People triumph
“Productivity isn`t everything. However, as noted by the economist Paul Krugman, in the long run it is almost everything. Productivity growth determines our living standards and the wealth of nations.”Erik Brynjolfsson of the Massachusetts Institute of Technology (MIT) and Lorin M Hitt of the University of Pennsylvania, in a paper that included the above statement, hit upon exactly why productivity growth is important to South Africa.The last 12 months have, as it happens, brought a sparkling productivity performance in the country. The past year has also seen compelling evidence, in a research project, that suggests an exclusive focus on technology to gain productivity growth is misleading; that productivity is about sharp and creative minds, and machines are tools in the process.McKinsey, often seen as the benchmark among management consulting houses, conducted extensive research and found that while IT investment plays a role in improved productivity, it is far outweighed in importance by innovativeness and corporate competitiveness. Don`t fear for jobsThough it remains above historic averages, US and European productivity growth has cooled with their economies. By contrast, South African productivity growth continues to soar at an imposing five percent. In the US, the comparable five-year average, as measured by GDP per person working in the private economy, is around half that, and it`s just below two percent in the EU.Viewed against the backdrop of South Africa`s continued, but modest, economic growth, this productivity performance looks extra sparkling. But there is a downside to this rosy picture.Since productivity is typically measured by dividing economic output by the number of people required to produce it, the implication of productivity growth that outpaces economic growth is lower employment.Job losses in a country with limited employment opportunities and no social security is a very high price to pay for productivity gains. One needs, however, to put a fine point on this: productivity improvement does not necessarily cause the job losses – but those losses make measured productivity levels look good.In other words it is a matter of reasons and results – better measured productivity is a result when employment figures decline for various reasons, only one of which may be productivity improvement strategies. Other reasons for changes in employment levels are related to competitiveness, globalisation, changed tariff structures, technology upgrades, obsolete products and services and similar market forces.Tradek economist Mike Schussler estimates that South Africa can attribute about half of its apparent productivity growth to job losses and the other half to greater competitiveness of South African companies. He is one of the economists that believes that, at least in the private sector, job losses have bottomed out and job growth is on the horizon.South Africa`s competitiveness improved, according to the World Competitiveness Yearbook 2002, from a ranking of 42nd in 2001 to 39th in 2002. But as overall economic growth continues on the back of South Africa`s improving competitiveness, at least in the private sector, there is now a light at the end of the job loss tunnel.Joseph Maqhekeni, president of the National Council of Trade Unions (Nactu), puts South Africa`s recent productivity performance in perspective. First he stresses that the US and South African situations are very different, and therefore not strictly comparable. He points to Department of Trade and Industry (DTI) research that shows a better relationship between employers and employees will result in dramatically improved productivity. In his experience on the shop floor in the chemical industry, this finding is entirely valid.The point is that people matter when it comes to productivity improvement.In addition to good workplace relations, Maqhekeni cites technology as the second driver of productivity improvement in South Africa. Long-term under-investment in plant and machinery in South Africa seems to support this view. He argues that as long as employees` skills are developed to cope with changing technology, thereby enhancing the individual`s productive capacity and employability, IT investment, particularly in the “e-world”, need not be a threat to employees. In fact, there are reportedly over 6 000 vacancies in the formal IT industry alone. The major crime of apartheidFrequent statements by Alan Greenspan, governor of the US Federal Reserve Bank, paint the ageing St Alan as a worshipper at the altar of technology-led productivity growth. Against this backdrop, McKinsey last year released the results of extensive research into the source of improved US productivity. The findings proved Greenspan wrong.The outcome of McKinsey`s research is simple: while IT investment plays a role in improved productivity, it is far outweighed in importance by management innovativeness and corporate competitiveness.Ketan Lakhani, chairperson of the Social Plan and Productivity Advisory Council (SPPAC), the body responsible for South Africa`s productivity policy, is sceptical about the validity of McKinsey`s research. But he concedes that if it is sound, “it confirms that productivity issues are about people and policies and not about technology and resources”. Either way, he believes these research findings confirm that South Africa`s approach to productivity is appropriate.“Our major thrust is developing trade and financial policies that create opportunities and that facilitate heavy investment in people development. Once they are fully operational, the SETAs will be spending around R50 million a day on training and development.“The underdevelopment of our people was the major crime of the apartheid past.”McKinsey undertook detailed research in the banking and retail sectors. And in South African banking the company`s findings seem to apply.An Absa Bank spokesperson stresses that technology is a means to an end and not an end in itself. Absa is currently developing a system to measure the impact of IT investments on its productivity; but even without firm evidence to this effect, technology is seen as an essential tool to achieve the bank`s business goals. “Technology is only a component,” the bank reports. “It is our people that help us to compete on a sustainable basis.”Absa`s good online customer services have enhanced customer convenience but do not appear to have caused huge direct productivity gains.In the US banking sector, McKinsey found the productivity return on investment in IT was “disappointing”. The reason it gives is that, between 1995 and 1999, US banks over-invested in PCs by a large margin: they spent $5 000 per employee, as opposed to an average of $440 per employee in other sectors.While one should note that almost every bank employee needs a desktop computer, unlike workers in many other sectors, much of computing power bought by banks will never be used. The biggest reason is the way banks purchase computers. They typically buy one computer model for all employees, which might save on support costs, but wastes computing power because they are locked into the highest level of PC requirement in the organisation.In addition, US banks invested for revenue generation rather than cost containment. This meant product ranges swelled to cater for every possible customer need. Another survey by McKinsey found that the priorities for bank customers centre on reliability, service and trust and not on product range.All in all, the consulting house found that the US banks got it wrong – perhaps too long on technology spending and too light on management innovativeness.In South Africa, the financial services sector boasts a healthy productivity performance. At the end of 2000, the latest full year for which figures are available, it accounted for six percent of employees in the private sector (excluding agriculture), and enjoyed a five-year annual average growth of 6.8 percent in productivity per person. Over the same period, the sector`s capital productivity growth reached 2.7 percent – third behind the electricity, the gas and water and the transport, storage and communication sectors respectively. Financial services account for 23.8 percent of private sector GDP – second only to manufacturing with 24.5 percent. Retailers` delightMcKinsey also examined the productivity payback on IT investment in the retail trade in the US. It found that Wal-Mart was first to invest in many new IT applications, which allowed it to “reduce its inventory significantly and to reap savings, boosting its capital and labour productivity”. But consumers` accelerating preference for higher-value items also contributed to its improved productivity in terms of sales per employee.In South Africa, retailer Edgars has had a similar experience. Chief information officer Henry Slabbert says the group is “happy” with the results it gained from investment in IT. As with Wal-Mart, investment in IT to streamline inventory and supply chain management has paid off for Edgars. Improving stock turn by just 10 percent when stock is valued at around R2 billion can have a major impact on the group`s bottom line.Customers want the right merchandise at the right price, and technology is Edgars` key to achieving this for its customers. Slabbert points out that in retailing, management must know on Monday what merchandise sold well over the weekend. If this system works well, it can have a dramatically positive impact on productivity.Eskom is arguably South Africa`s star performer in organisational productivity improvement and competitiveness. For successive years it has been rated by the World Competitiveness Yearbook as the most competitive electricity supplier among the 49 countries listed. Eskom productivity guru, Cliff Cooper, is ambivalent about IT`s impact on productivity in Eskom. He says: “Technology and IT probably does have a negative impact on jobs.” It depends where you areHe cites as an example new accounting systems which eradicated the need to manually input journals, and customer queries that are handled electronically over the Internet.But despite these gains, the impact on Eskom`s cost structures has probably been minimal.Not everyone faces the same economic imperatives, however. Lily Chang, corporate affairs director of Singapore`s Standards, Productivity and Innovation Board provides a different perspective on the productivity paradox debate.In her country there are too many jobs and too few people. Says Chang: “Job losses due to IT implementations are not a relevant issue in Singapore. Our situation here is different from countries where there are not enough jobs for the workforce. In general, companies here computerise to automate their operations as well as to train and upgrade workers` skills on a continuous basis, in the face of a labour shortage and rising wage bills.”Although many US economists talk about the link between productivity improvement and technology advances, it is people development and innovation, rather than technology, that triumph. This observation is key to understanding the simultaneously destructive and constructive roles of new technology and their relationship to employment.
04 May 2003
“Productivity isn`t everything. However, as noted by the economist Paul Krugman, in the long run it is almost everything. Productivity growth determines our living standards and the wealth of nations.”
The last 12 months have, as it happens, brought a sparkling productivity performance in the country. The past year has also seen compelling evidence, in a research project, that suggests an exclusive focus on technology to gain productivity growth is misleading; that productivity is about sharp and creative minds, and machines are tools in the process.
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