Fewer business terms are – arguably – more misunderstood than “productivity.” Such misunderstanding and the accompanying misinformation may explain why many firms’ attempts to be more productive fall flat. This article is a noble attempt to define productivity and to lay down certain principles that will enable most firms to become – inarguably – more productive.
“With an aging population and declining labour force growth, productivity is becoming increasingly important as a source of economic growth. Despite this importance, governments fear the productivity word because of public misunderstanding of its meaning…. productivity growth in this country since 2000 has actually deteriorated. This suggests that the private sector bears more responsibility for Canada’s productivity malaise than previously thought.” (Don Drummond, Fellow in Global Public Policy, Queens University, “Confessions of a Serial Productivity Researcher,” International Productivity Monitor)
In a major report, Canada’s Institute of Competitiveness and Prosperity says that innovation and productivity are needed for prosperity. In this article, which follows the conversations about innovation I captured in “Enabling Innovation and Its Implementation” (Nov. 11, IBJ), I talked with six leaders…business executives who have overseen major productivity gains, government leaders, economists and academics. My goal in these discussions was to determine the key enablers of productivity.
Don Drummond, the former Chief Economist at TD Bank and a former Associate Deputy Minister at Finance Canada, argues strongly that research based on a micro approach is needed in order to “obtain a deeper understanding of Canada’s terrible productivity record and to develop actions to boost productivity.” As evidence, he says Canada now stands 17th among 24 OECD countries — about 70 percent of the U.S. level — on productivity. This, according to the Conference Board’s 2012 Report on Productivity, represents $300 billion in lost output each year in Canada.
Carol Stephenson, Dean of Ivey Business School, asserts that “enabling productivity…is the job of the private sector….Companies own responsibility to invest in what will improve their productivity and competitiveness.” She notes the progress of major sectors like automotive and mining in investing in automation, modernization and IT. However, “a huge percentage of our economy is the service sector ,which influences our productivity numbers. We need a more targeted approach to measuring productivity.”
Jim Keohane, CEO of Healthcare of Ontario Pension Plan, says “a stronger Canadian dollar is forcing companies to restructure…and to buy equipment. We are going through a restructuring period where Canada’s productivity will improve as it did in the auto industry.”
What do we mean when we talk about productivity?
Drummond says that many Canadians see productivity as working harder for less pay. Rather, he says, productivity is” output per hour of work” or “combined output from capital and labour.”
Our interviewees believe we must see productivity as being about smart performance and economic growth that enables our wellbeing. Kelly Butt, a corporate director, and former CIO and hospital board chair, says “productivity is about getting smarter, faster, cheaper and better at producing high quality products and services.”
Keohane says improving productivity is about “giving people the tools to do their jobs more efficiently and investing in technology to make them more effective. For high-tech searches, (our Investment Division) has databases and systems…one person versus six, with a lot more technology. Now those six people are in IT; in the Investment Division…highly-paid people can focus more on decision-making.”
A fuller understanding of productivity is critical to success in making decisions and taking action. It is also key to harnessing people’s support for, and contributions to, productivity initiatives that contribute to our competitiveness. The discussion that follows is an attempt to provide this fuller understanding.
A general disinterest in, aversion to and misunderstanding about productivity impede needed action on what Drummond calls a “brewing crisis.”
Also discouraging is the fact that, despite government action on productivity policy over the last 2 decades, productivity growth weakened. Drummond cites positive policy actions at all three levels of government, including NAFTA, efforts to fight inflation and growth of public debt, GST, reduction in inter-provincial trade barriers, and changes in tax policy resulting in significantly lower corporate taxes. By the mid-2000’s, however, economists’ focus was still on public macro-policy, with little attention to private sector behaviour.
Culture either inhibits or facilitates change. Drummond points to large sectors in industry that are protected from competition, a cultural bias. We tend to be less entrepreneurial by nature. Canada has a heavier concentration of small businesses than the U.S., which on average are less productive; they invest less in R&D and tend to hand out bonuses rather than invest earnings in growth initiatives. Canadian governments and companies also under-invest in information and communications technology (ICT), almost half as much as companies in the U.S.
Taxation policies can serve as a disincentive, says Keohane. “Small businesses make leasehold improvements; then cities raise their property taxes. Individual tax rates are so high that people don’t have savings to invest. Governments intermediate in the venture capital process, moving capital away from where it could be more productive. Canadians tend to fear risk…fail and you’re out…and innovate less. (Lastly) capital is more concentrated in banking, a protected industry which doesn’t lend to venture organizations.”
Stephenson laments the lack of differentiation in education, citing “so much duplication, e.g., training of teachers we don’t need, arts courses replicating all over the place, creating unneeded programs for political reasons, and colleges trying to become universities, despite a huge need for their highly skilled graduates. The hard part is leading the change and having the will to implement. In universities, not a lot of people are trained in change management.”
Other obstacles relate mostly to people: a) insufficient investment in people (almost 50 percent less on training than in the U.S.); b) unions’ insistence on remaining rooted in policies from decades past; c) ineffective management systems and business processes, leaving employees’ work disconnected from strategy; d) global competition; and e) lack of leadership, engaging employees and creating healthy workplaces.
As with last fall’s IBJ conversations on innovation, interviewees and studies pointed to individual success stories on productivity within this rather dark picture.
A just-published study by Steven D. Levitt, the author of Freakonomics, supports the view that we need to look at private sector behaviours. Levitt believes the secret to productivity is in the details of people, performance and processes, not in policies. His overall message is that productivity is a question of detail, which should be left to the people doing the work in the businesses, not to government.
Now, we shift to positives – opportunities and enablers of productivity.
Interviewees talked about key opportunities for addressing the productivity challenge and resetting our approach to productivity growth:
1) Implementing the remaining 30 percent of the macro-productivity agenda mostly involving government policy, e.g., barriers to competition and growth, technology and education investments, and others.
2) Researching micro-economic opportunities in the private sector…and identifying opportunities for application in public sector organizations.
3) Investing smartly in people/teams, processes, technology and equipment.
4) Developing a culture of high engagement, ownership, partnership and teamwork.
Angela Coke, Associate Deputy Minister of Ontario Shared Services (OSS), says our challenging fiscal situation requires us to rethink our approaches, to get better at “driving value and efficiency from what we do, what we buy, who we contract with.” To achieve that, we need to “focus on the enablers of productivity: people, processes and technology. We need leaders with clear vision who can inspire others to get behind the vision and develop and support high-performing teams of diverse, skilled and engaged employees. Our processes must be streamlined and standardized. We must leverage technology to improve client access and service delivery.” Coke cites OSS’ shared services model, which was described in a 2010 Harvard Business Review article. Outcomes, after initial hurdles, included: a 26 percent reduction in administrative costs to government, ongoing savings of $25 million, and a 24 percent increase in clients served.
Stephenson, a former CEO, says, “One difference between education and the private sector is the way decisions get made, how you make change and influence people. Ivey made a lot of big change quickly….we did it through upfront influencing, having champions and funding innovative priorities….You can’t just declare.” She believes “we need to invest well in the really great pockets of innovation….We need to use a needs-based, supply-demand perspective, where the people deciding use well-understood criteria.”
With the insights of our interviewees and other research, we’ll now delve more deeply into specific enablers to address productivity growth in Canada.
We found that several enablers that topped our interviewees’ lists.
First, regarding the macro-productivity policy agenda, Drummond says “government needs to establish the framework for completing it” including removing barriers to firm growth and competition, removing work disincentives such as those in employment insurance, further reduction of regulatory burden, improved immigration policy, and investing more in education, training and apprenticeships.
Kelly Butt believes whole sectors need to invest more in technology. She urges” change in government policy to make it easier for small and medium businesses to access loans for technology. Government also has an enabling role to play to make it easier to get more productive through investment in education and training, and streamlining immigration regulations to facilitate doing business with partners around the world.”
Keohane concurs, stating that the biggest enabler of productivity is capital spending, particularly on technology. “HOOPP has the lowest investment operating cost per member in Canadian pension plans. Total costs/size of fund are 3 percent. Investment costs are 15-20 basis points versus 200-300 with some mutual funds. The main reasons are the size of the fund, investment in technology and the nature of activities we choose to pursue.”
Secondly, we must focus on micro-perspectives and private and public sector behaviour on at least four fronts:
1. Strategic leadership of people, processes, structures and systems
On the importance of vision and strategic priorities to achieving productivity growth, Butt emphasizes “focusing on three to four priorities. Don’t let anything else get in the way…companies have way too many projects on the go. (It is rare) to see a company that can handle more than ten…and five is better. Put the best people on them, free them up and they get it done.”
WestJet’s Director of People Relations, Jed Teigen, says WestJet has created a culture, guided by its strong vision and values, that “connects the company’s success to individual success through employee share purchase and profit sharing; this makes employees owners of the company. Various kinds of communication and connectivity, leveraged by technology, make senior leadership very accessible to the front line and create a connection between employees and leaders. Goals are cascaded deep into the organization. Performance ‘1-1’s’ with employees create the conversation by which managers check in bi-weekly. They help make employees feel supported and on top of their accountabilities. This builds engagement.”
Keohane says “From a management point of view we create an environment that enables people to succeed….We figure out what activities we are most likely to succeed at…backed up by fact-based decisions. Employees have a clear sense of the mission… they understand why they are here, what outcomes we expect, what their role is and how they can contribute…everything is tied to the mission.”
On processes and structures, several interviewees agreed on the importance of getting the business and work processes right in order to support and simplify organizational structures and technology that overlay them. Clearly defined and communicated management and work processes, with employees trained in their use, are essential to productivity improvement.
On strategic partnerships (or outsourcing or off-shoring), Butt says “organizations must focus on their core strengths and get other partners to do the non-core work based on their strengths…in a seamless fashion. True partnerships have common goals established from the customer or distribution end and both sides are compensated on the same basis.”
Drummond believes the top two priorities corporate leaders must pursue are to expand our business horizons to developed countries and buy more equipment. “We need to import productivity techniques from Germany, the U.S. and China. We should purchase the latest and best equipment versus building it.”
2. Healthy workplace cultures that support performance, productivity and innovation
Building and sustaining healthy workplaces is attracting greater awareness. The Centre for Addiction and Mental Health study surprised many with its finding on the $51 billion annual cost of lost productivity and healthcare costs associated with stress and depression. This represents huge long-term, unfunded liabilities; boards are paying more attention and EAP programs are attracting more requests.
To contribute to health and wellbeing, Butt says “organizations must be clear on what they want, provide frameworks in which to work, then unleash peoples’ creativity. They must also foster teamwork within and across the organization and encourage people to learn from what the best companies are doing.” Engaged employees also translate into personal and organizational health. Coke says “smart organizations measure and understand culture and what drives engagement and take action to improve employee engagement…the most skilled, healthy and engaged employees are the most productive.” And we know healthy workplaces help recruitment and retention of talent.
3. An entrepreneurial mindset, and partnerships and practices that drive focus on customers and results
Drummond says “we think of ourselves as a trading nation, but more than 80 percent of Canadian corporations don’t export at all. We invest very little in R&D, machinery and equipment. We treat failure differently than the U.S. (although they may take too many risks)….we don’t learn and try again. Few companies grow to a billion dollars without taking risks. We still have huge swaths of protected industries.”
Cultural roots aside, we can learn from innovative partnerships and strong client focus in successful companies. The financial services cluster in Toronto is one of the better clusters in the world. So is WestJet’s internal partnership with its employee association (PACT), a collective voice for employees to react to decisions and provide internal advice. WestJet’s “guest focus” results in entrepreneurial mindsets and remarkable stories of customer service. Coke is challenging the public service to take a more business-like, entrepreneurial approach and learn from best practices applicable to government.
Finally, to support them all…
4. High-performing leaders and teams who engage people to work smartly on the right priorities – while building capability…and having fun.
Coke points out that we often inherit – rather than build — build our teams. In either case, we need “a common understanding of shared goals….We need to understand one another’s strengths, communication styles and ways of working…and how to draw out the best in team members. High trust is essential….(With it,) we can have productive conversations …and build positive relationships.”
Butt emphasizes “unleashing the power of the team as they work to deliver systems and solutions faster and better. They start with the desired end result and find the process that best achieves it….those doing the work know how to do it best. Management must create a structured framework….they must be very clear on the goal, what is expected and what is/isn’t in scope…and then get out of the way. They must encourage people to learn what works and doesn’t and to try new things.”
Teigen believes “a culture of highly engaged employees with ownership mentality explains much of WestJet’s success. People want to do good work…and are willing to give that discretionary effort. We don’t need to chase turnover and absenteeism. We receive fifty thousand resumes yearly. These things lead to significant productivity savings.” HOOPP’s “top ten most-admired cultures” award speaks to similar thinking. Employee engagement continues in the 90th percentile, matched by member satisfaction scores.
Partnership requires excellent teamwork. HOOPP has a lot of internal partnerships that work well. Keohane says,” We bring people with diverse skill sets together in teams to brainstorm….People from different specialties, educational systems, cultural backgrounds and perspectives work together and come up with great ideas. Canada brings in many immigrants, but they find it challenging to get work….To compete, we need to place higher value on global perspectives and partnerships.”
Drummond believes the “nexus between management and workers” drives productivity. Employees are more productive when their ideas are heard and when they participate in making changes and get recognized for their contributions.
As several interviewees pointed out, unions could play a more collaborative role and partner more with business and education, as they do in Europe. Hyundai, Toyota and Southwest are all examples of productive relationships between management and staff. They are focused on a clear strategy, creating an environment for success and meeting customers’ needs.
In education, Stephenson says we need to engage the productivity issue as we have important issues in the past. We need to ask if there are “different ways of doing things that will have a greater outcome?” She asks: “Should we be considering a more rigorous performance management system for faculty that includes financial rewards playing a more significant role than they do today? Could we get unions to embrace such a system?”
Kathryn Cestnick, SVP, Excellence Canada, says its research shows the biggest opportunity for improving productivity is in engaging employees…making them feel part of the culture, involving them in planning and decision-making and listening to their ideas. They will want to perform. Productivity will go up. Turnover and absenteeism will go down. They will feel valued.” All of this contributes to a healthy workplace. The importance of a connection between employee engagement, client satisfaction and business success is strongly supported in research.
In terms of building capability, interviewees identified education and training priorities that need further development: leading change and culture transformation, resilience and EQ skills, teamwork and partnerships, healthy workplaces, apprenticeships, mentoring and communication skills. Drummond emphasizes training people’s minds. “We can learn on the job. We can’t teach entrepreneurship and culture if we’re so concentrated on the specific skills issues of the day. We need to develop the best minds…and set them loose to create and innovate.” He says we also need to pay attention to job markets and demographics.
Finally, to move forward, we need a forum where private and public sector leaders and academics can solve the puzzle of productivity growth. Drummond is currently working to create such a coalition. It will delve into private sector business behaviour, engage more people in industrial relations and in the business schools, and draw on the latest research.
What can we conclude from these diverse insights? We need to address productivity from a number of perspectives…strategy, customer perspective, partnerships, technology-enabled processes, leadership, teamwork and employee engagement. One final lesson: Many of our efforts toward enhancing productivity will also contribute to innovation and our country’s prosperity.