UK PRODUCTIVITY IS CRAP

In the last few years I’ve taken a break from consulting and worked in PE backed companies. Over that time, I’ve had a series of discussions at the political level about the thorny issue of U.K. productivity. Now I’ve returned to consulting I guess I have the chance to influence productivity at the company level so I thought I would lay out my perspective on the problems and potential solutions.

Let’s start with the basics. Productivity output per labour hour in the U.K. is stagnant. In the second quarter of 2008 real (i.e. inflation adjusted) domestic product per capita was ￡6,795, today its ￡6,903. Yep, over the last 16 years the average person in the U.K. is a hundred quid better off when you adjust for inflation. As a comparison, the US saw a rise of 46% over the same time period. And just to rub it in Donald Tusk, the Prime Minister of Poland recently correctly said that in a few years the average person in Poland will be better off than the average person in the UK. Poland is a county the U.K. used to send aid to as little as 15 years ago.

So, it’s crap. Why?

1. Inward investment (also known as Foreign Direct Investment) has gone into reverse.

Offering no opinion on Brexit as a political choice, what I can point out is that the stock of FDI into the U.K. is about two trillion. Before Brexit it was rising by about ￡55bn pa and since Brexit it’s been falling by about ￡34bn pa.?

Put simply, foreign companies are now less attracted to investing in the UK. This is crucial. FDI generally goes into technology and people. When there’s less FDI there are fewer drivers of increased productivity.

2. Our stock market doesn’t work.

In the U.K. about three quarters of the wealth of families is ‘invested’ in their property, with the remaining quarter being in equities (disguised as pensions, SIPPS, ISAs etc). In the US it’s 60 40 in favour of equities. So, most U.K. wealth sits in unproductive assets, houses. Most US wealth sits in risk assets that fuel growth.

But it’s not entirely irrational. The FTSE has produced 6% pa growth over the last 20 years and the S&P has produced 9%. So, no wonder UK households prefer to invest their hard-earned dosh in property, which has grown by 11% pa in the U.K.?

How is a house going to drive productivity? It isn’t.

3. The U.K. is a not-for-profit country.

We recently passed the magic 50% mark. 51% of all employment in the U.K. is in not-for-profit enterprises, largely the state sector but also educational institutions, charities etc. Let me be clear, we need these organisations. The NHS, local schools, HMRC, the BBC. But when more than half of a counties people work in organisations that have no market-based incentive to become efficient there’s a problem. The equivalent in the US is 26%.

4. We crush small firms.

Regulation is critical, but it must be kept in perspective. One example, the PRA currently has an approach where it gives preferential treatment for small businesses loans. Good. But it’s proposing to scrap it. The US isn’t. The EU isn’t. Just the U.K. One estimate, by the consultants Oxera estimates that scrapping the treatment would lead to a reduction in small business lending of ￡44bn. Small businesses is where big businesses grow from. Do we really want to choke them at birth?

5. Private sector businesses don’t invest enough.

We’ve gone from middle of the pack in 1995 to the class dunce now. If business doesn’t invest productivity doesn’t grow, it’s as simple as that. And why don’t U.K. businesses invest, is it really that they are dunces and don’t appreciate the value? Of course not. They don’t invest because the return on investment reflected in share price just isn’t there. As I’ve said. Our stock market doesn’t work.

6. Timidity.

A few days ago, Simon French, writing in The Times wrote a fascinating article titled Change our attitudes to risk and the rewards will follow. His subtitle was?‘A vibrant economy has a mix of risk and reward but we’ve let our anxieties inhibit innovation and stifle productivity, which in the long run makes us all poorer.’ A couple of paragraphs in particular caught my eye:

‘in a fascinating study of the costs of europes largest infrastructure project — the nuclear reactor at Hinkley Point C in Somerset — Sam Dumitriu, head of policy at the campaign group Britain Remade, has found that a staggering aversion to risk has led to the project becoming the most expensive nuclear power station in the world. Some of the data points are jaw-dropping.

Hinkley Point C — set to provide about 7 per cent of the UK’s energy when complete — is on track to be four times more expensive per unit of energy than the average nuclear plant built in South Korea. The Office for Nuclear Regulation has insisted on?7,000 design modifications ?to identical projects delivering nuclear energy in France. This has resulted in 25 per cent greater use of concrete and 35 per cent more steel. More than 31,000 pages of environmental impact assessment have resulted in millions of pounds being spent protecting a tiny number of fish in the Bristol Channel. Similar anecdotes are available from the contractors delivering?HS2 ?and planning the?Lower Thames Crossing .

The common theme of these projects — and in the wider economy — is that attempts to eliminate risk have often superseded a rational, data-driven trade-off between risk and reward. The rewards of lower energy costs, affordable housing and cheaper travel are sacrificed at the altar of trying to eliminate a long tail of small risks. A tangential argument continues to rage around’

This struck a chord with me as I visited Hinkley point a few years ago. In fact, it was my final meeting when I was a consultant. I was so dismayed by the lack of urgency, energy, and grip that I gave up consulting for a few years.

Enough of the misery, let’s remind ourselves of the potential.

1. Just because UK stocks have under performed doesn’t mean they always will

Just a couple of days ago Dean Turner UK economist at UBS Global Wealth Management, said that UK equities had under performed in recent years owing to a lack of technology stocks, but that the manufacturing sector was set for a rebound.

He said: “The UK has been cheap for some time, but a lot of that has been due to the fact that the UK market has much lower exposure to the sectors that have led the market recovery, which has been mainly linked to AI and technology stocks, and for that reason we’ve seen the UK under performing.

The UK is starting to look more attractive because it has a higher representation among stocks and sectors which will benefit from the initial stages of a broader recovery in the manufacturing sector globally, such as energy and commodities, and that comes against a backdrop of inexpensive valuations."

2.The U.K. has a proud history of innovation that is absolutely alive and well.?

Scale AI has just chosen the U.K. for the location of their first international headquarters and that’s quite a coup. But home-grown business growth is even more exciting.

Wayve, a British driverless car company, has raised over a billion dollars from three of the world’s most influential tech companies to commercialise its products.

Led by investor SoftBank, with contributions from Nvidia and Microsoft, the funds will help develop the start-up’s artificial intelligence software, which can make any vehicle hands-free.?

It is the biggest venture investment to date in a European AI start-up.?

The $1.05 billion series C funding round could value the London headquartered company at several billion dollars.

This is what we need, a business born in the Cambridge triangle growing rapidly and investing in technology.?

3. It’s not laziness.

The U.K. problem with productivity is emphatically not one of laziness. ?Hours worked, holidays taken, sick days and all the other worker productivity metrics place the U.K. firmly in the middle of the pack.

So, what can be done about it?

I’m going to be super brief on the macro / political levers as that’s not my focus. In brief the list has to include:

Deciding which industries, we can win in and placing a concerted focus on both internal and inward investment. The list must surely include AI, green tech and Life Sciences.

Lightening the regulatory costs for smaller businesses?

Not so much reducing the size of the state sector as increasing the size of the for-profit sector.

But I’m more interested in what can be done at the business level. How does a business improve productivity?

1. Belief

Let me start with a touchy feely one. Look at this data, U.K. workers don’t feel the same connection to their work as workers in many other countries:

This is a big, big?deal. Leaders in U.K. businesses have failed to win the hearts and minds of their people. That’s a bold and harsh assessment but the data doesn’t lie.

2. Invest in a productivity improvement approach?

Closely tied to the point above, do you actually have a productivity improvement approach in your business? I’m old enough to have seen the progression from Quality Circles to Total Quality Management to Lean to Six Sigma to Reengineering. All are good, all have limitations. The important thing is to adopt an approach, stick with it , refine it and get the benefits. Most companies I talk to have only weak approaches to sustainably improving productivity.

3. Measure it.

What’s your revenue per worker? Do you know? Better still, what’s your EBITDA per worker compared to your competitors? I’ve been doing a little tour of my old clients over the last month. I’ve talked to 22 companies. Only 3 could answer these questions.

4. Digitise

The best way to improve labour productivity is to take labour out of the process. AI holds tremendous promise here. Are you taking a serious enough look at how AI can transform your performance?

5. Replace three with one

Three good managers paid ￡100k each are usually much less productive than one great manager paid ￡200k. How many of your managers have you exited due to low performance over the last year. The last CBI survey reports an average of 4%. That’s awful. Are we really saying 96% of managers are doing a great job? Productivity hasn’t improved for 20 years but 96% of our managers are great. Come on!

6. Re-conceptualise the role of HR

In my book the job of HR is not ‘right people, right place, right time’. It is to reduce the cost of talent as a ratio to value produced. Of course we need the right people in the right place, that’s table stakes. What we really need is to consistently reduce the cost of that talent, not in absolute terms but in relation to the value the talent creates.

Forgive me one last whinge. As a 60-year Everton supporter how can it be that the Football Association docks the club 10 points (reduced on appeal) for breaching its profitability guidelines by spending a fortune on a new stadium? It’s likely to be the best stadium in the U.K. and one of the best in Europe. It’s a small example of the kind of investment we need in the U.K. and one of our regulators (the FA) chooses to punish the club for daring to invest. May the football Gods help us!