Poor productivity is one of the greatest problems the UK economy is currently facing.
The pre-2008 financial crisis rate of growth saw us produce about 2.1% more each year. But the typical rate of growth in the past five years has been 0.2%.
Our assumption that productivity growth would return to a more normal rate within a few years of the financial crisis reflected a judgement that whatever factors were depressing it in the wake of the financial crisis would fade as it receded further into the past. But as the period of weak performance gets longer, the explanations that people pointed to immediately after the crisis look less convincing.
Indeed, economic productivity in the UK will see only weak growth in the next five years, according to the Office for Budget Responsibility (OBR). The OBR argues that continued low productivity will hinder the ability of the economy to generate increased tax revenues.
This is why clear information is needed on where competitors across the world economy are extracting greater margins, whether in production, marketing or distribution. Such data can be a catalyst of change, enabling better decisions about how to allocate resources. The idea of benchmarking against world-class competitors is particularly important for small businesses, who often have a smaller knowledge base about sectoral conditions than big corporates.
Knowing the opposition and exactly where it is achieving better margins is one of the most crucial bits of information you can get in business. Benchmarking offers a powerful tool for improving the focus and motivation of everybody in a company.
When bosses talk to staff about the need for change it can just seem like just another demand. But if staff look at a benchmark and see the competition is doing better, they say ‘Well, if they can do that, so can we’.
For example, recently one company, Catomance Technologies in Hertfordshire, compared themselves against other chemical manufacturers, but also benchmarked against several food processing companies. That may sound strange, but the business model of combining ingredients in a production process to create a finished product was actually very similar to their own.
When they had completed the information gathering and comparisons, Business Link helped them to independently analyse the data. It was immediately obvious that some things needed to change. For example, they compared very well on innovation, R&D and customer satisfaction, but badly on managing suppliers and capital investment. The areas of weakness centred on our manufacturing operation.
They looked at ways of improving the production process, but the capital investment needed was huge. So they decided to outsource production for all but a handful of products. This cut their overheads and capital spending dramatically. They could then concentrate resources on what they were good at, which was creating innovative solutions for their customers and marketing them effectively.
The lesson here for Wales is obvious: we need to see more promotion to Welsh companies of data regarding performance indicators of leading firms such as profitability, earnings per worker, product lead times, stock turn rates, staff absenteeism and productivity.
This is a stark message when we look at past surveys which have found major variations in the performance of UK businesses in terms of competitiveness which had an exponential affect on profitability. It’s a well-used statistic that the top 25 per cent of businesses achieve profit margins five times greater than those in the bottom 25 per cent.
But it’s also a fact that the top quarter also achieves 98 per cent supplier accuracy and delivery reliability against 60 per cent accuracy and 85 per cent reliability for the bottom quarter. And spending on training is 10 times greater and staff absenteeism rates are up to 75 per cent better for top firms.
These statistics do not vary greatly sector by sector, suggesting that high-achieving companies perform well across a variety of indicators regardless of their type of trade. This sort of database enables useful comparisons for all businesses, and shows that if Welsh companies across all sectors increased their average competitiveness to that of the best performers in their sectors, then we would generate an estimated £30 billion more in gross domestic product.
We should be looking to the Welsh Government to create a database that will enable businesses of all sizes to benchmark themselves against the best performers across Europe.
This internationalising of benchmarking for our businesses should then be marketed to the business community in a straightforward and easy-to-understand manner. We must begin to realise that benchmarking is a powerful tool for closing the GDP gap between Wales and the EU average.