2006 Proudfoot Productivity Report
An international study of company-level productivity
About the survey participants
The Conference Board invited its global membership of senior business executives to complete an internet-based survey. More than 800 executives in 19 countries responded. Many were Conference Board members, plus other senior executives in large, private sector corporations.
For more than sixty years Proudfoot Consulting
has specialised in implementing change to achieve measurable and sustainable performance improvement in client companies. Its teams work with client company management, and with people at all levels in these organisations, to design and install programmes that increase bottom-line financial results. Proudfoot Consulting is part
of Management Consulting Group Plc. Through this
Proudfoot Consulting is pleased to provide underwriting support for exploratory research on workforce efficiency by the Management Excellence programme of The Conference Board.
The Conference Board
The Conference Board creates and disseminates knowledge about management and the marketplace to help businesses strengthen their performance and better serve society. Working as a global, independent membership organisation in the public interest, The Conference Board conducts research, publishes information and analysis, and brings executives together to learn from one another. The Conference Board is a not-for-profit organisation and holds 501 (c) (3) tax-exempt status in the USA.
Proudfoot Consulting wishes to thank Nicholas
Crafts, of Warwick University and the London School of Economics, for his contributions to this research
Proudfoot Consulting also acknowledges assistance from The Conference Board in administering the survey and analysing the data used in this report. While the global executive survey and micro data analysis conducted by The Conference Board underpin this project, the conclusions of this report are solely the responsibility of Proudfoot Consulting.
Below are our Top 10 findings on labour productivity from a global perspective, taken from
both the executive opinion survey and the Proudfoot Consulting business review data.
From the survey
¡½ Executives believe their people are becoming more effective at work: 78% said workforce efficiency
(labour productivity) had increased in their companies during 2005. Just 7% reported lower efficiency.
¡½ Executives in Asian economies, Germany and Brazil reported the highest percentage increases. Their
counterparts in USA, France, Canada and the UK reported the lowest.
¡½ The average productivity performance increase was 6.4%
¡½ Almost one quarter (23%) of executives have set no target for labour productivity in 2006.
¡½ Asian and Brazilian executives are setting the most ambitious targets for performance improvement in
2006. Executives in the UK are less ambitious in their target setting than their mainland EU counterparts, even though they are starting from further behind (measured in terms of wasted working time).
And from the company business reviews
¡½ There was a widespread productivity improvement in 2005, defined as a fall in terms of unproductive hours. This reverses the increase in unproductive hours observed between 2003 and 2004 and
represents a welcome overall advance on 2003.
¡½ Countries that are prominent in this improvement include Germany, South Africa, the UK and the USA.
¡½ Out of six countries where official statistics allow comparisons, in 2005, the average amount of time wasted through inefficiency was equivalent to 38 working days per employee. Australia wastes most at
56 working days.
¡½ Poor planning and control of work still accounts for most unproductive time but management of people and work is improving; more companies are implementing and adhering to efficient people and work
process management systems.
¡½ However, the second greatest cause of unproductive time is ¡¥inadequate supervision¡¦, and no significant improvement was observed in the entire three year timeframe 2003 - 2005.
About this report
This report is the latest in a series of annual studies on workforce efficiency ¡V what economists commonly refer to as ¡¥labour productivity¡¦. It will be of interest to anyone concerned with organisational effectiveness and performance; in particular to anyone with management responsibility, as well as those who create
policies that influence business. The report provides an overview of two elements of new work undertaken
in the first quarter of 2006.
The first is an independent analysis of three years of proprietary data collected by Proudfoot Consulting during internal reviews of operational performance of companies around the world (see below for details).
Although Proudfoot has published its annual Productivity Reports since 2001, this is the first time that three consecutive years of statistics have been analysed, producing more robust findings.
The second element comprises extracts from an executive opinion survey commissioned by Proudfoot Consulting from The Conference Board. The survey was completed by 800 people, including Conference Board members and other senior executives in large, mostly private sector corporations.
The report has a dual purpose: to expose and highlight the most commonly observed factors that prevent companies operating more efficiently; and to report the executive view on performance barriers, workforce efficiency in 2005 and their expectations for productivity growth in their companies for 2006.
The report also allows comparisons between the observed findings of what actually happens in practice, with what executives think is happening. Furthermore, it identifies the best and worst performing economies, in terms of labour productivity performance, and the best and worst performing industry sectors.
Additional chapters covering more specific aspects related to productivity performance will be released in series later this year. The themes for these include sales force performance, supervisor behaviour and management systems.
About Proudfoot Consulting business reviews
Over the three year period 2002 ¡V 2005, as part of its consulting activities, Proudfoot Consulting conducted some 1,900 business reviews1 observing deployment of labour in various departments on behalf of 235 companies seeking operating performance improvements. These reviews took place in 30 countries (see appendix for list) and amount to more than 13,314 hours of observation of managers and workers in
medium to large-sized firms.
Luiz Carvalho, Chief Executive Officer, Proudfoot Consulting
We¡¦re all familiar with the theory surrounding economy of scale: the larger you get, the more efficient you become. But, as any chief executive will testify, the certainty of that outcome is far from guaranteed; because hand-in-glove with scale goes the complexity of making the most efficient use of every company resource.
It was this conundrum that fascinated Alexander Proudfoot, becoming the cornerstone for the eponymous consulting business he founded in 1946 and which today I head. The answer certainly involves more than just finding ways to get people working more effectively. Running a large corporation today places huge reliance on other resources, be it information and communications technology, warehousing and logistics, premises and other physical assets, supply chain partnerships, and so on.
Whereas these resources often change, according to industry sector and geography, one constant resource, the one common to every corporation, is people. And they are arguably the most challenging of any resource to manage efficiently.
Certainly, the results of The Conference Board¡¦s executive opinion survey detailed in this report support this. And it¡¦s no coincidence that the top two barriers to improved productivity, arising consistently in thousands of Proudfoot Consulting business reviews, are both closely-allied to people, in terms of management, supervision and planning of work.
Management still matters where people are concerned, and rather more so than in Alexander Proudfoot¡¦s time, given the complex, global nature of modern day corporations. The late Peter Drucker summed it up neatly by observing that management is ¡¥the organ of the institution, the organ that converts a mob into an organisation and human efforts into performance¡¦. High performance is synonymous with high people performance.
ƒä Looking backward ¡V do executives believe workers were more effective in 2005?
Country comparisons of labour productivity
This section of the report details what executives at an individual country level said about workforce efficiency performance in 2005 and contrasts this with the results of Proudfoot Consulting¡¦s business reviews by country. It also reports executives¡¦ expectations for workforce efficiency performance in 2006 by country.
We asked senior executives around the globe about workforce efficiency in their company during 2005. Had it increased, decreased or remained the same?
At 78%, the overwhelming majority said workforce efficiency (labour productivity) had increased during
the period. Just 7% reported lower efficiency.
In France, an even higher percentage of executives said workforce efficiency had risen (83%).
However, this perception contrasts markedly with the results of Proudfoot Consulting¡¦s business reviews
in that country (see Table 1 overleaf). Analysis of data from these shows France has experienced a clear decline in productivity over the past two years. According to business reviews undertaken in French companies in 2005, workers wasted 10% more time compared to similar studies undertaken in 2003.
ƒä Looking backward ¡V do executives believe workers were more effective in 2005?
The picture in Australia is even worse than France, with unproductive time increasing by 14.1% over the same two-year period, although a lower number of executives (74%) than in France said workforce efficiency had risen in 2005. However, in the context of the entire three year period studied, Australia appears as a top performer, ahead of both the USA and the leading EU economies.
Germany has seen a 6.8% efficiency improvement. And here, executives also seem to have a more accurate handle on what¡¦s happening in their companies. Around half (48%) reported a workforce efficiency rise of up to 10% in the last year. And 37% said efficiency has risen by more than 10%, the third highest
figure after Asia and Brazil.
The level of unproductive time measured in the UK fell by 8.4% between 2003 and 2005. This apparently good news needs, once again, to be seen in context of the entire three year period studied. From this position, its performance is poor, with more time wasted by UK companies than in any other nation/region studied, except Asia. At least UK executives are much more in accord with data arising from business reviews undertaken there: some 62% accurately reported a workforce efficiency rise of up to 10% in 2005.
European countries fear Asian competition, especially in manufacturing. Business reviews by Proudfoot show Asia has more unproductive labour time than either Europe or the US, and by quite a significant margin, suggesting its management practices are markedly inferior. This data, together with evidence from The Conference Board help to clarify the basis of Asia's challenge to Europe: it is one founded on cheap labour rather than high labour productivity or superior management practices. Labour productivity per hour in China and India is around 6% of the EU15 level. However, unit labour costs in Chinese companies are approximately 50% of the EU15 level, but this is because wage rates are about 3% of those in the EU15.
However, if executives there are correct in their assessments, Asia¡¦s labour productivity performance is changing quickly: half of the executives in the region reported a workforce efficiency increase of more than 10% in 2005. This is more than any other national or regional group.
A final word about South Africa. In 2005, companies there wasted less time than any other nation/region studied, the result of the largest single year-on-year improvement during the period 2004-05.
Looking backward ¡V do executives believe workers were more effective in 2005?
France and the US
It is interesting to compare differences in unproductive time with differences in real GDP per hour worked between these two countries. Proudfoot Consulting¡¦s data for the last three years show slightly less unproductive time in France than the US, a difference which is statistically insignificant. By contrast, in 2004 labour productivity measured by real GDP per hour worked in France was 15.5% higher than in the US.
This is explained by the fact that labour productivity is affected by the amount of machinery and infrastructure, the sophistication of the technology in use, and the skills of the labour force, as well as the effectiveness of management in achieving high utilisation of labour time. The French lead in real GDP per hour worked is based primarily on the use of around 50% more capital equipment, per hour worked, than
in the US.
This implies that less of national income is available to be enjoyed by consumers and more has to be used to finance investment, so it is certainly no 'free lunch'; in recent years France has invested over 1% more of GDP than the United States.
Proudfoot Consulting's data suggests that there is no reason to believe that management of companies in France is better than in the United States, in that unproductive time is similar over the last three years together. This is borne out by a new comparative study of management practices in different countries.
This study concludes that, if anything, French management practices are a little bit inferior overall because French superiority in operations management is more than offset by American strength in people management (targets and incentives). This is consistent with the details of the Proudfoot database which reveals a substantial French superiority in supervision of workers.
So the French lead over the United States in real GDP per hour worked should not be interpreted to suggest that French management practices are generally superior. Recent trends in unproductive time in France do not suggest that management practices are improving, although a traditional strength in operations management is still apparent.
Regional productivity performance
Analysis of company business reviews shows that the regional group ¡¥Rest of Europe¡¦ (defined as Austria, Belgium, Denmark, Italy, Netherlands, Norway and Sweden) has significantly better performance compared with rivals. This seems to suggest that if Europe has an unproductive time problem it is more prominent in
the region¡¦s larger rather than its smaller economies.
Productivity comparisons are often made between the US and Europe. There is no evidence from the business reviews that US companies have substantially less unproductive time than those in Europe.
This adds further weight to the view taken from official statistics that the big advantages for the US in sustaining relatively high GDP per person are the result of longer hours worked and higher employment rates, rather than GDP per hour worked.
Executives¡¦ outlook for labour productivity in 2006
We also asked senior executives about their expectations for workforce efficiency in 2006 in their company. Do they expect it to increase, decrease or remain the same?
Most interestingly, is that overall, almost one quarter (23%) of executives have set no target at all for labour productivity increase in 2006. Countries where executives are least likely to have any target include: Canada, The Netherlands, the UK and the US. Executives in France and Germany, meanwhile, are most likely to have formal targets set.
Three times as many executives in the UK and US have no targets compared to those in Germany and France. And UK executives are less ambitious in their target setting than their mainland European counterparts.
A similar percentage of executives (26%) who reported a 5-10% performance increase in 2005 are forecasting the same level of performance increase during 2006. Asian and Brazilian executives are setting the most ambitious targets for performance improvement.
Industry sector comparisons of labour productivity
Taking as a group all executives reporting any increase in labour efficiency in 2005, the following industry sectors are most prominent:
¡½ Chemicals, oil & gas
Taking as a group all executives who reported a 10%+ increase, telecoms & hi-tech is most prominent, followed by retail then transport.
Although no retail sector executives reported a 20%+ improvement, more than a third reported an improvement of between 10 ¡V 20%. This is higher than any other sector.
Business review analysis identifies two sectors worldwide which stand out for having relatively little unproductive time. These are transport and financial services. In Australia, manufacturing also has significantly less unproductive time than other sectors.
However, in Germany the global position is reversed for the transport sector, which stands out as one with a significant problem of unproductive time. The UK¡¦s greatest time wasters are the services and entertainment sectors.
Telecoms & hi-tech sector executives are most bullish in their forecasts for labour productivity increases in
2006, followed by those in retail. Executives in the following sectors are more likely than average to have not set any target:
¡½ Chemicals, oil & gas
¡½ Financial services
Barriers & drivers
This section of the report details what executives at a global level believe prevents their workforces being more efficient, including any notable national and sector variations.
It also reports what executives believe are the most important drivers of efficiency in their companies, again with any significant national and sector variations. This is contrasted with the results of Proudfoot Consulting¡¦s business reviews at both global, country and sector levels.
On a global level, executives ranked three, closely-interrelated causes highest: internal communication
problems (1), poor management, in terms of inefficient work planning and organisation (2), and poor employee motivation/morale (3).
Ranked least important were transport infrastructure and outdated plant, machinery and technology.
Barriers & drivers
French and German executives gave below average rankings to problems with information and communications technology (ICT) as a cause of inefficiency. Meanwhile, US executives ranked this factor higher then average, perhaps a reflection of that country¡¦s more intensive use of ICT.
Executives in the UK and the US gave above average rankings to internal communication problems, the latter also ranked poor management above average as a cause of inefficiency.
Australian and French executives gave above average rankings to poor employee morale/motivation.
Not surprisingly, French executives felt more strongly than any other national group that legislation and regulation created inefficiency.
Industry sector variations
Internal communications, ranked top by executives in all industries, is a particular issue for those in telecoms & hi-tech and transport sectors, who gave it above average ranking. By contrast, executives
in manufacturing and oil, gas & chemicals ranked it below average.
Poor management, ranked second overall, is again more of an issue for those in telecoms & hi-tech and transport, but also the services sector. Poor management is less of an issue for executives in retail and manufacturing, when compared to average rankings.
Telecoms & hi-tech, transport and services rankings are prominent again for poor employee motivation/morale, the third most common cause of inefficiency. Manufacturing once again comes out looking better in this respect, as does retail.
Productivity barriers arising from Proudfoot Consulting business reviews
While analysis of the business review data highlights the management deficiency problem reflected in the opinions of executives, the most notable deviation is with the problem of poor communication. Proudfoot data shows this to be significantly less commonplace as a cause of wasted working time than executives believe it to be.
Inadequate supervision of work is the most frequently observed reason for inefficiency, although it should be acknowledged that there is a correlation between this and poor communication.
Barriers & drivers
Uppermost in the minds of executives was the consistent execution of strategy by senior management, followed by investment in workforce skills and development, then investment to improve management performance. Of least importance was any move towards outsourcing, offshoring or both in unison. This is surprising given the fact that outsourcing is one of the world¡¦s fastest growing industrial sectors2. One
possible explanation is that executives in this survey (on the whole from medium to large sized companies) believe they have already reaped all the potential efficiency gains offered by outsourcing.
Another surprise is that fewer than might have been expected thought investing more in information and communications technology (ICT) was a priority for driving efficiency. The effect of new technologies (combined with organisational change) has been considered fundamental to the productivity transformation of the US retail/wholesale sectors. These two sectors have been largely responsible for the entire productivity growth advantage enjoyed by the US over the EU in the last decade3.
Barriers & drivers
Fewer Australian executives ranked strategy execution highly, compared to the global average, although this was still considered the most important driver of efficiency by that group.
Although outsourcing and/or off-shoring ranked bottom globally, German executives appear to be more alert to the opportunities of offshoring than average. The proximity of several low-wage, German speaking nations to the East and recent EU border expansion are likely explanations for this.
French and German executives believe their companies would be more efficient if they had more flexible/liberal labour laws. German executives also ranked the implementation of a management methodology (e.g. ¡¥lean¡¦, Kaizan, Six Sigma, etc) more highly than average.
Industry sector variations
Of the top three drivers globally, manufacturing, services and telecoms & hi-tech sector executives ranked ¡¥execution of strategy¡¦ more highly than average. Retail and manufacturing sector executives ranked ¡¥investment in workforce skills¡¦ higher than average. And those in retail and services sectors felt more strongly about the need for investment in management development to drive efficiency.
Interestingly, transport sector executives came in lower than average on all of the three most frequently identified drivers. Yet this group is the most bullish of any sector in forecasting labour force efficiency increases for 2006.
Luiz Carvalho, Chief Executive Officer, Proudfoot Consulting
On the evidence of this report there are several closing comments I¡¦d like to make. The first is that business executives, on the whole, appear to overestimate efficiency improvement in their companies. Indeed, some would appear to be disconnected from the reality of what¡¦s really happening, as our findings for France rather uncomfortably demonstrate.
Second, reducing unproductive time is not just an issue for one particular nation or industry sector but for all. Whether viewed at company, industry or national level, there are some that are clearly better at
managing this than others, and no doubt there are lessons that could be shared more effectively to transfer best practice. One thing that we can be certain of is that, at the individual company level, it requires the chief executive to be the driving force.
Another certainty is that improving workforce efficiency will not happen without knowing current performance and setting a sensible improvement margin. It¡¦s lamentable that in an era of target obsession, the task of setting and meeting targets does not yet include workforce efficiency in a surprisingly high number of companies. We know that this is not because it is too difficult. Could it be that workforce efficiency is seen as just not important enough to require its own target? Further research on this would be telling.
As would a more detailed look at what¡¦s behind the stark contrast between our survey respondents¡¦ views on offshoring/outsourcing and that market¡¦s continuing buoyant growth. If they don¡¦t see it as a priority for efficiency improvement, what¡¦s the reason for all that continuing investment? The only sensible course in our opinion is to optimise the target function first, and then review the decision to relocate or risk giving away value.
One investment that does raise efficiency is in ICT, provided it happens with appropriate people, behaviour and organisation changes. Evidence from The Conference Board shows this, but our survey shows many have yet to accept it. The irony is that with more communications technology than ever before at their disposal, executives still rank internal communications problems highest of all productivity barriers. Perhaps it¡¦s time to ditch the Blackberry in favour of more ¡¥face time¡¦.
Getting close to 85% labour force utilisation for productive, value-added work, is possible but requires a mixture of clear, consistent strategy, management ability, work systems, technology use, people supervision, motivation and commitment. The challenge for the many is to mirror the few that have so far managed to get most, if not all of these ingredients right to form the winning recipe.