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The Business Times

Engage SMU profs; Why improving productivity is so vital for companies

Q: The government has recently called for greater productivity across various sectors. The obvious benefits aside, what are the challenges and costs in undertaking productivity improvements? How can companies mitigate them to achieve tangible financial returns and make productivity improvements worthwhile for their business?

A: The questions are timely, especially given the increased interest generated in response to the government's call. This is not surprising. Global economic uncertainty, unabated market competition, rising resource constraints and the shifting regulatory landscape constantly put pressure on many businesses to explore more efficient ways of managing their operations.

Most business owners sense that productivity improvements do ultimately yield benefits. After all, how could anyone logically fathom otherwise? Still, the questions are valid because productivity improvements can be costly to develop and implement, but the benefits are often not immediate.

Productivity improvements can be labour-related or asset-related. For labour productivity improvements, the costs may not be always obvious or direct.

As some business leaders have recently suggested, to be effective, labour productivity improvements require, among various things, a conducive environment and organisational culture that encourage and reward staff for initiating and developing improvements in work processes, changes in mindset, management and staff buy-in, and training and retraining of staff. Such productivity improvement initiatives often also impose demands on management time to supervise the implementation and monitor the outcomes.

Besides labour productivity, improvements can also be made in asset productivity such as through automation, technology or simply better machines. The costs of developing and implementing asset productivity improvements may be relatively more obvious and direct.

However, they often require significant capital expenditure investments as well as staff retraining. They may also result in redundancies that need to be managed. These decisions involve more lengthy budget discussions and cost-benefit analysis than straightforward improvements in employee work processes.

For example, the CFO of a multi-billion-dollar MNC once commented that even he would have to rigorously justify a $70 million investment in a new financial reporting system, although that cost would hardly represent a minuscule fraction of the company's stockmarket value.

Large capex investments in asset productivity improvements also run the risk of becoming white elephants should the improvements fail to materialise.

While the costs of productivity improvements are often real and immediate, the benefits may be more fuzzy, difficult to measure or sometimes even illusive. Budget committees and managers may need more than just verbal comfort that productivity improvements will yield tangible benefits over time.

Productivity improvements that are likely to yield the largest benefits (that is, beyond simply marginal increments) also require substantial effort and time to identify and source, as they involve carefully studying existing processes, exploring new processes (which may or may not be already adopted elsewhere), or even customising or innovating processes. Keeping abreast of productivity developments in other markets is therefore important and helpful.

Not withstanding the costs, however, evidence suggests that productivity improvements do yield tangible benefits to businesses, especially where the improvements give the business a clear edge over its competitors. While the benefits of a specific improvement initiative may be difficult to measure at the micro level, the evidence is quite strong at the enterprise-wide level.

In a study of the asset productivity of Asian companies conducted several years ago, I found that firms which achieved higher asset productivity relative to their industry peers tended to exhibit higher returns on investment for their owners. Those returns also tended to accrue consistently over a good five-year period.

The returns were even more remarkable for firms which achieved outstanding asset productivity relative to their industry peers. These star performers exhibited returns that in some cases were more than double those of their average industry peers!

Conversely, firms with asset productivity that was significantly lower than even their average industry peers exhibited quite poor returns on investment for their owners. In some cases, those returns were not even half as much as the returns of the average industry peers.

The pursuit of productivity improvements, while costly, does yield handsome rewards for enterprises and their owners. The rewards are also more than temporary, as the improvements tend to give these businesses a consistent advantage over the competition for some time to come.

Andrew Lee is associate professor of accounting practice at the Singapore Management UniversityBrought to you by:

Andrew Lee