the productivity challenge

The Productivity Challenge 1

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Written by: Michael DeVenney

Bluteau DeVenney & Company

The ProducTiviTy challengeWhy canadian organizaTions are losing comPeTiTiveness

and hoW To Turn iT around


901A - 5670 Spring Garden Rd, Halifax, NS, B3J 1H6 | Web:www.BluteauDeVenney.com | Email:[email protected]

has been the same for 10 years resulting in a real dollar decrease of 17% since 1996. Canada has actually fallen over the past six years from 12th position for investing in people for 2002 to 21st spot in 2008.

With an annual decline in competitiveness over the past five years alone of 4.41%, how much further can we go before we lose to our competitors?

Executives are much more comfortable making investments in tangible property or securities than people. This perspective is despite the fact that investing in people generally requires a lower initial investment and provides a higher return. And this perspective needs to change or Canada will lose.

The solution lies in focused investment - target your market to maximize your return.

The critical issue for maximizing productivity is to identify the pivotal positions (those 3 to 4 positions that when performed well will separate you from the competition) for your organization and invest in them strategically. The research indicates that a 1% improvement in the productivity of a pivotal position translates to a 10 times multiplier to profitability.

Connecting investment in training and development to the business strategy and people in positions that can leverage organizational results is the key answer to increasing competitive advantage. People are the business differentiators.

Canadian organizations need a strategic people investment plan.

The Productivity Challenge: Why Canadian Organizations are Losing

Competitiveness and How to Turn it Around

Executive Summary

“If you don’t have a competitive advantage, don’t compete”

Jack Welch

Competitive advantage is what separates your organization positively in the eyes of your clients from the rest of the herd.

Canadian organizations are facing a crisis in competitiveness. On an increasingly global playing field, Canadian organizations are falling behind and are losing their competitive edge. The impact is being seen in sliding employee retention, employee satisfaction and engagement, customer satisfaction and loyalty, product and service quality, leadership capacity, productivity and profitability.

Despite an advanced market and labor environment, Canadian organizations are not providing bang for buck. Poor productivity remains one of Canada’s most significant problems and is the main contributor to declining competitiveness. While unit labor costs have increased steadily by 18.86% since 2004, the overall productivity has declined by 5.2% over the same period. The combination of these two factors resulted in a competitive slide of 20.24% in a little over five years. Organizations are paying more in wages while receiving lower performance and output.

The decline in productivity is primarily responsible for the current Canada-US income gap of $6,400US per employee. The income per capita gap means that individual Canadians have considerably less spending power than their US counterparts limiting our economic growth.

The answer is clear though. The link between productivity growth and the investment in training and developing people has been researched and proven. Yet, Canada has at best a stagnant investment in training and development. The average spending is $852 per employee - which



Poor productivity remains one of Canada’s most significant problems and is the main contributor to declining competitiveness. While unit labor costs have increased steadily by 18.86% since 2004, the overall productivity has declined by 5.2% over the same period. The combination of these two factors resulted in a competitive slide of 20.24% in a little over five years. Organizations are paying more in wages while receiving lower performance and output.

The decline in productivity is primarily responsible for the current Canada-US income gap of $6,400US per employee. The income per capita gap means that individual Canadians have considerably less spending power than their US counterparts limiting our economic growth.

Does Canada need to work harder? No, Canada needs to work smarter to improve productivity which is the only sustainable way to reduce the gap in income per capita between Canada and other countries.

Canada’s long term position will depend on how well it can boost productivity and compete on an increasingly global playing field. Canadian organizations need to be innovative, attract investment, and use money wisely to win against competition that moves faster and faster. At the present time, Canada is lagging with innovation (scoring a D in a recent assessment), operating well below potential in attracting investment (our Foreign Direct Investment has fallen from levels of 10% in 1980 to 6% in 1990 and further to 3% in 2006), and not capitalizing well on our resources.

Canada possesses an economy with above-average labor-employer relations (denoting a generally cooperative environment), very flexible hiring and firing practices (way above the average level indicating a clear strength for Canadian employers), and a high degree of customer orientation. With a high rating for professional management, how can Canadian companies be falling so steadily and far in productivity?

Canada has at best a stagnant investment in training and development. The average spending is $852 per employee - which has been the same for 10 years resulting in a real dollar decrease of 17% since 1996. Atlantic Canada has the lowest investment in training and development per employee at $564 annually.

Introduction

You are offered the opportunity to invest in a piece of equipment that will save your organization approximately 10% of the operating costs for manufacturing your product. There will be an initial investment of $400,000 with the annual operating cost savings providing a return of 35% each year. Would you make the investment?

Definitely.

You have investigated and assessed an investment of $200,000 in the stock of a business that is projected to provide your organization with a return on capital of 25% annually with moderate risk. Would you make the investment?

Probably.

What if you were provided with an investment of $50,000 to train your people to be more productive with projected returns of more than 100%? Would you make the investment?

Apparently not!

Executives are much more comfortable making investments in tangible property or securities than people. This perspective is despite the fact that investing in people generally requires a lower initial investment and provides a higher return. Even though people generally account for the highest line item on the Income Statement, leaders are not inclined to invest in gaining the maximum return from this investment.

The impact for Canada is a decline in competitiveness. Organizations are seeing slides in employee retention, employee satisfaction and engagement, customer satisfaction and loyalty, product and service quality, leadership capacity, productivity and profitability.

The concept of competitiveness captures the medium- to long-term productivity and growth prospects for an organization. Canadian organizations - particularly Atlantic Canadian organizations - are falling behind in competitiveness. We are losing our edge.

Why?



We need a more quantitative - rather than qualitative - approach to evaluating investment in training and development. There is increased pressure on leaders to produce results and execute on strategic plans - the need to build both performance and engagement is critical. There is greater attention to how to increase performance.

Training and development is the answer - but not the way it has traditionally been done. For Canadian companies, 71% of training and development is focused on new employees (those employed with the organization for less than one year) with the majority of the investment being in job skills and technical competencies.

Only 10% of training and development is allocated to the executive level despite the tremendous impact of senior leaders on organizational results. Managers get even less. Do we assume that they already know everything needed for success?

How we invest in people is also an issue. The typical investment currently is conference attendance, academic tuition reimbursement, and in-class technical training. Almost none of the investment is connected to the actual strategy. This is just spending money - not making an investment.

We need to focus on improving competitiveness and organizational growth from investing the right way in the right people to maximize productivity.

Studies show that organizations that invest in people strategically can double the results of other organizations that take the traditional ad-hoc approach to training and development.

Canada ranks 21st in the world for investment in people in 2008 - down from 12th position in 2002. The US spends 40% more for training and development than Canada and has a productivity growth more than double that of Canada’s from 1996 to 2006.

As well, the investment made in training and development is mostly ad-hoc and not connected to direct business results.

What can you do to increase your competitiveness?

We cannot stand still.

• There will be more change in your market in the year ahead than ever before.

• There will be more competition in your market in the future.

• There will be more opportunity in your market than ever before.

The critical issue for maximizing productivity is to identify the pivotal positions (those 3 to 4 positions that when performed well will separate you from the competition) for your organization and invest in them strategically. Connecting investment in training and development to the business strategy and people in positions that can leverage organizational results is the key answer to increasing competitive advantage. People are the business differentiators.

No matter your industry or profession, you are in two businesses - your primary business and the people business. Although labor costs have increased over the past decade while productivity and engagement have declined, studies show that 63% of all leaders have no clear plan for building people effectiveness.

Further, the 2008-2010 recession has caused many organizations to limit, defer, or cancel their investments in training and development. Again, the decisions to cut or defer people investment is not strategic. Less than 7% of organizations measure return on investment in training and development. Despite being one of the largest line items, no analysis is done on people investment. Leaders see training and development as soft and a black hole - no one knows the actual return on investment in people. The result is indiscriminate budget cuts and further workforce de-motivation.



The Challenges

What are leaders going to be faced within the next five to ten years? A recent study asked leaders to rank the four critical business challenges with the most pressing being outlined below:

• Cost Pressures

• Growing The Business

• Driving Sales Growth

• Improving Customer Satisfaction

Underlying the ability of the organization to resolve the challenges was declining employee productivity. Investing in people wisely will have the greatest positive impact.

Do you invest right across the board in all positions?

No. Not all positions are created equal. In any organization there are positions that when performed well make a much greater impact on outcomes. These positions are pivotal positions. To identify the pivotal positions for your organization, start with looking at the strategic factors that when done well will separate you from your competition and produce the most results. Once the strategic factors are identified, work back to which positions in the organization support these results. You have defined your pivotal positions.

For a growth company seeking to expand into markets with innovative products, the pivotal positions may be sales, product development, and marketing. The pivotal positions for an organization will depend on the strategy.

What positions in your organization have the greatest impact on success?

Knowing the pivotal positions will also provide the foundation for what forms of training and development will provide the best return on investment. Having identified the business results that the pivotal positions most impact, you can take a further step back to assess what activities or competencies will the person in the pivotal position need to perform best to create results.

Organizational Improvement from Training and Development

Strategic People

Investment

Ad-Hoc People

InvestmentEmployee satisfaction and engagement 60% vs. 33%

Employee retention 58% vs. 29%Service / product quality 62% vs. 33%

Customer satisfaction / loyalty 62% vs. 35%

Profitability 52% vs. 32%Productivity 60% vs. 30%

If people truly are our greatest asset, we need to take greater care in investing in them. We have to find ways to invest to work smarter and what we have been doing to date is not working. With an annual decline in productivity over the past five years alone of 4.41%, how much further can we go before we lose to our competitors?

Canadian organizations need a strategic people investment plan.



able to compete consistently based on having the lowest price. Size definitely matters with this form of competition and there will be constant pressure from other competitors in the short-term to cut prices or costs further. It is in differentiation that most businesses find their competitive advantage. Differentiation in this sense applies generally to unique technology (more difficult to sustain all the time with the speed of innovation), unique processes (how you generate the product or service), unique experience (how you offer the product or service to clients), or unique relationships (how you work with providing the product or service to clients). More and more, sustainable competitive advantage is based in experience or relationship.

However, we see a third route to competitive advantage - people. What are the unique people or positions that you have in order to create and offer your product or service? People are the business differentiator offering the most enduring, sustainable, and overlooked approach to separate your organization from the competition.

What is the competitive advantage for your organization?

The first step is to identify what separates your product or service from the competition. Start with the client and think about what you need to do to both satisfy their needs and also exceed their expectations for service and experience. The key is to focus not simply on your product or service but on all aspects of your relationship with your client. Identify the three or four aspects of offering your product or service that will separate you in your client’s eyes from the competition.

Your competitive advantage may not lie in the products or services themselves, but in how you provide them.

• Make a list of all of your deliverables (what you do before, during and after the sale for clients in using your service)

• What deliverables make a difference for the client?

If you don’t have a competitive advantage, create one. It all starts with the client, their problem that brings them to you, the experience they want and need, and how you can exceed their expectations. What do you do - or can you do - that would separate how you provide your product or service to your clients as compared to the competition?

You can clarify your competitive advantage by starting with looking at your business and studying every point

To resolve the business challenges facing organizations today that result in declining competitiveness, leaders need to invest strategically in the right people the right way:

• Define the strategic factors that when done well will multiply results creating a competitive advantage.

• Work back to identify the positions that have the greatest impact on producing those results, that if their performance was improved would have positive effects.

• Identify the competencies for people in those positions that have the greatest contribution to producing the desired results

• Invest in training and developing people in those pivotal positions on those critical competencies

The connection is clear - start with the end in mind. Know what makes your organization competitive and invest in people strategically.

Defining Competitive Advantage

“If you don’t have a competitive advantage, don’t compete”

Jack Welch

Competitive advantage is what separates you from the rest of the herd. It’s what keeps your organization alive and growing. It is the reason you are in business. Yet the biggest flaw in most companies is their failure to fully reap the benefits of their competitive advantage. Lack of clarity is the general culprit - studies show that less than 3% of senior leaders can name the competitive advantage of their organization.

Traditionally, a competitive advantage can come in two ways – cost advantage and differentiation advantage. An organization can be the low-cost competitor and gain market share with this approach. As history shows, being a low-cost competitor is rarely a sustainable route to success. Unless the organization is Wal-Mart, it is unlikely to be



A further consideration is to connect positions to the strategy of the organization. What positions will have the most positive impact on strategic results if performed well?

Pivotal positions will vary by organization based on the factors you selected in the first step to create competitive advantage and your overall strategy. Our belief is that managers should usually be included as they are the positions that translate vision and strategy to results although they are often overlooked.

The concept of pivotal positions is based on the theory that all jobs are not created equal. It may not be politically correct but some positions have a greater impact on results than others. Performing well in these positions is critical. Pivotal positions are both an offensive and a defensive approach - you need to do well here to grow and you need to do well to protect the organization.

The last step in the competitive advantage equation is to determine what are the four or five critical activities the people in the pivotal positions must perform well to have the most positive impact on results. What competencies separate the A players in the pivotal positions from those who do not excel?

There are typically four or five activities that if done well - or if performance improves here - will have a leveraged impact on results. This step defines the drivers of success for your organization’s competitive advantage.

The process of differentiating your organization by competitive advantage through people - the only sustainable method for improving productivity and profitability - follows a funnel.

• Identify the four or five measurable factors that differentiate how the organization offers its products or services to the client from the competition in solving their problems and providing a valued experience.

• Determine the three or four jobs - pivotal positions - that have the greatest impact on performing well in the measurable factors that differentiate your product or service in the market.

• Define the four or five critical activities - drivers of success - that if performed well in the pivotal positions will have the greatest impact on leveraging results in the pivotal positions.

of contact between your organization and your clients. Find all the contact points. Study each contact point and understand what your prospects and clients see when they work with your organization now and build a plan that looks at four things:

1. Increasing the durability of your client relationships by investing in experience and satisfaction for them – always start here as these are the people who have already invested in your business and can provide the greatest support to building further clients.

2. Increasing your “share of wallet’ by figuring out other needs of your clients that you can satisfy and enrich your relationships with them.

3. Increasing your ownership of your target market by connecting with the right message.

4. Increasing the “referrability” of your business with existing clients by how you can show appreciation of their business and confidence.

When identifying your competitive advantage, your eventual goal should be to come up with a hard list of three or four factors that you can use to increase profits and performance for your organization.

Competitive advantage is objective, not subjective. It is quantifiable, not arbitrary. It is critical that the factors you select are measurable. Measurement coupled with a culture dedicated to the alignment of competitive advantages and accountability will deliver results every time.

From the initial step, you have identified the factors or aspects of how you offer your product or service that differentiate you with your clients.

The next step is to connect these factors or aspects with the people or positions in your organization that will have the most positive impact on generating them. If you could only change the performance in three positions in your organization that would have the most positive impact on your profitability, which would you select?

This question gets to the heart of the issue in defining the pivotal positions - the real competitive advantage for the organization. Pivotal positions are those jobs or roles that have the greatest leverage on profits for a change in performance.



However, if six of the employees were determined to be in pivotal positions and the investment in training and development was concentrated in helping them improve their performance in the drivers of success for their roles, the outcome would be considerably different. The research indicates that a 1% improvement in the productivity of a pivotal position translates to a 10 times multiplier to profitability.

In the example, if the training and development investment was focused on the six people in the pivotal positions, the productivity per pivotal employee would yield additional net profits of $86,667.

The real goal of competitive advantage is to build long-term shareholder value while solving client’s problems. The key to realizing sustainable competitive advantage lies in connecting the factors that differentiate your solution and experience with the pivotal positions in your organization that most impact those factors to the critical activities they focus on to perform with excellence.

Developing a Pivotal Position Strategy

Target your market to maximize your return.

Developing the organization’s competitive advantage lies in having a targeted people development strategy for supporting performance excellence in the pivotal positions. Training and development in the pivotal position drivers of success is the critical investment for organizations to achieve sustainable competitive advantage.

In Canada, most executives see training and development as a cost rather than an investment. Much of this perspective is due to a flawed process. Most training and development decisions are made on an ad-hoc basis, not connected to business strategy, and not measured for results. It makes absolutely no sense that if people are truly our greatest asset organizations do not measure their return on investment in that asset. Less than 7% of organizations actually measure the return on investment in training and development. This would not be the same if investing in equipment or machinery!

Connecting competitive advantage to pivotal positions to drivers of success provides a clear path for investing in order to improve productivity. If the organization invests in training and development on the drivers of success competencies in the pivotal positions, the return on investment will be maximized.

Where do you stand with your organization today?

The following template helps you determine a core dimension for your organization - productivity per employee.

Example Your Organization

Your Number of Employees 18 employees ___________

Annual Revenues - Per Employee

$2,600,000$144,444

______________________

Working Hours(hours per week multiplied by average weeks worked per year)

33,075 ___________

Current Productivity Rate $78.61 ___________

In the previous example of a small business, each employee is generating $78.61 of revenues per hour worked.

To increase overall productivity, the organization could provide training and development for all employees. Studies show that the general return on training and development for all jobs is 3:1 in terms of increased profits for improved productivity.

For the example, the net profit for the organization is $880,000. If the organization invested in all employees to realize a 1% improvement in overall productivity, the revenues per employee would increase to $79.40 per hour or $2,626,000 in total revenues. The additional revenues of $26,000 would also translate to $26,000 of additional net profits - a 3% improvement.



the competition. All that you do should be tied to that core idea.

Start by putting your core idea for your business into eight sentences describing your approach:

1. Explain the purpose of your strategy – why are you taking action?

2. Describe your niche or value to the client - what problem do you solve?

3. Explain how you will achieve your purpose and your competitive advantage.

4. Describe your target pivotal positions – who, how many and where?

5. Define the key drivers of success for the pivotal positions - what do they need to do well to excel?

6. Outline the key competencies that support excellence in performance of the pivotal position drivers of success.

7. State your budget as a clear percentage of your revenues.

8. What results do you want – be specific?

Remember you are not “selling”, you are meeting a need. For your pivotal positions, know what your people in those roles want, what they need, and find out what is important to them – you can find this out by asking them. Ask them about their challenges, their opportunities and what they need to achieve their goals. Ask them how they make decisions and how they like to receive information.

The best focus group and market research source is right in front of you. Best yet – when you ask them, you strengthen your most important relationships.

Be clear on why you are making an investment in people - describe your purpose. Start with your vision and strategy and outline how your investment will support the vision. Connect the vision and purpose directly to your client - how you provide solutions to their problems and the value your product or service gives them. Define your competitive advantage and how you differentiate your product or service to your clients - make it measurable.

How we invest in people is also an issue. The typical investment currently is conference attendance, academic tuition reimbursement, and in-class technical training. Almost none of the investment is connected to the actual strategy. This is just spending money - not making an investment.

Even in organizations that actually “plan” their training and development, the investment is usually program-based as opposed to strategic. When an organization wants to gain better results at the manager level, managers are sent to training programs and courses. The approach is simply “find a program to fix the problem”. The fix rarely happens as the investment is not connected to the actual business strategy. Questions should be answered first. Why are better results needed at the manager level? What would better results look like? What would be the outcomes? Why are the results not happening as expected? What are the skills or competencies that would make a difference in performance? Are the managers really the issue?

The result from the current approach to investing in people is a poor outcome. Studies show that the traditional approach organization’s take to training and development has little impact on performance and productivity over time. The amortization of traditional training and development from conferences, academic programs, and courses is sad ... after one month 47% of participants report a positive change in performance sliding to 12% after six months and 9% after one year.

We can appreciate the executive perspective on training and development. It has not been a good investment but how can it be - there are no clear results, it is ad-hoc, there are no lasting benefits, and the investment is not actually measured. The more correct perspective is “who knows?”

Canadian organizations are suffering competitively and the key reason is people productivity. It is critical that training and development is provided to improve productivity. The current approach is not working so take a smarter route.

Strategy needs to be connected to training and development with specific outcomes set at the beginning of the process - there needs to be a focus on results.

Intelligent people strategy is based on a core idea. Investment in training and development should be founded on competitive advantage for the organization. The core idea is the competitive advantage for your organization - where you need to excel to stand out for your clients from



Remember the Top Ten Pivotal Position Strategy Secrets:

1. You must commit to your strategy.

2. You must think of your strategy as an investment.

3. You must follow your strategy consistently.

4. You must make your clients confident in your organization’s pivotal positions.

5. You must be patient to keep your commitment and gain results.

6. Your strategy must have an assortment of initiatives – not just one.

7. You must depend on the returns coming after the investment.

8. You must make your strategy clear for your people.

9. You must measure your actions and results to judge the effectiveness of your strategy.

10. You must involve yourself with your clients and pivotal positions – ask questions and hear the answers.

Building a business is a journey – your pivotal position strategy is your map.

Identify the pivotal positions in your organizations where performance improvements will have leveraged impact on providing competitive advantage. Outline the activities that drive pivotal position performance - where doing these things well will make a difference. What are the competencies and skills that create performance excellence for the pivotal position drivers of success - how these activities can be performed to provide the best results. What will you invest in training and development of these skills and what are the results you want to see as outcomes?

The final step is to outline the training and development actions that will be taken to improve the pivotal position drivers of success performance skills. How will you invest and how will you measure progress?

You now have a plan to improve productivity for the greatest impact for the organization.



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the productivity challenge

Documents

poor productivity

overall productivity

focused investment

pivotal positions

competitive slide

competitive edge

lower initial investment

employee satisfaction