The Big Squeeze: Companies Struggle to Boost Productivity, Battle Inflation
To remain competitive businesses must produce at least 50% more every 8-10 years without increasing the number of people employed, according to the works of Dr. Peter Drucker. In this week’s Drucker Perspective, we look at how three requirements ––assignment control, concentration, and building continuous learning into the job––are essential to improving workforce productivity.
Productivity of knowledge and service workers will soon become a major issue as creeping inflation becomes more apparent... and workers ask for wage increases.
Increases in wages without corresponding increases in worker productivity inevitably leads to further price increases. Why? Organizations tend to pass cost increases to customers in the form of price increases.
It doesn't take a degree in economics to realize that a wage increase/price increase spiral could soon take hold… and where it stops nobody knows.
Simply put, to have price stability, wages cannot increase faster than productivity.
A simple equation , formulated by C. Jackson Grayson Jr, former pricing commissioner/czar during the Nixon administration, makes this easy to remember:
Wage increases- Productivity Increases = Price Increases
For example, if wages increase by 10% and productivity increases by only 3%, then prices would increase by 7%.
The challenge now facing organizations of all kinds and sizes is how to raise the productivity of their workforce.
Inflation is the equivalent of a tax on income. The purchasing power of the dollar goes down.
Expectations Versus Today's New Realities
Knowledge workers whether they be machinists, market researchers, police officers, business process managers, or sales managers all expect their incomes to keep pace with inflation.
In fact, the more highly educated expect their incomes to rise faster and higher in absolute terms than those less educated. In short, many feel entitled to enjoy a rising standard of living.
That's what they were promised. And that's what they expect. Many are in for rude awakening unless workforce productivity keeps pace with wage demands.
Solving the Puzzle of Productivity
The accelerating cost squeeze on governments, universities, businesses, healthcare institutions and others is the first warning––it is really a productivity squeeze.
The only way out is for knowledge and service workers among others to become more productive.
Peter F.Drucker believed to become more productive our knowledge-based workforce must become more responsible for their productivity. But–and this is the big " but"––organizations must enable them to achieve their productivity goals.
Thankfully, Drucker provided us with a way of thinking about how to solve what is certain to become a major concern and major challenge over the next five years.
How to Improve Workforce Productivity
Organizations must commit to improving workforce productivity. That is, they must achieve more with less.
To meet this commitment––said Drucker––they must aim at being able to produce at least 50% more within the next 8 to 10 years without increasing the number of people employed; this means they must aim to raise the productivity of people at an annual rate of 4 to 5 percent.
The Drucker framework for improving the productivity of people consists of three general components––namely:
(l) Assignment control;
(2) The need to concentrate;
(3) Building continuous learning into the job and into the organization;
What follows is a highly abbreviated description of each of these Drucker prescriptions. And, without doubt, some of these prescriptions overlap each other and their distinction blurs.
It also should be mentioned––indeed, emphasized––that Drucker discussed other very important factors in improving workforce productivity including streamlining and reengineering work processes… self-control through measurement… false reliance on worker creativity… management by objectives... and the like.
In the weeks and months to come, we will focus on how organizations are putting all these prescriptions into action.
This is a very simple concept to understand. But not simple to do.
Matching talent to the opportunity is a difficult task. It requires, first, that we know the strengths of people, and particularly of those with a proven record of performance.
What do they do well? Where do they belong?
"It requires, secondly, that as far as possible people are assigned where the application of their strengths can produce results. It requires that they are assigned to opportunities, and that those opportunities are the right ones for them."
Staffing for performance must become an ingrained habit. First -class people must always be assigned to major opportunities.
By putting the wrong people in charge of a major opportunity inevitably condemns to the scrap heap a potentially new and big business.
Drucker observed that many organizations avoid making priority decisions. So, what do they do? They try to do a little bit of everything with respect to assignment control.
This inevitably leads to diluting first-rate resources. Rather than concentrating first rate resources on a high-grade opportunity, many organizations tend to ask a strong performer to be available for support and advice to a weak performer assigned to a secondary opportunity.
The result? In no time at all the few really good people will do nothing but bolster weak people and secondary opportunities at the expense of maximizing the potential of first-rate opportunities.
The point? A person's strengths, to be effective, has to be fully concentrated on first-rate opportunities if the organization is to experience real productivity growth.
The Need to Concentrate
Concentration on the job and task is an important prerequisite for productivity in knowledge and service work.
In the work of making and doing things, the task is clearly defined. In knowledge work and service work, noted Drucker, productivity improvement requires the elimination of whatever activities do not contribute to performance.
Eliminating sidetracking activities maybe the single biggest step toward greater productivity in both knowledge and service work.
Here follows some excellent Drucker examples:
"The task of nurses in hospitals is patient care. But every study shows that they spend up to three quarters of their time on work that does not contribute to patient care.
Instead, two thirds or three quarters of the nurse's time is typically spent filling out papers.
Whenever we analyze the performance of salespeople in the department store, we find that they spend more than half their time on work that does not contribute to their performance, that is, satisfying the customer.
They spend at least half their time filling out papers that serve the computer rather then the customer.
Whenever we analyze the time spent by engineers, we find that half their time is spent attending meetings or polishing reports which have very little to do with their own task.
This not only destroys productivity; it also destroys motivation and pride.
Wherever a hospital concentrates paperwork and assigns it to a floor clerk who does nothing else, nurses' productivity doubles. So does their contentment.
They then suddenly have time for the work they are trained and hired for: patient care.
Similarly, both the productivity and satisfaction of salespeople in department stores shoot up overnight when the paperwork is taken out of their job and concentrated with the floor clerk.
And the same happens when engineers are relieved of their 'chores'––draftsman's work, rewriting reports and memos, or attending meetings"
Building Continuous Learning Into the Job and Into the Organization
It's so obvious: when employees share with each other best internal practices the productivity of individuals increases… and, in turn, organizational productivity skyrockets.
Today's talent-intensive workforce demands continuous learning and training. Most organizations have formalized their training activities. But only a handful have formalized the process of continuous learning.
Continuous learning does not replace training. It has different aims and satisfies different goals.
Back in 1974, Peter E Drucker wrote: "[Formal and informal continuous learning] satisfies the need of the employee to contribute what he has learned in improving his own performance to the improvement of his fellow workers’ performance, and to a better, more effective, but also more rational way of working."
Said Drucker: "The very fact that the knowledge worker, to be effective, has to be specialized creates a need for continuous exposure to the experiences, problems and needs of others and in turn for a continuous contribution of knowledge and information.
Whether the knowledge work be accounting or market research, planning or chemical engineering, the work group has to be seen and has to see itself as a learning group."
Continuous learning can be informal. A simple lunch time gathering held in a conference room with the expressed purpose of sharing success tactics among a telemarketing sales force qualifies as continuous learning… as does internally produced webinars and social media forums.
In short, continuous learning can be formal or informal. But it must be organized.
And many internal training organizations now realize that increasing the productivity of knowledge requires increasing extraction of knowledge from individuals or groups.
These three requirements––assignment control, concentration, and building continuous learning into the job and into the organization––are very powerful concepts when applied to the task of improving workforce productivity.
As indicated earlier, other concepts must be thoughtfully and thoroughly put into action. It cannot be assumed that the work processes within which the worker works are optimal. Processes must be streamlined and reengineered.
Further, knowledge workers need timely feedback information if they are to control their own work.
And the false notion that if workers are given more freedom and control of the process, they will come up with far better, far more advanced, far more productive answers than the experts must be exposed for the myth that it is.
We will discuss these and other topics in future columns.