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The solution to the UK's productivity problem is in HR's hands, Part 2

Raising productivity could dig the UK out of stagnation and sustainably raise wages. In the second part of our January/February 2024 cover story, Dominic Bernard finds out why a word employees associate more with job cuts than pay rises can be HR’s next proving ground.

A knotty problem

So far, we have covered why investment, and corresponding HR support in skills, talent and change management, is crucial to UK-wide productivity growth. This is all very well for organisations that can afford to spend on capital skills or talent.

Read part one of this long read here: The solution to the UK's productivity problem is in HR's hands, Part 1

There is, however, a profound disparity between the UK’s most productive organisations and its least productive.

According to a 2021 Resolution Foundation report, the least productive 40% of firms (weighted by number of employees) produced only around 12% of total value added. The most productive 40% produced around three quarters.

This has led many economists – and consequently public policy – to focus on improving the performance of these more productive businesses, where marginal improvements can deliver large rewards.

For Ben Wilmott, head of public policy at the CIPD, however, this is a mistaken philosophy that has condemned many thousands of firms – often small, often provincial – to struggle on with low productivity.

“Sectors like retail, hospitality, social care, transport and logistics employ a large proportion of people in the workforce, and the evidence suggests that unless you can improve productivity across those sectors, then you won’t be able to improve living standards and ‘level up’ different parts of the UK. I don’t think it’s an either/ or question: we need to target both [high-productivity and low-productivity firms].”

HR’s golden opportunity

One uniting factor of these low-productivity organisations is poor management.

In June 2023, the Chartered Management Institute found that 82% of new managers in the UK have no formal training at all. World Management Survey statistics also found the UK lagging behind Germany and the US for management skills, with only 11% of UK firms reaching the level achieved by the top 25% of US firms.

Van Reenen, who set up the survey 18 years ago, has long been studying the relationship between management and productivity.

Management practices are really important for raising productivity,” he says.

“And HR is one of the big three drivers of good productivity [in management]. These are: collecting data and using it to inform what you’re doing; setting data-driven goals; and doing that through the HR function.”

Improving management practices alone, Van Reenen says, can be transformational at the level of individual organisations. “It’s not an easy thing to do,” he adds, “but it’s not outside HR’s power.”

For Wilmott, this is the UK’s golden opportunity. Practical research by the CIPD, in the form of HR-led management support pilots, has proven beyond doubt that the huge number of small, low-productivity UK firms can undergo transformational changes simply by being exposed to good HR practice.

Read more: Outsourced HR could see a spike in investment in 2023

The pilot schemes have had very positive results, he says. Just that small bit of support proves eye-opening for these firms, which are often so small that they have little HR support beyond purely administrative functions.

Sharon Benson, HR director of care provider Lloyds Pharmacy Clinical Homecare, says: “The UK is made up of lots of small businesses that don’t have the level of HR support that bigger organisations have.

“Those bigger organisations are doing a huge amount to drive the HR agenda, but many small businesses can’t afford, or don’t perceive they can afford, to invest in a real commercial HR function that can improve productivity.”

This may yet change. Evidence from the Office for National Statistics shows that management practices across the UK have improved significantly since 2016, and that smaller firms are rapidly catching up with average scores – both of which can only be good for productivity.

Of course, plenty of leaders are still sceptical of HR’s value to organisations. Satnam Sagoo, chief people officer at the Southern Health NHS Foundation Trust, says: “I think the challenge we have with HR is the word ‘HR’ itself.

“It still means human resources, right? If you were to sit at a dinner table and mention you work in HR, there is a bit of cold shoulder – an ‘Oh, you lot,’ conversation.”

This difficulty can be further applied to any efforts HR might make to talk about productivity. “The challenge you have is the lens through which people perceive HR: they will perceive productivity, [in the HR context] to mean efficiencies, job losses, that kind of thing – it has a negative connotation.

“We need to find a language that allows us to be efficient, be productive, and still provide the right care,” Sagoo says.

“We should be thinking economically, I don’t shy away from that. Are we delivering bang for buck? We should be questioning this constantly, and asking what our return on investment (ROI) is. Ultimately, it doesn’t matter what sector you work in: ROI is a key conversation HR should be having.”

Read more: Six ways to maximise HR’s return on investment in a downturn

Wilmott agrees: “It’s down to HR to articulate the value of investment in skills and management capability. Ultimately, it’s going to be that business case which acts as a catalyst for whether companies make those investments in their human capital.”

Over the past 10 years, he says, HR has seen a gradual shift in how it is perceived – a shift it has earned by focusing on important strategic priorities, and carving out its place as a support function rather than an administrative one.

And whether through grassroots HR, building a company’s first L&D programme and coaching its leaders in good management, or full-flung change strategy delivering complex technological evolution for a 1,000-employee FTSE firm, HR has a critical role in rebuilding the UK’s productivity.

Businesses must invest. But at every stage HR must support and advocate for this investment, especially at times of economic uncertainty, when productivity counts for so much more than just profit.

It’s not just the business that will gain. If focusing on productivity means focusing on strategic HR, digging into job design and measuring – above all measuring – their impact, then it can only help HR leaders earn due respect.

After all, when leaders ask why their people aren’t more productive, it should be people professionals who answer.