Productivity Crisis

Have roles & seniority decoupled from skills & experience? An organizational self-assessment.

We are experiencing The Productivity Crisis worldwide, as companies and individuals. The current predicament results from decades of capital engineering culminating in the easy money era of the last decade. Cost insensitivity, followed by investment ineffectiveness, set off The Productivity Crisis domino. Poor organizational designs, over-staffing, seniority and pay inflation, and decoupling of skill from employment rewards formed the domino that epitomizes this crisis. Self-diagnosing our organizations for this domino will set us up for remedial actions.

John Oommen

There is an unease across the regions that practice Western capitalism. It's like anxiety; we can feel it but haven't articulated why we feel that lump.

In this second article of The Productivity Crisis series, I will introduce its practical significance to individual companies. We will discuss the domino of behavioral shifts that impacted companies went through. As any meditation teacher would suggest, sitting with a deeper understanding of our reality is essential for solutions to stick. In the third article, Why is a transition to ruthlessly efficient investment choices a necessity?, we will discuss the formidable measures impacted companies must take to rise from this crisis.

Central banks have been struggling to keep a lid on inflation even with sharp interest rate increases because maintaining near-zero percentages for over a decade has created systemically unsound consumer habits. After years of focus on growth at the expense of earnings, companies are laying off small margins of their workforce to show positive earnings. Regardless of these seemingly drastic actions, companies are starting to internalize that issues are deep-rooted; the more profound, systemic problem is The Productivity Crisis.

The Productivity Crisis has metastasized at Western capitalism's core for over a decade. We nourished natural human inclinations by putting our thumb on the scale since the 2008 financial crisis, and this is a 15-year crisis in the making.

What is The Productivity Crisis?

Lots of running around, jumping from one activity to the next without finishing any of them, no time to sit down and think, preset plans tossed out of the window, tantrums meet the demand for discipline, and by the end of a super fun day not much was accomplished from a grown-up perspective. These are my memories of spending quality time with my nieces and nephew. But it is understandable if it reminds you of an average workday.

Significant outcomes are always predictable if we carefully observe the day-to-day behaviors of the players involved. We can forecast a sports team's likely trajectory through a season if we carefully follow the training sessions and locker room dynamics.

How we operate our businesses to create value and act as we buy, personally as consumers or professionally as employees, influence overarching outcomes. One such overarching outcome is productivity.

We use the word productivity often. All technology tools promise increased productivity, and everyone has easy access to productivity advice and optimal lifestyle habits. But results and objective measurements matter.

To ensure objectivity, let's align on what productivity means. The US Bureau of Labor Statistics (BLS) publishes productivity measurements often, and I recommend that you explore those resources for a deeper understanding.

Productivity measures our effectiveness in converting inputs to outputs.

BLS reports two key productivity metrics: Total Factor Productivity and Labor Productivity.

Let's start with Total Factor Productivity. According to BLS, it "compares the growth in output to the growth in a combination of inputs that include labor, capital, energy, materials, and services." Total Factor Productivity measures the efficiency of our overarching investment decisions.

In this definition, labor is people employed to perform tasks, and capital, energy, materials, and service investments are decided and managed by people. The simple conclusion that human decisions and actions are responsible for this measurement's absolute magnitude and growth is evident whichever way we slice this definition.

Now, what is Labor Productivity? Labor Productivity "compares the growth in output to the growth in hours worked." Labor is one of the five inputs of the Total Factor Productivity measure.

The first chart in the infographic below shows the data published by BLS for Total Factor Productivity and Labor Productivity growth. Productivity growth has been at its worst since 2007 compared to decades past despite the impressive array of tools we have at our disposal. Both of these productivity metrics turned negative since 2021. In other words, we have been putting more inputs into the hopper and getting less out.

Our first takeaway is that the annual growth rate of both Labor Productivity and Total Factor Productivity has declined since the Financial Crisis.

The second chart in the infographic tells us why things look good from a casual observer's perspective while masking reality. We just injected our economy with more and more inputs through monetary and fiscal policy, and the outputs we brandish don't reflect our ability to convert inputs to outputs.

Our second takeaway is that we disincentivized productivity by overstimulating our economy with inputs through easy money to increase output artificially. Our intrinsic ability to convert inputs to outputs has remained flat and has started to decline.

This shift is disappointing, given all the advancements we believe we have made. This overarching outcome is how The Productivity Crisis is manifesting in our economy. Whether it is bank runs, overstaffing leading to layoffs, piling on debt to engineer unsustainable growth, or living with persistent inflation, the root cause is the inefficient conversion of inputs to outputs.

The Productivity Crisis has been predictable. In 2019, repeatedly observing early indicators of this crisis in the form of operational gaps at companies prompted me to pen my book, The Spiral Stairway: The System To Build A Holistic Company, which offers remedies for our challenges.

What does all this mean in practice?

Imagine getting to your gym for leg day at 6 pm. What if your gym has three squat racks, and all three have someone standing by it? You wait only to see the folks using the rack for 30 seconds and then browsing their phone for the next five minutes. The gym invested in those racks, and the equipment could be more productive. You are idle as you wait for those racks to free up.

Now take this further and imagine that you complained about the availability of squat racks, and the gym adds another squat rack because the gym is flush with investor cash. You are happy, and you also don't feel a rush when using the squat rack. All is perfect. Correct?

In a simple sense, this illustrates The Productivity Crisis. Unused squat racks sit around most of the day until evening, and folks inefficiently use them only at their convenience. If we dig in further, someone manufactured those underutilized racks, someone cleans them, and someone else maintains them. All this extra activity around this gym isn't improving fitness levels. Therein lies our problem.

Capital can and needs to be allocated to efficient pathways to serve the eight billion people on our planet at a macro level. In the micro construct of companies, the dollars companies invest in people and other assets must seek more productive avenues soon. With recent technology and information advances, it is inconceivable that our Total Factor Productivity growth is flat or negative.

We can look at the whole world through the lens of companies. They influence everything around us. I explain this phenomenon in my article, Why must we build holistic companies?, The Productivity Crisis' macroeconomic outcomes are an aggregation of the reality within individual companies, including those we work at. So, it is essential for us to self-assess our work environments.

How did The Productivity Crisis manifest within companies?

Through our current persistent inflationary trend, we are rediscovering that stable prices are preferable. The meaning of money became spurious due to a prolonged easy-money era. Similarly, a cavalier attitude to how we create and manage companies has resulted in skill calibration challenges which is the root cause behind our escalating unproductivity.

Many organizations are using return-to-office protocols to try to address a feeling that productivity is low. But this is a blunt tactic analogous to adrenaline; it can provide a wave of energy that will wear off and might even weaken us afterward. Each company must address its underlying conditioning and strength to tackle The Productivity Crisis at a company level.

Let's walk through the behavioral domino around companies that brought us to The Productivity Crisis. Self-assessing our ecosystem for this domino is an essential first step before we attempt to solve it. Without such introspection, we will resort to duct tape tactics, further kicking the problem down the road.

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Stage 1 of The Productivity Crisis domino: Easy money created highly valued yet immature companies.

Most of the world felt the 2008 financial crisis. Since then, most governments decided to prevent economic downturns at any cost. They did not introduce novel approaches and relied on turbo-charged versions of past decades' loose monetary and fiscal policies. Every time there was a sign of trouble, monetary and fiscal policy was adjusted to boost economic growth further.

No one addressed the root cause of the Financial Crisis - capital engineering. As I detailed in my first article in The Productivity Crisis series - What is capital engineering, and why is it unproductive? - easy money led to the same problem as the Financial Crisis. We replaced complex mortgage packages with valuation-inflated companies. We overvalued new, immature, private companies because novel, unknown entities are easier to get excited about.

But there are a lot of traditional companies out there. What happens when one team fouls significantly more than the others, and there is no referee to call the game? Others start fouling more too.

When we allowed immature companies to maintain inflated valuations, even disciplined and long-term-minded companies became incentivized to focus on short-term actions to boost valuations or risk losing shareholders. Barring a few exceptions, most companies sacrificed discipline in the past few years regarding whom they sold to, what they offered, and how they delivered their offering.

Here is the first self-assessment question for our organization: How much focus did our company place on short-term, extrinsic perceptions such as market valuation and unsustainable growth rates?

Stage 2 of The Productivity Crisis domino: Short-term valuation focus led to cost insensitivity.

Is short-term focus a bad thing? Making sure short-term outcomes are strong is good. But embellishing long-term prospects using unsustainable short-term gimmicks is suboptimal, especially if those stifle long-term growth.

Such short-term valuation focus distorted how we judged companies. Profitability is usually a necessity for companies to stay alive. But in a short-term focused ecosystem, valuations became tied to quickly increasing revenue without worrying about business costs.

Imagine that an advisor told us that we must invest in a fabulous coffee shop that the owner put on sale. We decided to walk by and see a shop packed with delighted customers. So, it must be a fantastic business. Correct?

What if the coffee shop had appointed a person to stand outside to hand out $5 bills to each pedestrian to come inside and buy a $4 cup of coffee and keep the remaining $1? Should this change our perspective on whether we should invest?

Investors exponentially financed businesses like this illustrative coffee shop through our easy money era. If investors are willing to put money into a business knowing that the business model is unsustainable, they are doing it because there is a short-term option to get out.

What happens when the valuations of a few companies are high despite low strategic, operational, and financial maturity? All companies were motivated to sacrifice maturity because valuations were high regardless. Cost insensitivity flared like wildfire through our economy, including individuals' spending habits, which is the underlying reason for the stubborn inflation.

Here is the second self-assessment question for our company: Does our organization have a history of prioritizing growth at any cost without focusing on maturity?

Cost insensitivity is precisely what an easy-money ecosystem encourages consumers, companies, and government institutions to embrace - spending. Gross Domestic Product (GDP) aggregates three spending figures – consumer, business, and government. The fourth factor is net exports. The first three spending factors comprise 103% of the US GDP. Even as a collective, our net exports are -3%, which means we spend as a country to buy from other countries.

Our narrow focus on propping up the national GDP figure as a sign of economic health has increased cost insensitivity in our economy for individuals, companies, and governments. Cost insensitivity translates to overspending money to make less money. This behavioral pattern led to the third piece of the domino.

Stage 3 of The Productivity Crisis domino: Investment decision management became weak.

Over the past decade, successful outcomes were primarily a factor of everyone spending equally lavishly. But the artificial correlation between spend and outcomes did not imply causality. The illusion that our decision to spend lavishly was the reason for good outcomes grew deep roots. In other words, we became overconfident that good things would happen no matter the quality of our investment decisions.

Thus, our ability to connect outcomes to inputs became less effective. We circumvented investment analysis and prioritization to achieve short-term growth by overinvesting.

The authority to make spending decisions spread further into each organization, and the amounts each person can approve increased to more significant figures. Meanwhile, the amount of diligence on spending shrunk drastically.

Most ideas, including unvetted ones, became approved projects. Buying technology solutions, expanding into new locations, or acquiring smaller companies became no-brainers because everyone had the Midas Touch.

At a company level, mergers and acquisitions were increasingly prevalent. But we didn't take time to introspect when an acquisition didn't create more substantial revenue, product differentiation, or cost synergies. When unvetted projects were approved but didn't deliver as expected, we didn't take the time to ask 'why.' Instead, enough money was floating around to incentivize another under-vetted investment.

We took consequences off the table when we didn't assess the eventual payoff of each investment choice. Poor investment decisions increasingly became the mainstay. At the highest level, the productivity of each dollar invested started to miss.

The third self-assessment question for our company is the following: How robust and objective are our strategic and tactical investment decision-making and prioritization?

Stage 4 of The Productivity Crisis domino: Unvetted human capital investment became pervasive.

Every investment decision implies additional human labor commitment.

Buying or selling companies require more bankers, lawyers, consultants, and internal staff to find, close, and integrate the companies. When operational problems arise, companies could buy off-the-shelf tools hoping to fix them. But buying tools implies we need people to implement and use them effectively. Similarly, every product improvement or market expansion requires more people's involvement.

Whether a company invests in new employees directly, new assets, new technology, or external services, it has to hire even further to manage that investment. Hiring or hiring external solutions providers became the answer to all growth needs and problems. We hired more people internally or through external service providers to make projects work without asking whether each project had a realistic chance of success regardless of spend. Hiring became an unregulated tap without an off switch in the cost-insensitive environment.  

In a more fundamentally sound ecosystem, the appropriate path would be to go through mental gymnastics to solve underlying problems rather than hope for good outcomes through excessive spending. Companies could organically improve their products or access new markets rather than buy another company. Process improvements are better solutions requiring little new investment or staffing to address operational issues. New projects are rarely the correct answer; squeezing more value from existing investment is often more optimal.

But consequences for suboptimal decisions were minimal. This accountability gap was the underlying pattern that led to over-hiring in our economy.

To self-assess our company, ask: Did looser investment decisions cause an unregulated increase in employee counts and spending on external services?

Although this pattern started with over-valued, fast-growth companies, the high valuation incentives urged large companies and all industries to follow suit. Over a decade or so ago, hiring required significant checks and balances. In the free money era, we removed such guardrails. Hiring more players or spending more with other companies that employed even more workers became the most popular tactic in the playbook.

But diminishing returns is a practical reality.

Stage 5 of The Productivity Crisis domino: Years of over-hiring led to title and pay inflation.

When we keep hiring and staffing more people, someone needs to manage them. And then someone needs to oversee the managers. When a company decides to hire exponentially, inexperienced employees are thrust into the role of supervisors even before they have time to build their skills and develop necessary competencies.

Folks move from entry-level roles to multiple promotions in 3 or 4 years, by which point their direct reports have their own teams. Their titles inflate quickly from entry-level to managers, directors, and vice presidents in a short period. When a person rises so rapidly, and their titles reflect authority, their pay must too. These patterns led to rapid pay increases.

When some inexperienced employees are given promotions and pay rises quickly, such benefits become a systemic expectation. Title inflation and rapid salary increases became an expectation rather than an earned reward.

Here is our fifth introspective question: Did fast-paced promotions and pay increases become a company-wide expectation to support exponentially increasing headcount?

Rapid hiring often implies filling spuriously defined roles with bodies. The ever-increasing volume of new hires meant quickly promoted managers became top-of-house decision-makers. This tactical-minded hiring ecosystem even sidelined experienced applicants with deeper skills because such applicants evoke insecurity among less experienced hiring managers and recruiters. Favoring less experienced hires and sidelining experienced ones accelerated title and pay inflation among the former group at the latter's expense.

This pattern has brought on the final stage of The Productivity Crisis.

Stage 6 of The Productivity Crisis domino: Title inflation and removal of objective performance assessments led to skill-to-role decoupling.

Most of us are average and need time and practice to build skills. The tricky thing to swallow about this domino is that quick and unsubstantiated career progression has become an accepted norm, which is not optimal for the whole economy. Fast advancements don't give ordinary people time to build the necessary skills.

Title inflation led to inexperienced executives who never received the apprenticeship to lead or spent enough time building skills, owning and managing entire departments. It became a fashion to consider an executive's job to hire a team and expect them to solve the problems.

An executive's job is to be an expert on the function so that they can coach and elevate their people. Otherwise, how would an executive delineate between confidence and competence? How would an inexperienced supervisor or executive measure the skills of the people they hire or the quality of work?

We dealt with hiring and promotions from a place of fear. Fear of being unable to hit targets due to a lack of staff was a common complaint. Fear of unfilled roles became the crux of most discussions.

Skill became decoupled from job titles and pay levels. We hired based on what people said they were good at or what they wanted to do, not based on tangible experience and competencies or willingness to learn by rolling up their sleeves. This sense of desperation gave individual employees the upper hand in the hiring and people management process across most sectors.

One example where qualification-by-association took over for skill is product management roles. Product management, a customer-centric, business problem-solving skill, morphed into an internally focused software development supervisory role. Why? Companies started placing software development supervisors into product manager roles because of their association with the execution of developing a software product.

Now imagine such a misaligned product manager expanding their team. Who are they likely to hire? A candidate with customer-centric skills or one with more software development experience?

Another example is the spin to minimize process design into a trivial activity that doesn’t require deep experience. Process design is a science that requires strong business acumen. But it lost meaning when folks started mistakenly plugging software to address process gaps or taking a democratic approach of asking and documenting opinions as processes instead of leveraging decades of process design methods and frameworks available to us.

Similarly, companies mistook the ability to set up data visualization tools such as Tableau for analytical skills. A foundational ability to perform structured problem-solving characterizes analytical skills. Instead, we started giving that task to more tools-focused individuals. Organizations spend eons looking at pretty charts without insights or decision-making information.

In these situations, misaligned individual performers in such clutch roles get promoted to supervisors and to executive-level roles soon after. A skill-deficient executive or supervisor tends to hire based on criteria other than skill. When organizations expand quickly and place folks who are light on skills in senior roles, it is living in a universe where decades of evolution around critical skills are no longer accessible without ever knowing it.

Our final self-assessment question is: Did we dilute critical roles and resort to staffing them with a bodies-in-seats mindset without prioritizing skill-building?

Folks used to whisper, “Fake it till you make it," as a short-term means to an end, but it has become too acceptable to operate with this mentality as a permanent state.

Confidence has outstripped competence; talking about skills has become more typical than building skills. Such decoupling of skills and competence from job titles is the underlying reality behind our declining Total Factor Productivity and Labor Productivity figures.

In a fast-growth world, interviews and performance assessments are looser and biased against decades of experience and deeper knowledge. Companies started making hiring decisions and promotions based on criteria unrelated to skills.

Indeed, skill never correlated with job titles or seniority. The saying, “It's not what you know, it's who you know," epitomizes this sad reality. But some checks and balances of decades past kept this relationship between skills and roles at reasonable connectivity. Over the past few years, we removed these checks and balances.

Softbank's $100B Vision Fund epitomizes The Productivity Crisis. Masayoshi Son was known for making fast and decisive calls on funding start-ups and the large sums of money he invested. Vision Fund posted a loss of $39B in 2023, which is incremental to other notable losses in recent years.

I remember reading about that $100B fund while commuting in a crowded Chicago bus. I was heading into a day of endless, oversubscribed meetings demanding little pre-work or using structured decision-making approaches. Those meetings often led to unsubstantiated decisions because sound problem-solving concepts never got a chance. The same topics would return to the radar because decisions weren’t cohesive or actions were too tactical. On that bus ride, my gut reaction was, "Hyper-scaling this chaos doesn’t make sense."

Even though our innate nature is to take the easy path of creating perceptions of skill and experience, the next decade's winners will embrace productivity and intrinsic value.

Sit with this reality. Look at your workplace. Does this domino resonate with you? Despite our career trajectory, we must be objective about this systemic reality because this goes beyond each of us. Once you internalize the gravity of this situation, please read the following article in this series, Rediscover Investment Effectiveness To Exit The Productivity Crisis, where I share our only realistic path forward.

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