Scroll down for earlier posts
The STOP-START explanation for the slowdown in the world’s modern economies that the experts STILL don’t see ….
After the flexible labour market took hold in the 1980s, something unexpected happened, the results of which many experts today are still ignoring as an explanation for our widespread slowdown in economic activity. Productivity, the wellspring of our profit, growth, wealth and associated things political, got more and more difficult to sustain.
With some spikes, the measure of this prime economic indicator started its gradual decline, a marker that was previously buoyed by a range of factors, among them some innovative management techniques and, more importantly, the advance of industry-related technology. Today, almost all the developed economies are suffering the effects of high staff turnover, which has brought about the most important change in workplace practice for more than 50 years.
Originally designed to help employers adjust more quickly and easily to rapidly changing economic and marketing conditions, the flexible labour market has imposed a workplace churn that has never been higher, with many employees now enthusiastically using it as an opportunity to improve their wage packets.
So, apart from the inevitable escalation in the cost of hiring, why is this specifically so important to output?
Flexible working’s short tenure has literally upended the workplace. Within a typical four-to-five year tenure at every hierarchical level, for example, outputs during the first and last years of in-house tenures of employees are predictably lower. Alongside the reality that few corporate functions are now excused the mid-flow disruption of a staff replacement or two, the accelerated rate of employee turnover has brought several other deleterious impacts on the quality of decision-making,
Corporate loyalty has all but disappeared, a phenomenon that has discouraged the ownership of employers’ previous experiences (“not my responsibility”), an explanation why operational lessons habitually go unlearned. And without much inheritance between generations, the employers’ unique knowledge and experience is constantly being overlooked, both phenomena leading to a reduced knowledge base from which new employees can make good and better decisions.
And this strips employers of the way most progress is typically achieved – organically, i.e. from the building of one experience on another.
Bottom line, with STOP-START affecting every job and every employer, EVERYTHING has slowed, exactly as the productivity scores show.
Oddly, the problem is only now beginning to be acknowledged, as is the solution.
No one so inattentive as a modern ‘expert’? It’s an uncomfortable enough observation that argues it is time for this unintended consequence of Adam Smith’s invisible hand to be considered systemic enough to address with purpose – at the educational level, the individual employer level and even by Government, which is showing its own late concern about productivity’s slippage. The workplace is, after all, where the MAIN factor of production goes to work.
What has FAUST, ADAM SMITH and PETER DRUCKER got to do with the experts’ unexplained reasons for our declining productivity?
How many times have you heard the expression “We must learn the lessons”? It’s boringly familiar, irritatingly frequent yet incisively relevant to how well we earn our living. Whether it’s in politics, business or elsewhere, NOT learning lessons is one of the biggest ways we become uncompetitive. A Google search throws up the shocking figure of 183,000 times that someone out there articulated the words “must learn the lessons”. For the same five words with the letters UK added, the figure is 80,900, both of which indicate the level of concern for the problem by interested parties after the event.
But the frequency of actual examples of recognised mistakes that have been repeated adds up to exceed any normal range of measurement. A Google search for “repeated mistakes at work” throws up 7.53 million results with the added letters UK registering 6.23 million. However imprecise are the real figures, the frequency of the defined problem is high enough to suggest the real impact on sales, profits and underlying wealth. It’s huge!
In fact examples of unlearned lessons in politics and commerce have filled many books as well as the classrooms of our numerous business schools, yet the delinquency persists, begging for an answer outside the conventional ways that decision-making is taught.
Consider this, at least in the UK. We’re the world’s oldest industrial economy and one of the most educated countries in the world, two qualifications that should, in theory, mean that our wider experience and schooling should give us some practical advantages. Yet we continually make both simple and more complex ‘missteps’, many of them recognisably the SAME mistakes of yore, often very expensive and – suggestively – unnecessary. To make the point accurately, look at our national productivity – i.e. how efficiently we, as employees, make the widgets that we want others to buy. It’s so low that, at a recent count, we’re 20 percentage points below the average of other industrialised nations, making many of those widgets more expensive than our potential customers would be prepared to pay. Whilst other developed countries also have ‘experience’ and ‘education’ behind them, they similarly have their own list of unlearned lessons, albeit in different measure, but the puzzling aspect of all the needless expenditure that increases our production costs is that the experts don’t know why productivity growth is shrinking.
As a subject, productivity is one of the most unexamined, important and misunderstood issues in society, a topic that’s always hidden itself behind the irreconcilable and out-of-date camouflage that Britons work the longest hours in Europe; thus, we’re must be more productive. Whilst latest research suggest that this work level is no longer the case (NatCen Social Research, April 7, 2016), it nevertheless still awkwardly highlights our lack of productivity behind another ‘politically correct’ reality – that one should not offend the workforce. In the past low productivity’s mention, at least in the UK, would hardly rate a decibel, with Government taking on the problem as its own. Top-down strategies have followed, mainly involving emphasis on infrastructure and education, all very laudable but still, productivity has lingered. Today, the problem is at last being acknowledged but recognition is still a far cry from any significant action, which first requires a creditable explanation.
Relatively speaking then, why are we – and others – so unproductive in today’s workplace? With much of past success down to improved technology, the explanation is not rocket science but, to be thorough, I need to be somewhat circuitous.
Self-evidently, it’s because we’re not very good at learning from experience, which otherwise means that the lessons of past practice are rarely heeded. And why is this?
Basically because our institutions don’t remember well their yesterdays and our education system doesn’t teach us HOW to be reflective in a constructive way. In other words we don’t know how best to APPLY tried-and-tested practice, whether that practice was good, bad or indifferent, to new circumstances and environments. It’s probably a societal thing; we don’t like to admit to failure or even to apologise for it.
With regard to the ability of individuals to ‘remember’, at least in Western spheres, there is an inherent personal limitation that manifests itself in the recognised physiognomies of short, selective and defensive memory recall, all well-researched inhibitions to good decision-making. Then, in the case of employers, little effort is made to preserve their own corporate experiences and thus provide the distinctive evidence with which their employees would otherwise need to make good and better decisions on their behalf.
And the reason why this is now more difficult than ever – and avoided like the plague – is because of the single biggest change in the workplace that employers once welcomed, for years actively encouraged and now finds itself stuck with. It’s the flexible labour market. Originally designed to enable employers to react quickly to changing market environments, many employees, including our key decision makers, have taken to short jobs tenure with gusto (every time it happens it typically gives them an uplift in their income) by changing their employer every four to five years on average in the UK, quicker in the US. Whilst this undoubtedly makes available to employers a more diverse and experienced employee base, what also emerges is a devil’s compromise; employers themselves quickly lose their own distinguishing memories and with it their unique selling point (their USP), substituting it with the unfamiliar experiences of replacement employees. Whilst not always disadvantageous, this interuption brings with it the phenomenon I’ve called corporate amnesia, which effectively disables much of capability to learn from one’s own experience. As such, it largely stops in its tracks the traditional way most progress is achieved – organically, i.e. through the building of one experience on another. Hence employers’ costly disposition to repeat mistakes, reinvent the wheel and not learn the lessons that would otherwise make them more competitive.
Truly a Faustian bargain.
Imagine …. Everyone, including the top brass, constantly changing employers in short timeframes with every job always in flux, no durable continuity, little or no corporate inheritance, a loyalty deficit, a corporate culture that is constantly being diluted, a disorientated employee base that has to deal with an endlessly shifting market environment, equally moveable corporate circumstances and the widespread breakdown in the recognised way that most progress is achieved. When flexible working was conceived in the late 1980s, the hope was that the diversity of new blood would compensate for all this disruption; instead, Adam Smith’s invisible hand has given us the unintended consequence of the business equivalent of Alzheimers.
If the late management guru Peter Drucker is right when he said in his best-selling book Managing in Turbulent Times that “It is only managers – not nature or laws of economic or government – that makes resources productive”, this is arguably the unidentified explanation for our declining productivity growth, which remains largely unaddressed. It’s a statement that should alert the experts to the reality that productivity is not just a Government thing.
By the bye, with the buttressing of several spikes due to technology improvements, it’s no coincidence that the West’s productivity shortfalls have coincided with the introduction and acceleration of flexible working over more than 35 years.
So, what to do? In today’s walkabout workplace, the imposed level of employer-specific knowledge flight needs to be addressed at the coalface of commerce and industry by much-improved Knowledge Management (KM), which is still a Cinderella discipline in the world of work. By which I mean that the individual institutions’ unique, hard-won and expensively-acquired knowledge and experience needs to be captured before it walks out of the front door and then made easily and compulsorily available to its rolling generations of replacement employees. And not only its explicit knowledge and experience, the easier of the evidence base to capture, but also its tacit component, a.k.a. the lubricating ‘how’ of know-how.
Then, alongside their own acquired resources, those same rolling generations of employees need to be able to efficiently apply that retained knowledge and experience to their new employers’ changing environment and circumstances, a skill that requires the largely untaught discipline of constructive reflection. It’s called Experiential Learning (EL), a teaching methodology that’s been formally acknowledged and refined over more than 35 years but, unaccountably, left to moulder in the armouries of most business schools.
Coupled with the more comprehensive evidence base of fresh employers, fresh employees should then be able to take their decision-making out of the land of intuition, untested judgment, political expediency, subjective thinking, experimentation and delay. And put good and better productivity back in play …..
FRANCE’S LABOUR REFORMS: Will it make the same mistakes as the UK?
With labour strikes, street protests and the survival of a no-confidence vote over plans to deregulate its complex labour laws, France is at a crossroad over a plan to get more of its 3.5 million unemployed back into work. Among a number of reforms, the intention is to join what the rest of the world calls the flexible labour market.
Is there a lesson that it could learn from its island neighbour?
When the UK reformed its labour laws to make it easier for employers to ‘hire and fire’ – exactly what France is ultimately proposing – the idea was to enable businesses to react quicker to the faster-changing market environment. The underlying motivation was that it would increase business activity, encourage inward investment and, thus, employment, and from the increased number of employers that employees would have in their working lifetimes, expand workers’ skills through their wider familiarity with industry and commerce. Arguably, it did, but with an iceberg-like downside that UK business is still largely failing to address.
It has – unintentionally and ironically – pared national productivity, which is the ability to produce its goods and services competitively. Ever since the flexible labour market got under way in the 1980s, output per individual worker has progressively become more difficult to improve, even to maintain. The relationship between high employee turnover and low productivity is uncannily coincidental – and, incongruously, despite the widespread availability of formalised business education.
In truth – and the statistics confirm this (see http://stats.oecd.org/Index.aspx?DataSetCode=PDB_LVEuropean) – productivity has also become more difficult for the other countries that have employed similar flexible labour market policies, albeit with different impacts. Instructively, the reasons appear to baffle the experts who have variously offered mainly both fiscal and monetary explanations and solutions. What they have carelessly forgotten is a little-appreciated slice of business wisdom offered by the late management guru Peter Drucker, who advised in his best-selling book Managing in Turbulent Times that “It is only managers – not nature or laws of economics or government – that makes resources productive.”
This non-macro steer puts the main responsibility for productivity squarely on coal-face decision-makers, whose ability to make good and better decisions depends more on their employers’ unique and hard-won knowledge and experience than their erstwhile employers’ knowledge and experience. Unfortunately, a flexible labour market means that its higher rate of jobs turnover dramatically reduces the evidence base with which rolling generations of replacement employees can make their decisions. In reality, the employers’ special knowledge and experience will have walked out of the front door, leaving the employer without the usual way most progress is achieved – organically, the building of one experience on another.
The extent of the knowledge loss can be easily sized up. In the UK, employee turnover, including managers, averages upwards of 20% a year and rising; record levels of employment have not contributed to productivity growth. In fact current levels of individual output, which is historically significantly below that in France, has slumped to a 25-year low at 20 percentage points below the average of other leading industrialised nations.
If flexible working takes hold in France, employers will, like most high-churn UK employers, experience the business equivalent of Alzheimers. Among the inevitable continuous jobs disruption and knowledge loss, they will literally lose a large proportion of their institutional memory and develop what’s called corporate amnesia. This reduces the available body of evidence that employees need to make good and better decisions. In short, employers will spend much of their time repeating their mistakes, reinventing the wheel and not cost-effectively learning from any of their hard-won lessons.
France should know that when employees have only half the evidence they need to make their employers’ determinations, their decisions will also be half-baked. In order for today’s flexible working to work optimally, decision-making has to be adapted to the new workplace reality of short-tenure working.
To solve the problem, employers need first to efficiently capture their valuable knowledge and experience before it walks out of the front door. And then, their rolling generations of new employees will need to know how best to apply it to their employers’ ever-changing circumstances. The latter is a widely untaught skill known as Experiential Learning (EL), which refocuses traditional decision-making away from the one-size-fits-all teaching approach that might have been suitable for long-stay employees.
In addition to transforming the Human Resource (HR) function of most organisations and extending the new discipline of Knowledge Management (KM), France should know that there will be another unexpected consequence to the flexible labour market. It will lead to having to pay higher wages to many skilled workers, typically the key players in the corporate hierarchy. In the UK – and elsewhere – so-called ‘job-hopping’ is responsible for increasing wage rates beyond the levels that a more permanent employee could demand; it has become a legitimate way of encouraging individual career advancement. And this will further exacerbate individual employers’ knowledge loss, the reduced ability of institutions to experientially learn and the difficulties they’ll have surrounding productivity growth.
Welcome, France, to a job-creating illusion, otherwise a corporate opportunity/misadventure depending, of course, on how important you rate productivity. For a reminder, consider the view of another top business virtuoso, Paul Krugman, the Noble prize-winning economist and author of the ‘Age of Diminished Expectations’, who wrote: “Compared with the problem of slow productivity growth, all our other long-term economic concerns – foreign competition, the industrial base, lagging technology, deteriorating infrastructure and so on – are minor issues.”
New job stats that point to WHY global productivity has slumped. Are managers listening and do they know how to solve their own looming, even bigger, knowledge deficits?
Some of the best business brains and economists admit that they don’t know why the OECD’s productivity growth has been declining over at least four decades, a period when technology, one of the main ways output has traditionally been activated, has proliferated and the availability of business education has never been higher.
But the figures tell it like it is. Our national ability to grow is shrinking and has been getting more and more difficult to deliver. As far back as 1989, Edward Denison, an Emeritus Fellow of the influential Brookings Institute reported that, in spite of two decades of speculation and study, the reasons for the worldwide productivity slump was a mystery. He had just conducted a comprehensive analysis of 17 suggested causes and concluded that much, if not most, of the slowdown remains “unexplained”. Since then, productivity growth has continued its slide and the reasons continue to baffle (other sources, OECD see http://stats.oecd.org/Index.aspx?DataSetCode=PDB_LVEuropean Union, Bank of England, Bank for International Settlements, Wall Street Journal, Forbes, Financial Times).
Over the years the debate has covered a myriad of traditional economic ‘inputs’ to this straightforward matric that, at the end of the day, serves as the most relevant indicator of any economy’s underlying health. These have included rates of investment, levels of innovation and entrepreneurship, mostly those factors that can be stimulated by Government or Central Bank inspired actions, the theory being that top-down fiscal and/or monetary applications are more systemic.
Not a minor issue
Productivity growth’s importance to the wellbeing of an economy is confirmed by Paul Krugman, the Nobel prize winning economist and author of “The Age of Diminished Expectations”, which was first published in 1994, who wrote: “Compared with the problem of slow productivity growth, all our other long-term economic concerns – foreign competition, the industrial base, lagging technology, deteriorating infrastructure and so on – are minor issues.”
If this is the case, what other possible inputs are there that would affect output? What about a visibly unnoticed issue within labour, one of the primary factors of economic production, arguably the most important and without which nothing would happen? What would be the effect on employees, and in particular skilled operatives, technical staff and management, if a change in the fundamental character of their workplace ensured that almost every individual was spontaneously less productive by a large margin? And by a large margin, this would mean that ALL employees are involuntarily turning out to be MANY TIMES more expensive than their perceived or admitted cost, much of which is unacknowledged, unmeasured and thus not taken seriously. Would not this unidentified expense help to explain why productivity growth has been declining and why – and how – it should be addressed?
In truth one part of employees’ role – their skills – was considered as a possible explanation for the productivity weakness, but not the durational side of employment, which is an issue that is also both structural and systemic. This part of the employment cycle refers to the effects of the flexible labour market, the much-heralded phenomenon across much of the developed world that, for almost 40 years, has coincidentally affected almost every single employee big-time. Whereas employees previously might have expected to have one or two employers in their working life times, the average in today’s UK’s workplace (and elsewhere) is around EIGHT – equivalent to just over five years in each workplace or less if jobs are not contiguous. This average includes management at all levels. In the US, the figure is dramatically lower – for example just 3.68 years among Fortune 500 companies based on median employee tenure (PayScale, 2013).
And for an even more sobering statistic, the United States Department of Labor’s Bureau of Statistics is forecasting that today’s learners – i.e. tomorrow’s employees – will have 10-14 different jobs by the age of 38, which would cover just half their working life times (http://data.bls.gov/projections/occupationProj). For the present, one in five workers and one in two workers have been with their current employer for less than a year and less than five years respectively, figures which would help to underscore the separate research (below). Is this a hint of what’s to come in all those other economies who are championing flexible working ….?
FORTUNE 500: SOME EXAMPLES OF EMPLOYEE CHURN
Employee Age Employee Tenure Pay $
Massachusetts Mutual Life 38 0.8 60,000
Amazon.com 32 1.0 93,200
American Family Life 38 1.0 38,000
Google Inc. 29 1.1 107,000
Mosaic 37 1.1 69,000
Berkshire Hathaway Inc. 41 1.5 53,600
Microsoft Corp. 33 4.0 109,000
Pitney Bowes Inc. 41 7.2 54,400
Xerox Corp. 41 7.2 58,600
General Motors Corp. 41 10.3 82,500
Eastman Kodak 50 20 77,400
Caption: All figures median and tenure in years (http://www.payscale.com/data-packages/employee-loyalty/least-loyal-employees). The fact that there are some successful companies with low employee tenures might suggest that flexible working is not the problem that this Paper will be suggesting. The reality is less specific, indicating that those more profitable businesses are just better experiential learners. As this Paper will be outlining, short tenure is responsible for dispersing much of the organisations’ cornerstone of unique and special knowledge and experience, thus preventing the host institution from fully benefitting from their own tried-and-tested practice. In essence, high staff turnover institutions have become experiential NON-learners. Alongside this, the high level of staff churn has dramatically increased the conventional headline costs of hire and orientation, both broadly explaining this Paper’s explanation for the productivity fall-off.
The flexible labour market arose out of a policy stance among developed economies that equated high levels of labour market regulation with poor economic performance. Widespread deregulation followed, providing businesses with an easier way to hire and fire, an outcome that has brought with it an iceberg-like handicap – still to be acknowledged – that directly impacts on both corporate and national productivity. Designed to advantage employers, the device has also been taken up with gusto by ambitious employees as a way of improving their own salaries and career opportunities. The bewildered employer response has been to vainly try and understand why their staff leave so often and then defensively compensate with higher remuneration and other benefits, strategies that have been only marginally effective.
Recurrent short employee tenure has had an insidious effect on the workplace. First off, it replaces the organisations’ unique and valuable knowledge and experience with others’ knowledge and experience, which is too often less unique. Why this – in the vernacular – is ‘not cool’ is that without the evidence of their new paymasters’ tried-and-tested practice, it unavoidably affects the ability of new hires to make good and better decisions for their new employer. On top of this, staff replacement removes the institutional ability to evolve organically, which is the acknowledged way that most progress occurs – i.e. from the building of one experience on another. One other encumbering feature is that it comes with increased levels of ‘fallow’ working times, the downtime periods between employee departures and the recruitment of replacements.
Alongside the hire-and-fire advantage for business, the theory has been that all this employee churn is supposed to provide the workplace (and thus the employer) with greater levels of experience, which was always – and still is – the more valued part of the skills package. It DOES what it is supposed to do, but the bizarre twist – in one of those unintended consequences of Adam Smith’s invisible hand – is that the imposed disruption that short tenure has brought to the workplace is NOT delivering productivity growth. Hence the experts’ puzzlement.
A historic semblance
While this observation might seem somewhat inconsequential to those more familiar with ornate economic theory encompassing the usual top-down strategies of Government and Central Banks, the consequences of upturning this corporately dependent asset is not too different from the apocryphal explanation of Napoleon Bonaparte’s defeat at the Battle of Borodino in 1812; that for want of suitable winter horseshoes, the war was lost. Napoleon’s soldiers were unquestionably superbly trained and very experienced but to translate this lesson for the modern workplace, messing with a similar systemic factor of production, which short job duration now presents, messes with the entire wealth-creating machine.
Whilst it should be appreciated that corporate profitability is always possible in conditions of low productivity (it just costs more and depends on increasing prices and/or lowering the quality of service), imagine the following …..
+ Everyone constantly changing employers in short timeframes.
+ Every job always in flux.
+ No durable continuity.
+ Little or no corporate inheritance as unique knowledge and experience regularly exits.
+ A loyalty deficit.
+ A corporate culture and USP (unique selling point) that is constantly being diluted.
+ A disorientated employee base that has to deal with an endlessly shifting market environment and equally moveable corporate circumstances.
+ A widespread breakdown in the recognised way that most progress is achieved.
And while the reason for productivity growth’s weakening has got everything to do with skills, it has – ironically – little to do with the inherent decision-making skills of employees, who are being short-changed by what their employers and business education DON’T provide.
The very fact that rolling generations of employees lack the familiarity of their replacement employers’ tried-and-tested experience means that the only evidence with which they have to work is restricted to the practice of other employers and a personalized style of decision-making based on little more than intuition, untested judgment, political expediency, subjective thinking and unnecessary experimentation. This happens against the backdrop of the instinctive reaction by most new faces who typically do not see themselves responsible for others’ behavior or obliged to take heed of any ‘lessons’ that might have to be learned. An Anglo-Saxon-cum-Western educated cultural “we know better” attitude towards preceding generations’ experience persists.
Then, because everyone’s doing it – i.e. experiencing low tenures – nobody’s noticing its effects or how BIG is the actual negative impact. Why the durational side of flexible working has not triggered an earlier alert is truly puzzling.
Definition of productivity
By way of clarification, productivity’s influence on any modern economy – altogether accredited, even by the experts – is the very yardstick by which all industrial nations can be defined. Widely misunderstood, at least in the UK, its meaning can be better understood by the imagery underlying the classic question of how many people it takes to change a light bulb. It is the measure of efficiency, anything less being unnecessarily more expensive and less competitive. It is calculated in several ways, one as output per hour worked or output per employee. The other, characterized as productivity growth or Total Factor Productivity, calculates the increase in output not attributable to inputs such as labour, capital and natural resources, driven by technological advances and/or improvements in efficiency, the latter being the decisive factor through which profitability and competitiveness is propelled. It is in these matrices – and particularly productivity growth – that the OECD is seeing slim and declining returns that, in turn, negatively impacts the bottom line.
To get to our productivity slump, there is a long list of new overheads to high-turnover recruitment and employment, as follows:
(i) A fallow period that all employers spend recruiting their walkabout workers.
(ii) The increasing direct costs involved in hiring and training.
(iii) The enduring low-output induction and decamp times within short employment tenures.
(iv) The careless loss of corporate-specific knowledge and experience (known as corporate amnesia) and
(v) The consequential less-than-effectual decision-making that takes place on the job because of the untaught skill of formalised experiential learning (EL).
Through the single biggest transformation in the workplace since WW2, these changes to the employment process have made the workplace unrecognisable. But it is in the inevitable negative effect of flexible working on employee decision-making – un-appraised until now – where the largest of all new increased costs resides.
For the whole recruitment/employment wrapper, consider the following indisputables that specify old basics and new, repeating and higher costs: (Additional sources Quarsh;, Bersin by Deloitte; The Society for Human Resource Management; Capgemini, Corporate Leadership Council; The Center for American Progress; Dun and Bradstreet; CIPD; The Institute for Research on Labor and Employment; authoritative academics; Bloomberg; BOLT; Wall Street Journal; The Economist; other newspapers).
FACTS #1 – THE TIME TO HIRE, INDUCTION AND THE DECAMP: In a typical reactive recruiting environment for middle-income employees in the UK, for example, the average hiring time for in-house recruiting is up to four months (or three months if the recruitment process is outsourced), leaving vacant a potential profit-making job that is often temporarily filled by an unqualified replacement or expensive contract labour. This un-invested or under-invested stage of the employment cycle heralds even more fallow periods of output, as follows.
Relevant across the jobs spectrum, the escalation can be seen in just one part of the corporate hierarchy. Typically in jobs that pay an average £40,000 a year, representative of middle management (the 2014 average salary in the UK was £26,500), there is an attrition rate of up to 50% within the first year, which means that employers have to repeat the process, continually.
Then, when appointees do settle in, which is the next phase of the employment time-cycle, the new four-to-five year average tenure across ALL the workforce (and this includes ranking decision-makers) involves two further distinct periods of low output. The first is an initial induction stage that can last around eight months and a variable period at the end of tenure, which some recruiters estimate at around three months. In the US, the estimate is higher, one assessment being that it may take a new employee 12-24 months to reach the productivity of an exiting person, by which time the individual is almost ready to move on.
Even for the longer-tenure companies, the core period of low productivity for EVERY appointment thus extends beyond 20% – and possibly much more – of actual average tenure, a not insubstantial time gap in the employers’ potential investment period. The cost of these ‘fallow’ times can reasonably be calculated as a percentage of related salary plus lost productivity.
FACTS #2 – THE NEW ‘HEADLINE’ COSTS: To the pre-employment stage has to be added a list of new direct expenses associated with jobs change and hiring, usually described as the headline costs. There is the expense of recruitment agencies when used, advertising, subscriptions to social media and database aggregators, attendance at recruitment fairs and the management costs of screening, interviewing, hiring and training (including onboarding, the new name for induction or so-called ‘organizational socialisation’), the charges of which vary across national boundaries.
In the UK, the direct cost of being mainly reliant on recruitment agencies is calculated to increase salaries by 15-30% while taking recruitment in-house will add 8-15% to salary. Whether managed in-house or externally via agency, the average management time (specifying roles, reviewing CVs and interviewing) is averaged out at 10 days per hire. Then the stated 50% of rejected offers (whether candidates are sourced in-house or through an agency) will incur further costs when the process is repeated.
The US comparison
The comparison between the UK and the US, where recruiting through employment agencies is much less common, is instructive. There, it is said to cost at least six months annual salary for low-wage employees, 16% for middle-range earners and up to 213% for highly educated executives. For mid-level managers, the cost is said to be at least 50% of salary. And the estimate for additional training costs over 2-3 years increases salary by up to 20% or more.
Yet another US organisation reports that it may cost as much as 150% of salary to replace a management position, with the average replacement cost for blue collar and manual workers being $2,000, professional workers $7,000 and for all categories of worker about $4,000. It is also pointed out that there are extra costs to hire for new positions such as remodelling office space or rental for an off-site workspace, training and equipment such as computers, uniforms and tools.
FACTS #3 – ‘AMNESIAC’ DECISION MAKING: Thereafter sits the biggest hidden cost of all. To this category of expense, there are several classes of so-called productivity waste. Two belong in the grouping related to long-standing conventional issues of hiring and the other to direct short-tenure factors. All three’s costs are imprecisely estimated because of the obvious difficulties of assessing actual values but several institutions have bravely nailed their estimates to the flagship called ‘productivity waste’.
In the conventional category, there are costs that can be identified by (i) newspaper headlines such as ‘Wasted time in meetings costs the UK economy £26 billion’, ‘Smoking breaks at work cost British businesses £8.4 billion’, ‘Twitter costs British economy £1.38 billion’, US employees cost employers $134 billion on non-work tasks and (ii) those expenses directly linked to old-style induction – i.e. those charges incurred by lost output as replacement employees ‘get up to speed’.
For the latter, one UK researcher calculates that a typical £40,000 hire can cost well over twice salary. Another puts the cost at three times salary. This gets some validation by the global forecasting organisation Oxford Economics, which has calculated that the attached cost to replace staff in 2014 averaged almost £26,000 per employee. This includes the logistical cost of recruiting and absorbing a new worker and the cost of lost output while replacement employees achieve their “optimum productivity level”.
It is the other category of extra costs – the ones that derive directly from corporate amnesia – that isn’t usually taken into account. These are where outlays can be shown to escalate, literally, beyond measure – from poor decision-making from the dearth of tried-and-tested knowledge that previous incumbents have taken with them and where lessons can’t get learned. They occur from so-called ‘amnesiac’ decisions made from the provision of ‘short’ corporate evidence. Academics have estimated that up to 90% of the knowledge in any organization – otherwise known as tacit knowledge, the self-styled non-technical ‘how’ of getting things done in that organisation – is embedded and synthesized in employees’ heads.
Short tenure allows this evidence to decamp the host employer at levels greater than ever, leaving replacements without the important evidence with which to learn from their predecessors. Replacements then have to subconsciously re-learn the ropes, in the process repeating mistakes, re-inventing the wheel and not learning other lessons that litter the workplace, all buried in those events, when significant, characterized by whistle blowing, cover-ups, gagging, the different types of public enquiries, post-project reviews, tribunals, commissions and the lists of ‘not-fit-for-purpose’ activities. They can be more easily termed as experiential non-learning, which – this author asserts – is one of the biggest focus neglects of modern business education.
The non-learning dysfunction
Underpinning this decision-making dysfunction are several types of experiential non-learning, one being where the evidence exists and another where the evidence is either unrecorded or forgotten. A more pernicious category is where experiential non-learning takes place purposefully.
For the former at the top end of its measure is the 2008 sub-prime catastrophe that went global and cost anything from $12.8 trillion to upwards of $15 trillion, estimates that arguably can be categorized as experiential non-learning because of the long list of early warning signs that were ignored and the numerous instances of subsequent decisions taken to try and mitigate its effects. In this case the evidence was widely available, the dysfunction arising through an inability and/or reluctance to learn from prior experience.
For a big example of deliberate experiential non-learning, there is the decision to actively dispose of much acquired professional expertise that has decimated much of South Africa’s post-apartheid development, the load shedding of electricity provider Escom being the most current example. In this case, the acquired knowledge and experience was disposed of for political-cum-racial reasons. There are even religious exemplars where non-learning inhibits progress.
Other, more corporate examples, of the non-learning syndrome include the random and well-documented case of BP executives in the US overlooking a dangerous butane leakage problem for eight years, questioning whether the company’s many other safety issues leading up to Deepwater Horizon were equally correlated to the same non-learning syndrome.
For other examples, the effects of short tenure on learning can be seen in the instances of an insurance company that, having slimmed its claims department, found it was settling big claims too swiftly and too generously; it subsequently reinstated the exited team. A senior financial consultant who resigned on a Friday night without notice put at risk 1,000-client relationships with $175 million of assets under management. And a high-tech company had to offer a $1 million project completion bonus to a key engineer to prevent delay in a new product launch after a high level of departmental departures.
Too many to list here are other examples that proliferate in Government and elsewhere in the private sector, whether in farming, the banking sector, and others, ad nauseam, all of which reflect poorly on the decision makers of commerce and industry. The uncomfortable coincidence is that the availability of conventional business education and training has never been higher.
FACTS #4 – MANAGEMENT DYSFUNCTION: That managerial skills are less than optimal comes straight from the horse’s mouth – managers themselves. Their own assessment – in this case by senior British managers or direct board report positions in companies turning over more than £200 million a year – is that an astonishing 25% of their decisions are wrong. According to the same 2004 study, the rate in the financial services sector is even higher – nearly one in three. With an average 20 “business critical” decisions taken by each manager every year, the financial impact of which is computed to be worth an average £3.4 million each, this equates to a wrong determination every eight weeks by each of every one of an average 33 decision-makers in every organisation. This author suggests that the same general performance would likely not be tolerated among managers’ vocational subordinates.
The suggestion that something has gone awry in the world of decision making got some official acknowledgment, at least in the UK, when Vince Cable, MP, the coalition Government’s Business Secretary, publicly admitted in 2014 that the flexible labour market “may be” too flexible and that it was, indeed, “contributing to low productivity”. I followed this up with a straightforward Google search for ‘repeated mistakes at work uk’ that reported – wait for it – 14.9 million hits. This trailed the result of another computer search that The Times of London did in Hansard, the official record of all legislative utterances in the Westminster Parliament, for the words “no stone unturned,” which the author decoded was “an inflated way to claim energetic action” for something gone wrong. Although the result did not specifically indicate how many instances were long-standing, the computer came up with the number 4,933, equal to an average one reference a day for 14 years.
The only authoritative source to put a strong number on the big picture is the US-based management consultancy Proudfoot Consulting that, in 2005, bravely estimated the cost of “wasted productivity” among several OECD countries. It’s considered estimates for five major economies was between 5.9% and 9.7% of their respective annual GDPs.
PRODUCTIVITY WASTE 2005
United States of America – $888 billion
Germany – $266 billion
United Kingdom – $158 Billion
France – $121 billion
Spain – $84 billion
Through short tenure, institutional decision-making is thus being short-changed far beyond the productivity loss that would exist in less flexible working conditions. It is within this factor, unconsidered as part of the traditional cost of employment, that understates the true expense of modern labour and the impact on productivity. And because it is un-researched in any wider or definitive way, its existence is hardly even acknowledged in this context. The reality of why productivity gains are so slim is thus dependent on observation, logic and rough estimates, as this Paper submits.
But just on all these stated evaluations alone, the list is clearly very long and very expensive, suggestive of a hugely unacknowledged shortfall in productivity buried in the causal link between the flexible labour market’s short tenure, its imposed corporate amnesia and the absence of the formal discipline of experiential learning in business education. I suggest that this is surely deserving of much additional academic research to persuade the knee-jerk detractors of this commentary.
The scale of all these indicators might suggest that modern commerce and industry lacks the ability to turn a tidy profit. Not so. The fact that jobs churn within organisations does not all happen at the same time does allow a measure of continuity, some knowledge sharing and the opportunity for experiential learning, however informally orchestrated. Hopeless attempts to reduce employee churn, ineffectual onboarding practices and the more effective strategies like job overlapping, mentoring and apprenticeships also help to provide some short-term connectivity but, as the record shows, the compounding adverse effects of the flexible labour market still runs deep, seemingly almost exclusively dependent on the rolling fiscal measures that governments desperately roll out to buttress productivity. In Paul Krugman’s understanding, these top-down efforts can only tweak the greater outcome. Coupled with the late management guru Peter Drucker’s counsel that “It is only managers – not nature or laws of economics or government – that make resources productive” (Managing in turbulent times, 1980), is it not time for the coalface to step up …..?
Productivity’s value can be specified in a different way – through the number of hours that employees work to achieve their output, a popular substitute for increasing production. The aphorism ‘less is more’ – a phrase adopted by the German-born American architect Ludwig Mies van der Rohe as a precept for minimalist design in the 1960s – is probably the most accurate portrayal of this widely misunderstood factor of production, an expression that can be clearly seen in the latest statistics (below) published by the OECD’s World Economic Forum. The dictum should not necessarily be muddled with lower employment; providing lower overall costs, it offers the opportunity of additional investment – and higher individual wage rates.
The figures record the number of working hours that employees work in 38 modern economies. Although this particular observation is likely affected by exceptional country-specific reasons in 2013, it is conspicuous that most of the world’s more productive employees work the LEAST amount of time, with US workers, who have maintained their position as the world’s most productive employees for decades, appearing mid-way in this particular league table. While they’re indirectly connected, this snapshot’s account of annual working hours should not be confused with the increasing number of different employers that employees are having to experience. Nor should it be assumed that the efficiency of the more productive employees is optimal. As Proudfoot Consulting’s estimates of productivity waste indicate, even the most productive countries have plenty of surplus incapacity with which to improve even further, a fact that confirms the size of the opportunities for both non-efficient and efficient workers.
A time to concede ….
For governments that wanted to de-regulate the labour market and businesses that see it as an easier way to hire and fire, the flexible labour market is all about finally admitting …
+ That short jobs tenure is not all it is cracked up to be.
+ That without knowledge sharing, short tenure is largely self-defeating.
+ That without the ability to better learn from experience, knowledge sharing is also largely wasted.
+ That the traditional dependence on technology is insufficient for the pursuit of corporate productivity.
+ That productivity is a project that can’t just be left to the Government and Central Banks through their macro strategies.
+ That good decision-making is not something that machines can do on their own.
+ And finally, that Ludwig Mies van der Rohe’s ‘less is more’ CAN happen if actual experience – whether that experience is successful or unsuccessful – is better applied.
Happily, business does not have to give up flexible working’s advantages. But human resources (HR) does have to improve its induction/onboarding, knowledge management (KM) needs to do knowledge sharing properly and business education has to include formal experiential learning in its skills offering.
IS THE REPORTING OF CORPORATE PRODUCTIVITY TOO MUCH OF A HOT POTATO? DISCUSS …..
To most people in business the use of the matrices turnover and profit are the main ways to measure trading activity.
The former is a quantitative term used for what is also known as inventory replaced, gross income, total income received or sales, all pointing to businesses’ achieved monetary value of goods and services produced over a specified period of time. The complementary measure, profit, is the money that is left after accounting for all expenses, made confusing to the lay reader by a number of its versions, all with their own distinct constructions.
In the case of turnover, the variables in its computation include depreciation, amortisation, VAT and foreign currency exchange. And with profit, the various versions (gross, operating, pre-tax and net profit) are complicated by issues surrounding interest, tax, cost of sales and others. Even though they both purport to be definitive indicators of corporate well-being, the capricious character of many of their different calculation cannot reflect the true state of corporate health, however the numbers move.
And whilst dependent on the levels of enterprise within a business, the stated variable factors in both cases are non-trading issues that are applied tangentially, so the actual evidence of turnover and profit gets diffused. On this basis, would not a matric based on actual trading values be a far more informative indicator of corporate health?
For this, the most useful matric would be one that has a common influence on both turnover and profit, and which also reflects the single most important determinant of the bottom line – productivity. In a corporate environment, it is the conversion level of inputs into outputs, a process that, in a comparative process over time, indicates the measure of individual departmental and corporate efficiency. Being efficient simply means reducing the amount of waste in activities from finance to human resources and from production to distribution.
Thus a more efficient or productive operation becomes automatically more competitive – and thus more profitable – than a similar less efficient operation, and contrariwise.
There are several ways in which productivity is normally calculated, the most visible one expressed as output produced per hour worked or output produced per employee. The other, as total factor productivity or productivity growth, is the contribution to output of everything except labour and capital such as innovation, managerial skill, technological advances and/or improvements in efficiency, even coincidence or luck.
In addition to being an easier-to-understand benchmark, this matric would have several other important advantages, the first one being that output can also be assessed qualitatively. Being more trading orientated, it additionally becomes a more accurate pointer to actual management and subordinate endeavour. And as a more visible marker for encouraging better performance, it is a more acceptable indicator of how wage rates are often determined.
Finally, while productivity is already an estimated matric in government, an aggregated approach from corporate to national level would give a much improved indicator of nationwide capability and ‘wealth’ with which to evaluate monetary issues like currency value, the stock market and other fiscal pointers to risk assessment.
This subject is timely for discussion because the British Chancellor of the Exchequer, George Osborne, has commissioned an independent review of the UK’s economic statistics. Against the background that much of the framework for gauging the UK’s economic statistics was developed after the Depression of the 1930s. Sir Charles Bean, a former Deputy Governor of the Bank of England, will consider whether the Office for National Statistics (ONS) is well placed to keep abreast of the latest advances in data collection. It is also a subject that was recently addressed by the Institute for Fiscal Studies (IFS), whose director Paul Johnson published a review of the Office for National Statistics (ONS) on how inflation is measured.
Given this high-level of interest in this attendant subject, is it not time for someone to do a similar review for corporate-based productivity?
But productivity growth across the OECD is notoriously low so this just might be too transparent for over-sensitive bosses and/or politically too incorrect for employees? If so, it’ll be a hot potato for someone out there to juggle ….?