The Productivity Puzzle: How to Improve Productivity in Small and Medium Sized Businesses

The Productivity Puzzle arises from statistics that keep showing the UK doing poorly in the productivity stakes.

But what is the productivity puzzle? What can be done about it?

And how can someone running an SME improve their small business’s productivity?

Firstly productivity is a measure of how productive workers are in an economy. It is quite simply the total amount of economic activity divided by the total number of hours worked by the workforce.

According to Bank of England figures, an average worker in the mid-2000s produced as much as 5 workers did 100 years earlier. We’ve become much more productive in that period, due in large part to advances in technology.

The financial crisis of 2008 brought that productivity growth to a shuddering halt. Figures suggest that over the last 10 years productivity has hardly changed. Whilst productivity in other countries has also slowed down in the same period, it has stagnated in the UK. Workers in the USA, Germany and France are more productive than those in the UK. This is the UK’s productivity puzzle. You can read more about it on the Bank of England’s website.

Why productivity is low is difficult to determine. Maybe this is why it is called the Productivity Puzzle.

The figures suggest it is the largest and most productive companies that, whilst excellent,  have lost some of their shine.

It could also partly be a failure of measurement. Not all economic activity is measured in the GDP figures. The digital economy gives lots of stuff away for free and this trend has continued in the last 10 years. For example platforms that enable communication, like social media, are free. Things that otherwise would be paid for don’t show up in the figures and could distort the numbers.

Research (by Centre for Cities) has also shown that in the UK many of the so-called “unproductive” businesses are local businesses serving their local community. There can be limited scope to improve productivity in a cafe or gym, the market is limited and location dependent.

Most productivity growth is therefore likely to come from other sorts of businesses, ones that can serve beyond their local area. Most SMEs however don’t grow very large – 96% of all limited companies in the UK are “micro businesses” with less than 10 staff.

Maybe The Productivity Puzzle is not so puzzling after all. If we look at a step by step approach to improving productivity, some solutions may become clear.

If productivity is the economic output per hour worked, then productivity is really about turning inputs into outputs.  There are only 2 numbers to change, giving 3 mathematical possibilities to improve productivity:

1. the number of hours for the same output needs to decrease
2. the output for the same number of hours needs to increase
3. both hours and output need to increase, but output increases at a faster rate.

Already it looks like solving the productivity puzzle is possible!

So let’s look at each of these in turn.

1. Decreasing hours

Most of us have heard of “Parkinson’s Law” – that work increases to fill the time available. We can flip that around and say that a task will take the amount of time that is available for it. So it might be possible simply to reduce the number of hours, but not decrease the output required.

This is not the same as saying that we need to decrease the work involved. When we really put our minds to it, when we have to, we find more efficient ways of doing things. There are some activities that simply don’t need doing, or don’t need doing as thoroughly as we are doing them, or there are more efficient ways of doing them. The pressure of time focuses the mind and we get more things done.

There is also the added bonus of fewer hours worked – which is more leisure time and more time to recharge, reflect and re-energise. A fresher brain on Monday morning is more likely to be more productive.

2. Increasing output

The second option for improving productivity is to keep the staff time the same and increase output.

Most businesses find that their ways of doing things could be revised to accommodate more output. Quite often teams can take on “just one more project”, the incremental expansion is possible up to a point, sometimes it’s difficult to find maximum capacity until you’ve gone past it – helpful in the short term, but unsustainable in the long term.

Some businesses have spare capacity and can expand output with no more staff time. For example looking at utilisation rates of machines or rooms can indicate where spare capacity might lie. There can also be a spare capacity mismatch – some areas of the business could be overloaded whilst others are under-utilised. A re-arrangement of tasks between people could enable more to be accomplished in the same total amount of time.

3. Scaling up efficiently

The third option for improving productivity is to increase both inputs and outputs, but with outputs increasing by a greater proportion.

This is could be a straightforward application of economies of scale. A larger scale could enable a more expensive and more efficient piece of machinery to be bought which increases output much more than the increase in labour required to run it.

It looks like we are well on the way to solving the productivity puzzle!

Investment is one of the main ways to improve productivity – but investment in what?

Investment in infrastructure – some of our infrastructure is creaking and struggling to cope. Even our new infrastructure can struggle to support us. From poor internet connections to gridlocked roads, time that is wasted cannot be spent on productive activity.

Investing in infrastructure can give a more reliable environment for business to work in – but this is outside of the control of an SME. What you can do is work around it, such as can change provider, relocate to a different area or re-organise your business so that not such a heavy reliance is placed on things like travel.

Investment in the right technology can produce significant returns – as it has done over the last 100 years. Moving from manual processes to automated processes can significantly improve your results.

Quite often however, because of the pace at which technology is moving and developing, we’re not even aware that new technology exists that can help us.

Technology can and does improve productivity, sometime radically.

Sometimes it enables you to do something that you currently do much more quickly and more efficiently – and probably more accurately and in less time.

Sometimes it enables you to do something that you aren’t doing at the moment, and didn’t even know was possible. It can produce a whole other set of outputs with no increase of time spent.

So technology can help your business by doing current processes quicker and better, but it could also help you do new and valuable things with minimal effort.

Often our challenge is not that the technology doesn’t exist, but that we don’t know it exists. And if we know it exists, we might not understand what it could do for us, or we can’t think how it could work in our situation.

You know your business inside out. The technology provider knows the solution inside out. The problem is that that knowledge resides in two separate heads! You really need an understanding of both the solution and the business to see the real possibilities and how technology could work for you. For a business owner this requires an investment of time to understand the possibilities.

Education is an investment, although many businesses feel that training is a cost. Education – or at least education in the right things – can produce a return on investment that can last a lifetime.

Firstly, continuing the thinking about technology: we install a new piece of software, mentally tick it off the list and use it the way we first learnt it, probably at a basic level. We might then never get past that first level of understanding and so never unlock the true potential of the system.

If you have a piece of technology that you implemented and haven’t really taken the time to understand then you might be able to improve your productivity by learning it properly – a “post implementation review” as the jargon describes it. Relearn what the technology can do, get past the basic features, identify what is time-consuming, or what information you’re missing and look again for it.

A classic area for improvement is reporting – the basic standard reports are probably quite limited – getting a report configured properly can tell you a lot about your data in the system – there’s no point in having lots of data if you can’t turn it into useful information quickly and then make better decisions which could enhance your productivity.

Educate yourself on your technology and you can really start to derive value from it rather than just scratching the surface.

Education in skills that are core to your business are also essential. Being able to have the knowledge to do the right thing right first time will produce a better output and save time. Better to invest in education upfront than to spend money correcting or repeating something that’s gone wrong.

Make sure that your team are up to date with the latest skills and standards that are needed for their core work.

Strangely, high labour costs and an inflexible workforce seem to boost productivity!

In the UK a flexible labour market means that people can be hired and fired relatively easily. Compare to France where there are strict labour laws and it’s more difficult to terminate an employment contract. The result is that in France SMEs are cautious about taking on more staff. Instead they look to technology first. As a result they then have a higher ratio of technology to people. People are operating technology instead of supervising other people. France has higher productivity than the UK because they use technology to help turn an hour of labour into greater output.

Making a choice between a new role and investing in technology can also be influenced by expected demand over the short and long term. In times of uncertainty businesses are less likely to commit to an investment in technology that pays back over several years when they could achieve the same outcome by using more labour that can be more easily scaled up and down as demand determines. So even though it is a less productive option, it is a safer and less risky option. There’s no point in investing for the long term if there is no long term future!

When you’re creating a new role or recruiting a new person, consider ways in which the role or tasks could be re-shaped to be more efficient, or maybe you don’t need the role if you use technology and re-organise existing roles around it. Also consider the impact over the short and long term of your decision – what would have to change for your to make a longer-term investment?

Whether using technology or not, all business have systems and processes. Some are effective and efficient – but most could do with some improvement. And some business have no processes at all!

Process and systems build up over time and can easily end up with unnecessary steps and complicated ‘work-arounds’ that are time-consuming and clunky.

Take the time to review one of your key business processes.

Walk through the process step by step and see how many of them are really necessary:

Are they in the right order?
Is there duplication?
Does everyone understand their role?
Is anything missing?
How do you know it’s working well?
Could it be producing useful information at the same time?
Do you even need this process, or is it redundant?
Is it trying to control something that could be done more efficiently in a different way?

Many SMEs fall into the trap of running on gut instinct and never putting a process or policy in place. As a result productivity is hindered by repeatedly going through an ad-hoc process which is inconsistent and produces erratic results, rather than having a set policy or procedure which anyone can follow and produces reliable and consistent result time after time with minimal effort.

Are there decisions that you are having to make repeatedly, or doing the same tasks over and over again?

Are staff coming to you to rubber-stamp a decision when you could just as easily delegate to them within some agreed boundaries?

Consider putting in place simple processes, agree them with your team and see if it’s more efficient. If nothing else it’ll free up your time to do something more constructive and productive with your time, such as growing the business.

You will have probably heard of the Pareto principle – or the 80/20 rule. This might be the insight you need to help you solve your productivity puzzle.

The rule says that 80% of your outputs come from 20% of your effort. It is almost always true that much of what you do is unproductive compared to some of the things you do that are extremely productive.

If you can identify what those are then it’s easy to boost your productivity: simply cut out some of the least productive activity and replace it with more of the most productive activity.

It’s an embarrassingly simple idea and profoundly effective if consistently applied – the simple mathematics of it make that a certainty!

But don’t worry about the maths, just ask yourself the simple question: is this the most productive thing I could be doing right now? If not, what would be the most productive?

Having clarity about what your business is about and where you are trying to take it will make it much easier to plot a course in the right direction. Clarity of direction lets you see what needs to be done and gives you a way to filter out what isn’t relevant.

Clarity enables you to keep moving in the same direction, getting better and better at the core parts of your business. Productivity improves when you move consistently in one direction.

There’s no point in starting new things, then changing direction because you weren’t clear on the right thing to do. All that happens is that you never get anything going really well, never master one thing and never get really expert at one process.

Clarity will enable you to choose the right things to do.

Are you clear about the direction you are taking your business? Or is it a bit hazy?

Focus is linked to clarity. When you are clear on where you are going, it is also clear what you need to focus on.

Having a focus and sticking with something will enable you to quickly get up the learning curve with concentrated attention.

A “sprint” is a highly focused project probably lasting a few weeks, in order to create a step-change in what you do.

What do you need to focus on over the next 90 days? What initiative would help you solve the productivity puzzle in your business?

Running an SME successfully is about taking all the component parts and making them work together. To have a plan and execute it well.

Management of people and processes is a key skill, but not many business owners seem to take the time to invest in their management and business skills. The Federation of Small Businesses (FSB) reports that just 17% of those running small companies have invested in leadership or management training in the last 12 months.

Taking on your first employee is a big step. Managing a growing and complex business that you can no longer run by yourself brings in a multitude of new challenges.

It’s a catch-22. You’re busy running your business and don’t have time to learn about all these management issues, or your too busy doing your job to manage others.

Business owners need to recognise that management is a core part of the job. Getting things done through people is not that easy and the upheaval and disruption of an employee leaving an SME can be huge.

Good management can make the difference to staff turnover – and to solving the productivity puzzle.

Leadership is another area that SMEs tend to struggle with. Being a leader is one of the key roles of a business owner.

Instead of doing the work, you are now encouraging and inspiring others to do it, creating an environment in which they can thrive.

Instead of running the business you have an eye to the future and a vision in mind which you communicate to the team.

Unlocking the discretionary effort of your team and mobilising them towards a compelling vision is a skill in itself.

Leadership can be developed over time, but only with effort, self-reflection and self-awareness.  Selling a vision that everyone buys into will unleash greater levels of creativity and productivity.

A vision of the future almost always includes growth. A move from start-up to scale-up.

When scaling up it’s the straightforward maths of economies of scale that helps boost productivity. You only need one Chief Executive whether it’s a business of £1m or £100m – and so with all other fixed costs, they get spread over more units of output. You can produce more output per hour of labour and so productivity increases.

Having scaled up at home you reach a new plateau.

The next option is to export.

Do the same thing in multiple markets and take the business to a new stage of growth. The government is keen on exporting as a solution, but it’s not right for everyone.

Maybe the productivity puzzle isn’t so puzzling after all.

Productivity is a long-standing issue in the UK. It’s a problem the government wants to solve and provides help and support in various ways, such as encouraging SMEs to export.

The productivity puzzle should also be of great interest to you as a small business owner. It leads to greater profit, helping more customers and makes the role more enjoyable and sustainable.

There are two agendas here. The government’s agenda to drive SME growth is about improved productivity, GDP growth, increasing exports and creating jobs. You don’t need to worry about the government’s agenda though! Your job is to serve customers as well as you can and as efficiently as you can, for your sake and for theirs. If you happen to also create jobs and start exporting, well that’s a bonus.