Grant Thornton partner Simon Hunter tells Caitlin Sykes how Kiwi firms can be bolder about making calls that boost productivity, and unearths areas for improvement.
We hear so much about productivity. How do you define it?
It’s about enterprises being able to consistently produce greater volume and value of products and services, from the equivalent mix of three inputs: people, capital assets and their organisational assets and IP.
An enterprise needs to be able to define what productivity means for them and use this definition to gain a deep understanding of what drives the value of their business, what creates waste, the current trends in productivity, and where breakthrough needs to come from.
Why is productivity so important for companies?
Every enterprise should aim to grow and be more profitable — and in a way that’s sustainable — to avoid losing their competitive advantage and shareholders’ equity.
For most enterprises, productivity keeps them in the game and allows them to exploit big opportunities from new products, markets or acquisitions.
Only a very small proportion of New Zealand enterprises — probably about 5% — consistently achieve improvement.
It surprises me how many businesses, struggling to deliver a profit, have waste of between 5% and 10% tied up in management layers, unreliable process, idle assets and inventory, quality failure and rework. This is five years of lost productivity that needs drastic action.
At an enterprise level, boosting productivity is important to the owners and employees as it drives job security, creates more jobs and allows for higher earnings.
At a ‘NZ Inc’ level, extra growth and profitability will allow us to re-establish our position as a prosperous economy that’s able to afford the services we expect, such as health and education.
It’s a simple equation; we need more fast-growing and profitable business if we are going to be able to afford these services.
Critically for New Zealand, our productivity improvement needs to occur faster than it does for our global competitors.
After 40 years of low productivity, our GDP per capita is 20% below the OECD average and 40% below Australia’s. Improving productivity is the only way we can grow faster as a country and employ more people at higher rates.
How can firms can improve productivity?
Companies that perform best in this area are the ones that have a board and management team that really understand the value of productivity — it’s in their DNA. Change needs to be led from the board and at the C-suite level.
The way boards and management make investment decisions is also a key to productivity and profitability. Often there’s reluctance in New Zealand to make the call to invest in change that influences productivity, or if there is investment, it’s done in a sub-optimal way.
This is a reflection of New Zealand’s general investment trends. Our business investment in R&D is a third of the OECD average; our investment in IT on a per capita basis is relatively low, as is our investment in the capital assets that would drive productivity.
As a country we have relied on labour input to drive GDP, rather than smart investment. But productivity is not about working longer.
Productivity is also a really long game. The most productive firms have had a singular focus on productivity for 20-plus years. They understand it’s about systematically getting 1% or 2% gains each year.
Too many of our organisations think that productivity can be delivered by a one-off event or short-term programme.
The other key observation is you don’t do it alone.
Firms that do it best are well connected and focus on communication and collaboration internally and externally. They’re strongly connected to their suppliers and customers — always looking at the full value chain to drive the productivity outcome.
The firms that do well are those that systematically invest in people and the capability needed to deliver the gains. Top performing enterprises also invest so that they have leading practitioners, systems and processes to understand value, pinpoint waste, design interventions and successfully deploy change.
How should we measure productivity?
At an enterprise level, you can tell if your productivity programme is working through the specific output/input measures.
That’s if you’re able to keep growing faster than your competitors and operating margins are continuing to improve.
Importantly, you’ll be doing well if you are able to reward your people with a better level of income and reward for their contribution.
From an ‘NZ Inc’ perspective, it will be when more of our firms are achieving steady growth and productivity gains, not just 5%.
What we need to see is an increase in firms steadily making those 1% to 2% gains year after year.
What explains our lack of productivity?
Source: Grant Thornton International Business Unit Survey, 2013
Simon Hunter is a partner at Grant Thornton. Simon.Hunter@nz.gt.com