UK productivity: challenging every business to improve Tera Allas McKinsey Global Institute 14th October 2016 OECD Global Forum on Productivity

1. UK productivity: challenging
every business to improve
Tera Allas
McKinsey Global Institute
OECD Global Forum on Productivity
14th October 2016
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited

2. McKinsey & Company 2|
Contents
▪ While the government has a role to play, business action
is required to address the UK’s productivity shortfall
▪ Two thirds of UK employees work in businesses whose
productivity is lower than expected for their size and sub-sector
▪ The ‘How good is your business really’ on-line tool is part of
the proposed solution
▪ The potential prize from a scaled-up UK ‘productivity
movement’ is substantial

3. McKinsey & Company 3|
The UK suffers from long-standing productivity gap which is getting wider
SOURCE: OECD; McKinsey analysis
30
20
70
60
50
40
10
2004
2008
2012
2010
2014
2006
2000
1996
1972
1974
1970
1998
1992
1994
1988
1990
2002
1984
1986
1978
1982
1976
1980
X% UK vs. US gap
Germany UKFrance US
-38%
-25%
-18%
-24%
Labour productivity, 1970-2014
GDP per hour worked, $ (2010 PPP)

4. McKinsey & Company 4|
National level drivers do not fully explain the UK’s productivity gap
SOURCE: World Economic Forum Global Competitiveness Report 2015-16; OECD; McKinsey analysis
4.7 5.24.4 4.9 5.34.8 5.0 5.1 5.44.6
65
35
30
25
75
70
60
55
50
45
40
20
10
5.9 6.0
5
5.8
15
5.6
0
5.5 5.74.54.24.0 4.34.1
80
Korea
Luxembourg
Portugal
Latvia
Slovenia
Switzerland
Sweden
Norway
New Zealand
Mexico
Estonia
Iceland
United Kingdom
Spain
Poland
Netherlands
United States
Japan
Israel
Ireland
Belgium
Czech Republic
Australia
Turkey
Germany
Finland
Italy
Hungary
Denmark
Canada
Greece
France
Austria
Chile
Captures factors such as institutions,
macroeconomic stability, human capital,
infrastructure, regulation and policy environment
Competitiveness index score, 2015-16
Labor productivity, 2014
GDP per hour worked, $ (2010 PPP)

5. McKinsey & Company 5|SOURCE: ONS; OECD; EU KLEMS; McKinsey Global Institute analysis
The productivity gap to Germany is not explained by sector mix
0.6 0.9
1.7
2.2
2.9Financialand
insuranceactivities
Sectormix
0.4
Agriculture,
forestryandfishing
0.1
Professionaland
adminservices
Construction
30.9
Germanaverage
Wholesale,retail,
transportation,storage
0.1
Miningandutilities
0.2
Informationand
communication
Manufacturing
24.2
UKaverage
1 Excludes real estate, public administration, arts and entertainment, and community services due to lack of comparability; based on 2009 hours
Market sector1 labour productivity gap between UK and Germany, 2015
Estimated contribution to GVA per hour worked, £ (2010 constant, market exchange rates)

6. McKinsey & Company 6|
Poor management practices are a known cause of UK’s lower productivity
UK
(5.7%)
US
(1.8%)
Germany
(2.3%)
Global
(9.7%)
SOURCE: World Management Survey 2014 database; McKinsey analysis
1 2 3 4 5
54321
42 531
51 42 3
Percent of firms according to management score
Scale 1–5
Management scores, 2004-2014
Scale 1–5
2.83World average
China
Brazil
-9.6%
2.66
Japan
Sweden
Argentina
3.00Australia
2.88
2.97
2.95
3.17
Italy
Poland
2.75Spain
2.69
UK
2.68
3.00
Canada
France
3.17
3.29
3.18
US
3.14
Germany

7. McKinsey & Company 7|
The Productivity Leadership Group, led by Sir Charlie Mayfield, was set up
to explore what businesses could do practically to raise productivity
Sir Charlie Mayfield
Chairman, John Lewis
Partnership
Carolyn Fairbairn
Director General, CBI
David Abraham
Chief Executive,
Channel 4
Sir Roger Carr
Chairman, BAE Systems
Ian Davis
Chairman, Rolls-Royce
Professor Juergen Maier
Chief Executive, Siemens
UK
Sir Andrew Witty
Chief Executive,
GlaxoSmithKline
Jeremy Anderson
Chairman, KPMG Global
Financial Services
Sir Richard Lambert
Former Director-General,
CBI and Chancellor,
University of Warwick
Sir Mike Rake
Chairman, BT
Dame Fiona Kendrick
Chairman and CEO,
Nestlé UK and Ireland
Nigel Whitehead
Group Managing Director,
Programmes and Support,
BAE Systems
Phil Smith
Chief Executive UK and
Ireland, Cisco International
Lady Barbara Judge
CBE, Chair, Institute of
Directors
Tera Allas
Visiting Fellow, McKinsey
Global Institute

8. McKinsey & Company 8|
Contents
▪ While the government has a role to play, business action
is required to address the UK’s productivity shortfall
▪ Two thirds of UK employees work in businesses whose
productivity is lower than expected for their size and sub-sector
▪ The ‘How good is your business really’ on-line tool is part of
the proposed solution
▪ The potential prize from a scaled-up UK ‘productivity
movement’ is substantial

9. McKinsey & Company 9|
UK productivity varies more within than between sub-sectors
SOURCE: ORBIS (2013 data)
100 150500 0 15010050 1000-50 50 150 200
Bottom quartile Top quartileMedian
Professional
services
Wholesale
Construction
Leasing
Retail of goods
Hospitality
Industrial
manufacturing
Utilities and telcos
Business admin
CPG
Repair
Petro-
chemicals
Machinery
Metals
Chemicals
Electronics
Construction
materials
Dyes
Pesticides
Plastics
Gases
Inorg. basic
chemicals
Rubber
Fertilisers
Paints
Org. basic
chemicals
SectorIndustry Sub-sector
CHEMICALS EXAMPLE
Distribution of firm productivity within segments of industrial manufacturing, 2013
GVA per employee (€’000), excluding micro-businesses of <10 employees

10. McKinsey & Company 10|SOURCE: ORBIS (2013 data)
5
15
12
10
8
14
6
13
11
9
7
4
3
2
1
0
The productivity distribution is wider in the UK than Germany
Expected value
Productivity1, difference from expected value as a proportion of peer group median
+100%0 +200%+50% +150%-50%-100%-150%-200%
1 Productivity measured by Estimated GVA (EBIT + employee costs)/Number of employees. Best proxy possible with available data.
2 Estimated GVA (EBIT + employee costs) is regressed on a range of variables to control for sub-sector and number of employees using a Weighted
Least Squares method (with employee numbers as the weighting)
Two thirds of UK employees
work for companies whose
productivity is below expected
1
UK employs 11% more of its
workforce in companies whose
productivity is below expectations
2
GEUK
Distribution of employees by their employer’s productivity1 relative to the expected productivity2
for a firm of their size and sub-sector
Percent

11. McKinsey & Company 11|
Significant under-performance is found among all sizes of firms
SOURCE: ORBIS (2013 data)
SME1
Productivity difference from expected value as a proportion of peer group median
1 SME = 10-499 employees; Large = 500-4999 employees; Very large = >5000 employees
Large
Very
large
5
20
0
15
10
0
6
8
4
2
8
4
2
6
0
+100%0 +200%+50% +150%-50%-100%-150%-200%
Expected value
Distribution of UK employees by their employer’s productivity relative to the expected productivity for a firm of their size in their sub-sector
Percent

12. McKinsey & Company 12|
Contents
▪ While the government has a role to play, business action
is required to address the UK’s productivity shortfall
▪ Two thirds of UK employees work in businesses whose
productivity is lower than expected for their size and sub-sector
▪ The ‘How good is your business really’ on-line tool is part of
the proposed solution
▪ The potential prize from a scaled-up UK ‘productivity
movement’ is substantial

13. McKinsey & Company 13|SOURCE: McKinsey analysis; literature review; expert interviews
We have developed an on-line app to diagnose 5 areas of performance
and to provide practical tips and advice on how to improve
Commercial
Excellence
▪ Management
behaviours
▪ Vision and
values
▪ Ambition
▪ Target setting
▪ Investment
▪ Innovation
▪ Performance mgmt.
▪ Talent development
▪ Motivation
Leadership
Talent
Management
Operational
Efficiency
Planning for
the Future
▪ Continuous
improvement
▪ Cost management
▪ Procurement
▪ Maximising sales
▪ Exports and
internationalization
▪ Online presence
Firm-level levers for improving productivity

14. McKinsey & Company 14|
The tool comprises short surveys for each of the 5 categories, with
downloadable advice guides associated with each of the ~15 sub-categories
SOURCE: Team analysis
Users have a personalised “dashboard” page,
which gives access to surveys and best practice
across the 5 categories
1
The tool provides information on
best practice, practical
implementation tips, and
access to other useful resources
3
Users complete mini-surveys and their
answers get benchmarked against best
practice and their peers
2

15. McKinsey & Company 15|
The dashboard page provides an overview of performance in completed
sections of the tool
SOURCE: Team analysis
The tool is modular, so different
elements can be completed at
different times
When filled in, the bars in each
section indicate performance
against benchmarks

16. McKinsey & Company 16|
The tool is part of a broader ecosystem of support on productivity
What does
good look
like?
Where
am I
now?
How do
I get
better?

17. McKinsey & Company 17|
Contents
▪ While the government has a role to play, business action
is required to address the UK’s productivity shortfall
▪ Two thirds of UK employees work in businesses whose
productivity is lower than expected for their size and sub-sector
▪ The ‘How good is your business really’ on-line tool is part of
the proposed solution
▪ The potential prize from a scaled-up UK ‘productivity
movement’ is substantial

18. McKinsey & Company 18|
The productivity opportunity is spread across all sectors of the economy
SOURCE: ORBIS (2013 data); OECD (2013)
1 Each company was given a percentile ranking within a group of comparable companies (same sub-sector and size category). We then calculated the
gains to GVA if each company in the bottom 75% increased their performance to match the productivity of the company ten percentiles above them
2
3
3
4
3
3
Construction
Business admin
Prof. services
IT services
CPG
Indust. Man.
Utilities & telcos
Wholesale
Retail of goods
Total
Extractive
131
High-street
14
11
12
10
6
12
6
5
5
5
Other
Hospitality
Healthcare
Leasing
Education
Media
26
V LargeLargeSME
Potential GVA gains per year1
£bn (2013 prices)
If the lowest
75% of UK firms
matched the
performance of
a firm 10
percentiles
above it, UK
GVA would be
£130 billion
higher

19. McKinsey & Company 19|
The government and business community need to work together to build
up momentum behind the ‘productivity movement’
Business
▪ Engage customers,
suppliers and
networks
▪ Provide leadership,
expertise and
resource
▪ Build into self-
funding initiative
Government
▪ Raise awareness
▪ Use business ‘touch
points’ to engage
▪ Co-ordinate with
other programmes
▪ Seed-fund
permanent initiative
Collaboration
▪ Authority
▪ Accountability
▪ Evaluation

20. McKinsey & Company 20|
The tool is available on the ‘How good is your business really’ website
You can test the tool at:
tool.howgoodisyourbusiness
really.co.uk
Demo username:
cafegreaterlondon2016@yahoo.com
Demo password:
Cafe2016

21. UK Productivity:
A business perspective
Tera Allas
McKinsey Global Institute
tera_allas@mckinsey.com
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited