3.2 Productivity measurement

Companies use performance indicators to measure the productivity. The following table gives an overview of the most frequently used performance indicators

Table 1: productivity measurement

Source: S Eilon (1985), A framework for Profitability and Productivity Measures

The performance indicators in the first column of the table are based on physical output or quantities, such as tons or volume. They are particularly used in industrial companies. The second and third columns refer to financial indicators, which focus on profit and loss. The R/I and Z/I ratios represent capital revenues. These indicators are mainly used in financial reports. The last column refers to performance indicators based on added value. Added value is defined as revenues minus operational costs (materials, energy, and purchased services). It represents the added value that the company creates through employing labour and capital.

In order to be able to monitor productivity development it is recommended that productivity indicators be quantified. However, measuring productivity in the service sector is difficult and uncertain. For instance the productivity of a bank or a consultancy firm is hard to determine: the differences in the quality of the various services offered and the customisation of the service often lead to rough measures of productivity. The discrepancies in productivity figures which are presented in various on-line research databases are tantamount to this measurement problem. Nevertheless the following link offers some of the most accepted databases on productivity.

http://www.eco.rug.nl/GGDC/dseries/dataseries.shtml.

On the national level productivity is usually measured in terms of the volume of labour used in relation to the output produced (GDP, Gross Domestic Product). For within enterprises, ‘labour’ (meaning ‘human beings at work’) tends to be either the single most important factor of production or that which is easiest to measure (in terms of persons employed or hours worked). Within the enterprise, technological and organisational changes serve to improve the effectiveness and the efficiency of the factor labour, without the outcome necessarily having been produced by labour working harder or longer.

‘Labour productivity’ is usually a proxy for ‘overall productivity’ or ‘total factor productivity’. Total factor productivity is a weighted expression of how well all the factors contributing to productivity development (labour, capital, resources, etc) are marshalled, enhanced and managed to produce the output demanded. Labour productivity does not, as such, measure the specific contributions of labour as a single factor of production. Rather, it reflects the joint efforts of many influences, including new technology, capital investment, capacity utilisation, organisational design, energy use, and managerial skills, as well as the skills and efforts of the workforce.

Productivity has been — and remains — the main component of economic growth: it is the “residual” element that still has not been explained once all the increases in the amounts of the factors of production are accounted for. It is enhanced by substituting capital for labour, or ‘taking the labour out of work’. This has been continuously taking place since the beginning of the Industrial Revolution: labour intensive processes of producing materials, transportation, information and leisure, for instance, have all been substituted by capital-intensive processes using new machinery and devices. These drastically reduce the number of workers needed in the production processes, but through the additional wealth generated new demands for goods and services are opened up, thereby increasing employment elsewhere. At the same time, the continuous drive to make better use of labour — both as ‘brawn-power’ and ‘brain-power’ — generates new employment opportunities, at least for the qualified and healthy members of the workforce who are able to cope with change.

The factors of production are not limited to the traditional ‘labour’ (or ‘human resources’), capital (both money and ‘plant and machinery’) and raw materials, but increasingly cover time, space and all resources of the environment. Hence there is the emergence of new concepts such as ‘green productivity’, trying to ensure that the benefits of productivity development for the present generation will not be detrimental for the generations to come.

On the macro-economic level, productivity on the one hand influences the use of economic resources in order to achieve better results and, on the other, is also the result of the performance process.

But all approaches to developing productivity come up against limits and can start bringing about just the opposite of what is being striven for. Thus, at a specific point in time, production can become isolated and alienated from society — through automated factories, excessively lean organisations or environmentally doubtful processes — causing difficulties in equitably distributing the value added. The net outcome can be that productivity development grinds to a halt with a deteriorating infrastructure, a lack of skills, strikes and social upheaval. Thus, productivity is not a self-perpetuating, value-free process, but rather one which requires some monitoring and, at least at times, management and intervention at various levels.

Productivity implies taking a longer term perspective than that of profitability, a concept with which it is intimately, but complexly, associated. Profitability clearly has a productivity component, but it is strongly influenced by the prices a company pays for its inputs and receives for its outputs. If a company can recover more than the cost of its inputs from rising prices for its outputs, its profitability can rise even in times when its productivity can be falling (the so-called ‘price recovery factor’). Thus, the key characteristics of productivity at the enterprise level are that it is expressed in physical units, in quantities; at the level of the branch, sector and economy overall economic units must be used which take account both of deflated money and purchasing power parities, i.e. the conversion of different currencies.

Similar to its association with profitability, productivity is a significant component of competitiveness, the level of which is also determined by the prevailing national level of prices and costs. However, unlike productivity, these costs and prices are to all intents and purposes outside the influence of the individual enterprise.

Productivity does not depend on monetary fluctuations which can lead to windfall gains (and losses) by intermediaries and speculators in future developments; rather, it requires perseverance, being a continuous process of doing things better today than yesterday and tomorrow better than today. And the inevitable driver behind this process is ‘competition’ in its many forms.

The EANPC and its members strive to pursue a ‘holistic concept’ of productivity. The input side covers not only the volume of labour but the quality and quantity of all resources — including the natural, infrastructural and organisational — which enterprises use to achieve their results. In this way a whole range of options are opened up for the efficient design of performance processes. On the output side of the production process it has to be mentioned that nowadays outputs not only include products and services but also the social and ecological impacts of the production process. The approach of the EANPC and its members covers the whole gamut of measures for fostering productivity focusing on the ‘human factor’. This human factor consists of two notions of capital: on the one hand human capital constituted by the individual skills competencies and attitudes of the employees and on the other social capital, the mutual trust and confidence, the collaboration and cooperation, the spirit of partnership among the labour and management of enterprises. Thus, human factor can be a valuable element in enterprise competitiveness only when it consists of two equally important aspects: high quality human resources and good organisation of people’s work. Improving the productivity of the enterprise and its supply chain results from how this social capital (organisation of work) enables the enterprise to make effective use of its human capital to make the most of its economic capital. This social capital facilitates innovation and change for productivity and competitiveness. There are various examples (LINK 1) of enterprises that have managed to optimise the human factor. Measures of particular importance to foster productivity focusing on the human factor include giving more responsibility to employees at the workplace, providing work that sustains health, designing workplaces which require skills and organisations that thrive on individual and collective learning, critically monitoring and using new understanding and knowledge, facilitating cooperation and collaboration between management and labour, etc. In other words, it means taking the ‘high road’ to enhanced performance — improving the quality of the factors of production and the ways in which they are used, having the medium and long term development of the enterprise in mind — rather than the ‘low road’ of unthinkingly economising on the use of the factors of production for the benefit of short-term profit, which is, unfortunately, prevalent in today’s world.

A broad approach is also taken for recording the results of performance. It is not just figures for turnover, profits and yields which are important, but also the societal benefit of the results from the performance processes, including the benefits for employment, improving working conditions and sustainable development within a shrinking world.