For Technology to raise productivity, we need to do more than just plug it in.
Given the challenges of the moment, the Chancellor’s Spring Statement last week was somewhat inevitably focussed on short-term cost-of-living mitigations, with much less discussion of the most important structural challenge facing the UK today: the Great Stagnation. UK businesses produce less per hour than other Western Economies, and productivity growth has stalled since the financial crisis of 2008 averaging a dismal 0.4% a year.
This is not just an economic issue depressing wages: flat-lining productivity makes it much harder to solve the other strategic challenges facing the country. Low-carbon and secure energy supplies that are actually affordable; the rising costs of health and social care driven by an ageing population; and the rebalancing of the economy by ‘levelling up’ areas outside London and the South East. All of these are made politically soluble by raising productivity. No one wants to choose between heating and eating. Neither as a society do we want to choose between climate change and social care. Restart productivity growth, and we won’t have to.
When I worked in the Treasury on Productivity policy, we knew that Technology lay at the heart of increasing the productive potential of the UK. And the UK has enviable strength in our Tech Sector. We attract more private investment into AI than any country other than the US and China. We are one of only three countries in the world to have produced over 100 tech Unicorns or companies valued at more than $1bn. And tech innovation by UK companies like Astrazeneca through their Covid Vaccine have made a palpable difference to people’s daily lives.
However, harnessing that technology across the wider economy is easier said than done: there is a world of difference between the skills, investment, organisational design and culture between the digitally native firms and the analogue firms who see IT as a specialism to be bolted on to their existing operations. In the UK, the tail of unproductive firms is larger and longer than in most other countries, and it is growing. Three years ago, the Prime Minister commissioned a report into the diffusion of technology for productivity. Despite clear analysis, the results have been disappointing. To adapt the phrase of Nobel prize winning economist Robert Solow – AI is visible everywhere except in the productivity statistics.
The second industrial revolution of the early 20th century gives us a model for our contemporary challenges. The new technology was not AI but electricity. Initially, it was an expensive and disappointing investment for factory owners. Stripping out the steam turbines and replacing them with electric wires did little to raise the productivity of those firms. It was not until the business architecture was reformed that the productive potential of those factories was transformed. Previously, work stations were arranged linearly along the central shaft of the steam turbine. But it was not until entrepreneurs like Henry Ford used the freedom that electricity provided to change that organisational model to follow the logic of the production line, with stations arranged and distributed much more flexibly across the factory floor, that productivity improved.
The challenge today is similar. 9 out of 10 business leaders recognise that AI represents an opportunity for their business. Yet failure rates on AI projects are high. At the same time that the leaders of ‘Big Tech’ are jostling to outdo one another with the superlative level of importance they ascribe to AI for their future strategy and competitive advantage, 61% of executives in a broad industry survey report that their AI programme had no impact. This is because while higher levels of investment, skills training, and competition are all well intentioned, they do not address the root cause: the lack of orchestration to bring all of these technologies into productive harmony with the human systems at the heart of every firm.
Change is possible. Across many sectors, firms like KLM in aviation, John Deere in agriculture, and H&M in retail are all becoming digitally native and much more productive, despite their analogue heritage. My own experience at the Government Digital Service showed me that it was possible to transform a venerable institution that has had a pretty difficult relationship with technology over the years. And while there is no silver bullet, the common theme in all of these transformations has been the integration of technology and human systems. The changes required often involve a change in leadership too, who are less invested in the status quo.
To orchestrate the application of technology in the broad swathe of the UK Economy; to defeat our great stagnation; the Chancellor should do three things: first, allow investment in the expertise and advice required to make new technology productive to fall within Business Investment relief or the so called ‘super deduction’; second, he should support access to that advice for smaller firms which is often only affordable to larger firms; and third he should turbocharge the National AI strategy by fixing broken data supply chains that are a vital foundation for digital reform.
To address our biggest challenges as a nation: the rising costs of living, clean affordable energy, health and social care costs, and levelling up, we must defeat the Great Stagnation. Yet to harness the spirit of the second industrial revolution and return to galloping growth we must not simply invest in technology, but fuse it with the organisational design and architecture at the heart of every firm.
