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Saturday, October 02, 2004

Is Poor Management Contributing to Low European Productivity?

    Posted by Adam Crouch

Michael links to an article in The Economist about Europe's huge demographic problem:

Americans have long seen Europe as the old world. Now they have another reason to count the difference. Europe is ageing much faster than the new world. The old world faces a daunting demographic challenge. This year's expansion of the European Union from 15 to 25 countries increases its population from 380m to 455m-way ahead of America's 295m. Yet by 2050, the United States will have almost caught up: if forecasts prove correct, there will be 420m Americans, compared with 430m Europeans.
Populations age when people live longer and have fewer children. Life expectancy is rising at roughly the same pace in most rich countries-although not in Russia (see article). So it is low fertility that explains why Europe's population is ageing faster than America's. In Germany, the median age will rise from 40 in 2000 to 47 by 2050; in Italy, it will reach 50 as early as 2025. In America, by contrast, it will rise only from 35 in 2000 to 40 in 2050.

It goes on to discuss the myriad problems that having a much older population will cause for Europe (read the article). A few possible solutions are given, and one is dismissed very quickly:

Faster productivity growth would help, but it would be foolish to bank on it. Indeed growth in output per worker may well fall in ageing economies, given the link between innovation and youth. Entrepreneurship tends to be stronger in more youthful populations, says Sylvester Schieber, research director at Watson Wyatt, an actuarial firm.

Keep in mind that European productivity is already low relative to its peers, and rapid ageing is likely to make it worse. But why is Europe in the spot that it is with productivity? Why aren't European nations as productive as their economic peers? Labor laws and a lack of IT investment (see chart here) are popular reasons, but a new culprit has now been uncovered: poor management.

(note: Just passing this on, don't kill the messenger :-P)

Proudfoot Consulting conducted a study into differences in productivity growth between countries, and the causes behind it. They took a micro-level approach, asking executives about what problems stifle productivity growth in their companies. They found that the biggest factor hindering productivity, particularly in Europe is "Insufficient management planning and control":

Factors we observed in this category included:
  • non-existent, poor or inappropriate measurement procedures
  • objectives set too low, too high or against peers rather than 'absolute'
  • problems ignored or not anticipated
  • inadequate reporting
  • key performance indicators not set or performance poorly measured
  • planning from an existing (and often inherently flawed) perspective, instead of from an optimum potential perspective
  • acceptance of a degree of failure as routine and therefore built into future plans.
Here is what The Wall Street Journal says about it:

"Maybe low productivity in Europe isn't a result of short working hours or inadequate technology after all -- but instead a product of bad management.

"Managing for mediocrity," a study published Monday by Proudfoot Consulting, observed workers in nine countries for more than 10,000 hours and found that bosses are behind low productivity, a notion that debunks the conventional wisdom. "The blame can be placed squarely at the feet of management, which is accused of insufficient management planning and control and of providing inadequate supervision," says a statement accompanying the study.

That rings a note of truth to Andreas Kiffe, who works at one of Germany's largest financial institutions in Frankfurt. Mr. Kiffe said that he might in fact be more productive if his supervisor were more closely peering over his shoulder. "Right now my boss is on vacation, and it's sort of quiet at the moment," he says with a smile. Understandably, the banker preferred that his employer go unnamed.

And that attitude comes from Germany, which among the countries included in the study had the least "lost" working days-per worker each year -- just 74 in total -- suggesting that there might be something to be said for German efficiency. A lost day is defined as a full working day during which the worker didn't accomplish anything."

Barry Ritholtz has done some more research, combining this with insights from the European Central Bank. Definitely worth checking out.

(Via BusinessPundit)

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