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Britain's productivity paradox

Has technology disrupted our ability to measure productivity? Is it about to do the same again? Are we overlooking some of its disruptive benefits?

Broadcaster and journalist Stephen Pritchard thinks this might be the case. And getting up to speed might help our nation, as we face-up to Brexit.

By one measure at least, Britain is the poor man of Europe. Since the financial crisis of 2008, productivity in the UK has stagnated, and we now lag behind most other, advanced economies.

The most recent figures from the Office of National Statistics place the UK's output per hour 18 per cent lower than the average for the G7 club of rich nations. The gap between the UK and Germany is a staggering 36 per cent. The gap with the US is 30 per cent. Only Japan fares worse.

This is all the more surprising, as UK productivity actually performed rather well in the years up to the 2008 crisis. But today, the UK economy is left in the shade not just by the global industrial giants, but by the Netherlands, Spain, and Belgium too.

With a falling exchange rate, mounting worries over Brexit, and popular cries of "British jobs for British people," the UK economy seems to be in a bad place. The truth, according to business leaders and economists, is rather more complex.

 
 

"There is a 'productivity paradox'," says Mark Skilton, Professor of Practice at Warwick Business School. "Compared to other developed nations, we are allegedly 30 per cent less productive as a nation."

But this is not the whole picture, Professor Skilton suggests. "If you look at the degree of e-commerce in the economy, the percentage of GDP that is e-commerce is 12 per cent in the UK. But the average for the G20 is five per cent. If productivity is related to e-commerce we are fifth or sixth wealthiest."

So, by one measure at least, the UK economy is in rude health.

Questions of measurement

But then, working out national productivity has always been an inexact science. Changes to the global economy make it harder still. Knowledge workers, digital business, and the "sharing" economy all make it harder to form an accurate view of a country's economic health. Counting goods leaving the factory gate no longer works.

"What we are describing is a move away from selling a widget, where the deal is 'won and done' to a focus on recurring revenue. Firms want customers to be friends," explains Mark Ridley, a former chief technology officer and now business adviser.

Measuring these longer-term relationships needs new thinking. Is a phone sold by Apple or Sony or Google a physical product, or a platform for those companies to sell subscriptions or downloads, during its lifetime? A move towards longer-term relationships with customers is also changing how we sell both goods and services.

"The traditional measure of productivity is around serving so many customers per hour. But we're now seeing retailers taking a more relaxed approach, which is about experience rather than transactions," says Dan Rossner, a digital economy expert at PA Consulting Group.

A growing number of customers will not even buy products in the store, but complete their purchases online later, a phenomenon retail experts call "showrooming". This does not make the retailer less productive, or profitable, but it does change how business – and the economy operates.

Statistics pointing towards poor UK productivity cannot, of course, be dismissed completely.

The number of people at work in the UK is at an all-time high, and unemployment is far below levels in countries such as France. But still, productivity lags behind.

One reason is that companies have tried hard to hang on to skilled staff, even during the financial downturn. In previous recessions, firms have shed staff more quickly, and then found it hard to recruit and train replacements when business picked up. But keeping on staff, with a falling order book, hurts productivity.

More contentious is the suggestion that companies have turned to low-cost labour, especially from newer members of the EU, to fill in gaps in the workforce.

Relying on cheap labour, rather than investing in new factories, machinery, or even IT, will cause productivity to fall – even as profits hold up. But businesses could find their margins at risk through rising wage bills, driven by the national Living Wage and, post Brexit, a shortage of cheap migrant workers.

"It is possible that the UK has relied too much on cheap labour, and this is one of the primary reasons for not becoming more efficient," says Rune Sovndahl, CEO of Fantastic Services, a company that uses digital platforms to help householders find anyone from a carpenter to a cleaner. "But I think it's more a lack of understanding of what is possible. There is a fear of technology, but if labour wages rise that will change very fast. Cost cutting is a driver."

For businesses, investing in technology could be the most practical way to compensate both for higher wages and a shortage of skilled staff. Sovndahl, for example, believes that new technologies, from artificial intelligence (AI) to robotics could change jobs as yet hardly touched by technology.

"There will be jobs that we consider dangerous now, that we can replace with robots and nano technology," he says. "It will allow us to make windows that are self-cleaning and potentially solar-powered too, for example."

And they may be a decade or more from day to day use, but manufacturers are developing robots that can act as child minders or care for the elderly, or wait on tables in restaurants. A growing number of firms are also looking at AI to help with decision making, in fields as diverse as financial markets, medical testing, and aviation.

AI is unlikely to replace skilled staff anytime soon, but computers area already helping to sift through data and allow "super humans" to concentrate on the more difficult cases. Even in more mundane areas, such as customer service, AI in the form of "bots" is already making decisions. Once again, though, these changes are not always measured in the economic data.

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"New digital technologies may improve quality of service, but this may not be picked up in the official productivity data as it can be hard to disentangle price and quality effects," says John Hawksworth, chief economist at PwC.

Official productivity figures could also overlook the role of the "sharing economy", and the shift towards customer self service. Both are being driven by technology. And more businesses are providing at least some services free of charge, which also affects how we measure value.

"These free services might not be captured by traditional GDP data. For example, Wikipedia provides free information to billions of people with internet access, but might actually subtract from measured GDP as it reduces demand for traditional paid-for encyclopaedias," he says. "I estimated this added around £17 billion for the UK in 2014, which would not be captured in GDP."

This could also explain why few businesses say they have a productivity problem. At PA Consulting Group, Dan Rossner says firms are more likely to ask for help with growth, or entering new markets. "New opportunities can be helped by better productivity and more by being more efficient overall, but it is not necessarily number the one driver," he suggests.

And digital business transformation – including the disruption of conventional business models – is starting to change the way firms think about efficiency and growth.

Until quite recently, firms have tended to trade a desire to grow, in good times, for a need to control costs when times are hard, says Neil Ward-Dutton, research director at MWD Advisors, a IT research and advisory services firm. Could that change?

"There's much made of the potential of digital business models to enable breakthrough economic productivity," he says. "When we look at stereotypes like Uber, or even Facebook, one way to look at their business models is that they’re built on extreme versions of outsourcing. The resources these companies use to produce value are the resources of their customers and communities.

"The big challenge for more established firms wanting to explore digital business models is that for many, new models they might need to consider have the potential to cannibalise their existing businesses. So there are likely to be very strong cultural and political barriers to truly embracing digital business models."

But if companies want to grow – in what could, post Brexit, be a challenging economic environment – this is exactly what they need to do.

The conventional ways of "improving" business performance, from cutting staff, hiring cheaper labour, or endless restructurings and reorganisations are counterproductive in the modern economy, warns warns Gi Fernando, founder of Freeformers, a firm which helps FTSE companies with digital transformation

"In today's society and digital economy, skilled staff can just go off and build their own business or live a portfolio lifestyle through various gig economy jobs," he says. "This is not how you retain staff, build their trust and increase their productivity and your profit. It is important that employers make sure their staff are doing roles where they are the ones trained to use the AI and automation to do their job.

"In return, these technologies will create new roles we're yet to hear about, understand or imagine."

And even Brexit could contain a glimmer of hope. "We need to understand the problems that people in the EU and beyond will pay to have solved for them," says Mark Ridley. "As long as we embrace our rich heritage of innovation and re-establish the UK as a country that invents to solve big problems, we will be able to respond to the opportunity."

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