ADP Europe at Work - A Vision On Cost and Productivity


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Cost and productivity measurement tools are very accurate and provide companies with useful indicators to benchmark European countries.

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ADP Europe at Work - A Vision On Cost and Productivity

  1. 1. E U R O P E A T W O R K A VISION ON #3 COST AND PRODUCTIVITY SEPTEMBER 08 Cost and productivity measurement tools are very accurate and provide companies with useful indicators to benchmark European countries. However, economic experts and HR professionals agree on the importance of qualitative factors that go well beyond the figures. gilbert cette albert Martens filip abraham gilbert cette, associate Professor of albert Martens, Professor filip abraham, Professor of economics at the university of the Director, in charge of Hr international economics and european Mediterranean and Member of the global transformation at iKea. integration, Vice-rector at the catholic french economic analysis council university of Leuven (Belgium) "Productivity is a prism "Labour costs alone are not for observing qualitative iKea: productive by being motive enough to set up performance factors" human business in a country" Page 2 Page 4 Page 6 facts and figures p. 8-9 An ADP publication
  2. 2. cOst aND PrODuctiVitY Gilbert Cette "Productivity is a prism for observing qualitative performance factors" Looking beyond the figures, co-author of "The Levers of French Growth" Gilbert Cette reviews the factors influencing a country’s productivity and what they tell us about its economic and social context. In his critical assessment of the calculation methods used, he also does away with a few preconceived ideas. What are the main factors multinationals certainly helped short of the European average governing a country’s productivity to improve productivity, and productivity although they are level? GDP was artificially boosted by Eurozone member states. The main factors are structural. large companies’ declaring their They relate to the way the profits in the country. Why don’t you hold Luxembourg country works and its ability But that in no way detracts from or Norway up as models? to mobilise the most efficient the structural factors behind It’s true, these two countries organisations and technologies. Ireland’s performance. It has have the highest productivity “ First come training and maximised productivity by levels in continental Europe. education policies, which govern qualification levels. Another important parameter Companies must is flexibility on the goods and labour markets. Barriers make strategic that limit access to certain economic activities and factors that impede recruitment and professional mobility are detrimental to productivity. Lastly, innovation efforts “ decisions in accordance with their activities and play a key role, as is the case markets today with information and communication technologies Gilbert Cette, (ICTs). All these factors are, of Associate Professor of Economics at the course, correlated. Training University of the contributes to innovation. But Mediterranean and what is the point of innovating Member of the French in ICTs if the market is not Economic Analysis open, as was the case with Council telecommunications in several countries for a long time? investing in training, relaxing But they are both small regulations and promoting ICTs. countries specialising in high Which countries are europe’s It’s by capitalising on these key value-added production. By best of breed in this respect? factors that Ireland has forged concentrating on highly capital- Ireland quickly moved up to ahead of other countries such as intensive industries - finance in the top three. Tax incentives for Greece and Portugal, which fall Luxembourg and forestry, oil 2
  3. 3. and fisheries in Norway, they have reached record-breaking not lost for countries with low productivity if they make >> productivity levels. This highly the necessary efforts. By gilbert cette is a member of specific approach is difficult to concentrating on the right export to larger countries with factors, the Czech Republic, the french economic analysis bigger populations and, hence, Hungary and Slovenia have council (a body reporting to more diversified economic already overtaken Portugal. the french Prime Minister) activities. Poland, Slovakia and the Baltic and associate professor of states are right behind. If economics at the university Why is france’s productivity productivity is improving more of the Mediterranean. a higher than that of the united slowly in Romania and Bulgaria, specialist in macroeconomics, Kingdom, where flexibility is it’s because they are restrained theoretically higher? by inflexible institutions. growth, productivity analysis, One thing needs to be made production economics and clear as regards the method used What importance must labour economics, he sits on the for calculating productivity: companies place on productivity editorial committee of several it only takes into account the before setting up in a new publications, including the performance of employed people. country? review of income and Wealth That explains France’s good Productivity cannot be (uK) and the international figures: with an employment separated from labour costs. rate ten percentage points lower What is the point of doubling Productivity Monitor (canada). than that of the UK, France’s jobs productivity if the costs triple? are concentrated on the most But cost is not the only factor. His works include numerous productive people. Furthermore, You also have to consider books and articles: with shorter working hours, institutional factors such as drops in productivity due to the industrial property protection, “the Levers of french growth” (2007 – in french), a report by the french economic effects of fatigue are avoided. corruption, etc. Qualifications analysis council, co-author and the quality of training must “growth and Productivity in europe and a somewhat disconcerting also be taken into account, as the united states” (2007 – in french), paradox... must a country’s infrastructure. La Découverte, collection "repères" Companies are familiar with These are the factors that lie “trends in ‘structural’ Productivity Levels these data, which illustrate the behind productivity, as though in the Major industrialized countries” influence of economic policies it were a prism through which (2007) economics Letters #95, pp. 151-156, co-author on productivity. A country we observe various qualitative with a high employment rate aspects of performance. But “Opportunity costs of Having a child, mobilises more of its available a company must also make financial constraints and fertility” (2007), applied economics Letters, workforce, hence more less strategic decisions in accordance Vol. 14, issue 4-6, May, pp. 239-244, qualified people. Productivity with its field of activity and co-author suffers as a result, and it is more markets. difficult for employers to recruit. What’s more, longer working hours lead to fatigue and reduce productivity. Thus, if you increase working hours by 1%, you only obtain 0.7% additional output. So productivity decreases by 0.3%. But you still increase the wealth produced by 0.7%, which boosts growth and GDP per capita: that’s the choice the UK has made. Will the new eu member states catch up with the others? The change can come quickly, as it did in Ireland. So all is EXPERT 3
  4. 4. cOst aND PrODuctiVitY Albert Martens IKEA: productive I kea’s performance lies in the success enjoyed by deploying the same offering and management model across all the continents, undergirded by the universal by being human values of the brand, which apply both to its millions of customers in 40 countries and its 125,000 employees. This ideal of well-being Costs and productivity are closely measured at Ikea both at home and in the workplace rules out could ever doubt that! But the Swedish home furnish neither monitoring nor optimising measures. From cost prices to checkout queuing times, giant, which is not listed on the stock exchange, is m from productivity to sales per employee without forgetting cost per hour or staff costs, long-term investments in managerial quality, to the p nothing escapes the company managers. But standing back from current productivity models. This they keep an even closer eye on the quality aspects of these quantifiable performance is reflected in the universal well-being values that the indicators. represents to both its employees and customers. “A checkout employee can make all the difference between a customer returning or not,” reckons Albert Martens, director in charge of Ikea’s HR global transformation project. Natural radiance rather than just a smile, that is the impression to be left by the brand at that ultimate moment when the unfathomable factor influencing customer loyalty is so often put into play. That is how success is built in a dimension that is both tactical and strategic, with costed measures for short-term action on the one hand and a long-term commitment to investments in quality on the other hand. “We never lose sight of our long-term development objectives. Our HR policy is considered strategic and we are banking on our employees in the long run. We call them co-workers, in the primary sense of working Every two years, co-workers are together.” interviewed individually to rate Ikea as an employer. Career advancement, corporate fostering productivity responsibility, management, everything is So Ikea will be taking a close look at its evaluated. The results are consolidated at staff’s working conditions. Confident that individual team level. A clear message is its values are universal, it applies them revealed when these results are compared in-house with as much assurance as it does with business performance: “Customer on the market. An accurate impression of satisfaction is commensurate with co-worker the workplace environment can be gained satisfaction.” Hence a major ambition for HR: by simply taking a stroll through an Ikea a student employed part-time who stays only store: an open organisation; direct, informal for a year is already seen as a failure for the relations; virtually non-existent bureaucracy. management. Fortunately, co-workers are Co-worker satisfaction and loyalty must allowed to make mistakes, as they are seen be upheld in this area as well as all the as opportunities for improvements... others. In a company where well-being is an “Everything is based on respect for people,” integral part of its culture; nobody is afraid of stresses Albert Martens. “Everyone must be measuring this factor. able to advance. So we ask our managers 4
  5. 5. - nobody to be leaders first and foremost. All our The Swedish giant doesn’t cut corners, and hings processes are transparent, from the definition continues to invest even when times are hard. of objectives to assessment methods and For Ikea, the quest for productivity is based making reward criteria.” on an exemplary integration of short and long term goals, quantitative and qualitative point of in time and space aspects, development of business and people. s quality Some people will say that there is nothing It has to be said that the company is not new about Ikea and that many companies under pressure from the stock market to e brand – especially in the service sector – have deliver growth, and the HR managers feel understood the productivity gains that can quite at home with that. “ be made with an intelligent HR policy. But the Ikea model goes much further and is deployed within the mosaic of the Our vocation is to different culturalofenvironments and regulations each country Ikea improve people’s in which the firm operates – from “ IKEA is specialized in functional home Russia to Malaysia, Sweden to furnishing products. Since its creation in 1943 lives, so we start Japan and Saudi Arabia to China. in Sweden, the IKEA Group has grown into a This also requires a certain major retail experience. With more than with those of our amount of patience. 231 stores in 24 countries and over co-workers Ikea is conquering the global 125,000 co-workers in 40 countries, the IKEA market on an obvious fact - Group has annual sales worth more than Albert Martens, people feel happiest at home. 19 billion euros. Today’s IKEA range consits Director, in charge of HR of about 9,500 articles. The IKEA Group is a And the company is so confident Global Transformation at IKEA of the values represented by its privately held company. brand that it carries them over to its management, striving for universality. “Our vocation is to improve people’s lives, so we start with those of our co-workers,” sums up the manager. Inside, like outside: Ikea will adopt the same approach, the same personnel management procedures and the same employee services across the board. This is one objective of the current global HR transformation. Payroll, for instance, will be centralised and standardised, while each country will have a shared services centre guaranteeing the same quality of response for all. “People need to be respected, recognised and treated fairly all over the world,” adds Albert Martens. Last and not least, Ikea knows how to take its time. Time to win over new markets, such as China or Russia, time to watch its co- workers develop and boost customer loyalty. PRACTICES 5
  6. 6. cOst aND PrODuctiVitY Filip Abraham "Labour costs alone are not motive enough to set up business in a country" In underlining the difference between hourly costs and unit labour costs, Professor Filip Abraham, a European integration and international economics expert, deciphers the different factors that make a country competitive and attractive. What are the main things you can we predict future changes are hourly labour costs a good see when you look at european in this difference between old and indicator of how attractive a country hourly labour costs? new eu member states? is for a multinational company? Hourly labour costs are much There’s no doubt that the new Not on their own. The factor lower in the countries that have ones are catching up, at quite a that companies must consider is joined the European Union since fast pace. This is demonstrated the unit labour cost, which is the 2004 than in the 15 states that by the level already reached in expenditure required to produce were already members, to which some countries. It is reasonable the same output value in each we can add Switzerland and to assume that the new EU country. So it takes into account Norway. So there is still a gulf member states will have halved productivity. Sure, you can take “ between the accession states and the difference with the EU-15 The new EU member “ states will have halved the difference with the EU-15 states in ten years’ time Professor Filip Abraham, Professor of International Economics and European Integration, Vice-Rector at the Catholic University of Leuven (Belgium) the “historic” member states of the EU, although there are states in ten years’ time thanks a short cut and say that costs variations. Hourly labour costs to their rapid economic growth. are lower in the new member have already reached 50% to Investment from western states and that the EU-15 states 60% of the EU-15 average in the companies is generating high are more productive. But it’s Czech Republic, Slovenia and demand for labour in the new the unit labour cost that tells Hungary. This figure is around member states, pushing wages, us in what proportion. And we 30% in most of the other new hence labor costs, upwards. see that the difference between member states; it is even lower old and new member states is in Bulgaria and Romania. smaller with unit labour costs than with hourly costs. 6
  7. 7. so the new member states are not that attractive after all? What about countries with high labour costs? >> The advantages related to hourly At the top of the scale, where Professor filip abraham is labour costs alone must be put hourly labour costs are fairly into perspective. Studies have similar, the ratio between Vice-rector for Humanities already shown that Poland the wage and non-wage and social sciences at the and Hungary are no longer components varies. Wages are catholic university of Leuven competitive in some sectors. But high in Switzerland, Norway (Belgium), where he teaches we also need to bear in mind that and Denmark, so welfare international economics and wage costs in these new member contributions are less of a european integration. He is states are increasing because burden. And yet these countries also professor of international their productivity is improving! benefit from excellent social And that’s a good argument for services, which are funded Business in the Vlerick Leuven setting up business there! In my through “general” taxes rather gent Management school. view, the main risk lies rather in than through payroll taxes. He is an external contributor what I call the “benchmarking In other countries, including for the european commission effect”, when the employees of France, Belgium and Germany, and a consulting expert to subsidiaries in low-cost countries welfare contributions - i.e. the multinational companies such compare their wages with those non-wage component, are the as Philips, siemens, Hoechst and of the parent company. Taken largest proportion of labour to its extreme, that can result costs. iBM. Pr abraham holds a Ph.D. in in demands for readjustments economics from the university of that bear no relation to actual With such high labour costs, Michigan and is a member of the productivity levels. That’s a will these countries manage to editorial board of the Journal of risk that cannot be ignored; we keep productivity high enough to international trade Law & Policy. saw it recently in the strikes at stay competitive? Renault’s subsidiary in Romania, They are staying cautious and Dacia. In short, making labour keeping a tight rein on their He is the author of many articles costs the sole motive for setting hourly labour costs. Some and publications, including: up business in a foreign country countries have simply opted – “the rise of china: Prospects for is not a wise calculation. The fully aware of the implications regional trade” (2005), review of World country must offer the company – to devote a large proportion economics, vol 141, no 3, p 486-509, other advantages such as to social welfare. And we are co-author centres of expertise, suitable seeing that is not detrimental “sectoral employment effects of trade infrastructure, potential for to their productivity – on the and Productivity in europe” (2003), applied economics, vol 35, p 223-238, innovating, etc. contrary. So they are remaining co-author competitive, as the unit labour “global and european Labor costs” What about differences between cost figures demonstrate here (2002), tidjschrift voor economie en eu-15 member states? again. Management, vol XLVii no 3, p 373-398 Hourly costs are much higher in some countries, such as France, Germany, Belgium and Norway, than in others such as the United Kingdom, Spain, and Greece. Remember that the hourly cost is the sum of a wage component – gross wage – and a non-wage component, most of which is usually given over to social welfare. These factors vary from one country to another. In Spain or Greece, wages are lower. In the UK, the social welfare system is less developed, so contributions are lower, which is why hourly costs remain moderate. EXPERT 7
  8. 8. facts & figures Hourly labour costs 26.83 5.49 30.21 4.68 31.8 Hourly labour 4.27 costs (€) <5 5 - 10 6.28 10 - 20 27.44 24.89 20 - 25 30.56 27.5 25 - 30 7.14 > 30 32.39 5.15 Not available Labour costs cover wage and salary 25.3 costs, more generally remunerations in 34.26 6.52 cash or in kind paid by an employer to an 28.2 employee as well as the employers’ social 12.01 2.82 contributions plus employment taxes. 21.39 1.71 16.15 12.13 13.37 9.51 13.13 Source: European Communities Eurostat 2008 – Hourly labour costs 2004, 2005, 2007 Did you know? • Baltic countries showed the highest rises in labour • Labour productivity per person costs in 2007: from 17.5% in Estonia to 33.3% (relative to constant 100 base for EU 27): in Lithuania. USA: 139.0 (1997), 140.5 (2008) • Lowest increases were recorded EU 15: 114.7 (1997), 109.7 (2008) in Germany (1.6%) and Sweden (2.2%). 8
  9. 9. facts & figures Labour productivity per person employed: variation 1997-2008 EU 15 countries + Norway New EU members Relative to constant 100 base for EU 27 Source: European Communities Eurostat 2008 – Labour productivity values 1997-2007, forecasts 2008 Full time employees contractual wages Contractual minimum monthly wages ( ) Contractual minimum monthly wages ( ) Proportion of full-time employees on minimum wages Proportion of full-time employees on minimum wages Source: Based on European Communities Eurostat 2008 9
  10. 10. To receive ADP HR European Atlas, please contact: © ADP Europe - September 2008 ® HR Services