funding for a Project Manager to maintain networks, even pre-existing relationships are not necessarily strong enough to tackle the complex issues surrounding productivity improvements on a sustained basis.

Some of these issues may seem difficult to tackle from a policy perspective. Whilst many of the features of the UK Futures Programme seemed to be well received, the end of funding left many projects unable to make further progress. A potential solution to this is to be more realistic in the time it takes to address these problems. None of the projects examined had initial funding for more than 18 months. Longer-term funding for a Project Manager, dependent on achievement of goals detailed in a logic chain demonstrating potential for impact on enhanced workplace productivity, could have enabled some of these projects to develop further – for instance by sharing staff and enabling progression across firms, keeping skilled and talented staff within a sector, etc.

The longer-term evaluation of  the UKFP as a whole, leads us to suggest that a series of place-based rolling reflective learning projects, with ongoing evaluation and dissemination and involving organizations with aligned goals might be one way of helping address productivity deficiencies. These projects need to be supported strategically by a trusted Project Champion (in a respected intermediary/ employer organization) working alongside advocates in senior positions in beneficiary organizations who can provide employer leadership. While this does not preclude staff churn, it may provide some insurance and reduce the unknowns in the productivity equations.

Professor Anne Green, City-REDI, University of Birmingham
Carol Stanfield, Carol Stanfield Consulting
George Bramley, City-REDI, University of Birmingham

The meaning, measurement and importance of productivity to UK firms

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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

Stop button on board a bus

Real Journey Time, Real City Size, and the disappearing productivity puzzle.

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For a year we’ve been tracking most of the buses and trams in The West Midlands; the UK city region centred on Birmingham. We do it by polling the live departure screens that you see at bus stops, even at stops where they aren’t installed.

So far we’ve recorded 40 million bus departures, a total of 16GB of data. And we’ve written tools to explore it in seconds.
You can try for yourself at www.realjourneytime.co.uk. You can see how long every bus took to connect any two bus stops anywhere in The West Midlands, and calculate averages over tens of thousands of bus journeys at specific times, to see how bus journey times change over the course of a typical day.

But why?

Agglomeration: Big cities are more productive.
We’ve mostly done this work because of the following graph.

Many economists argue that larger cities are more productive than smaller cities, and become ever more productive as they grow due to something called agglomeration benefits.

There are many other factors that contribute to productivity, but this simple law seems to hold well in economies like The USA, Germany, France, and The Netherlands. For example, Lyon, the second largest city in France, is more productive than Marseille, the third largest city, which is in turn more productive than Lille.

Almost uniquely among large developed countries, this pattern does not hold in the UK. The UK’s large cities see no significant benefit to productivity from size, especially when we exclude the capital.

The result is that our biggest non-capital cities, Manchester and Birmingham, are significantly less productive than almost all similar-sized cities in Europe, and less productive than much smaller cities such as Edinburgh, Oxford, and Bristol.

Public transport and city size.
One notable difference between the UK’s large cities and those in similar countries is how little public transport infrastructure they have.

While France’s second, third, and fourth cities have 8 Metro lines between them (four in Lyon, two each in Marseille and Lille) the UK’s equivalents have none.

Manchester and Lyon have similar-sized tramway systems, with about 100 stations each, but Marseille (3 lines) and Lille (2 lines) have substantially more than Birmingham (1 line) and Leeds (0 lines).

Is it possible that poor public transport in the UK’s large cities makes their effective size smaller, and thus sacrifices the agglomeration benefits we would expect from their population?

Our Real Journey Time data lets us ask this question.

Real journey time, and journey time variability.
There is an important difference between bus public transport and fixed infrastructure public transport: reliability. I have used our Real Journey Time tool to calculate the worst-case (95th percentile) journey time on public transport on two routes into Birmingham. This is the time that a public transport user must leave for their journey to ensure that they are only late for work or a meeting once a month.

The first journey is a bus from the South of the city, Stirchley to Birmingham. This 3.5 mile journey takes about 20 minutes between 6am and 7am, and about 40 minutes between 8am and 9am.

The second journey is a tram from West Bromwich to Birmingham. This 8.5 mile journey takes 30 minutes regardless of when it is taken, as the tram route is almost completely segregated from traffic.

While the tram is substantially quicker at all times than the bus, the reliability of its timing, even during the most congested periods, provides an additional large benefit to users.

We think that people generate the most agglomeration benefits for a city when they travel at peak times, to get to and from work, meetings, and social events. Our tool shows us that at the times when people need to travel in order to generate these benefits, buses are extremely slow. And since buses are by far the largest mode of public transport in Birmingham this is likely to have significantly higher impact on Birmingham than in Lyon where the largest mode of public transport is the metro, which delivers reliable journey times no matter the time of day.

Our hypothesis is that Birmingham’s reliance on buses makes its effective population much smaller than its real population. This reduces its productivity by sacrificing agglomeration benefits. For the past six months, using our Real Journey Time tool, we’ve worked with The Productivity Insights Network to quantify that.

At peak times, Birmingham is a small city.
The technique is quite simple. We pick 30 minutes as the travel time by bus that marks the boundary of the Birmingham agglomeration. This doesn’t include walking at either end of a journey, or waiting time, so this figure may well mean a 50 minute total journey.

We then use our real journey time to examine how far from central Birmingham that allowed journey time would let a person live.

For example, by examining six months of journeys on the buses we calculate that at off-peak times a person 5 miles from Birmingham in West Bromwich is part of the Birmingham agglomeration. At peak times, this is no longer the case and the outer boundary of the Birmingham agglomeration is reduced in size to just 3.5 miles away in Smethwick.

Making use of our data on trams we can also imagine a Birmingham where major bus routes are replaced by trams and enjoy fast and reliable journey durations, even at peak times. This then includes people as far away as Bilston, 9 miles away.

By repeating this process for bus route into Birmingham from every direction we create a boundary of the effective size of Birmingham at different times of the day. By summing the population living within each boundary we calculate the real size of Birmingham under three conditions. By bus at peak time, by bus at off-peak time, and in an imaginary future where all buses travelled as quickly and reliably as trams (simulated tram).

At this point you might see why we picked 30 minutes as our travel time. Allowing 30 minutes of travel time using fixed infrastructure such as a tram gives Birmingham a population of about 1.7 million people. Which is very close to its population as defined by the OECD of about 1.9 million.

But at peak time Birmingham’s effective population is just 0.9m, less than half the population that the OECD use.

Birmingham’s effective size might explain most of its productivity gap.
This is where things get very interesting. If we consider that Birmingham has a population of 1.9 million, and we assume that agglomeration benefits should work in the UK to the same extent that they work in France, Birmingham has a 33% productivity shortfall. This underperformance of the UK’s large cities is part of the productivity puzzle that UK economists have been desperately trying to solve.

But once you understand that Birmingham’s real size is much smaller, below 1 million people, the productivity shortfall reduces to just 9% and is no longer significant.

Our hypothesis is that by relying on buses that get caught in congestion at peak times for public transport, Birmingham sacrifices significant size and thus agglomeration benefits to cities like Lyon, which rely on trams and metros. This is based on our calculations that a whole-city tramway system for Birmingham would deliver an effective size roughly equal to the OECD-defined population.

This difference seems to explain a significant proportion of the productivity gap between UK large cities and their European equivalents.

So what should we do?
The good news is that Birmingham’s current plans for transport investment are aimed at increasing its effective size at peak times.

• Using our Real Journey Time tool, TfWM are targeting investment in bus lanes and bus priority measures to improve journey speed and journey reliability on existing bus routes.

• Seven sprint bus routes are being planned, with bus priority measures hopefully delivering journey time reliability similar to a tram.

• Two tram extensions (to Wolverhampton Train station and Edgbaston) are under construction, with two more (to Dudley and Birmingham Airport) under study.

• Station re-openings at places like Moseley and Kings Heath will offer reliable journeys by rail to new areas of the city.

The prize for achieving this is large. If bus journey times became as reliable at peak time as they are off peak the effective population of Birmingham would increase from 0.9m to 1.3m. If we assume that agglomeration benefits in the UK are as significant as in France, this would lead to an increase in GDP/capita of 7%.

What’s next?
We have a reached a good point to share our work, but this is just the beginning.

• We are continuing to improve our codebase to ensure that it can handle up to 200 million stored bus and tram departure times.

• We are looking to incorporate trains into our tool, which will boost Birmingham’s effective size, though not by much.

• We are continuing to work with The Data Science Campus at The Office for National Statistics and Transport for The West Midlands on strengthening our methodology for calculating travel isochrones.

• We have already expanded our service to another UK city and continue to search for more, the sole requirement is an open bus departure API that reports a unique ID for each bus.

• We are working to bring our technique to a French city, probably Lyon or Lille, in order to check that the increased amount of fixed public transport infrastructure does make their effective size larger than Birmingham’s.

How was this work made possible.
The project was delivered by Open Transport North, working with The Open Data Institute Leeds.
This work was inspired by a Birmingham City Council hack event run by Deft 153 held in 2016 at Innovation Birmingham and made possible by the Transport for The West Midlands API, which almost uniquely allows the tracking of individual vehicles.

Development has been funded and supported by Transport for The West Midlands, working with The West Midlands Bus Alliance, including National Express. Funding for the development of a method for estimating the economic impact from increased bus journey times was provided by The Productivity Insights Network (an Economic and Social Research Council investment) with specific guidance provided by Professor Iain Docherty of The University of Glasgow.

Additional support and inspiration has been provided by The Office for National Statistics Open Data Campus, Transport API, The Open Data Institute, and Nesta.

Tom Forth
Head of Data at the Open Data Institute Leeds
This work was undertaken with Daniel Billingsley and Neil McClure
hello@odileeds.org

Read about our other funded projects

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Open Innovation, Experimental Entrepreneurship and Productivity

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Paul Romer, the co-recipient of the 2018 Nobel Memorial Prize in Economic Sciences, argues that economic growth and productivity concerns the nature, formation and commercialisation of ideas. Of course, this a dynamic process, and in recent years significant changes have occurred within economies, industries and places with regard to the generation, sourcing and exploitation of ideas, and the innovations these result in. Such changes are likely to be impacting on productivity and productivity growth at a number of levels. As a means of going someway to addressing these issues, I am currently engaged in a study within which I have interviewed more than 120 individuals – to date – in the field of innovation and entrepreneurship in the UK, Germany, the US, China, and Japan. This includes entrepreneurs, venture capitalists, the operators of incubators, accelerators, co-working spaces, universities, policymakers, as well as representatives of large corporates such as Honeywell, Cisco, Accenture, Bayer, and Snapchat.

There are a myriad of issues that have come to light from the work, but perhaps two of the most notable in the context of productivity are the widespread emergence of open innovation practices and what I term ‘experimental entrepreneurship’, both of which are interrelated. First, it is clear that open innovation practices have become prevalent across many industries, especially technology-based sectors. Firms, particularly large corporates, are increasing looking for the latest ideas outside of their corporate boundaries. Alongside traditional joint ventures and collaborations, firms are becoming more and more engaged in a range of new practices from corporate acceleration to open access innovation centres, innovation scouting, innovation competitions and the like. In essence, these mainstay innovation players are moving part of the burden, costs, and to some extent the risk, of innovation to start-up firms, new entrepreneurs, and purely aspirational entrepreneurs, rather than within the safety net of the corporation itself.

These changes are having a potentially profound and complex impact on the relationship between innovation and productivity. For example, the costs, investments, and inputs required to innovate are shifting. In particular, firms are having to invest more and more resources into the networks and relationships that are required to access ideas. Building and maintaining relationships is expensive. There are tangible costs in the form of events – innovation theatre – and the contracting of intermediaries – innovation scouts – as well as huge intangible investment in terms of the time required by firms to generate and sustain the social capital and network capital they need to develop their own innovation ecosystems.

Alongside these inputs, the research undertaken to date indicates that many of the external relationships developed by firms do not result in fruitful outcomes, in terms of innovations that lead to productivity improvements. A lack of compatibility and alignment between internal and external forces, as well as internal resistance, means that many funded ideas and innovations are never implemented. This begins to suggest that despite its undoubted capacity to combine and unleash new ideas, open innovation is not always a practice that leads to efficiency within the innovation process or results in productivity gains.

Partly as a result of open innovation and an unstable macroeconomic climate in recent years, we are witnessing the emergence of a phenomenon that can perhaps be best described as ‘experimental entrepreneurship’. Fundamentally, more and more individuals are experimenting with the idea of becoming entrepreneurs, especially technology entrepreneurs. This goes beyond the usual upturn we see in the numbers of self-employed workers during a crisis, to something that is becoming more embedded and sustained.

Within the technology sectors more individuals across all age groups are taking time to consider if they can develop an idea into a commercially viable innovation and business. The rapid growth, especially in big cities, of co-working spaces and incubators attests to this development. Generally, this can be seen as healthy economic sign, and all cities and regions, large or small, will require this innovation infrastructure if they are to become or remain productive places. It also indicates a role for public policy, and whilst acknowledging the positives of competition, there often appears to be considerable redundancy in terms of the overlap of ideas across experimental entrepreneurs. Many seem to be doing the same thing, all with their own funding streams. For example, within what can be called the ‘App Economy’ there is potentially excessive competition due to low entry costs.

It is noticeable that in areas such as biotechnology and life sciences we do not see anything like the same kind of experimental entrepreneurship. However, there is considerable activity in the area of social innovation among these entrepreneurial groups. Such activity has the potential to have significant positive impacts on productivity, but there appears to be little research that has sought to understand this.

Finally, the current study concludes that the time and external finance many of these experimental entrepreneurs spend is by far from wasted, especially in the long-term. However, the bottom line impact on contemporary productivity is less clear, but perhaps this does not matter to any great degree, and as the urban sociologist and planner Jane Jacobs noted in the 1960s when discussing the economic development of cities, ‘cities are indeed inefficient…the largest and most rapidly growing at any given time are apt to be the least efficient. Cities are economically valuable because they are inefficient’. This appears particularly relevant in the contemporary context and suggests interesting routes for examining the relationship between productivity and efficiency, especially institutional efficiency, with regard to innovation processes.

Robert Huggins
School of Geography and Planning
Cardiff University, UK.
January 2019

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Productivity Policy Review

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We tend to think about productivity as a long-term issue.  We often review its performance against the long-term trend and we consider underpinning factors that inherently take some time to influence.  How should this translate into policy formulation, and what have been the recent trends in policy?

To complement the evidence reviews on different thematic areas of interest to the Productivity Insights Network, we have conducted a review of policy changes in relation to productivity.  The review focused on policies and the policy narrative over the period from 1997 to present, and as well as looking at specific policy areas relating to business support, innovation, skills and regional/local economic development.

The review found that the policy focus on productivity has waxed and waned, with three periods identified:

• The policy narrative was explicit in the 2000s with the five drivers framework (investment, innovation, skills, enterprise and competition) used as a device for policy formulation and review, both nationally and regionally.

• There was a hiatus in productivity as an overarching policy objective from around 2010 until 2015. This reflected the focus on other issues, notably dealing with public finances.

• An explicit productivity framework re-emerged from 2015 culminating in the recent Industrial Strategy, which established the five foundations framework (ideas, people, infrastructure, business environment and places). This has strong alignment to the aforementioned five drivers.

These periods align with significant changes in the political and economic landscape, notably changes in government and the immediate aftermath of the financial crisis of 2008-09.  The review also found that there has been constant churn in the policy and institutional landscape, both between different administrations and throughout successive governments’ times in office.  In many cases it was the nomenclature that changed with rebranding or repackaging of existing programmes or policies.  Other changes marked a shift in targeting or focus to reflect the issue of the day.  There were three aspects where policy developments have been longstanding and have crossed government administrations:

• The gradual shift towards a new form of industrial policy-making and ultimately Industrial Strategy, which began in 2009 and has continued to the present.

• The increased emphasis on a demand-led skills agenda, highlighted initially in the Leitch Review of 2006.

• The changing nature of innovation policy, with more consideration of societal challenges and the use of demand-pull, as well as supply-push, policies, identified in the TSB’s (now Innovate UK) first strategy in 2008.

Churn in policy has been commented on by others (e.g. see Norris and Adam, 2017), including its relationship with short-term policy cycles, and ministerial changes whereby ministers want to make their own mark.  Resolving the productivity puzzle is a long-term challenge, and such policy churn may in and of itself be damaging to these endeavours.  Greater stability would result in more certainty and allow institutions to mature and develop.

The role of regional/local institutions has similarly changed over the period, especially in England.  Some issues are persistent challenges, though political, economic and technological contexts have evolved.  Regional institutions and devolved administrations were critical in the 2000s and were specifically tasked with improving drivers of productivity.  The current context places greater importance on the local scale through various structures and initiatives including Local Enterprise Partnerships, combined authorities, Local Industrial Strategies and City Deals.  Arrangements and tools have altered, though those adopted previously may provide lessons and insights to inform current developments.

National policy and strategic documentation is important in framing local responses, because it informs how local strategy is developed, structured and delivered.  This is important for productivity, because of the importance of breaking down silos and integrating different issues.  In terms of these institutional and policy-framing issues, we highlight three sets of points:

• Regional Economic Strategies (RESs) were 5-10 year strategies and their priorities had to align with Public Service Agreement targets and the five drivers of productivity. Whilst the strategic development matured over time, this requirement for alignment may have driven a focus on silos.  Prior to the abolition of the regional development agencies, there was the intent to develop Integrated Regional Strategies so that economic priorities were integrated with spatial planning.  In developing and delivering Local Industrial Strategies are there lessons from the RESs, in particular so that they are integrated and can genuinely focus on long-term issues?  And how can funding, and alignment with statutory obligations and planning help?

• How can the local-regional-national interface in delivering the Industrial Strategy work most effectively? There remain debates about the appropriate geographical level for intervention, and our policy review identified how different aspects of policy had been variously regionalised, localised and/or centralised.  Other spatial configurations exist, such as pan-regional working on issues like research and innovation, access to finance, and transport.  This raises issues around the joining-up of policies and programmes to make the most of synergies and avoid duplication.

• Regional Development Agencies were quasi-autonomous institutions, and so they were independent and could consider longer-term priorities that were outside of political cycles. However, it also left them open to criticism as they lacked democratic accountability.  How can LEPs, and local and combined authorities strike the right balance between these factors?

These sets of points highlight three important principles for strategic development, which need to be set nationally and locally.  These are having a long-term outlook, integrating key factors that influence productivity, and having appropriate institutional arrangements.  These three principles are clearly interconnected.  Our policy review suggests that this combination of principles has been lacking in the last 20 years.

Jonathan Cook, Dan Hardy and Imogen Sprackling
SQW
jcook@sqw.co.uk

Picture of the words Small and Medium Sized Enterprises on a notepad with some lightbulbs sat beside

SMEs and the Productivity Puzzle

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The new report published by the Business, Energy and Industrial Strategy Committee focuses on the potential of small business to make a bigger impact on UK productivity. Small businesses – SMEs – represent 99.3% of the UK economy and have, understandably, become the focus of the productivity debate. Unlocking the productivity puzzle demands better understanding of this highly heterogenous group of businesses, and in turn how low productivity might be addressed.

The wide-ranging variations in productivity of UK businesses have given rise to the now infamous long productivity tail, shown in Figure 1. The tail is complex, and while there are examples of more productive businesses of different sizes and in different sectors across the UK the evidence shows that smaller businesses tend to be less productive on average than their larger counterparts.

At the same time, research by the Centre for Cities contends that this is in fact the ‘wrong tail’, and that the cause or cure to the productivity puzzle is unlikely to reside in the long tail, and instead the emphasis should be on exporting, or tradeable businesses. While conclusions drawn from the research differ as to the cause and consequences of the long tail, focusing on small business has the potential to have a meaningful impact on the long tail, and represents an opportunity for more experimental approaches towards the productivity puzzle.

Figure 1: The UK’s productivity distribution (ONS, 2017)

From Policy to Practice

The UK is an attractive place to start a business and has a generally strong business environment. Government policy relating to aspects of business (e.g. export, finance, employment), as well as to different policy areas ranging from transport to energy, and planning to science have undoubtedly contributed to this. While the ongoing work of Productivity Insights Network aims to rethink the experimental approach of Government policy from silos to the system, the BEIS report also highlights the need to consider the support available to SMEs to help them become more productive.

Despite productivity being a political priority, there are not many small businesses that think in terms of productivity. Instead, the focus tends to be on profitability, if they have their sights set beyond their immediate survival. As the BEIS report notes, there is a need to raise the ambition of entrepreneurs to grow and scale their businesses. Another related aspect raised in the BEIS report, that was announced by the Chancellor, Philip Hammond, in the 2018 Budget committed to support leadership, business development and technology adoption for SMEs.

The BEIS report references the nature of and need for business support. However, the What Works Centre for Local Economic Growth found that of 23 evaluations on business advice that met the minimum standards 14 had a positive effect on at least one business outcome, 5 had no effect, and 4 had mixed findings. The evidence from this systematic review offers guidance on how to develop programmes and improve policy effectiveness, while also emphasising the need for clearer objectives against which to assess and evaluate success and value for money.

This is likely to become more pertinent in the preparation of Local Industrial Strategies, which aim to increase regional economic productivity. In order to redress the spatial variations in regional productivity, SME policy typically pursues locally-led approaches to improve growth and productivity. If Local Industrial Strategies are to be effective, they do need to be local in more than name – they will require the requisite autonomy and resources to design and deliver local solutions appropriate to the sectoral and firm profiles of those localities. Moreover, these solutions need to meet the challenges of the small businesses that they seek to support on their own terms if they are to improve both the businesses and ultimately the place where they are based. This means adopting strategies that are sensitive to the diverse needs of firms of different sizes and that incentivise growth across a spectrum of dimensions.

In many respects the BEIS report, and those aspects that relate most prominently to the productivity of small business as oppose to the performance, are not radical. This is for the most part reassuring. However, the next challenge in unlocking the productivity puzzle is developing and implementing effective local responses through the Local Industrial Strategies that are accepted and empowered by Central Government. Achieving this will demand the creation of new governance institutions that are accountable and able to deliver, but given the plateau in productivity more experimental and creative solutions are required if we are to meaningfully address the productivity puzzle…

Tim Vorley and Jen Nelles
productivity@sheffield.ac.uk

 

Productivity in SMEs: Management Practices or Effective Leadership?

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As the UK has started to grapple with the challenge of stagnant productivity growth over the past decade, increased attention has turned to questions of how to raise productivity in the small and medium enterprise (SME) sector. This is one important element of the work of the Productivity Insights Network. SMEs are highly diverse and, while they account for three-fifths of UK private sector employment and just over half of UK business turnover, the range includes both ‘frontier’ performers and low productivity laggards.

A recent McKinsey Global Institute report provides a very comprehensive national-level analysis, highlighting both issues of changing demand patterns and patterns of business investment and innovation, as well as ‘deep dives’ into a number of key global business sectors. But the McKinsey analysis focuses very much on the significance of the big corporates and has relatively little to say about the importance of innovation and productivity in the small business sector. This is odd given the numerical importance of SMEs and the contribution of SMEs to the economy.

Influential recent research has focused on the importance of effective management practice as a driver of productivity. A recent survey conducted by the UK Office for National Statistics, covering 25,000 UK enterprises of all sizes across manufacturing and services, computes a management practices score (normalised as an index between 0 and 1) from reported use of a range of practices in four key areas of use: continuous improvement (lean) techniques, key performance indicators, management targets and employee performance. The key finding is that an improvement in the score of 0.1 in a given business is associated with a 9.6% improvement in labour productivity. However larger firms, and foreign-owned firms are much more likely to report higher use of management practices that smaller, and family-owned ones.

I want to highlight two particular issues relating productivity improvement in SMEs, in the particular context of small (below 50 employees) rather than medium sized businesses. The first concerns the importance of successful SME leadership. The second concerns the ‘mediation chain’ through which business practice translates into better productivity.

On the first of these, my own experience is that SMEs vary enormously in their attitudes to innovation and growth, and in the leadership capacity of their owner-managers. This is something that UK policy officials and statisticians in BEIS and ONS are beginning to recognise and investigate, and is central to the recent UK Industrial Strategy. Evaluation of hands-on working with SME owner-managers suggests that productivity improvement may be as much to do with the personal skills, attributes and mind-set of the business leader. It is only through improvements in leadership skill that SMEs are able to introduce effectively those changes in management practice, as seen in the ONS analysis, that lead to better productivity. We can’t assume, in the absence of any improved ability on the part of the business owner, that ‘box ticking’ a range of good management practices alone will enhance productivity.

On the second issue, my own recent research undertaken with my colleague Dr Meng Song at Cardiff Business School suggests the following. For the smallest of SMEs, it is the need to innovate, often to take advantage of emerging international market opportunities, that leads to productivity improvement. Yet in the recent sample of UK micro-businesses analysed, only 11% of micro-businesses (under 10 employees) have brought to the market new product, service or process innovation in the last three years, and only 17% derived any sales from exporting. However, the data suggest that it is the self-imposed discipline of selling internationally that necessitates innovation and leads to improved productivity. So management and leadership advice and support that promotes innovation and encourages exporting is most likely to yield better productivity for these businesses.

Both of these issues offer pointers towards why there is such a diversity of performance across the SME sector. They also suggest that the design of appropriate support for productivity enhancement in small businesses is challenging. It needs to be targeted carefully towards business owner-managers who have both an appreciation of the market opportunities they face, and a realistic appreciation of how and why their own management and leadership practices need to adapt to address those opportunities.

Andrew Henley
henleya@cardiff.ac.uk

A Day at the ESRC Festival of Social Science

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As we set up our stall against the beautiful backdrop of Sheffield’s Winter Gardens, we weren’t sure how well passers-by would react to an offer to discuss the UK’s productivity puzzle on their Saturday morning. We needn’t have worried. As part of the ESRC’s Festival of Social Science we were challenging the general public to pick the top 3 issues they think we should be focussing on. After only a brief introduction to the productivity puzzle and our work with PIN, we were delighted with the depth of conversation that soon flowed.

First to gamely accept our challenge was Peter, a former steel worker. After posing some excellent questions of his own around how productivity can be measured when it comes to intangibles (if you’re reading, Peter, see here…) the conversation turned to the decline in the skills to make things (our work around education and skills is ably led by Dr Maria Abreu). Reflections on a decline in manufacturing skills became one of the key themes of the day. Perhaps not surprising, considering the region’s history.

Another common theme arose in variations of a question posed to us, along the lines of ‘why do you want to make people more productive? Doesn’t that just mean making people work harder?’. And is there a more important question? Indeed members of our invaluable International Advisory Board have always provided a strong steer that our work be underpinned by principles of wellbeing and a vision of inclusive productivity. However, it was a pertinent and welcome reminder to receive the same steer from the Sheffield public.

It was a pleasure to see parents engage their children in our challenge and do our work for us in breaking down the different themes that we are looking at. Many of the children who attempted our challenge were of the firm belief that “inventing things!” is our sure-fire route to success (and they might be onto something – see Professor Robert Huggins’ analysis of the innovation-productivity debate). At the other end of our participant demographic, many gravitated to the area of health and wellbeing (led by Dr Leaza McSorley). More than one opened with the rueful refrain “well, I’m getting on a bit, so…”.

By the end of the day, skills & education, work & employment (the theme led by Professor Kirsty Newsome at Sheffield), and health & wellbeing were ranked as the most important by the surprising number of individuals who took up our Saturday challenge. The real value of the exercise for us was in the rich stories that were shared in the process, bringing to life the themes of our work and strengthening our desire to find productivity insights that are accessible for all.

Phil Wallace
Impact and Knowledge Exchange Officer
Productivity Insights Network
p.wallace@sheffield.ac.uk

Returning to Work and Thriving at Work After Sickness Absence Due to Mental Health Problems

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By Professor Karina Nielsen, Principal Investigator on a Pioneer grant funded by the Productivity Insights Network

One overlooked aspect of solving the productivity puzzle is how we can support employees with mental health problems return to work to stay and thrive at work after a period of long-term sick leave.

Common mental disorders (CMDs), such as stress, anxiety and depression are costly to individual, their families, organisations and society as a whole. In 2016/2017 it is estimated that 12.5 million working days were lost due to CMDs. During this period, each individual on sick leave due to CMDs took an average of just under 24 days off.  A recent report found that the cost of mental health problems to the UK economy is £34.9 billion a year or £1,300 for every employee in the UK economy. Despite what might be expected, it is not the cost of actual sickness absence that is the highest but the loss of productivity; people being at work and unwell, also known as presenteeism, or people leaving their job as a result of poor mental health.

A lot of the current research has focused on supporting people with CMDs return to work but the figures above tell us that we also need to focus on supporting workers once they have returned. These workers often suffer from reduced work functioning and are less productive even if they are no longer so ill they need to be signed off work. Another challenge is that sometimes people return before they are ready because they are worried they might get laid off; this of course also means they struggle to be productive and thrive at work

Although there are no official figures in the UK, data from other countries show that relapse is frequent, as is turnover. Furthermore, over time workers who have been on sick leave due to CMDs also have a higher risk of being laid off due to reduced performance. We therefore need to understand what can be done to support workers with CMDs once they have returned to work after a period of sickness absence. Support includes not only helping them stay at work but also to achieve their previous performance levels and help them thrive at work.

Support for workers may come from resources outside work such as a healthy life style, support from family and friends, continued support from their GP, from local charities and community support and indirectly through the availability of affordable housing and childcare. Organisations can also do a lot to support workers with CMDs returning and thriving at work so that they can reach previous levels of productivity. Resources that organisations can offer include work adjustments, making sure that workers return to a safe environment where colleagues are not afraid to ask questions but at the same time accept that work adjustments may be needed. Line managers play a big role in making work adjustments, and adjusting these adjustments over time as the returned worker’s needs change. HR policies and practices such as flexitime and working from home policies can also help.

How we can support workers with CMDs to be productive and thrive at work is what we want to explore in the project Returning to Work and Thriving at Work after Sickness Absence. If you are interested in the project, please contact Karina Nielsen k.m.nielsen@sheffield.ac.uk

For more information, see:

http://www.hse.gov.uk/statistics/dayslost.htm

https://www.centreformentalhealth.org.uk/news/mental-health-problems-work-cost-uk-economy-ps349bn-last-year-says-centre-mental-health