Business

Managing to deal with Northern Ireland's productivity crisis

Productivity - or lack of it - has been a persistent problem in Northern Ireland for more than a decade

WHEN we consider current challenges facing businesses, discussion tends to focus on Brexit, and understandably so.

But while the impending exit from the European Union presents, for many, the most pressing contemporary issue for industry, there is another which has been a persistent problem for more than a decade – productivity.

It is a major issue because without increased productivity, economic growth will remain sluggish, government will find it harder to reduce the deficit meaning less manoeuvrability on taxes and spending, therefore leaving little chance of an improvement of living standards.

The factors contributing to low productivity growth are various and have been the subject of much debate.

However, according to research carried out by McKinsey & Co for its Global Management Matters survey, a direct correlation can be made between management practice and productivity and return on capital employed.

Further research presented by the Department for Business, Innovation and Skills has illustrated the connection between strong management and leadership skills and increased productivity and vice-versa.

A lack of growth in productivity is experienced in all sectors across the UK with the most recent government figures, produced by the Office for National Statistics (ONS), showing levels over the first three months of this year fell to their lowest point since 2007.

The drop of 0.5 per cent in hourly output followed a full year of quarterly growth in productivity but since the financial crisis, levels have generally plateaued.

And although growth has slowed in almost every major economy across the globe, rates in the UK lag behind many of its main trade partners such as Germany and the United States.

The issue is felt even more keenly in Northern Ireland where productivity is persistently around 80 per cent of the national average.

It is estimated that for businesses across the UK, ineffective management costs more than £19 billion per year in lost working hours.

According to McKinsey, a single point improvement in management practices (which it rates on a five-point scale from ‘worst practice to best practice') is associated with the same increase in output as a 25 per cent increase in the labour force or a 65 per cent increase in invested capital.

Returning to the Department for Business, Innovation and Skills research, it found best practice management development can result in a 23 per cent increase in organisational performance.

In could therefore be surmised that focusing on the development of directors, and improving governance and management practice in organisations could play a major part in cracking the productivity problem.

In Northern Ireland, that means a particular focus on small and medium enterprises which make up the vast majority of firms here.

While the pragmatism that tends to be more present at smaller firms goes a long way to help them deal with downturns in fortunes, the companies are also generally structured less formally.

This unstructured approach to management can have a major impact on the provision of leadership skills and strategic thinking within the organisation.

In addition, the predominant ownership model of firms in Northern Ireland is typically family or founder owned and managed.

The well-worn saying ‘first generation makes it, second generation maintains it, third generation blows it' is too sweeping to apply to all family businesses.

But there is an element of truth according to The Family Firm Institute. It has found that only around 30 per cent of family businesses survive into the second generation while 12 per cent remain viable into the third generation, and just 3 per cent of all family firms operate into the fourth generation or beyond.

Employees at firms where management is less than best practice can be left feeling disengaged and unenthused so it is unsurprising they may not be working at full productive capacity.

There are some practical steps that can be taken to address the problem however, such as creating economic incentives for all levels of staff, from senior down to lower-level employees.

Feedback should be constructive and provided regularly while additional training and support should be provided when appropriate.

Formally recognising of the good work of employees should not be held back and will undoubtedly raise future standards.

These steps form only a small part of an overall strategy to improve management practices.

Although it will not solve the dearth in Northern Ireland's productivity growth alone, there is no doubt that raising management standards – one of the key aims for the IoD – will build the foundations for future prosperity across the whole economy.

:: Kirsty McManus is national director of the Institute of Directors (IoD) Northern Ireland

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