Productivity: Our economic elephant in the room

Our latest procurement index provides some harsh but compelling insight into the cost pressures businesses across New Zealand are facing. Unfortunately, with inflation continuing to rise at home and abroad, these pressures aren’t subsiding any time soon.

So, what can your business do to manage these pressures now and into the future, and how can you build resilience into your operations and practices?

The answer lies in our economic elephant in the room: New Zealand’s productivity crisis.

It’s an issue that has continued to hamstring the country’s economic development for decades and despite many analyses pointing to root causes, we are yet to see a shift at a system level.

Poor productivity is significantly driven by under-investment in productive capacity. For too long, New Zealand firms have neglected to invest in innovative technology or automation at a large scale, instead opting to plug productivity gaps with cheap unskilled labour. To build long-term productivity, businesses need to focus their efforts on staff development, and innovation and automation.

By investing in productive assets like modern machinery, IT based solutions and automation, New Zealand companies can drive productivity by freeing up time for staff. Instead of doing mundane, repetitive tasks that can be automated or at least dramatically sped up through investment in capital equipment, your team members will be able to focus on doing value-add activities and developing useful skillsets for your organisation.

To have productive staff, you need to have staff

COVID-19 has been an unexpected barrier to New Zealand’s brain drain over the last three years. With no guarantee of being able to come home, many of our brightest Kiwis stayed in the country for the duration of the pandemic. Now, they’re departing the country en masse, and businesses are struggling to cope with the rapid departure of the workforce. The logical economic reaction would be to throw more money at the problem by increasing wages to incentivise staff to stay. However, for many businesses, this simply isn’t a viable option. Balance sheets are already stressed and trying to compete with Australian and British firms who can often pay more than the market rates in New Zealand would be fighting a losing battle.

So, how can businesses respond to this crisis? The answer is investment in human capital. Most workers don’t blindly seek a pay rise when considering whether to stay in their current job. Many people will be inclined to stay in New Zealand because it’s where their friends and family are – they should therefore be retainable if they are provided with sufficient development and investment from their employer. The added benefit of investing in your human capital is the increase in productivity you can see as a result. Skilled staff can work more efficiently and effectively, almost invariably leading to improved outcomes for your business’s bottom line.

It’s vital firms find other ways to develop the human capital they have. There are a few ways achieve this to increase staff retention:

• Training courses for staff
• Providing engaging and challenging work that grows their skillset
• Funding training certification
• Simply providing opportunities to try new tasks at work

Additionally, thinking more deeply about how and who you can employ and train might be a way to tap into underutilised potential. In Aotearoa, the underutilisation rate has been lowering since a peak just after the GFC. But that only brings it back to similar levels last seen just before the GFC. Right now, the rate is 9.3% or 280,000 people who are unemployed, underemployed or a jobseeker. That’s a lot of potential sitting on the side-lines. How could they help you? What would it take? Training? A flexible work policy? Altered hours? Work from home technology? A four-day week?

Innovation and automation need to be more than just buzzwords

Our well documented productivity issues run deeper than just human capital. We’re currently experiencing the “productivity paradox”, where despite policy settings being at or close to best practice, productivity in New Zealand pales in comparison to our peers.

Kiwi firms have chronically under invested in productive ideas, technologies, and assets for decades resulting in the poor productivity compared to our global competitors. As a nation we have routinely failed to invest in productive assets as a class (think technology, or plant and machinery), choosing the housing casino instead.
More enterprising firms may even consider options such as horizontal collaboration and investment with other firms (sharing the cost of productive investment into technology and equipment), or options such as equipment leasing if they simply do not have the cash for more substantive investment in capital equipment.

An added benefit to investing in modern productive assets is the reduced requirement for energy input into the production process. When considered against the backdrop of spiralling energy prices, this is an absolutely vital development for New Zealand companies.

Perhaps the more difficult part of the productivity problem for New Zealand companies lies in re-tooling their approach to IT.

International firms have and continue to lead with their IT investment. Grant Thornton International’s most recent International Business Report survey found 66% of respondents either agreed or strongly agreed that the risk of inflation is accelerating the investment in digital/IT activity within their business.

New Zealand has this the other way round – IT is seen as a cost that can be cut, and at a c-suite level, this manifests itself in the “final seat at the table” syndrome that afflicts many of our leading CTOs. To lift productivity, New Zealand firms must reverse this – technology needs to lead us, not be dragged behind us.

Instead of IT being an afterthought for your business, consider increasing investment in the technology your business uses – engage with technology partners to find solutions that will improve performance and grow your technological capabilities. Empower your CTO to pursue new technological solutions that are likely to drive productivity in the business. Instead of asking “why does this cost so much?”, ask “how does this help our business?”.

As stated by Steven Perkins, National Leader for Technology and Telecommunications Industries at Grant Thornton U.S., “Before inflation became a problem, the focus was on improving the customer experience and employee engagement in response to rising competition and the remote working trend. Those areas remain vital, but inflation has become an additional pressure and there’s a need to rationalise infrastructure and find efficiencies.”

Adding procurement to the productivity equation

You don’t have to source the right solutions all by yourself. The key is finding the suppliers who can do this for you, or even co-develop innovative products and production solutions. Successful firms are better at managing their suppliers and procurement practice, at collaborating with their networks to identify and capture value. Don’t just sit on the side-lines as a business owner and accept what suppliers provide you – ask more of them and tell them you want them to do things like leverage technology to improve efficiency or improve sustainability in your supply chain.
New Zealand businesses have a choice to make. They can play it safe and keep running the same playbook– failing to acknowledge the rising tide of environmental and economic pressures they face, or they can take a revolutionary step towards success for their business in the modern economy.

For further information, contact: