The Productivity Prescription
Derek Hudson
Recently Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, in an address in Halifax entitled Time to break the glass: Fixing Canada’s productivity problem, declared that Canada is facing a "productivity emergency".
In her speech, Ms. Rogers announced the emergency, reminded us of the broad benefits of higher productivity, and listed some ideas for improvement. She also handed out some work assignments. I'll give a quick overview and then provide my thoughts on what really needs to be done.
Ms. Rogers' attention grabber sets the stage. When the Bank of Canada starts talking about breaking stuff, we should pay attention.
I want to talk about Canada’s long-standing, poor record on productivity and show you just how big the problem is. You’ve seen those signs that say, “In emergency, break glass.” Well, it’s time to break the glass.
She based that conclusion on the scoresheet:
Back in 1984, the Canadian economy was producing 88% of the value generated by the US economy per hour. That’s not great. But by 2022, Canadian productivity had fallen to just 71% of that of the United States. Over this same period of time, Canada also fell behind our G7 peers, with only Italy seeing a larger decline in productivity relative to the United States.
Ms. Rogers, you have my attention. I entered the workforce in 1984. I have spent my career helping organizations and individuals improve their performance, so I take it personally when I see Canada falling behind.
Productivity is one of the easier concepts in economics to understand. It's the amount of value produced per unit of effort. High productivity means more capacity for wage increases to employees, capital investment, returns to shareholders and even taxes for public services. It mean more efficient use of resources and better value to customers.
Low productivity means the opposite. From the Bank of Canada perspective, having low productivity makes inflation very hard to control - which can create a self-supporting negative cycle. Low productivity increases risk and dissatisfaction from all stakeholders. I can't imagine a good argument for being satisfied with low productivity.
The ideas improving productivity Ms. Rogers suggested include better trained workers, economies of scale, more competition, and more investment. To me this list is not compelling. For many businesses in Canada, these are not their particular barriers to higher productivity.
High productivity comes from good systems, not isolated solutions. More on that in a bit.
Finally, Rogers handed out some action items. The Bank of Canada will provide stability. Governments are to provide the right policy background. The business community was told "do [your] part to invest."
The message, though subtle, is clear. Bank of Canada works on the foundation. Government sets the background. All the hard work, all the innovation, all the improvements must come from the business community.
Fellow members of the business community, it is clear that "our part to invest" must be to invest our hearts and minds in solving the productivity crisis, one leader and one business at a time. We can step up, scale up and level up Canada's economic productivity to an extent never seen before.
The productivity prescription is simple, yet immensely challenging. It is that we learn to manage our businesses at the next level. At a level of productive output this country has never seen before. It is that each business leader take responsibility for designing and operating their system for creating value at increasing levels of productivity. And to do this, each organization should focus on its unique challenges, it's unique drivers and unique constraints. Rather than “invest” in more, why not begin with unlocking the value in what we’ve already invested?
Business leaders need to learn how to get outside of the day-to-day operations and think of their business as a system, and then identify the barriers to creating value. Bad process, rework, inefficiency, chaos: all are pervasive killers of productivity.
In larger enterprises, business leaders need to stop assigning pieces of the value creation system to competing groups. Internal dysfunction, silos, empire building, and blaming are huge killers of productivity.
We will ask no more of our institutions than financial stability and decent economic policy. And to otherwise stay out of the way.
If they are willing, we can ask academic institutions to take a systems view of leadership and management. In the pursuit of productivity, we do not need experts working in isolation, we need team players building integrated systems that focus more on overall output than individual recognition.
No financial stability can compensate for bad management – which may simply be management focused on the wrong things. No business-friendly policy can make up for poor quality or misdirected focus. No economic stimulus (whatever that is) can make up for weak project management, dysfunctional organizational silos or failure to engage employees.
The prescription for us as business leaders is simple. To solve Canada's productivity problem, Canada's business leaders need to lead - to lead their teams to design and operate systems that create value at unprecedented levels of productivity.
The bad news is that we are a big part of the illness. The good news is that we are the prescription.
