Productivity puzzle:

Why motivation is the real key to Britain’s productivity puzzle By Jeremy Renwick, CapX

The UK’s productivity problem is well-documented. Just this month a report from the Office for National Statistics highlighted a drop in productivity at the end of 2018.

Since the 2008 financial crisis our productivity has barely increased and is lower than in nearly all comparable economies. This matters because it means that we are not getting wealthier as a nation or as individuals, on average, with obvious impacts on public services and living standards.

It’s now high time for a new approach to the productivity gap — one that draws lessons from growth sectors and focuses on motivating people.

What’s really interesting is that commentators including the Office for Budget Responsibility, McKinsey & Co. and many thinktanks have neither explanations for nor answers to this problem. The typical factors used to explain productivity challenges include slow adoption of technology, lack of willingness to invest, cheap labour reducing the incentive to invest, the need to improve education and lots of low-productivity “zombie” companies being kept alive by low interest rates.

The real productivity puzzle is that all of these factors are also true to a greater or lesser extent in the other G7 countries, so why is productivity a particular problem for us?

There is a key signpost in the Manufacturing Organisation EEF’s article on the subject. They highlight that the productivity gap does not apply to the manufacturing sector. Given that 79 per cent of the UK economy is services — the largest proportion amongst the countries in the G7 — clearly this is where we must look.

Like manufacturing, services companies are investing in technology and infrastructure to support their staff, while opportunities to use low-skilled labour are fairly limited. These companies are also investing in learning and development and putting pressure on government to improve education. If these firms are not increasing their productivity, it appears to be down to something other than the standard levers.

Service businesses are all about the people, so perhaps the link the economists are missing is something more personal — motivation. There is lots of research that identifies that motivated people are much more productive. Could it be that, since 2008, those working in service industries have not been given the motivation to become more productive?

People are working longer and longer hours, in jobs that are increasingly insecure, for organisations focused solely on the bottom line who don’t seem to care about their employees. Given this context, is it any surprise that many workers feel demotivated and unloved? There is a possible explanation for the 2008 inflection points, in that polling shows many workers still resent the lack of accountability for the financial crisis, and the bailouts that resulted from it.

It does not seem a stretch, in this context, to suggest that increasing productivity, GDP and GDP per capita means creating a more motivated British workforce. Even if the link turns out to be less direct than I’m suggesting, increasing motivation is a good thing in itself as motivated people tend to be happier.

So the key question is how do we go about increasing motivation?

We can look to examples from the corporate world, case studies written by senior managers or presentations given by consultants at conferences. But this territory has been explored before. Now is the time for new solutions and there is somewhere less obvious we should explore in order to learn lessons.

The UK’s growing gig economy represents about 20 per cent of the workforce, is the largest in the G7 and presents a major competitive advantage simply by providing labour market flexibility. More subtle, but equally important in this context, is that most gig economy workers have actively taken a choice to act on and manage their own motivation.  Whatever your views on the merits and pitfalls of the gig economy, it’s clear that the behaviour of those involved in it, particularly in high end jobs such as IT contractors, could help us to understand what motivates knowledge workers. This, in turn, indicates where productivity gains could be made elsewhere in the economy.

Having been part of the high-end gig economy since 2001, both as a contractor and as someone growing consultancies based on contractors, I believe there are seven patterns the broader economy can learn from to potentially increase productivity.

Focus on outcomes/outputs: Contractors are typically contracted to deliver a set of specific outcomes or outputs, and bosses should not be too prescriptive on how to achieve them. A lack of micro-management is well known to be key to motivation, which is why I believe service companies should be looking closely at how their leaders are managing their people in order increase motivation and productivity.

Flexible working: Linked very closely to being outcome-focused, is ensuring there is the flexibility to allow each individual to do the work where and when it suits them – allowing each individual to fit other parts of their life around work more easily.

Avoiding toxic environments / working with people we like:  Probably the most important part of keeping us happy and motivated at work is the people we are working with.  Part of the motivation for contractors is that the underlying expectation of moving on regularly allows them the safety net of getting out of difficult environments with little penalty and switching to join people they have enjoyed working with before. Fully buying into the philosophy that a happy work environment is a productive one, and ensuring that toxic ones are dealt with quickly, will make a massive difference to productivity in service businesses.

Fair reward: Contractors typically take home more money than the equivalent employee and this is a large part of the motivation for moving into contracting. Service companies, and their shareholders, can do much more to acknowledge that motivated people are productive people by taking steps to share more of the profits with them – John Lewis has shown the way here.

Flexible benefits: A more subtle aspect of reward is that contractors choose the benefits they want to opt into e.g. self-funding private health care rather than buying expensive health insurance.  Good practice in industry already provides flexible benefits to employees but there is more that can be done to motivate employees and increase productivity.

Entrepreneurial opportunities: It is particularly true for IT contractors that they spot niche (and sometimes large) entrepreneurial opportunities e.g. for them to develop a mobile phone app.  Their problem is typically finding the business/marketing expertise and finance to turn the idea into a business.  This happens for some employees in large service companies as well, so setting up an authentic early stage business fund to help employees be entrepreneurial could help increase general motivation.

Meaningful work: Again more subtly, contractors are increasingly attracted to work that has meaning for them and are open to adjusting their rates to take on meaningful work.  Companies can do much more to bring their employees closer to the benefit they deliver to society.

Being a contractor has productivity downsides such as having to pay for and manage your own training and development, which is a core part of being an employee. There is also the fundamental issue of constantly looking for work, whereas an employee still has a reasonable expectation of work being provided. So could the way forward, for maximum motivation and productivity, be to find ways to combine the best of the contractor and employee mindsets?  If so, there are steps the traditional corporate sector, along with the public sector, could take to further motivate employees now, starting with the seven patterns of behaviour outlined above.

If they can really get to grips with the productivity challenge, the prize for policymakers, business leaders and civil servants is clear, and the value created could be transformative in the years ahead. Productivity gains are the fuel that will power the British economy into the 2020s, through Brexit and beyond.