The Real Productivity Paradox

Alan Bennett | September 26, 2011

US Economist and Nobel Laureate Robert Solow famously said in 1987 that "You can see the computer age everywhere but in the productivity statistics".This quote is regularly cited in a body of academic work on what has come to be called the ‘Productivity Paradox’.

 

The paradox is that anecdotally and even in firm level measures, technologically enabled productivity improvements are being witnessed, but they do not seem to show up in economy-wide statistics.

 

While there is a growing body of work proving this link between ICT and productivity – the paradox doesn’t have much of an impact on my day-to-day business.

 

In selling technology-enabled solutions to clients we need to demonstrate a return on investment and a lot of that comes from enabling productivity, and therefore efficiency improvements, within key business processes. If we don’t, we don’t win business.

 

And this is my fundamental concern with the productivity debate. It is too focused on the macro picture and not on what can be achieved within organisations and across sectors, where the real productivity transformation can occur.

 

To quote Robert Solow again, discussing one of his contemporaries he remarked:

 

"Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers."

 

So the productivity debate also gets flavoured by your perception.

 

If you work in the education and training sector, productivity is about improving educational outcomes and the responsiveness of training to the demands of the labour market. If you work in transport and infrastructure chances are, as far as you’re concerned, infrastructure bottlenecks are the major impediment to improved productivity growth.

 

If you’re an economist, then it is all about macro- and micro-economic reform. IR reform – be it individual agreements or enterprise bargaining depending on your side of the political spectrum; removing trade barriers to drive productivity in previously protected industries; and removing any impediments, government regulation or incentives that prevent markets operating efficiently.

 

Unsurprisingly, given I work in the technology sector, I feel the role of technology is critical in driving productivity improvement within organisations and across industries.

 

Much of the current debate focuses on economy-wide productivity measures. These show that since 2003-04 Australia’s productivity growth rate declined to a level that was no better than what we were achieving in the 1960s.

 

I’m not saying that this isn’t an issue – more that there is no “one size fits all” solution. There is no silver bullet because the truth is that all elements are critical in combination. The productivity whole is definitely greater than the sum of its parts.

 

Ultimately what drives the greatest productivity improvement is innovation. That is innovation that is user-focused on solving problems or enabling a new, improved way of working.

 

Over the last decade Australia’s innovation performance slipped from fifth to fifteenth, according to the World Economic Forum’s Global Competitiveness Index.

 

My premise is that if we fix the innovation problem – more importantly our ability to articulate and solve business problems – we can start to unlock the productivity potential of Australia.

 

Again this is not a problem requiring a macro solution. It doesn’t require tax incentives. It doesn’t require a major funding package. But, it does require firm-level and industry-wide analysis and strategies.

 

And, it will require education, infrastructure investment, technology investment and workplace reform.

 

To really understand productivity, we also need focus on what we can measure. The bigger the picture the fuzzier it is.

 

A recent article from Ross Gittins looked at this issue. Gittins identified that in the macro level statistics you would see that labour force productivity in mining has dropped by 40% in the last ten years, while in utilities it has dropped by a third over the same period of time.

 

However, as Gittins points out, both sectors have seen significant new capital investment in the past five years, which has skewed the value of inputs before the new capacity from new power infrastructure, desalination plants, dam upgrades, new mines and mining infrastructure comes online – which in turn impacts the measurement of productivity in those sectors.

 

This isn’t saying that there isn’t a productivity issue, more that you need to look at the context and then get closer to the organisational level see what’s really happening.

 

It also requires a focus on defining the issue. It requires organisations and industries to ask the question: “what is the fundamental problem preventing productivity?” or simply “how can we do this better?”.

 

Then organisations ultimately need to empower individuals to find creative solutions. If there are IR, skills, process or technology issues, there are solutions. A lot of it comes down to asking the right question.

 

Too often organisations and governments look at the problem with a solution already in mind or too narrow a frame of reference.

 

If there is a transport bottleneck it requires new transport routes right?

 

Well, you can either invest in that new infrastructure or you can find an innovative way to ensure that existing infrastructure works as smoothly as it possibly can. One is a significant investment over a long period of time – possibly up to a decade – the other could be a series of process changes or information systems improvements that could see results within months.

 

As an example, by integrating the supply chain into a single information portal, Spain’s Port of Valencia was able to improve the time to process a container by up to 60 percent over a five year period.

 

Similarly, if your workforce is not delivering desired productivity improvements, then that’s a problem with the Industrial relations legislation right? Well, you can wait for a change of government and some form of future industrial relations reform which may improve your ability to structure productivity-enabling wage incentives. Or you can find a way within the existing rules to incentivise your workers or look at whether it is in fact internal processes that are holding your employees back.

 

When we took over Revenue Collection for the British Columbian Government, it was this process improvement that enabled the Province to be in a position to collect an additional $750 million in revenue over a ten year period.

 

More than this, because the revenue collection function became more productive, generating greater revenue for the Province – rather than reducing staff in that function – HP actually had to increase the number of staff from the original numbers transferred from the Government to meet the increased volumes.

 

The key is that organisations need to be mature and confident enough to define the problem, and then open it up and empower both internal and external parties to help solve it. This is an approach that Henry Chesborough from the Harvard Business School has defined as Open Innovation – “a paradigm that assumes that firms can and should use external ideas as well as internal ideas”.

 

Taking this to its extreme is a site called Innocentive.com. Innocentive.com allows organisations to crowd-source innovation, providing financial incentives to innovators to respond to challenges posted by a range of organisations, from NASA to Eli Lily.

 

Challenges and rewards on the site range from $1 million for anyone who can double the speed of a particularly genome sequencing technology, through to $5,000 for a design of an innovative container for a six pack of boutique beer.

 

Not only is this a clever way of tapping into the collective wisdom of the masses – it is also a very cost effective way of sourcing intellectual property. It is a disruptive model that more traditional organisations need to pay attention to.

 

In HP we are taking similar approaches across our 320,000 strong workforce, using social media tools to uncover problem solvers across the globe and enabling them to bring their innovative ideas to support the development of local solutions.

 

For business and government it can be as simple as approaching the market with a problem statement rather than an already detailed set of functional requirements.

 

This opens up the sourcing process to innovation, and enables organisations to procure productivity improvements as an outcome rather than simply buying a series of inputs that may or may not improve productivity.

 

 

This approach does require a degree of organisational maturity and a recognition that all good ideas are not internal ideas. No one organisation has all the answers, but it takes a strong culture to admit that.

 

It takes an even stronger manager to admit publicly that they have a problem that they don’t know how to solve.

 

In fact it was a study involving the GAP initiated Society for Knowledge Economics, Macquarie Graduate School of Management and UTS that identified the strong link between Management performance and organisational productivity. The same study also found a strong and statistically significant link between management and innovation – with well managed firms having higher levels of innovation activity.

 

This link between management, innovation and productivity was even further backed up by a US study in 2004. Using data from the US Bureau of Labor Statistics and Worker Employer Surveys, researchers Black and Lynch found that innovations to workplace practices such as process re-engineering, job rotation and organising workers in teams was an important component of total factor productivity. This study uncovered that, in fact, up to one third of US output growth came from productivity enhancing innovations at the workplace level.

 

I work in an industry that provides our customers with productivity-enhancing solutions. I believe, along with the majority of our industry, that we can play a major role in delivering future productivity growth.

 

The ICT sector has often been criticised for selling unnecessary technology rather than focusing on solving business problems. But this is an issue that needs to be fixed on both sides of the fence.

 

As much as we need to change the dialogue we have with our users, we need our users to be willing to engage in that dialogue and to ask us the right questions.

 

A technology question will get a technology answer.

 

Ask me how I can solve a business problem or deliver a better way of doing something, and I will aim to come back with an innovative solution that delivers the best possible outcome. It is this collaborative dialogue focused on innovation that holds the key to unlocking future productivity growth.

 

Let’s open up the productivity debate to be about how to generate better engagement on problem-solving between users and suppliers, between employees and managers, and  across organisations and within industries, rather than continuing to look for the economic reform silver bullet.