Many companies in India still overlook the fact that improving their people/managerial productivity can make a significant difference to their bottom line
Thanks to the demographic dividend at play, Indian businesses have access to one of the largest young and educated workforces in the world. Yet these businesses are not able to make their people as productive as their counterparts do across the world. A recent AT Kearney study found that revenue per employee in the Indian consumer packaged goods (CPG) industry—on a PPP-adjusted basis—stood at $64,000, compared to China’s $87,000, South Korea’s $188,000 and the UK’s $287,000. In other words, a UK CPG firm is five times more productive than its Indian counterpart.
Remarkable as this statistic is, many companies in India still overlook the fact that improving their people productivity can make a significant difference to their bottom line. We found that EBITDA growth has a 50% correlation with workforce productivity (much higher than gross margins). Put simply, increasing workforce productivity is a more relevant driver of profits than brand building or increasing scale.
Across organisations in India, salaries have been growing at an average of 10% or more over the last five years. At the same time, volume growth has largely stagnated, and players in sectors like telecom have had to reduce prices to sustain growth. Companies need to find efficiencies and reduce costs; or better still, improve their productivity if they are to grow their profits.
Indian managers are surely talented, but are they productive enough? To answer this, we studied managerial productivity and a comprehensive set of drivers across five sectors. We define people productivity as EBITDA divided by personnel cost of a company. Of the companies we studied, leaders in productivity were found in automotive, apparel & textile and food & beverage industries, with a score of 7.75, 6.92 and 6.67, respectively. In these sectors, the company with the highest people productivity enjoys an EBITDA that is 7.75 times its personnel cost.
While labour (blue collar) productivity has had a fair amount of leadership attention, the productivity of white collar staff and managers in non-service industries is never measured. Our analysis found a high positive correlation between people productivity and managerial productivity. The reasons are simple—managers, especially at senior level, influence both the profitability and personnel cost in a big way. They drive strategy and execution, which determines volumes, pricing and variable costs. They also command high salaries across industries, which is one of the biggest drivers of fixed costs. Turning attention to improving managerial productivity can help entire workforce innovate and respond to market changes faster.
We found five key factors holding Indian firms back from maximising their managerial productivity—complex organisational structures, significant over-staffing (many Indian firms have 1-2 additional management layers along with redundant or duplicate roles across divisions), low maturity of systems and processes, centralised decision making, and inadequate capacity building. In the case of a leading automotive manufacturer, we found that overall headcount had increased, even though sales volumes had dropped by 20% over two years!
First, Indian firms usually have complex organisation structures and superfluous managerial positions. As a result, they are bogged with more-than-necessary management layers and redundant roles across divisions and geographies. In most companies we came across 1-2 layers in the organisational pyramid that are unnecessary. This creates more complex, centralised decision-making processes that cause delays and reduce productivity.
Second, lack of a consistent manpower-sizing methodology. As per our study, a company’s design, processes and people quality can improve workforce productivity by 15-30% and reduce personnel costs by 10-20%. In turn, EBITDA margins can improve by 1-1.5% of revenues while improving the quality of talent and their satisfaction with their employer.
Most Indian companies struggle with over-staffing. The general trend is to hire “ahead of the curve,” on the basis of projected sales volumes, since they don’t want to lose the growth upside. But if the anticipated volume growth doesn’t happen, which incidentally has been the case in many sectors in the last 2-3 years, they don’t go back to revisit the base. As such, most companies grapple with an excess people capacity enough to support a 10-20% volume growth.
Complex structures lead to centralised decision-making processes that cause delays and reduce productivity. A closely-related issue is the burden of immature systems and processes. Even amongst market leaders and subsidiaries of MNCs, there are a few areas where they “throw people” to fix what is essentially a process issue. Analysis of managerial time reveals that even middle managers spend almost a third of their time on low-value tasks such as reporting and monitoring. As such, higher value activities such as decision-making, organising, planning or budgeting either get delegated upwards or horizontally to specialist roles. Over time, companies realise that many of their younger managers lack adequate “managerial” skills.
Companies willing to address each of these factors systematically and pro-actively can look forward to significant gains in people productivity. As a first step, Indian firms should adopt progressive organisation design principles—a flat organisation design with 4-5 reporting levels. Also, functions such as procurement, finance, HR and IT need to be run as centres of excellence.
Firms should focus on decentralised decision-making, based on clear rules, and a culture of empowerment. IT offers a unique opportunity to enable decentralised decision-making as senior managers can monitor all activity through real-time dashboards, even on smartphones. Streamlining processes is the next step; using a work-cell approach to eliminate unnecessary processes, simplify the remaining, and a digital factory approach to automate the rest can make an organisation far more agile and productive.
All successful companies unanimously agree on the power of their unique culture. Unfortunately, most Indian companies still don’t value productivity as a desirable cultural trait. But as Indian companies start becoming sizeable, efficiency needs to be as much of a cultural theme as growth.
By Neelesh Hundekari
Partner & Head of Leadership, Change & Organisation Practice India, AT Kearney