Finding the Key to Labor Productivity Growth
Finding enough workers with the right skills is now a global challenge. On top of changing demographics and widening skill gaps, companies face burned-out middle managers, workers needing flexibility, generational disconnects, and eroding real wages. Little wonder, then, that few businesses report lasting success at reigniting productivity after a decades-long slowdown.
Business leaders have responded by expanding investment in technologies ranging from automation and robotics to digital processes and AI. Some organizations have reaped productivity gains, but many more have fallen short of expectations. McKinsey analysis has shown that the average company captures only about one-third of the expected value from digital transformations and initiatives.
The Research
To help companies unlock new possibilities for labor productivity growth, we set out to learn from businesses that have outperformed their respective sectors in both TSR and labor productivity growth. This article summarizes our findings, which identified 56 companies that performed better than their sector peers in both categories. Most important, we learned that these labor productivity leaders display a mindset very different from other companies’ mindsets about their labor-related spend.
From Cutting Labor Cost to Investing in Talent
Historically, business leaders have understood that capital and talent must work jointly to drive productivity. But that basic insight has only rarely kept companies from treating talent—especially the frontline workforce—primarily as an operating cost to be minimized. Our data reveal just how shortsighted this belief has been.
Across almost every sector, we find that, on average, companies spend three times as much per year on talent as they do on capital assets. Despite this stark imbalance in spending, few companies attempt to calculate their ROI in labor with the same rigor they apply to ROI in capital assets. That fundamental gap in metrics encourages companies to continue accounting for labor spend only as a cost, so they lose sight of highly attractive business cases for talent investment.
Investing in Talent Attraction and Onboarding
Many of the productivity leaders are directly addressing constrained labor supply by expanding the pipeline of future workers. Quanta Services, a US company dealing with construction procurement and engineering, has spent more than $150 million in strategic people development initiatives—including partnerships with local colleges and universities to graduate new technicians with the latest knowledge.
Building a Talent Investment Engine
In developing the substance of a talent investment program, companies can’t rely only on the HR department. Instead, labor productivity leaders usually assemble a dedicated, cross-functional team encompassing HR, operations, engineering, finance, technology, and other departments. Crucially, these teams include representation from the front line to ensure that the proposed investments met real needs.
Conclusion
Productivity leaders show how investments in talent can yield exciting results when they are given at least as much thought as investments in capital are given. Simple labor cost optimization isn’t enough: Instead, the challenge is to maximize returns on talent investment. That mindset shift can not only stabilize short-term workforce problems but also achieve productivity breakthroughs that can sustain competitive advantage for the long haul.
FAQ
Q: How can companies improve workforce planning and scheduling?
A: Labor productivity leaders are enhancing their capabilities of forecasting labor demand and supply and creating dynamic and happier workforces by providing scheduling flexibility.
Q: What are some examples of companies investing in talent development?
A: Companies in some sectors have started collaborating with universities to build tailored programs and providing tuition reimbursement for courses already on offer. In some cases, companies have found it more effective to build their own programs.
