FTSE productivity: raising their game

Many FTSE 100 companies are failing their employees and shareholders through
allowing themselves to drift with the same productivity, increasing it only
slightly – or even suffering negative productivity. They need to raise their bar
if they want make the playing field more level, deliver better shareholder value
and better retain skilled staff.

FTSE productivity is the focus of a new measure – the Total Factor
Productivity Index (tfpindex.com). The experience of a similar ranking of
Fortune 500 companies showed a clear link between productivity and share price.
The same link will be happening this side of the pond.

So why is it that some companies fail to address real productivity issues,
when the result is ‘free lunch productivity’, the populist name for TFP.

Cost and productivity are conceptually identical. Cost is expense per unit of
output, productivity is output per unit of resource (expense). So, cost is the
inverse of productivity. But, for many managers and workers, they are not the
same.

Their mindset is to spend less, whereas they should be adopting the mindset
of producing more through improving productivity.

The latter message is far more powerful and far more energising but it is one
that many FTSE companies fail to see. Why?

They can’t see the wood (how to really increase productivity, rather than
imagine they are) for the trees (‘easy’ cost reduction programmes that are, in
reality, costly).

The companies that don’t implement productivity improvement need some
introspection – or be prepared to be faced down by their shareholders. For what
they are doing is not unlike cutting paper with only one blade of scissors. It’s
very ineffective.

Awareness, focus, resolve and a simple way of measuring TFP with a view to
raising it, are what’s necessary for raising the bar. If company management does
not do it, it is incumbent upon the shareholder to demand it.

The results of the first FTP Index for the FTSE 100, of July 2007, showed the
top 15 companies delivering 46% TFP growth by achieving revenue growth of

38%, while reducing employees by 7% and capital employed by 1%; this is true
bottom line productivity. But 40 of the 100 had below-average TFP gains, and 20
had no TFP gains at all.

Had these poor performers measured TFP regularly, alarm bells would have
sounded and remedial action been initiated. We – and their shareholders – hope.

Brendan Cahill and Professor Shlomo Maital are co-authors of the Trinity
Horne TFP Index of FTSE 100 companies