Productivity Prescription - Part 2

Investment is Not the Practical Solution to the Productivity Crisis

Dave Kane

There has been a lot of talk again about Canada’s productivity challenges. Productivity, in this context, refers to the efficiency with which Canadian businesses utilize labor hours to produce standard outputs, such as goods or services. The Bank of Canada recently highlighted our productivity relative to our American neighbours. It is not good and has been getting relatively worse for years. In fact, over the last 38 years, our relative performance to the US has declined more than any of our G7 partners, except Italy. OECD forecasts expect this disappointing performance to continue for decades. The Bank of Canada was right to sound the alarm. It is a trend that works against sustaining or even growing our standard of living.

Unfortunately, few agree on what specifically to do about this. This past week we were presented with a new federal budget. This unfortunately did not focus on productivity the way many had hoped. Economists, leaders, and small business owners, many far more academic than me, do not seem to agree on whether this budget will help or hinder Canada’s productivity. They do agree that it was not enough. My observation is that regardless of which way it moves the needle, it will take a long time before we see the effects of this week’s adjustments.

Helping my son with a Social Studies assignment recently led me to reflect on Adam Smith's Invisible Hand. It resonated with me that instead of waiting for governments to pull various policy levers, our productivity challenges are best addressed by small and medium-sized businesses focusing on their own profitability and stakeholder success. By pursuing their own interests, businesses inadvertently contribute to overall productivity and competition more rapidly than will new government actions.

The Bank of Canada followed a similar notion with their call for business to invest more, which undoubtedly would boost productivity. But is that practical for the thousands of small and medium-sized businesses in this time of higher risk and higher capital costs?

Imagine your business is like a classic car. You've been driving it for years, and while it still runs well, you've noticed that it's not performing as efficiently as it used to. You face a choice: do you invest in expensive new turbochargers and high-tech gadgets that may not fit well within the existing components of your car, and that you're not entirely confident in installing properly? Or do you take a different approach?

Instead of going the route of flashy new technology, consider fine-tuning the performance of the car by making minor adjustments to the inner workings of its systems. Think of it as tweaking the carburetor and fuel injection system to optimize performance. However, adjustments need to be focused on the right constraints, not by tweaking the easiest part to access. For that carburetor, imagine the air-to-fuel ratio is too low, making the amount of air the constraint. Adding more fuel or adjusting other factors will not improve performance. The key constraint of air needs to be adjusted up to realize any benefits. Focusing on refining and optimizing the system that is already in our businesses will cause significant improvements in efficiency and productivity, and will be achieved without the risk and expense of implementing entirely new technology. Like a skilled mechanic, it's about working with what businesses have and know, making incremental changes that align with each business's unique needs and capabilities.

Of course, this is easier said than done. So many business leaders are the key cog in their business. They are neck deep into the daily operations of the organizations they built through hard work and personal effort – working to fight fires, solve problems, direct resources or rolling up their sleeves to get the work done. Although they don’t feel they have the time, leaders are the best people to methodically approach the fine-tuning of operations, unlock the hidden potential and maximize performance. At Unconstrained, we refer to this as Management Attention Deficit, wasting scarce management attention on the less important things.

So here is the rub, for business to improve their own success, profitability, and productivity, they will need to find the time to step back and look at the business as a complete system. Finding the initial time is hard, but making the tweak to the business without stepping back first often lands businesses on the wrong priority or pursuing an incentivized distraction. The place to start, just like if it was me tinkering with the car, is to talk to someone who’s worked through this before. Just by having a conversation with someone who is not invested in the day-to-day business is likely to reward leaders with the beginning of clearer thought. Start by stepping back, talking through the system used to create value, ensure it aligns with the business purpose and explore the drivers and constraints to this system. These conversations will help crystalize the system, prioritize constraints and focus management attention on the right things. Communication of this same “value creation system” to the business team and adding practices to monitor and manage the evolving system empowers everyone to make better decisions. Soon, leaders are free from some daily operational interventions and create a positive reinforcing loop that increases time for attention to the right areas, improving results and freeing up even more management attention.

Chambers of Commerce and industry associations are terrific at lobbying and speaking up about what businesses need from the government. Leave advocacy to them, but do not wait for others to fix productivity. New investment in capital and innovation is best left to those who have optimized their value creation system or have the business model that can benefit from that new supercharger. For the thousands of other businesses, they need to look inward at their own value creation system and then begin to systematically address constraints in their order of impact.

Thousands of businesses managing their business system more effectively, using labour and inputs more efficiently, and making themselves more profitable will do more to improve Canada’s productivity than the millions of dollars the government will spend incentivizing investment and productivity. My productivity solution is to support more leaders to do less in the day-to-day operations, invest more time working on the business and, most importantly, make the small improvements to the investments they’ve already made. In essence, addressing the productivity crises requires a shift in mindset. We cannot wait for governments to be the solution and we do not need to modify that classic car we worked so hard to own into something we don’t recognize. We just need to find that first investment of time to step back, see the system, and find the right parts of the engine to tweak.