I retired from personal blogging in July 2008.
But you can find me over at http://blog.xero.com.
There has been a lot of talk about raising productivity in New Zealand.
Forgive my amateur economics here but …
In the software industry productivity is something you can measure easily and I think should be something that software company managers should be very aware of.
The goal of productivity is raising real incomes, for both the business - and as important - for staff.
Many employees would think that improved productivity means that they work harder. To me that is not the point. As managers our challenge is to raise productivity using the resources that are available to us.
A formula for productivity at the dawn of the industrial age might look like this.
Productivity = Labour * Plant Multiplier
If you don’t have any Plant or Equipment then your Plant Multiplier = 1
Productivity = Labour * 1
This is what we have is we just sell time. This is the services industry.
To raise productivity this century the Plant Multiplier is Capital.
Productivity = Labour * Capital
Capital allows us to take the time to build things so that rather than labour hours directly leading to productivity, those labour hours can be used to build earning machines that earn money (and pay tax) themselves.
Earning Machine = Labour * Capital
So
Productivity = Earning Machine * Management Quality
Putting all of this together
Productivity = (Labour * Capital) * Management Quality
In this equation, the two biggest scalars are Capital and Management Quality. So productivity is best influenced by good management. It is a manager’s responsibility to increase productivity and lift labour rates for macroeconomic benefits.
So in the transition from Services to Products a key performance indicator is Revenue Per Employee (or Profit per employee to normalize costs but you know what I mean).
It is a huge milestone for a software company when Revenue Per Employee derived from a Product sales is higher than what the employers chargeable revenue would be. At that point you have crossed the chasm.
The time required to fund the employee to get to that point is the capital required to fund a software company.
So there it is. Mathematical proof that you should be thinking about Productivity.
blog
Slightly off topic, but another interesting equation is as follows:
It is well known that Time is money.
Time = Money
also it is said that Money is the root of all evil
Money = ?evil
And we all know that to keep a woman happy you need to spend a lot of money and time on her.
Women = Money * Time
Some simple algebra follows:
Women = Money * Time
Women = ?evil * Money
Women = ?evil * ?evil
Women = (?evil)2
Finally,
Women = Evil
You need another factor: Skills. Skilled labour beats unskilled 9 times out of 10. A good programmer is 28 times more productive than a poor one (ask Rowan S for the proof on that one!)
Rod, good article. When you travel overseas you find that no matter how strong the NZ dollar is, it is how many you have that counts as far as hotels, food, car rental goes.
Kieran, “also it is said that Money is the root of all evil”; actually it is not. This is a popular misconception about a Biblical saying, misquoted. The original actually says “the love of money …”.
Without wealth we are up the creek without a paddle.
so is it;
Productivity = ((Labour quantity * labour quality) * Capital) * Management Quality
Bodmas says this is the same as;
P = Lqn * Lql * C * Mql?
And surely there’s a quantity of management issue there too… so;
P = Lqn * Lql * C * Mql * Mqn
If one considers that an organisation is defined by it’s people, then Lqn, Lql, Mql, Mqn disappear and one is left with P being proportional to capital investment.
QED. Spend (invest) more to make more. The right numbers of the right people with right tools… duh.
What about “we are happy the way we are” ?
Or how do you sell a growth and productivity tool to someone who cares about neither?
Yes, Xero will save my wife a lot of time on preparing GST reports, but she doesn’t mind doing it the old way.
The question of productivity arises only when under pressure. The economy has been hot enough not to worry about it too much. It probably still is.
interesting stuff, like the analysis.
any question of productivity is relative, to what we are currently doing. And theres two ways of raising productivity, doing the same thing better, or doing new things that are just better than the old ways.
so good management should address the first of these, but does it also encourage the second?
Another consideration is looking at what happens as a result of any increased productivity.
Are benefits equitably shared between those responsible for the financial and human capital supplied as inputs? And does the fruit of increase productivity become imputs to the next round of anticpiated productivuty increases, or does it ‘leave the table’ for domestic/foreign pockets?
What NZ needs isn’t a single round of productivity gains, but multiple successive iterations where the benefits of each round are widely felt thereby spuring participants on for the next iteration.
You make a comment ‘the transition from services to products …’. You don’t need to think mathematically about this, it’s intuitive that more revenue from the same or less employee’s means more profit and implicitly you are getting more productivity. So more productivity is more revenue and more profit.
But what about the declining revenue per widget? Or no revenue per widget!! In the old days, SAP, Oracle etc sold licences for $millions; now it’s $100k’s; when will their products be given away? What’s happening to productivity, revenue and profit there? That’s why the bulk of product companies fail; especially in software.
In the move from products to services the productivity measure isn’t much of a lever (you can only get so much blood from a stone), but at least you’re getting revenue and hence profit.
What does this mean for productivity in NZ? We will always need products; but that’s a commoditisation game. We need to develop more services-driven revenue; and grow that to grow wealth.
“Productivity = (Labour * Capital) * Management Quality”
or = (Labour * Labour Quality * Capital) * Management Quality
i.e. hire the right people, give them the right tools, and get them doing the right stuff. If I remember correctly “The Mythical Man Month” posited a 10:1 productivity difference between the best and the worst developers, but the salary range is a lot smaller than that. So there’s an argument that finding top people is a big leverage point.
Andrew: “That’s why the bulk of product companies fail; especially in software”
I’d argue that the failure doesn’t lie in declining revenue, it lies in not anticipating this, realizing that your product has a finite life, and getting the next great product in place in time to move on. Oracle etc are good examples of this: they’re trapped in gilding the lily. The more succesful physical-product makers realize that facelifts will only take you so far - every so often you need to come up with a Prius, Ipod, Walkman or Wii.
Kieran: “Women = Evil”
Time is money, knowledge is power, and salary is money per unit work. And as we remember from 3rd form science Power = Work/Time. Therefore knowledge = work/money, or salary is inversely proportional to knowledge. Thus Dilbert’s boss.
Great fun - I don’t think Maplesoft (www.maplesoft.com) will be quaking in their boots if they read this lot!!
Andrew: In the move from products to services the productivity measure isn’t much of a lever (you can only get so much blood from a stone), but at least you’re getting revenue and hence profit.
What you are also getting from giving the product away is a degree of lock-in. Once people start using a product it becomes more difficult for them to switch as they are investing time (= money) in becoming familiar with and learning how best to use that product. Hence, the services revenue can benefit from a largely captive base. However, this also means that any radical changes to the product will also put the revenue at risk as some customers decide the increased costs in learning imposed by such a change outweigh the costs of shifting to a rival product. Hence, there will be a bias towards incremental evolutionary development at the product level.
The trick for the producer is to have a product that requires high levels of expertise in services on a regular basis. SAP could get this through the need for configuration and customisation, but it has historically outsourced this mostly to consulting firms. It’s also possible that their shift from ABAP to Java based development may decrease the cost of in-house development by customers and so work against their revenue stream in that area.
Andrew: We will always need products; but that’s a commoditisation game. We need to develop more services-driven revenue; and grow that to grow wealth.
Commodities can be drivers of wealth and more so than services. The key is the balance of supply and demand. For most of the second half of the 20th century the supply of agricultural commodities exceeded the effective demand (ie the demand of those who had the income to buy them) - hence the declining prices over that period. A tendency towards a long-term decline in commodity prices is not a necessary fact. As we are seeing at the moment with minerals and agricultural commodities, the effective demand, mostly from the developing countries (especially China), has risen to the point where constraints on supply are now determining prices and commodity prices are on the up. A huge advantage that physical commodities (like milk products and coal) have over digital commodities (like software) is that they can not be pirated. Hence, whilst digital commodities are locked into the downward spiral of prices because of the lack of constraints on the supply side (the only constraint being IP law), physical commodities are not. Historically, if we look back centuries, food prices have been extremely variable in reaction to fluctuations in population (ie demand) and weather (ie supply). The discovery of guano and then the invention of artificial nitrogen fertiliser gave the supply side an enormous boost at the start of the 20th century, hence the subsequent decline in prices until recently when the demand side finally caught up. Environmental concerns may act as a brake on production increases in much of the developed world and thus hold back any further leaps in production there.
Nice discussion; and all good points. Here’s my main point in a nutshell:
-wealth from products is concentrated for innovators and first to market. There isn’t much reward if you aren’t an innovator or first to market. Most product developers aren’t innovative or first to market and hence fail, either outright or in terms of concentrated wealth.
- for services, the wealth isn’t so great (i.e. an individual can’t make so much wealth as is possible with a product), but is spread across relatively many, and hence overall, at a macroeconomic level, is potentially better for the whole macroeconomy (of New Zealand).
We need products, and we need services, my thesis is that as products commoditise then the only way to make lots of wealth from products is in terms of scale and efficiencies; hence productivity is important(or, innovate). Perhaps it is better overall for NZ to focus more on services - design, engineer, configure etc.
I attended a recent workshop held at University of Auckland , Business School by Prof. Michael Cusumano of MIT about software entrepreneurship, start-ups & innovations, where he briefly touched on productivity (in the software industry). Anyone who is interested in Cusumano’s power point presentation can request it from the following contact:
pania [dot] shepherd [at] frst [dot] govt [dot] nz
Very interesting discussion. I’ve been musing about this question myself:
http://ciscoetl.wordpress.com/2008/03/09/ill-have-a-large-order-of-productivity-with-a-side-of/
Our brains are the factories of the modern age of business. In this round of optimization, in which so much value is derived from the application of unique intellectual skills, will it be the workers and not the processes that hold the key to productivity?