Productivity Slowdown Presents Middle Market CEOs With An Unusual Profit Opportunity
Middle-market companies – those with highly engaged workforces — are uniquely positioned to defy the prevailing trend of slowed productivity growth in the U.S. economy.
Robert J. Gordon, an economist at Northwestern University, and others have explained with disturbing clarity that the easy productivity gains of past decades may be behind us. While we may marvel at our tech gadgets today, things like the electric light, the locomotive, the internal combustion engine and the shipping container provided giant leaps forward in the ability to get work done. Gordon and some others now believe we face a slow-growth economy going forward, and there are early numbers to suggest the pessimists are correct: While U.S. productivity rose a healthy 3.0% annually during the years 1995 to 2005, more recently it slackened to a near standstill, edging up just 0.4% yearly from 2011 to 2015.
Many claim the culprit is under-investment. McKinsey, for instance, in a recent white paper, concludes that the U.S. economy has only grasped 18% of its digital potential. And the consultancy warns companies that aren’t on the technological cutting edge that they risk an early demise.
But many of the large technology applications being sold to American business these days have had a mixed record at best. With uncertain results and big up-front costs, leaders might want to look elsewhere for productivity gains.
The opportunity seen during company visits by my team applies to a broad swath of middle-market companies with relatively engaged workforces. At these companies, operating knowledge still resides in the rank-and-file. Ideas can – and perhaps already do – bubble up.
At Schweitzer Engineering Laboratories, a power systems equipment manufacturer in Pullman, Washington, employees are encouraged to rethink how they do things. Circuit board testing, for example, requires the use of many fixtures, some of them heavy boxes, and they moved around as needed. Previously organized by number, Devin Griffin suggested reorganizing them, with the most-often-used ones placed closest to workers. The change saved the team an estimated 90 miles of walking in a single year, helping boost boards tested to 60,000 a month from 45,000.
At S&C Electric Company, a Chicago-based manufacturer of electric power equipment, Kaizan events are used to examine efficiency and boost quality. In one such event, workers on an assembly line simplified the process and reduced required labor from 23 people to 18.
At both companies, there was an implicit guarantee that workers wouldn’t be laid off after having shown their managers how to do more with less. Growth, and a flexible approach to training and workforce allocation, keeps everyone busy. Both companies also happen to be employee-owned, which isn’t a requirement for bottom-up productivity initiatives, but it certainly helps. A lot, a wide survey of research shows.
Many giant companies lack that trust and find it difficult to hear these ideas from their workers. Sometimes, managers aren’t listening. Entire middle management layers were long ago stripped out, so the natural sounding board and experimentation structures within companies were hollowed out. And the giant organizations became focused, like a good McKinsey client, on the company-wide systems to drive productivity. Those big and costly systems installations may, or may not, provide a pop in productivity. But they’re generally a one-time improvement. Idea flow from engaged workers never stops.
At middle-market companies, decision makers are typically closer to rank-and-file workers. Top executives often know the workers because they built the company together. A middle-market company, by definition, usually has a small market share; corporate giants have often maxed out their share. So the smaller company can grow. And the prospect of growth means workers displaced by efficiencies in one area can be reassigned to another.
Even at some of the best middle-market companies, however, ideas don’t always surface. Ask yourself:
–Do we have a system to solicit, reward and implement continuous improvement ideas?
–Can we quantify our financial gains from adopted ideas and thus measure the rewards against related spending and any downtime?
–Is it abundantly clear to employees that an efficiency idea won’t result in layoffs, but instead in moving idled workers into higher value tasks, with training of new skills?
I happen to disagree with Professor Gordon on the bleak prospects for economy-wide productivity gains. The ingenuity of American business is often underestimated. But waiting for the next wave of invention seems a poor strategy. Within the four walls of most businesses resides a fertile ground for improvement and growth.