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How do we solve the region’s productivity puzzle?

The productivity puzzle has occupied business minds since the financial crisis. Picture: Getty Images/iStockphoto

The productivity puzzle has occupied business minds since the financial crisis. Picture: Getty Images/iStockphoto

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The productivity puzzle has bedevilled the country for a decade – but new research suggests firms are still be refusing to face up to the problem.

Manufacturing could be at the heart of a new productivity spike, believe employers' organisations. Picture: Ian Burt.Manufacturing could be at the heart of a new productivity spike, believe employers' organisations. Picture: Ian Burt.

In the aftermath of the financial crisis, the productivity of British businesses has been thrust under the microscope.

Before the crash which rocked the western world, growth in the rate at which countries produced goods and services was almost taken for granted.

But the stagnation everyone expected to run its course is continuing – and with the average British worker now taking five days to produce the same amount that a French or German counterpart could do in four, some feel recent figures, which showed a 0.5% decline in productivity in the first quarter of 2018, should serve as a wake-up call.

While businesses, politicians and pundits often blame include a lack of business investment and slow wage growth, new research suggests that complacency could play a part in our region.

Be the Business, an organisation created to improve the productivity of UK companies, has found that the majority of businesses in the East of England rank their skills highly relative to their peers – but invest little time in improving their operations.

Its survey of small and medium business owners and managers found that more than three quarters (76%) of bosses surveyed in the East of England believe their business is as productive or more productive than their peers – but 28% had never evaluated their business practices to identify areas for improvement.

University of East Anglia professor of organisational behaviour Kevin Daniels. Picture: Neil Perry/ArchantUniversity of East Anglia professor of organisational behaviour Kevin Daniels. Picture: Neil Perry/Archant

Of the regional bosses surveyed, 23% cited lack of time as the biggest reason for not adopting best practice while 12% said they struggled to find best practice relevant to their business challenges and 9% did not know where to go for advice on boosting performance.

Be the Business has urged companies “not to sit on their laurels” when it comes to productivity and to make efforts to assess their performance in comparison to their peers.

Its chief executive Tony Danker said: “Evidence shows that business leaders consistently overestimate the performance of their businesses, and Brexit will only increase the demand for our firms to be more competitive.”

Kevin Daniels, professor of organisational behaviour at the University of East Anglia’s Norwich Business School, said analysing business performance in greater detail could bypass the “positive delusion” which firms can harbour about their own productivity.

“If you ask businesses what their sales performance is like, if their machinery is running optimally, if they are training people properly, that could lead to more accurate results,” he said.

For the New Anglia Local Enterprise Partnership (LEP) addressing slow productivity growth – and helping businesses work to improve their own performance – is a lynchpin of the local economic strategy it helped to create.

New Anglia Local Enterprise Partnership chief executive Chris Starkie. Picture: Angela SharpeNew Anglia Local Enterprise Partnership chief executive Chris Starkie. Picture: Angela Sharpe

According to evidence compiled by the LEP, productivity in the region has risen just 0.04% since 2009 – compared with 2.2% from 1981 to 2008.

However, the counties’ economy has grown by 10% in real terms since 2009 – faster than a number of so-called ‘powerhouse’ areas and established London growth corridors.

Chris Starkie, chief executive of New Anglia LEP, said the organisation was working with partners on a number of initiatives to improve business productivity.

These include improving the skills of business leaders – a problem flagged by its research – by setting up schemes to help high-growth companies access leadership mentoring, and encouraging cross-sector collaboration, for example between the region’s flourishing IT sector and industries like agri-tech and advanced manufacturing.

David Fagan, regional manager for manufacturing and engineering trade body EEF, said getting to the root cause of the productivity puzzle would help the East Anglian economy “significantly”.

“Manufacturing is at the root of this and if we can get to the root cause it should boost things like wage growth,” he said.

“There are a few trends that we are coming across. One thing is management and whether people have the skills to drive the business.

“Another factor is capital investment, but if you look at the EU, the country with the highest capital expenditure is not the most productive.”

Mr Fagan said the manufacturing industry – which was growing faster than the economy as a whole prior to the financial crash – could be the “main driver” of growth if put back on course.

“Compared to our European neighbours we are significantly down. The Germans and the French are around 20% more productive than us,” he said.

“A few factors need to be considered as to why our productivity is not as strong as other nations.”

People power

While much of the talk about productivity is focused on improvements to machinery and technology, research has shown that job satisfaction can play a key part.

A study by the What Works Centre for Wellbeing has proven a link between productivity and staff wellbeing, and further research in association with UEA has shown the positive impact that better training and creative opportunities can have on performance.

Meanwhile the Department for Business Energy and Industrial Strategy’s (BEIS) ongoing productivity survey identifies softer leadership skills as being crucial to success for managers alongside harder skills.

Prof Kevin Daniels of Norwich Business School said: “Generally you see the highest levels of productivity when you have work which is engaging, satisfying and secure.”

He added that the freedom to innovate at work – a feature of many workplaces in Germany and Scandinavia, where productivity rates are higher – could also improve performance.

The national picture

Output per hour is the main measure by which the Office for National Statistics (ONS) keeps track of the UK’s productivity.

It estimated that, between January and March 2018, output per hour fell by 0.5%, following a 0.7% increase in the previous three months.

This was attributed to a combination of strong employment growth and weaker output growth. The measure can also be affected by the average number of hours an employee works.

ONS data shows that UK productivity has barely moved since the financial crisis hit a decade ago.

It lists reasons including an unwillingness by banks to lend to new businesses, coupled with generally low levels of business investment, and companies being able to keep more staff on as wages have remained almost stagnant.

But it says there is a fundamental lack of understanding about what has caused the slowdown, also being experienced by other European countries.

Seeking business views

Engineering and manufacturing trade body EEF is in the middle of its own consultation on productivity, seeking productivity problems and best practice from its members around the country.

Regional director David Fagan said the response from Norfolk and Suffolk businesses had been particularly strong, with organisations like Hethel Innovation publicising the survey.

“It is a huge issue and every single manufacturer I go and see is discussing it,” he said.

“Engineering and manufacturing firms have it in their blood to try to get product in and out of the door as quickly as possible while adding that value, so productivity is very high on their agenda.

“But the ones who need the improvements the most are the least likely to participate. Those who are most likely to benefit from better productivity need to change their focus.”

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