22 Feb 2004: The Observer - Page 9 - (960 words)
Business & Media: Management: Why brain still beats brawn: , says Simon Caulkin
THE increasing cost of doing business in the UK is driving manufacturers and service operators offshore, the president of the Engineering Employers' Federation, Mike Baunton, warned the Chancellor recently.
He singled out pensions, national insurance, energy and the new emissions trading scheme for particular stricture. 'There is now an increasing range of pressures making it more expensive to do business in the UK and eroding our advantage as a low-cost, lightly regulated economy,' he complained. 'This is only fuelling the fire of moves to lower-cost countries and damaging our ability to manage proactively the transformation of our economy.'
To be fair, criticism of the opportunistic NI increases is justified. The Government can also legitimately be castigated for its disastrous handling of the public sector - the Prime Minister's admission that real improvement may take a further 15 years will be an underestimate unless it changes its methods.
Yet in the wider perspective, industry's attempt to offload responsibility for its own shortcomings on to Westminster and Whitehall is right royal cheek. For the last 30 years the British economy has been run almost entirely according to the managerial agenda - in fact no other has had a look-in.
Imagine the wish-list of a captain of industry in the Eighties. The right to manage? Certainly, sir, courtesy of Margaret Thatcher's series of trade union laws. Lower taxes and a smaller state? Yes, thanks to draconian cuts across the public sector (now flapping heavily home to roost) and successive waves of privatisation that have turned great swathes of near-monopoly over to profit-seeking private hands. Flexibility? You got it. No workers' rights or social protection, please, we're British. A stable economy? Of course - and rightly- plus explicit policies for manufacturing, innovation and training, all washed down with oodles of performance-related pay. And the result? Though the UK economy (apart from the US) is unique in being driven so directly by the perceived demands of corporate competitiveness, as Michael Porter politely reminded us last year, it remains stuck in a low-wage, low-skill groove.
The Engineering Employers' Federation noted last year that productivity was being held back by low take-up of proven remedies, such as high-performance workplace arrangements. Meanwhile, European Commissioner Chris Patten caustically remarked recently that while sorrowful official British speeches about the eurozone countries suggested that we should be sending them food parcels, they don't seem to accept that our lightly regulated, low-cost model has anything to teach them.
The reality, he said, is that five allegedly sclerotic EU states are richer than the UK, and only Spain, Portugal and Greece have poorer productivity levels. The UK has low unemployment, but four other countries do even better. For all its boasts about being outward-looking and internationally oriented, the UK trades a much smaller share of its economy than Germany (42 per cent of GDP to 57 per cent) and is surpassed even by those supposed bastions of protectionism France and Italy (45 and 43 per cent). Nor is it obvious, Patten added, that 'the consumer of public services, the train passenger, the hospital patient in Britain is better off than our continental cousins'.
As is so often the case, the captains of industry are unerringly attacking the wrong enemy. For a start, a low-wage, low-skill economy is only low-cost in a very limited sense. The inputs may be cheap, but any gain is many times outweighed by the cost of poor quality, unsophisticated products, and primitive processes. As Derek Bok, a famous Harvard president, said: 'If you think education is expensive, try ignorance.'
In the same perspective, not all regulation is bad. Well-framed regulation with sensible lead times can set in train a virtuous circle of innovation leading to superior products and, in the long run, lower costs. Emissions trading is a good example of market-friendly regulation rewarding companies that innovate in socially desirable ways, without dictating how they should do it. Firms that meet the targets will be in a good position to benefit from their experience and knowhow when stricter environmental conditions are imposed in other parts of the world, as they surely will be.
The real barriers to better performance are not external, but internal. The Engineering Employers' Federation noted that companies that adopt high-performance working practices can expect to show a 20 per cent improvement over companies that don't. The Work Foundation has come up with similar findings. The invariable revelation for manufacturers (and often service operations) adopting lean approaches is the huge potential for stripping out waste of all kinds, much of which drops straight to the bottom line.
In other words, most companies could find 20 to 40 per cent extra resources within their own four walls, and much more by spreading good practice to their suppliers. The secret of the rare UK companies that concentrate on world-class work practices - Rolls-Royce and Reckitt Benckiser spring to mind - is that they open up vast strategic possibilities that are effectively closed to their competitors. It's no accident that 30 per cent of Reckitt's turnover comes from products introduced in the last three years.
This illustrates their other secret: innovation. These companies understand that finding new and better ways of giving customers what they want isn't an optional extra. It's what firms are supposed to do, part of the makeup that distinguishes them from markets. In the long run, the ability of a company to use its workforce to innovate - there is no other sustainable way - far outweighs the advantages of cheap labour or even energy. Brain trumps brawn every time.
No company has to put up with 20-40 per cent waste nor is there any inevitability about relocation east. The big issue for UK manufacturing firms is their own self-imposed determinism, not government policy. You got what you wanted: your destiny is in your own hands.
The Observer, 22 February 2004