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Innovation has been the biggest factor in productivity improvements for the Australian oil and gas industry.
Innovation has been the biggest factor in productivity improvements for the Australian oil and gas industry.

Raising productivity: What’s the solution?

Business and industry groups have long lamented Australia’s declining productivity performance. As John Steen argues, the key to restoring productivity is improvising and innovating.

It’s hard to pick up a business magazine without reading about the Australian productivity problem. However, the decline in Australian productivity performance has been going on for some time.

In 2008 a report from the Australian Business Foundation warned the golden years of productivity growth from the 1990s were being threatened by the lack of investment in physical and digital infrastructure and the tightening of skilled labour markets. In 2011 a report from the Grattan Institute confirmed the rot had set in, with a stern warning that the free ride of the mining boom would end.1

Fast forward to 2014, and the smokescreen of high commodity prices has disappeared, revealing just how much stagnation occurred in Australian business performance over the past 10 years. Everyone now agrees productivity is a problem but nobody agrees on the solution, with the worst of the debate spiralling into political finger-pointing.

Business groups hire one group of consultants to produce a report that shows unions and labour laws are to blame, then unions hire their consultants which produce another report that shows industrial relations have not negatively affected productivity.

In the meantime, the popular business media equates productivity with cost reduction and cheaper wage bills. The productivity discussion has become thoroughly confused.

Murphy Pipe and Civil is now a leader in the unconventional gas industry because it adopted German plough pipe technology.
Murphy Pipe and Civil is now a leader in the unconventional gas industry because it adopted German plough pipe technology.

WHAT IS PRODUCTIVITY? Put simply, productivity is the relationship between business inputs and outputs. Labour productivity is the amount of output per unit of labour (tonnes per worker hour, for example). Capital productivity is output per capital unit, and another measurement called multi-factor productivity combines these, along with other business inputs.

Different types of productivity measurement matter more to different industries. For example, labour productivity is much higher in mining compared with hospitality, due to the capital intensity of mining. As McKinsey has argued recently, capital productivity is a much better measure to focus on in the resources industry.

One truth about productivity that hardly gets mentioned is that we get more outputs for the same inputs when we find better ways to run the business. In other words, as the 2012 Grattan Institute report from Saul Eslake put it, productivity improvements are about “working smarter rather than harder or longer”. This can be a hard message to get across to managers but in the long run working smarter is the only sustainable way to improve productivity.

One study of the UK economy since 1600 shows most productivity improvements are due to improved technology and business processes. Another example, this time from the US, shows labour productivity has grown by about two per cent per annum over the past century.

That doesn’t sound like much but it translates into the 2010 worker having seven times more output per hour than their great-grandfather in 1910. Does the person in 2010 work seven times longer or seven times harder? Of course not! Over the past 100 years we have invented all sorts of ways to do things better and faster.

It’s obvious if you give a moment of thought to it but consider the changes you have seen in your own working lifetime.

Forty years ago I might have written this article by hand and then sent it to the typing pool at the University of Queensland.

Searching the library for journal articles took days of scouring heavy paper lists of new releases. Now I write and edit articles on an ultra-light laptop in between meetings. Desktop literature searches with powerful search engines take minutes rather than days.

In a recent study of the Australian oil and gas industry I did in partnership with Ernst & Young, we found innovation was the biggest factor in productivity improvements.2

What was remarkable about the result was this was true for anywhere in the industry value chain, from the big operators to the major engineers right down to smaller specialised product and service providers.

This is an industry confronted with major cost and productivity challenges yet many companies have used the challenge to find new ways of operating. Some are continuous improvements, such as drilling companies that have reduced the time taken to drill a coal seam gas well from 11 days to three but others involved more significant game-changing breakthroughs.

For example, Murphy Pipe and Civil needed to develop more efficient methods to lay thousands of kilometres of pipes in Queensland with minimal disturbance to the land. The result was adapting German plough technology, and now Murphy is a global leader in the unconventional gas industry.

When Laing O’Rourke won the contract to build LNG cryogenic storage tanks for the Inpex project near Darwin, the company quickly realised getting skilled welders on-site at reasonable cost was going to be a problem. In collaboration with one of its own suppliers, Lincoln Electric, it adapted automated welding techniques that were less labour-intensive and also significantly faster.

The solutions to Australian productivity will come from encouraging businesses to find ways to create economic value and removing obstacles to doing new things. When the Reserve Bank governor talks about wanting businesses to take more risks, what he means is encouraging experimentation with new markets, processes and technologies.

Ultimately, businesses drive national productivity. While governments can do a lot to help, the future of industry is in the hands of managers and employees who find ways to work smarter. 

John Steen is an associate professor in strategy at the University of Queensland Business School in Brisbane. He is presenting on organisational practices at CMIC14 in Brisbane on 4 September.

1. Eslake S, Walsh M. Australia’s productivity challenge. Grattan Institute, Melbourne, 2011.
2. Curtin R, Farrell B, Steen J, Ford J. Adapt to win: How Australian oil and gas companies improve productivity in challenging times. Ernst & Young/University of Queenland Business School, 2014.

Thursday, 24 January, 2019 04:18pm
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