US productivity slump a huge wakeup call for CEOs

Productivity slump

Last quarter, US non-farm productivity took a massive 2.7 percent decline. Labor shortages and wage inflation mean that while US economic output increases in size, it does so at the cost of productivity. As Jason Furman, an economics professor at Harvard, told Marketplace, “Productivity is probably the single most important thing in the economy. It’s the most important determinant of living standards over time.”

According to the Bureau of Labor Statistics (BLS), the average US labor productivity growth rate from 2000 to 2020 was 1.3 percent. Yet, GDP growth over the same period was nearly a percentage point higher at 2.2 percent. When productivity lags GDP growth for over two decades, and when GDP growth isn’t all that to write home about in the first place, it is indicative of a more significant economic issue.

While the US economy took a huge hit through the pandemic, it is now struggling with the resulting inflation crisis and bounce back of heightened consumer demand driving up prices in a constrained supply environment. The dirty secret we must all confess to is that we knew this was coming.

As readers of ERP Today, we should take a moment for introspection because we know that while we were playing our part in driving growth, we also knew that multiple factors of operational lethargy were dragging down our productivity output.

Taking a look inside

Over the last 20 years, the US economy found an average of 1.3 percent productivity output, and US businesses spent $19.6tn on IT systems, hardware, software and services. To put that in context, US Federal spending over the same period was around $60tn; so, US businesses spent around 30 percent of total federal spending on technology when US worker productivity only went up by 1.3 percent. It is a shocking statistic.

Why would all this spending on IT investments produce such a small productivity gain? Do you reading this feel any more productive today than you did 20 years ago? Yes, you have more devices, applications, emails, instant messages and online meetings – but do you actually feel more productive?

It is time we did some introspection and recognized that we need to be more vocal enough in our companies if we’re going to act as agents for change. We need to be the voices that are driving efficiency, removing friction, simplifying the way our companies work so as to contribute to productivity improvements.

Making big decisions about operational transformation in a changing world

Innovations in data analytics and data science have enabled organizations to unlock advanced insights and decision-making capabilities. However, businesses still leave around 70 percent of data they create idle and unused.

Low-code application and workflow development advancements have enabled businesses to evolve and simplify the way people work and even empower themselves to drive their own productivity outputs. Intelligent automation and RPA now allow companies to reduce the strain on their human resources and unlock people to do more productive things they enjoy.

Recent advancements in AI with ChatGPT and Google Bard may still be untested in the business world, but their impact seems to increase every day as we watch in awe.

Now consider that McKinsey estimates we would gain $11.3tn in global GDP by using the data stuck in an information landfill. Goldman Sachs believes Generative AI could deliver over seven percent global GDP boost in the coming years.

According to research by Sapphire, the productivity accelerators Automation and Data Analytics are now the two key buying drivers behind adopting new operational platforms such as ERP.

The ERP component

However, while still recognizing that it is tricky to move from a legacy ERP platform to a new one, there is still too much lethargy in US companies struggling to take on the challenge of driving their business forward and boosting productivity.

In the US alone, tens of thousands of businesses are running core operations on SAP ECC. According to estimates, around 70 percent of them will still be using it by the time it reaches end-of-life in 2027.

Suppose you consider an average ERP system is in play for around seven to ten years, and ECC was first released in 2004. In that case, organizations will have run their businesses on the same piece of software without updating processes for over a decade. Given what has changed in the world in the last two years, the last two months even, why are more businesses not embracing ERP change?

The key factors delaying organizational change

The old methodologies pushed organizations to customize their ERP platform. They believed these hard-coded business processes, first adopted over a decade ago, are their ‘secret sauce’ of success.

For many businesses moving to a clean cloud core, using standardized processes and the latest in cloud innovation can unlock simplicity, productivity and cost savings, pushing standardized, tested processes across the business. If a business thinks the way it processes an invoice, raises a purchase order or picks a product in a warehouse is the secret sauce, it may have been drinking from very much the wrong water fountain.

Organizations that need to continue with some level of customization can also make use of assistive tools that sit alongside public and private cloud cores, such as the SAP Business Technology Platform, among others. Investing in new skills such as RPA or data analytics can also accelerate the value and productivity boosts from cloud adoption.

These tools enable businesses to build their own differentiated processes outside of the core ERP platform. This innovation in workflow, integration, data and automation is the digital engine room that enables businesses to move to the cloud with the confidence they will not lose any of the processes that make them who they are.

We cannot continue to see productivity flatlining or even reducing like we did last quarter. It is undeniable that the US economy needs executives who are focused on driving productivity through the modernization of systems and incorporating tools such as AI/RPA assistants to help their workforce.

This is a sponsored article by Sapphire.