Why are Britain's companies so unproductive?

Bad managers and an atomistic business culture mean the UK has a long tail of low performing companies, says RSA chief exec Matthew Taylor.

by Matthew Taylor
Last Updated: 21 Feb 2019

Sorry to seem churlish, but should we even be having an award for Britain’s Most Admired Company? The reason I ask came to me at my first meeting as a member of the government’s Industrial Strategy Council. I’m not allowed to reveal what was said, but you won’t be surprised that the UK’s woeful productivity performance was a recurrent theme*.

On the one hand, output per hour worked in the UK is about a third lower than the average of other G7 countries or, to put it another way, German workers produce as much value by Thursday lunchtime as ours do by Friday evening.

Things have got worse since the global financial crisis – before 2008 the trend rate of productivity increase was 2.3 per cent, over the last decade it’s been below 0.5 per cent. If you want to know why living standards in the UK have hardly moved in the last 10 years, there’s your answer.

But, however important it might be, there are drawbacks to focusing on productivity. First, few ordinary people can accurately define what it means. Second, some experts think the way we measure it is increasingly inaccurate, for example failing adequately to account for the increased use of technological products (a modern mobile phone does a great deal more than the Bakelite set your parents had).

Third, when ordinary folk hear ministers talking about raising productivity they are apt to decode it as either "we demand you work harder" or "the robots are coming for your job". This may be why the narrative around the government’s industrial strategy emphasises the ultimate goal as higher wages and better jobs.

So, how can a country with so many good companies also be so poor on the economic fundamentals?The answer has been provided by Andy Haldane, the chair of the Industrial Strategy Council and Bank of England chief economist, in a speech made recently entitled ‘Hub No Spokes’: while the UK is actually home to more world-beating super high-productivity firms than Germany, we also suffer from a long tail of low-performing companies.

In an area replete with sobering statistics one stands out: every morning a large majority of British employees set off to spend their day working in a low productivity organisation.

Behind every cause is another cause. So what explains our long tail? One aspect is the poor diffusion of innovation from high to low productivity firms. This in turn may be related to the rather atomistic nature of British business culture. While German companies are required to join local chambers of commerce, and sector bodies are strong and important, British businesses have very low rates of joining trade associations.

This is one reason why ‘Be the Business’, the organisation funded by the government to agitate for better performance, is putting so much energy into strengthening business-to-business networks. One of its initiatives, the Cornwall hospitality cluster, brings together 75 SMEs to learn from each other and a variety of outside experts. Interventions like this also recognise the role of geography. Our internationally larger-than-average regional disparities in income and wealth are mirrored by productivity gaps between the thriving South East and lagging areas such as Wales.

When we think about productivity our minds tend to turn to high-tech, high-expert sectors and to major capital investment – in kit by firms and in infrastructure by government. This is an important part of the picture and of the government’s industrial strategy, but the human stuff matters just as much.

In most organisations the people in charge, especially in SMEs, are accidental managers who learn how to run things through intuition, trial and error. The evidence is strong that engaged employees – those who can see the value of what they do and feel respected and listened to by their boss – are more productive. Yet, according to Gallup, only a minority of workers feel engaged. Many firms lack even the most basic tools of performance management.

Complex problems are rarely solved by a single intervention. To reverse the trend that has seen our underlying economic performance deteriorate will require progress on many fronts; from cutting edge technology to basic management, from global corporations to local start-ups, from financial services to public services, from major infrastructure to core skills.

This means that however off-putting the idea of productivity may be, we have to make it a national priority and demonstrate patience. After all, if productivity is what determines whether we can expect our children to be better off than us, or that the nation can afford effective public services, we all have an interest in making it better.

As I write this, the final outcome of the Brexit process is still shrouded in doubt. But whatever happens, the time is coming when the focus of domestic debate will shift from that tangled web to what we as a country have to do to thrive in the modern world.

Hopefully, Britain’s Most Admired Companies are here for the long haul. If so, they could perhaps ask themselves this question: given our own success, what more can we do to help the rest of British business rise to the productivity challenge?

*This piece was first published in the Dec 2018 print edition of Management Today. Subsequent research, published by OECD, has shown that UK productivity is slightly better than initially thought.

Former political strategist Matthew Taylor has been chief executive of the Royal Society for the encouragement of Arts, Manufactures and Commerce since 2006. 

Image creditsMartin Nancekievill/GettyImages


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