In business productivity, just as in rugby, it is steady work that brings results, rather than simply flinging passes and hoping that something magical will occur, says Robert Bruce
This article was first published in the May 2017 UK edition of Accounting and Business magazine.
I have always enjoyed the sport of rugby. And I am a Scot; I know where my heart lies. So you will understand that the recent Calcutta Cup match, when England completely overran the Scottish challenge, was a difficult few hours. But what was interesting were the two approaches used by the Scots.
There were several periods where they painstakingly built their positions and were rewarded with tries, momentarily pegging back the English. And then there were other times when a cultural memory of the Scots’ reputation for derring-do overcame them. They flung passes halfway across the field. They put their faith in the idea that something magical would occur. And, of course it didn’t.
In a somewhat different context Andy Haldane, the always-thoughtful chief economist at the Bank of England, applied his mind to the same conundrum in a speech later that week.
In the last few years the riddle of the strange stagnation of productivity figures, both in the UK and elsewhere, has perplexed many. There are several theories as to why this might be. It could be that companies are also being painstaking in their management processes and skills but are not bringing off the Scots’ achievement of getting over the goal line. It could be that companies are not going strongly enough for throwing out the long and enterprising pass of innovation. Or it could simply be that in a changing world, we are simply not looking at the indicators that would give us a more accurate and plausible picture.
In terms of the old accounting adage that ‘what gets measured, gets managed’ none of this is new. You can sense the frustration in Haldane’s summing-up. ‘Productivity is a gift for rising living standards’, he said, ‘perhaps the greatest gift. It is not, however, one that always keeps on giving, as recent events attest. Whether in supporting living standards, or in shrinking their distribution, tackling the global productivity puzzle is among the most pressing public policy issues today. If history is any guide, there is unlikely to be any single measure which puts productivity growth back on track.’
Meanwhile there are all manner of theories. The official statistics, based on outdated business models, may underestimate economic activity. The financial crisis may have had a long-term scarring effect. Low interest rates, prompted by government actions, may simply be keeping innumerable hopeless companies – which Haldane refers to as ‘zombies’ – just above water. It may be that the technology revolution and its major effects have now moved on to relative maturity. Or it may be that there are many poorly managed companies that chug along thinking they are fine but not adding much to the economy. Perhaps it is a regional thing in the UK – London is around 75% more productive than the North East. But even so, both regions have what Haldane refers to as ‘a short, fat lower tail of laggard firms’. Diversity seems to make a difference. Companies that export are more productive by around a third than companies that don’t. And foreign-owned firms have twice the average productivity of domestically-orientated firms. All these are relatively predictable.
There are two areas which, to be fair, the accounting world has been working at for years. One ties into the idea that the useful stuff is not being measured and not appearing in the statistical overview. Another could simply be that accountants have been slow to push through obvious changes in financial reporting.
The narrow focus on the annual report has tended to exclude innovation and the recognition of non-financial reporting. Such factors are understood but have not been measured, nor reported, in a way that would ensure that they took their place in the productivity story. ‘One potentially important micro-economic measure supporting innovation is greater recognition of the importance of companies’ intangible assets, such as intellectual property,’ Haldane suggested. ‘These constitute an increasing fraction of companies’ total assets, but are not measured or valued in as consistent and coherent a way as tangible assets such as plant and machinery.’ The process of change in the accountancy profession’s corporate reporting process does lag way behind what would be useful.
Haldane also suggested that ‘current UK corporate governance practices may act as a brake on innovative companies’. He highlights attempts to reposition efforts towards the long term, both in terms of investment and productivity. The profession generally considers itself to have done much good work from the fields of integrated reporting to strategic reports and sustainability reporting. But in reality, while these are having an effect, they are not yet carrying all before them. It could simply be that much of the problem of low productivity is also related to the reluctance in business heartlands to accelerate such disclosure and reporting.
In the end, as Haldane points out: ‘For the same reason most car-owners believe they are above-average drivers, most companies might well believe they have above-average levels of productivity.’ In fact, he says, ‘we know most companies have below-average levels of productivity and a large fraction have seen no productivity improvement for several decades’. For him benchmarking, mentoring and gradual improvements in the way businesses operate would help.
We are back to the Scottish rugby team. It is the steady work on improving the fundamentals that brings results. None of which means that innovation and the occasional long pass to a waiting genius out on the wing doesn’t bring about success as well. Just not as often.
Robert Bruce is an accountancy commentator and journalist