How the Productivity Paradox Can Hurt Your Business and How to Avoid It
What would be the first thing to come to mind if I defined someone as a “wise fool”? How about if I told you that you can save money by spending it? Makes no sense, right? Here’s another one: This one is from George Orwell’s Animal Farm. What comes to mind when you hear the phrase “All animals are equal, but some are more equal than others”?
All these are examples of paradoxes. The simplest definition of a paradox is a statement that is self-contradictory. What this means is that they contain two or more statements that are both true, but cannot be true at the same time. For example, someone is wise because they are not foolish. So there can’t be such thing as a wise fool.
Another example: By saying that all animals are equal, the implication is that no animal is better than the other. There is no such thing as being more or less equal because the word ‘equal’ shows balance. When you say some animals are more equal than others, the conclusion becomes logically unacceptable.
The interesting thing about paradoxes is the fact that despite the seemingly inconsistent conclusions from the statements, when some investigation is done or an explanation offered, the statement may prove to be true or it might promote critical thinking.
To sum it all up, a paradox is when the actual occurrence is different from what is implied in the statement.
Productivity on the other hand is a measure of the output produced per unit of input. In business, inputs can include labor and capital and outputs are measured in revenues and business inventories. It is calculated by dividing the output in a given period by the total costs that have been incurred during that period. These costs include energy, capital, raw materials and labor. It is a very critical measure in industries because it helps them determine their cost efficiency so that they can know what to improve.
Although it is easy to define, productivity is very difficult to measure, especially in the modern times. Two aspects that have made this difficult are the two variables that need to be defined when calculating productivity: input and output.
The output should not only include the number of products leaving a company’s production line, but also the value that has been created for the customer. Five decades ago, it was reasonable to take the weight or quantities of products leaving the factory as a reasonable value of output. Today, things have changed. Other variables like product quality, convenience, customization, variety and even timeliness need to be considered when computing the output.
On the other hand, inputs are also not easy to compute. Hours put in by workers will not cut it anymore. There is a need to consider other variables like materials consumed, training for workers, supplier relations, investments in new processes and even the quality and quantity of equipment used.
WHAT IS THE PRODUCTIVITY PARADOX?
Now that we know what each of these two words mean, it’s time to try and figure out what they mean in an industry when they are put together.
In recent decades, there has been a widespread growth in the use of computers in industry. We now have the technology and systems that enable us to get all sorts of data concerning production systems and what exactly is going on in the factories.
This means that we can efficiently collect data on almost all the variables affecting inputs and outputs in our factories. The general expectation here is that with all this data, we should be in a position to easily make the necessary changes to achieve unprecedented levels of productivity that weren’t possible without the modern technology. Unfortunately, that’s where the paradox comes in.
Despite having all this improvement in technology, there doesn’t seem to be any significant improvement in productivity. This has prompted researchers to look into the trend to try and establish whether or not there are any benefits on the productivity front from improvements in technology.
DEVELOPMENT OF THE PRODUCTIVITY PARADOX
The first question to ask here is where productivity growth comes from. If we take a look at the definition, we’ll find that although working harder is advocated, it may not have a big impact on productivity. This is because it will increase outputs, but inputs will also go up. As a result, productivity will usually remain unchanged, and if there are changes, they will be small and insignificant.
On the other hand, pumping in more capital and other factors of production may not necessarily improve productivity. Let’s take a step back and see where it all began.
The productivity paradox was seen very prominently in the United States in the 1970s and 1980s when there was a big uptake of information technology. It is the period where the use of the computer in business grew rapidly.
Companies invested large sums of money in IT with a hope to make things go faster and generally improve their processes. However, the same cannot be said about productivity growth. As a matter of fact, productivity growth slowed down over the same period.
Labor productivity growth came down from about 3% in the 1960s to about 1% in the 1990s despite the increase in computing capacity thanks to the massive investments in IT. Robert Solow, an American Economist, noted this trend and observed that the computer age can be seen everywhere except in productivity statistics.
There have been many theories going around trying to explain this trend. One such theory is that the productivity paradox doesn’t really exist. The main argument here is that productivity growth only seems to be going down, when in real sense it isn’t. The reason for this is that the statistics used to compute the growth fail to measure all the gains, especially those that have been made possible by the availability of ICT.
Let’s look at a practical example. Traditional measures of productivity are normally based on GDP. This means that only output that has been produced can be included. This means that customer surplus is ignored, despite the fact that it is increasing rapidly with the increase of internet based services like Facebook and Google search which generate substantial utility at an extremely low market price.
Another example: very few people nowadays still buy music CDs. Taking the number of CDs sold as the way of measuring output in the music industry will show that the industry is shrinking. However, the truth is that we are not listening to less music. As a matter of fact, we are listening to more music thanks to the increase in access thanks to the increase in popularity of smartphones that have built-in media players. On paper, the music industry is shrinking. In reality that is very far from the truth. It’s measuring that just got more complicated.
Brookings Institution together with the Chumir Foundation did a review of productivity research. This review proved that gains from new technologies are underestimated as a result of lack of ways to accurately measure all the affected variables. Specifically, the two most affected variables are customer surplus and product quality.
However, the report does explain that these inaccurate measurements only account for a small fraction of the slowdown in productivity gains. It also goes on to say that the lapses have been around for a long time and they don’t seem to have significantly increased in recent years.
As a result, the conclusion is that despite the presence of lapses in measurement, the slowdown in productivity growth is still real.
Another way to look at it is that the recent technological improvements have not been as widespread as their predecessors. For example, the internal combustion engine and electrification both had numerous benefits on the entire economy. The same can’t be said about the ICT advances we have seen in the past.
Firm-level data looked into this and they found that there has been a significant productivity growth in the companies that have fully harnessed modern technology. The difference comes in the companies that have not fully leveraged the power of new technologies. These companies have experienced productivity growth slowdowns which have pulled the industry average down. So the problem is not modern technology, but slow adoption.
Luckily, world leaders understand the need to do something about the trend. In a recent G20 summit, leaders put emphasis on the need to accelerate reforms that are going to enhance productivity and to lift potential growth. They also talked about the need to boost investment in new tech. Hopefully, this will help reduce the forces against adoption of technology in industry.
We don’t know the impact that modern technologies will have on the world economy in the long term, but one thing is certain: the productivity paradox is real. It is responsible for the rising inequality in many societies and for that reason, it’s time to do something about it.
AVOIDING THE PRODUCTIVITY PARADOX
The way to improve productivity is by working smarter. This means analyzing the processes and changing the technologies and techniques that can help get more output from the same input. No matter how much you are compelled to do so, working harder is not going to do you a lot of good on productivity.
The first important thing to note is that your business can easily become a prisoner of its own cost cutting measures. Many productivity programs assume that cost cutting is the best way to recover from a competitor who brings cheaper products to the market. As a result, they would set targets that try and get managers to cut costs by all means. This derails them from the real objective and they end up incurring huge opportunity costs as they focus on short term considerations.
What this means for your business is that you need to look at the bigger picture. Don’t spend too much time looking for shortcuts and end up spending no time on innovation and other things that will help you in the long run. Drastic cost cutting measures will also create constraints that will make you lose flexibility. Before long, making product changes will be a problem and the business will have problems developing new programs as a result.
Someone once said that with great power, comes responsibility. No doubt, advances in technology will give you power that can also be abused. It is a well-known fact that computers and mobile phones are the greatest reducers of productivity in the office because they bring with them distractions. Rather than doing their work, your employees could be on social media having chats with friends or doing other things that they are not supposed to be doing at that time.
The result is less productivity for your business, not because technology isn’t working for you, but because in your case, the disadvantages that it comes with outweigh the advantages. Nonetheless, even with these disadvantages, when used correctly, modern technology does pull its weight.
For example, spreadsheets have made it possible to perform complex calculations of large volumes of data with a high degree of accuracy. This is something that was very hard to achieve using manual spreadsheets. So the worker is able to save time, time which can be used on other productive tasks that can help the company. It also means an improvement in quality due to the high accuracy of the information received.
Let’s look at the productivity paradox in banking. ATMs generally reduced the number of paper checks that were processed by banks. In a way, this can be seen as a reduction in banking output and by extension, productivity. However, the convenience that the ATMs brought is undeniable. If this is the case in your business, then you have nothing to worry about. Things are much better than they look.
Another thing that can help improve your business productivity is creating a flat organization structure as opposed to having a hierarchical structure. This can be achieved by increasing the number of skilled workers and giving them more decision making responsibility. This way, you will reduce inefficiencies created by long approval processes.
There is a consistent positive relationship between the use of modern technology and the use of self-directed teams with greater levels of individual decision making. This is because technology empowers the workers and makes it hard to constantly monitor every single activity they engage in at all times. So to get the most out of this technology, you will need to have skilled workers who will be able to work with little or no supervision.
Another thing that could lead to the productivity paradox in your business is workers maintaining their old ways. These people have been used to a specific system of working that has been successful so far. To survive, they may have picked up a number of habits. These habits could be the reason behind low productivity growth even after switching to modern systems.
Every modern system has its own perks which make it better than the old system. For some, the benefit can be seen in low work-in-progress inventories for others it is something else. If workers were used to having a pile of unprocessed inventories waiting at all times, (for all the good reasons) they will certainly have trouble getting used to running with a small pile. That could be keeping you from reaping full benefits of the new system because if one benefit is low work-in progress inventories, you won’t see it.
To ensure that you don’t end up with this problem, proper training is essential. Make sure that your employees understand exactly how the new system works. In this training, also make a point of highlighting the operational differences between the new system and the old one. Spend as much time as possible here and make sure that everyone understands. This way, they are less likely to use tricks from the old system in the new one without first verifying that they work.
Be prepared for the change. Most companies think that the only change they would have to deal with is purchasing and installing a new system. Far from it. The biggest cost is changing the company. When you foresee this, you will be better prepared to make the decisions that will need to be made after the system has been installed. You will also understand that changes will not start to be seen overnight. You’ll also understand that the benefits from the investment are going to be realized over a long period of time so you will adjust your expectations to ensure that you don’t find yourself pressuring your managers and derailing them from the main cause.
It’s also important to note that computerization alone will not automatically increase your business productivity.
However, it is a vital component of a modern system of organizational changes that if properly effected, are going to improve productivity. It is therefore important to consider these changes as a part of the computerization process. For example, to reap the full benefits of computerization, you will need an overhaul of the way communication is done in the business.
Traditionally, you could have been using typed memos and other such channels of messaging. With computers, you can reduce your paper consumption and also enjoy faster communication. If you stick with the old communication system, you won’t be able to reap full benefits of computerization and it will appear like you are stuck in the productivity paradox.
This was the same problem faced when electric motors were introduced into factories. At first, all that was done was a replacement of the large steam engines with gigantic electric motors. The work process remain the same and as a result, the productivity improvements were minimal.
The big gains came about 40 years later when they realized that they no longer needed to arrange the machines around a central power plant. They then re-engineered the factory and distributed the machines in a manner that allowed the semi processed materials to move from one machine to the other in the most efficient manner. This is because each machine could be powered by its own small electric motor, hence there was no need for a central power plant.
The same applies in computerization. All the benefits of new technology have to be exploited before we can reap maximum productivity growth. The good news is that the revolution is happening much faster this time round so we won’t have to wait four decades.
It’s normal for productivity to first go down when new computer systems are installed. This is the period when employees are learning how to use them and getting them to peak performance. Here are some things that you can do to ensure that this learning phase is as short as possible:
- Identify and clarify all roles and responsibilities of all the people who will handle the system. This will be most effective if it is done before the system is commissioned.
- Create easy to understand process flows and new procedures. They should be distributed to all the people who will need them and like the roles and responsibilities, this should also be done before the system is commissioned.
- When designing the new system and its implementation, ask for input from frontline workers and supervisors. They have hands-on experience with the old system hence they are the best people to tell you how the new system can be better applied. They will also own the new system when they feel that their thoughts and feelings were put into the purchase and implementation of the system.
- Ensure that the training is relevant and practical. Give employees as much practice as possible during the training sessions and if possible, have them work on a live system during the training to ensure that they are fully conversant with what to expect once everything is rolled out.
The important thing to note is that throwing some new technology to a problem will not make it to go away. It is vital for the people who will be working with the technology to be congruent with the new technology. This can only be done through training and providing all the necessary information to them.
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