Time to halt the productivity slide

There is now a simple test that boards of large companies or government organisations can institute to help determine whether their chief executive is up to global standards – ask the CEOs whether they can measure the organisation's productivity and accurately measure the effectiveness of measures to improve it.

In contrast to most of their counterparts overseas, according to the latest Telstra Productivity Indicator Report, an incredible 58 per cent of Australian CEOs can't measure their organisation's productivity and have no identifiable target. Given 58 per cent of our CEOs are productivity dunces, it is perhaps not surprising that during the eight years to 2008 Australian productivity lagged France, Germany, Ireland, Japan, New Zealand, the UK and the US. Worse still there has been a dramatic fall in Australian productivity growth in the past few years culminating in an actual decline of almost 3 per cent in 2008-09. Given this disastrous outcome, it's not surprising that the Telstra report showed the percentage of CEOs without measurement ability and targets rose from 51 per cent to 58 per cent in 2009. Yet 78 per cent of CEOs claimed to have productivity improvement as a key priority.

Effectively the CEOs took their eye off the productivity ball and it could be said that they concentrated on things they could measure like executive pay levels and achieving short-term profits. Telstra believes that in the face of slower output growth and revenues, CEOs of large organisations kept employment high and kept investing. Those measures may help a fast recovery but the fact that our CEOs can't measure productivity means we are going to perform badly well into the future. Some will say that the only way to get many CEOs to measure productivity will be to make it one of the criteria for their remuneration.

When Telstra's current CEO David Thodey was Telstra's Enterprise and Government Group managing director he released the first Telstra Productivity Indicator Report and I saw the glass as being half full rather than half empty. The lack of productivity measurement skills was an opportunity for Australian CEOs to follow groups like Woolworths and the big miners and begin measuring productivity and enjoying the profit gains that follow (Three kinds of productivity, February 3, 2009).

Now it's clear Australia CEOs are moving the other way, so it's time to look at the fact that the glass is nearly 60 per cent empty. And they see the German retailer Aldi and US entrant Costco ripping out market share partly because the Germans and Americans understand how to measure and drive productivity.

Why are Australian CEOs behind their global counter parts in such an important management measurement tool? I must confess I do not really know the answer but here are a few suggestions:

First, our institutions don't use this as a widely accepted criteria for management.

Second, there are few CEOs who announce how much travel, car hire and other costs they save by investing in information communications and technology. Telstra produces the productivity report in part to show how investment in their ICT products can lift productivity and so this year David Thodey announced that the Telstra Countywide/Telstra Enterprise and Government Operations have reduced domestic flights by 10 per cent and car hire by 55 per cent and that Telstra communications technicians have increased productivity by 43 per cent.

Third, the better performing productivity companies have not made a big fuss about it for fear of alerting their rivals.

Fourth, a year ago the survey showed that the biggest management concern was attracting and retaining staff. In the latest year that priority has fallen from 80 per cent to 61 per cent causing it to slump in the rankings. This high priority at the start of the 2009 year caused companies to hold their staff longer than they do in most downturns. Many were influenced by the high cost of retrenchment.

Miners have been some of the biggest beneficiaries from higher productivity because most measure it and set themselves clear and defined targets. If the new industrial relations legislation reduces their hard-won productivity gains – and it almost certainly will – then there will be a volley of complaints that will put new emphasis on productivity. It remains an opportunity.