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Why is productivity so low?

Thursday, 14 May 2015, 07:44
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Edited by Adam Jacobs, Thursday, 14 May 2015, 07:46

I just heard a fascinating interview on Radio 4's Today programme with Robert Peston, who was explaining why low productivity was such a big problem for the British economy, and what might be causing it. You can also read his thoughts on his blog.

The short answer is we don't really know why productivity is falling.

Some plausible explanations have been put forward, but I'd like to offer another. A great many jobs in the British economy are in the service sector. For example, I work as a medical statistician. You could measure my productivity in terms of how many clinical trials I analyse, but of course no-one would. My productivity would be measured as the value of the work I do.

And that, in turn, is measured by how much clients pay for it.

So if prices for services are squeezed in a recession, then productivity will drop, even if everyone is working just as hard and as smart as they did before. Certainly in clinical research I've noticed prices come under a lot of pressure in recent years, though how much that is due to the recession and how much it is due to global competition from low cost countries such as India and China is a question wiser people than I will have to answer.

It's easy to imagine many parts of the economy where prices have come under pressure, or where there has been a shift from expensive services to cheaper ones. I'm sure a waiter at Pizza Hut will serve more customers in an hour than a waiter at Le Manoir aux Quat'Saisons, but the waiter at Le Manoir will have far greater productivity when measured by the value of all that work, just because Le Manoir is a more expensive restaurant. In a recession, there is undoubtedly a shift to low-end services.

So I wonder if lower productivity is driven not so much by workers becoming more inefficient, but by the difficulty of selling expensive services during a recession.

Tags: economics, business
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Big businesses screwing their small suppliers

Friday, 5 Dec 2014, 09:02
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Congratulations to Laura Kuenssberg at the BBC for a powerful report on how Premier Foods treats its small suppliers: effectively making them pay protection money if they want to carry on working with them. This is important stuff, and deserves to be widely known about.

None of this comes as a surprise to me. Until recently I used to have a small business of my own, which I'd run for 15 years. It went bust this summer. There are many reasons for that of course, and one of them is no doubt that I wasn't very good at running a business, but another is definitely the attitude to small businesses that I'd found from some of our larger customers. We didn't come across anything quite so blatant as the Premier Foods example, but we did nonetheless find many of our larger customers insisting that we reduce our prices substantially if we wanted to work with them.

We couldn't afford to reduce our prices as much as was being demanded, so we lost the business. Eventually, I lost the whole business. There goes my retirement plan. Mind you, at least I found another job fairly quickly. I'd sleep a lot easier at night if everyone who used to work for me had also been so lucky.

Some may argue that what Premier Foods is doing is simply competition at work, and it benefits the consumer. They may argue that the businesses that can't compete on these terms will be the less efficient ones, and the ones that survive will be the good ones, so everyone wins.

I really don't think it's as simple as that.

Competition is a healthy thing in principle, but the problem is that when suppliers are under such relentless price pressure, it's going to be the quality that suffers. We've already seen what happens when people prioritise price over quality in the food industry: you end up with horse meat in your lasagne. So the businesses that survive may be the efficient ones, or they may just be the really dodgy ones that are prepared to cut a few corners to keep their costs down.

My own business was not in the food industry: we were in clinical research. Parts of the clinical research industry are very highly regulated, and our business held up pretty well in those parts. Clients can't afford to cut corners on quality, as they would fall foul of the regulators if they did, so mainly they were willing to pay a fair price to get the job done properly.

However, there is one large part of clinical research, which used to be a big part of my business, which is largely unregulated, namely the publication of clinical trial results in the medical literature. We took a huge battering there as clients took their business to cheaper companies in places like India. No doubt the quality was dreadful, but if it's unregulated, who cares? This stuff matters: doctors rely on the medical literature to make decisions about how to treat patients, and if research has been badly reported, maybe those decisions won't be the best ones. I don't know of any direct evidence that that is actually happening yet, though it seems plausible. I do, however, know of evidence which shows that clinical research published in low income countries is more likely to be fraudulent.

I'm not suggesting that tighter regulation is necessarily the answer. There are good reasons why clinical research is highly regulated, but those reasons don't apply to every industry. Regulation brings its own costs and inefficiencies.

It has been suggested that big businesses charging small businesses an "investment" (aka protection money) to do business with them should be outlawed. I don't think that's workable. Big businesses will simply find another way to screw small businesses, for example by demanding ever larger discounts. Unless you want to go down the road of full-blown communism, there's nothing you can do about that with legislation.

So what can we do about it?

Situations like we see with Premier Foods can arise, I think, for 2 reasons. First, there is a huge imbalance in economic power between big businesses and small businesses. I'm not sure how that can be fixed, but it really needs to be. Exempting small businesses from many of the taxes that large businesses have to pay (national insurance, business rates, corporation tax etc) would be something that government could very easily do, and I expect it would help. Though I doubt it would be enough.

The second reason is that we as consumers have become too fixated on price. If we demand the cheapest goods, then prices will come down, but we will get crap. I'm quite sure there is nothing government can do about that. It is up to consumers to think a bit more about whether they really want the cheapest things they can buy.

In the meantime, we will see good small businesses go bust, as mine did. The ones that survive may do so because they are more efficient, but I suspect that in many cases they will be the ones that are prepared to take a chance on passing off horse meat as beef, or whatever the equivalent of that is in other industries.

Is that really what we want?

Tags: economics, business, power
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Horse meat and processed food

Friday, 15 Feb 2013, 16:31
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Edited by Adam Jacobs, Friday, 15 Feb 2013, 16:35

The news is full of stories about horse meat in processed food at the moment.

Why now? I don't know for sure, but I rather suspect it's because people have only recently started testing for horse DNA, and not because no-one ever put horse meat in cheap processed food before. It would not surprise me one little bit if it turned out that this sort of thing had been going on for years.

The problem is that the consumer demands cheap food. Meat should not be cheap. We'd like it to be cheap, but the reality is that it really shouldn't be. To rear animals for food in an ethical and humane way is a very resource intensive process. If you're doing it right, it's going to be expensive. Once supermarkets and other food suppliers start responding to consumer pressure to supply meat at rock-bottom prices, then it's inevitable that corners are going to be cut.

Clearly somewhere along the line, someone has been actively dishonest. Somewhere between the abattoir and the supermarket shelves, someone knowingly sold horse meat as beef. There's no excuse for that, of course, but in a multibillion pound Europe-wide industry, it's inevitable that there are going to be some less than scrupulous players.

But what of the supermarkets' role in this? Are they the innocent victim of someone else's fraud?

Absolutely not, IMHO. It is their job to know where their meat comes from. In an ideal world, a conversation in a supermarket buying department might go like this:

Buying underling: "Boss, I've found a new supplier of beef for our burgers. They're only charging half the price of our existing supplier!"

Buying boss: "Well, that's a suspiciously large difference in price. I think we need to be careful here. If you think this is worth pursuing, then let's get our quality assurance department to pay them a visit and make absolutely sure that they're not cutting any corners."

I'm guessing that what actually happened is more along these lines:

Buying underling: "Boss, I've found a new supplier of beef for our burgers. They're only charging half the price of our existing supplier!"

Buying boss: "Sounds legit. Where do I sign?"

Now, I'm not saying that the supermarket buyers are necessarily evil people. But here's the thing. There is relentless pressure to keep costs to a minimum. If you find something that's a bit cheaper than it really should be under those circumstances, I'm guessing it's all too easy for a bit of cognitive dissonance to set in. You know, deep down, that the prices are a bit too good to be true. But you don't want to believe that there's anything wrong that's going to scupper this great new deal that could get you a promotion. So you ignore that little nagging doubt that you have.

So are the supermarkets the real bad guys here? Partly, but, and I know this isn't going to be a popular opinion, I believe that we also have to blame consumers. Consumers want cheap meat products. Supermarkets are responding to that demand. They don't actually have a huge amount of choice about that if they want to stay in business.

Politicians are currently expending a lot of hot air on how shocked they are that so many supermarket meat products contain horse. (Are they really shocked? I'm not. Did you really expect that a beef lasagne costing just £1.60 contains only wholesome pure beef?) They will no doubt introduce some more regulation that makes it harder to get away with selling horse meat passed off as beef.

So that will solve the problem, right?

Wrong. The problem is that people expect their food to be produced on the cheap. When the horse meat problem is fixed, other problems will come along and take their place. The only solution is if consumers start to take a bit more of an interest in where their food comes from and are prepared to pay a little more to make sure that their food is produced properly.

Yes, I know that times are tough and there are many who struggle to get by. But there are many ways of eating cheaply without buying processed foods. Not everyone is lucky enough to live near to a local butcher, but for those who do, there are plenty of cheaper cuts of meat that can be delicious (one of my personal favourites is hand of pork). And there's no need to eat meat at all: a vegetarian diet is far cheaper, and healthier as well as an added bonus. If you can't afford to eat good meat every day, it's far better to have it occasionally as a special treat than eat meat of dubious provenance regularly.

So until consumers change their shopping habits, then I'm afraid we are going to see more food scandals. If not horse, then something else. It's inevitable.

Just a thought, but has anyone been checking the supermarket meat for rat DNA?

Tags: business, politics
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"It's happening Reg, something's actually happening Reg!"

Tuesday, 3 Jul 2012, 08:54
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Edited by Adam Jacobs, Tuesday, 3 Jul 2012, 09:01

There's a wonderful scene in The Life of Brian in which the People's Front of Judea sit around endlessly discussing the need to take action, rather than actually taking any. If you haven't seen it for a while and your memory needs refreshing, here it is.

This is exactly how our political leaders are dealing with the recent revelations of rampant corruption within the banking sector. It is clear that action is required. But instead, our political leaders are sitting around talking about it.

So what action is required? It's pretty simple really. There is excellent prima facie evidence that fraud has happened on a massive scale, and those responsible need to be prosecuted.

When I say those responsible, I mean not only the traders who were actually perpetrating the fraud, but also the entire board of directors of Barclays, and indeed any other banks found to have been joining in. Traders would not be breaking the rules on this kind of scale if the directors of the company had set a culture of honesty, rather than one of greed.

I am not a lawyer, so I'm not sure which specific offences may have been committed, but it seems obvious that if the allegations we've heard in the media have any basis whatsoever, then any half decent prosecutor ought to be able make a pretty good case under either the Fraud Act 2006, the Financial Services and Markets Act 2000, or (particularly in the case of the directors) the Companies Act 2006.

Prosecutions, with meaningful penalties (ie imprisonment) for those found guilty, would send an important message that this kind of thing is not acceptable. Directors of other banks would act pretty sharpish to clean up their corporate cultures if they thought that they could be held personally liable for any wrongdoing that happened on their watch. Fining the bank just doesn't cut it: what that actually means is that ordinary people saving for their pensions are the ones who get hurt, as I've written before. I honestly believe that going after the directors in this way would solve a lot of problems.

But that doesn't seem to be what our politicians are doing about it. On the one side, the People's Front of Judea Conservative Party are arguing that there needs to be an inquiry led by a senior politician. But the Judean People's Front Labour Party disagree, and insist that the ludicrous and transparent ploy to kick this issue into the long grass inquiry must be led by a judge. This kind of petty squabbling suits the political parties nicely, as they love to be seen to disagree, to keep up the narrative that there is somehow an important difference between them.

In reality, however, both political parties are united against the common enemy, the Romans ordinary British people. Setting up inquiries, or even better, arguing about how to set up an inquiry, is simply a way of avoiding taking any action.

Let's face it, politicians and bankers have a lot in common. It's not that long since MPs were perpetrating fraud on a massive scale in the form of claiming expenses to which they were not entitled. With the exception of a token number of politicians that you could count on the fingers of one hand who did actually get prosecuted, they got away with it. We already have a couple of token resignations from the board of directors at Barclays, but the bankers will probably get away with it too.

MPs and bankers are both dishonest elites who consider themselves above the law. Is it surprising that when the chips are down, they look out for each other?

Tags: business, politics, power
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A fracking mess

Tuesday, 17 Apr 2012, 08:45
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I heard on the radio this morning that a "government-appointed panel of experts" is minded to allow fracking to continue on the UK.

The "experts" have clearly decided that the benefits of fracking justify the risks. This is an important decision to get right. Clearly there are both benefits and risks of fracking, and weighing them against each other needs to be done accurately.

If we overestimate the risks and ban fracking needlessly, then we are forgoing an economically valuable activity for no good reason. That's not a good thing. Conversely, if we underestimate the risks and allow fracking and it then causes some kind of environmental catastrophe, then that is also not a good thing.

I can't help thinking, however, that a "government-appointed panel of experts" is not the right way to go about it. How do we know they're experts? Can we really trust them to balance the risks and benefits accurately? And how much is the poor taxpayer paying for them anyway?

I would like to propose a much simpler solution to the problem, based on straightforward free market mechanisms.

Rather than the ludicrously complex and expensive system of regulation that we have at the moment, we should do away with it all and replace it with just one single regulation.

That regulation should be as follows: any company who wishes to do any fracking should be required to maintain an insurance policy with a reputable insurance company that would cover any conceivable risk from the fracking process. If an earthquake in the fracking area causes structural damage, then the insurance policy would pay for fixing it. If any groundwater is contaminated, then the insurance policy would pay for the clean-up. If any other bad things happen, not necessarily ones that anyone has thought of yet, then the insurance policy would pay for putting them right.

Insurance companies have considerable expertise in judging risk. Far more so, I suggest, than a "government-appointed panel of experts".

If the fracking company can't find any insurance company willing to take on the risk, then that would suggest that the risks are too uncertain, and it would be right, following the precautionary principle, to avoid fracking until the risks are better understood. If the premiums make fracking uneconomic, then it probably shouldn't go ahead, as that would suggest the risks outweigh the benefits. To use a technical term, requiring the costs of the risks to be borne by the fracking company in this way avoids the negative externalities of fracking, and so makes the economics of it more honest.

If, however, the fracking company can pay the insurance premiums and still make a profit from fracking, then I can't see any reason why it shouldn't go ahead.

Wouldn't that be a much better way of doing it than having government trying to micro-manage everything? And who knows, maybe you could apply the same principle to other activities, besides fracking, that also have a potential for environmental damage?

 

Tags: business, economics
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Barriers to competition in insurance

Tuesday, 27 Mar 2012, 11:47
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Edited by Adam Jacobs, Tuesday, 27 Mar 2012, 11:47

I've just renewed my annual multi-trip travel insurance policy. It was a hassle. I spent about 20 minutes on the phone to sort it out.

And this was renewing with an existing insurer, who already had most of the details they needed on file. I hate to think how long it would have taken to switch to a different insurer for whom I'd have needed to start from scratch.

No doubt I could have got a better deal by shopping around. But any better deal I got would have to have been dramatically better to compensate me for the time it would have taken to find the deal. I figured it was unlikely that such deals are available, so I didn't bother to shop around.

The ridiculous length of questions insurance companies make us go through therefore seem to be acting as a barrier to competition.

Just a thought, but I wonder if this is deliberate? Isn't it in the insurance companies' interest to make it difficult for us to compare prices?

Tags: business, economics
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Promoted Tweets

Thursday, 24 Nov 2011, 11:42
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I like Twitter. I really do. It's not only fun, it's also very useful. I have two Twitter accounts: my official work Twitter, @dianthusmed, in which I tweet worthy things about medical writing, clinical research, etc, and my personal one, @adam_j666, in which I do all the ranty sweary stuff.

As an example of how useful it is, I recruited someone to my company entirely through Twitter earlier this year. This probably saved me thousands of pounds in recruitment agency fees. But that's just one example among many. If you're reading this blog, it's quite likely that you're doing so because you saw me Tweet about it.

One of the great things about Twitter has been that you get to decide which bits of the huge amounts of activity you see. You can follow people if you find them interesting, and ignore them if you don't. You can monitor tweets containing certain key words that you find interesting. It's really a wonderfully ingenious way of filtering gargantuan amounts of information so that you only see what you want to see.

However, there is now a disturbing development, which is that Twitter are inserting "promoted tweets" into places where they are not wanted. This is a real threat to that model. Now, in addition to the things I have chosen to see, my Twitter experience is spammed by completely irrelevant and unwanted Tweets that someone has paid to have inserted into my searches. Some Twitter users are also having them inserted directly into their timelines, which seems even more intrusive.

According to Twitter, promoted tweets are supposed to be relevant to particular searches. Well, sorry, but I had a promoted tweet advertising wrapping paper in a search for "medical writing". If they really were relevant, perhaps it wouldn't be so bad. Twitter also claim that promoted Tweets can be deleted with a single click. Perhaps they can on the Twitter web interface, but like millions of other Twitter users, I use the TweetDeck interface (which is owned by Twitter), which does not allow promoted Tweets to be removed in any way. They just sit there, staring at me, no matter how many times I try to block them. I have occasionally managed to get rid of one or two after repeatedly blocking and reporting as spam, but then they come back again, zombie-like, the next time I open Tweetdeck.

Sorry, Twitter, this really isn't on. Promoted Tweets are far too intrusive. Now, I realise that Twitter needs to find a way of making money somehow. But surely there are ways of doing so that don't degrade the user experience so badly? I can't help thinking that there must be scope to use the freemium model, ie that Twitter is free to the majority of users, but there is an option of having premium added-value services to users who don't mind paying a fee. This appears to be working well for companies such as LinkedIn or Skype, and I don't see why it shouldn't work for Twitter with a bit of imagination.

But Twitter really need to come at this problem with a bit more imagination. Spamming our Twitter timelines is not going to lead to a successful business model.

 

Tags: business
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Corporate law breaking

Monday, 31 Oct 2011, 13:53
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There is something terribly wrong with today's news that Npower has been fined £2 million for the way they mishandled complaints.

The figure of £2 million is, of course, chicken feed to a company the size of Npower, whose revenues in 2010 were just short of £8 billion (yes, that's billion with a "b").

But that's not the point.

The point is that fining a large publicly listed company does not bring about proper accountability. Who loses when a company like this is fined £2 million? The shareholders. And who are the shareholders? Er, that would be people like you and me, who no doubt have bits of our pension funds invested in companies like Npower.

Was it the shareholders who were responsible for failing to treat customer complaints properly?

No. That would be the company's board of directors.

The directors of a company are legally responsible for the actions of that company. It's not clear to me whether action against the directors personally would have been an option in this case from a legal point of view. But taking action against the directors personally would be far more likely to result in proper accountability, and if the law doesn't allow it in cases like this, the law should be changed. If the law does allow it in cases like this, then shame on Ofgem for not having the balls to take the action they should have done.

Company directors may be minded to cut corners and do bad things like failing to treat customer complaints honestly if they know that the worst that will happen is that their company gets fined.

I wonder if Npower would have mishandled the complaints in the way it did if the directors thought that they could be personally fined £2 million if they got caught?

 

 

Tags: business, ethics
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Mobile phones again

Tuesday, 15 Feb 2011, 09:52
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Edited by Adam Jacobs, Tuesday, 15 Feb 2011, 09:55

Last month, I wrote a couple of blog entries (here and here) about the decision I was trying to make about whether to trade in my old mobile phone for one of the latest smartphones. I was a little reluctant, partly because I suspected that it would all go badly, as indeed it seems to be doing.

Anyway, I eventually decided to take the plunge, and on Saturday, I phoned up Vodafone and asked them to send me 2 nice shiny new HTC Desires (the second one for my other half, in case you were wondering). I'm still not totally sure I really need one, and suspect I have just been seduced into getting a new toy by the marketing hype, but as most of the people I know who have smartphones think they are brilliant, I finally gave in.

My new phone hasn't even arrived yet (it's due to arrive sometime today), but already, things seem to be going badly.

When I phoned Vodafone on Saturday, I asked if they would be prepared to offer any kind of discount on their standard tariffs, given that I was ordering 2 phones on a single account. They said they would, and I was happy. But I was conscious that this was something agreed only on the phone, and that I had nothing in writing. Many years of experience of dealing with big faceless utility companies have taught me the wisdom of making sure that anything that's agreed is agreed in writing.

Anyway, the person I spoke to said that they would confirm all the details in an email, so I gave them my email address, and felt reasonably content about the whole thing.

As of this morning, no email had arrived, so I phoned Vodafone to try to chase it up. It was about 7.30, and I wasn't sure if they would be open at such an early hour, so I checked on their website. It said that their customer service lines were open 24 hours, but some services may be limited between 10 pm and 7 am. That sounded like it should be pretty safe, given that it was now after 7 am.

So I phoned them.

"Please press 1 to..."

Beep

"Please enter your account number"

Beep beep beep beep beep beep -- oh bugger

"Please press 1 if correct, press 2 if incorrect"

2

"Please enter your account number"

Beep beep beep beep beep beep beep beep beep beep beep beep beep

"Please press 1 to..."

Beep

"Please press 1 to..."

Beep

"I'm sorry, we are closed until 8 am. Please phone back later".

Well, that was 5 minutes of my life I was never going to get back.

Anyway, I tried again after breakfast, and after going through all the rigmarole of pressing various options and entering my account number, I finally got to speak to Paul, who sounded like he wasn't completely awake yet.

I explained that I had not received the email confirming the deal I had been given, and Paul seemed to struggle to understand this concept.

He pointed out that terms and conditions were posted on the Vodafone website. That's not the point, I explained, I wanted confirmation of the specific tariff that I was being offered. I pointed out that the person who signed me up had promised to send me an email. Paul said that they don't do business by email, so they didn't send emails to customers.

I asked why the person who signed me up had asked for my email address and promised to email me the details.

Paul didn't know.

However, when pressed, Paul did say that they had sent an old fashioned letter in the post to confirm the terms under which I'd signed up. I'm not sure I believe him. It took a lot of prompting for me to get this information out of him, and I can't see why he wouldn't have volunteered it earlier had it been true. I suspect that this was just a ruse to get me off the phone, given that there was no way in which I could immediately prove him wrong, as he said they only sent the letter yesterday and today's post had not yet arrived. This seems to be a common tactic by people in call centres for big utility companies. They know that when you phone back later even more annoyed that not only did what was supposed to happen not happen, but also they lied to you about it, the chances that they will have to take the call again will be miniscule and it will now be someone else's problem.

Time will tell.

I was also told on Saturday that the phones would arrive today, and that my other half (who often works at home and is doing so today) would receive a text message at about 8 am to advise her what time the phones would arrive. By the time I left the house at 8.30 this morning, she had not yet received a text message.

So, even before I have my phone, that's at least 2 things that have not turned out the way I was told.

I have a bad feeling about this. Fortunately, under the Distance Selling Regulations, I have 7 days to change my mind and send the phones back if I wish to. If I don't get written confirmation of the deal they offerred on the phone within that time period, I shall be making use of that facility.

Right now, I am so glad I haven't yet cancelled the contract on my old steam-powered mobile phone.

Tags: business
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