The extra gear: the role of management and leadership in boosting productivity

The UK’s productivity puzzle has politicians, economists and commentators scratching their heads. While the economic recovery has been marked by rising employment, productivity growth has not followed. In fact, had productivity continued to rise at the pre-recession rate, it would be 14% higher than it is now.

The government has identified the slump in productivity growth as a “great economic challenge”, and is taking action. On July 8th, George Osborne explained that “productivity is key to delivering the financial security families see when living standards rise and will ensure Britain becomes what we want it to be, the most prosperous country in the world by the 2030s.”

Later in the week, the Treasury along with the Department for Business, Innovation and Skills published a productivity plan, which championed skills as a key component to boosting productivity in the UK.

What makes the situation puzzling is that, although we have continued to invest in improving our human capital and our tools, the rate of productivity growth is showing few signs of life. A closer look and we can see that total factor productivity (TFP)—the measure of how good we are at turning tools and workers into goods and services that consumers buy—has been taking a hit since the recession.

TFP covers factors such as the deployment of innovation and technology, how effective the market is at separating the wheat from the chaff, and how organisations are managed and led. The latter matters greatly to us at UKCES—how productive people are in work depends on their level of skills, but also on how those skills are used.

Research by the Department for Business, Skills and Innovation has found a clear link between management and leadership skills and productivity: developing best-practice management can improve the performance of an organisation by 23%; a one-point improvement (on a five-point scale) in management practices can have the same effect as increasing the labour force by 25%, or capital investment by 65%.

Defining what good management and leadership looks like is not always straightforward, however. Between December 2014 and April 2015, the UKCES commissioned Ipsos MORI to investigate some of these issues through a survey of over 100 ‘Captains of Industry’, followed up by 20 additional in-depth interviews. Captains are executive board-level directors and chairs from the top 500 industrial companies by turnover and top 100 financial companies by capital employed.

Management and leadership skills are generally viewed as two sides of the same coin by the Captains, and they are seen to consist of two key elements:

• A commercial skills set, including strategic management, financial acumen, and the ability to identify more broadly what a business must do to be competitive and grow; and,
• Softer, people management and interpersonal skills, such as influencing, motivating, team leadership and communication.

Good managers are not necessarily good leaders. To be either you certainly need a combination of commercial and people skills. But, while management skills are described as being more tangible and easy to teach, leadership skills include an additional set of personal qualities, which some Captains describe as being difficult to impart.

In addition to seeing beyond the day-to-day operational challenges of a business, good leaders tend to display a range of more specialist softer skills, including the ability to influence others, a certain degree of emotional intelligence and self-awareness, and good judgement. Leaders also have the respect of their peers and staff, and actively set the values of their organisation. “Good management is doing things right; good leadership is doing the right thing,” notes one Captain.

In the UK we have some great businesses, but we know that there are also too many with weak management and leadership practices. Our economic recovery cannot rely on getting people into work alone, we also must make the most of the skills and talents of the workforce. All employers in the UK should shift into the extra gear on management and leadership. How they do that will depend on their size, sector and location.

As the economy continues to recover, averages often mask local variations that are deeply-entrenched and that require locally-growth solutions. In its recent productivity plan, the government championed the creation of strong local areas that work toward a skills system that is responsive to local economic priorities.

At UKCES we are very interested to find out just how that might work. One way in which we are doing that is by working with anchor institutions through our UK Futures Programme — a co-investment fund that invests in solutions to long-standing workforce issues.

Anchor institutions are those that, alongside their main function, play a significant and recognised role in a locality by making a strategic contribution to the local economy; these can be anything from further education colleges to chambers of commerce, and from universities to local enterprise partnerships. Through the Futures Programme, we want to investigate whether and how anchor institutions in low-productivity parts of the UK can raise the quality of leadership skills in small firms in the local area, and eventually raise productivity too.

Watch this space for announcements on the successful projects, the solutions in which we’ll be investing, and the lesson we’ll learn along the way!

Sara Mosavi is research manager at the UK Commission for Employment and Skills (UKCES), a publicly-funded, industry-led organisation that offers guidance on skills and employment issues in the UK