Business leaders tend to think of "efficiency" and "productivity" as two sides of the same coin. When it comes to strategy, however, efficiency and productivity are very different. At a time when so many companies are starved for growth, leaders must bring a productivity mindset to their business and remove obstacles to workforce productivity.
This view differs substantially from the relentless focus on efficiency that has characterised management thinking for most of the past three decades, but it is absolutely essential if companies are going to spur innovation and reignite profitable growth.
The common definition of labour efficiency is: "The number of labour hours required to accomplish a given task, relative to an industry standard." The typical way of assessing efficiency is to compare the number of hours it takes to produce a given product or service with those usually required.
Improving efficiency is about doing the same with less as companies find ways to reduce the time required to produce the same level of output. This results in savings because the company spends less on wages and other labour-related costs.
Efficiency is about shrinking the denominator — inputs (headcount, labour hours) — to improve profitability.
At first glance, the definition of productivity appears remarkably similar. A common definition is: "the ratio of the output of goods and services to the labour hours devoted to the production of that output". Productivity is typically measured by comparing the amount of goods and services produced with the inputs used in that production.
Productivity is about doing more with the same. Growth in labour productivity is measured by the change in output per labour hour over a set period.
— INSTEAD OF CUTTING HEADCOUNT, EXECUTIVES SHOULD SEEK TO BOOST OUTPUT.
For a country, productivity is closely linked with living standards. For a company, it is tied to performance. With higher labour productivity, a company can produce more goods and services with the same amount of work. Productivity is about lifting the numerator, the output, to increase top-line growth from the same workforce.
For most of the past three decades, executives have been encouraged to focus on efficiency. Tools such as Six Sigma, process re-engineering and spans and layers analysis have helped executives uncover waste in their operations — in effect, identifying labour hours (or materials) that are unnecessary to produce the same output. In the absence of growth, efficiency gains are most often monetised through workforce reductions.
Today’s business environment requires a different world view. The benefits from improving efficiency appear to have petered out. In the 1990s and 2000s, a focus on efficiency produced solid results. Earnings growth for S&P 500 companies ran at nearly triple the inflation rate, despite tepid top-line growth in many years.
In the first quarter of 2015, however, S&P 500 earnings began falling, and growth has remained negative. Without top-line growth, continuing to wring out greater profits through efficiency has become the managerial equivalent of attempting to squeeze blood from a stone.
If efficiency is no longer the secret to superior performance, what about productivity? Bain & Company recently completed a study of workforce productivity and performance. We collaborated with The Economist Intelligence Unit to survey more than 300 senior executives from large companies worldwide. In addition, we did two dozen in-depth organisational audits to identify how companies can unleash the productive power of their teams and accelerate profitable growth.
The research highlights three fundamental tenets of a productivity mindset. First, leadership must recognise that most employees want to be productive, but the organisation often gets in their way. The average company loses more than 20% of productive capacity — more than a day a week — to "organisational drag", the structures and processes that prevent people from getting things done.
Leaders with a productivity mindset seek to eliminate this drag at every turn. They simplify their organisation’s structure, fight bureaucracy and create ways of working that allow staff to focus on delivering for customers and shareholders.
Second, companies have a few talented people who can have a disproportionate influence on strategy execution and performance. These "difference makers" are often hidden away. Despite the millions spent fighting "the war for talent", relatively little has been devoted to guarding the spoils. In most companies 15% of the workforce are star players who can have an outsize effect on strategy execution. Both "the best" companies and "the rest" have roughly the same amount of star talent.
But productivity-minded leaders ensure their scarce star talent is assigned to business-critical roles. In retail, for example, if superior merchandising is essential to competitive advantage, leaders ensure that stars fill critical merchandising roles. This allows for more and better output from this function and better strategy execution.
Third, people have a lot of discretionary energy that they could devote to their work, but many are not inspired to do so. Virtually all staff can do more, but many do not invest their full ingenuity and creativity.
Inspired employees bring more discretionary energy to their work every day. They are 125% more productive than an employee who is just satisfied. Stated differently, one inspired employee can produce as much as 2.25 satisfied employees.
Executives with a productivity mindset do all they can to tap into every employee’s reservoir of discretionary energy. They strive to align the firm’s purpose with each individual’s purpose. They invest in improving the inspirational leadership capabilities of their managers. And they build a culture of autonomy and accountability to allow all employees to do their best work.
While these steps may not inspire every employee, they can increase the level of inspiration across the organisation and, with it, labour productivity.
Each of these tenets has important implications for the approach leaders should take in managing the scarce time, talent and energy of their workforce. Adopting a productivity mindset can be challenging, but the payoff is enormous. The best companies are more than 40% more productive than the rest. And this difference in productivity boosts profits — operating margins 30%–50% higher than peers — and speeds growth.
In the next decade, it will be critical for business leaders to focus on productivity. Instead of managing the denominator, by cutting headcount, executives should seek to boost output. By removing obstacles, deploying talent strategically and inspiring their workforces, leaders can dramatically raise productivity and reignite top-line growth.
• Moolman is a partner in Bain & Company’s Johannesburg office and Mankins a partner in the group’s San Francisco office.
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