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The UK productivity puzzle

Productivity growth has slowed across much of the developed world in recent years. In the UK, however, where workers’ output per hour was already low in absolute terms, the deterioration has been an even more marked. British productivity is now no higher than it was just before the 2008 financial crisis.

Multiple theories and explanations

Incredibly, government and central bankers can’t agree on the cause of this productivity puzzle. Is it really right to focus attention on the ‘long tail of productivity laggards’ - SMEs serving limited local markets that pull down the UK national productivity average, as the Government and economists of the Bank of England believe?

Or should one focus more help towards the energetic exporters (or would-be exporters) to drive UK productivity - with yet potentially higher productivity in the future?

Research by the think-tank Centre for Cities shows that Midland and Northern cities’ corporate productivity lags even their rural neighbours, let alone that of London and other cities the South East. Looking at companies’ performance regionally, the Centre for Cities has shown that it is the most successful private companies, normally those with highly skilled employees and exposed to international competition through exports, that drive success across the UK. Is this the natural focus for help and aid or should we look at another, perhaps less obvious area?

Large company ‘hangover’ – an alternative view

This theorising comes at the same time that new evidence, reported in the Financial Times, shows that the blame for lower productivity in the economy may actually lie with the biggest and the best companies, which are simply not achieving as much as they used to in productivity terms. Yet the top echelons of business and politics seem desperate to ignore this explanation.

Not only is larger companies’ lack of productivity holding back the economy, their lack of drive as they seek to maximise dividends to shareholders can be seen to be hampering the tier of ambitious growing companies who supply them.

Our own analysis of the Government’s payment practices reports shows a worrying number of companies, like the ill-fated Carillion, with extended standard payment periods. More than 85 companies registered have standard payment terms exceeding 100 days. Of the 1,420 organisations currently reporting, the average time they take to pay is 35 days. At the median level, 26% of these 1,420 organisations fail to pay within these stated terms.

So perhaps stretched payment terms and late payment are – as the Government’s own Small Business Commissioner Paul Uppal said in a recent speech to the ICAEW – at the heart of some of the UK’s productivity woes?

Slower payment equals slower pace

Slowing down payment terms constrains the working capital and cash-flow available for smaller companies to invest in expansion and growth.

Research by Sage shows that UK SMEs spend an average of 15 days a year chasing late payments (that alone is 5% of their productive working time), and 40% of smaller companies say they have seen a direct, negative impact to their business from late payments – ranging from reducing future investments, to cutting staff pay, and inability to pay bonuses: there is also the risk that they won’t be able to pay their suppliers, risking a domino effect. Moreover, 9% of late payments are written off as bad debt.

At its worst, larger companies’ supply chain pressurising and payment-stretching places short-term return to shareholders ahead of long-term industrial development, their suppliers and their customers.

Perhaps now is the time for the Government to increase the pressure on larger companies to reduce payment terms and to considerably strengthen the Prompt Payment Code.

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