A new report from the CIPD has found a clear link between an organisation’s mindset and its approach to investment, which could help to explain the UK’s poor productivity performance in recent years.

The report, from the professional body for HR and people development, found that despite two years of solid economic growth, a fifth (21%) of organisations are still stuck in survival mode and aren’t making the necessary investments in equipment or people to boost their productivity. A further 29% of employers are failing to get the right balance between investment in their workforce and investment in technology and equipment.

The CIPD’s chief economist Mark Beatson warns that too many businesses are being held back by an ‘ambition ceiling’ which is preventing them from making the productivity gains needed to achieve business growth and implement the new National Living Wage without risk of job cuts.

The CIPD’s report, Investing in Productivity, found a clear link between an organisation’s mindset and its relative productivity. It breaks down the nearly 1,000 organisations surveyed into five distinct mindsets based on respondents’ experience over the last two years:

‘Balanced investors’ – A quarter (25%) said that they have ‘continued to invest in equipment, technology and people and have increased their productivity significantly’ over the last two years.This group is most likely to have increased investment on the previous two years. Over half (53%) have increased expenditure on capital equipment, 43% increased expenditure on learning and development (L&D) and 72% had increased their output in the previous 12 months.

‘Survivors’ – 21% of organisations felt that their business had been ‘in survival mode for a long time and had not been able to invest in major improvements to the business’. This group is most likely to have reduced investment in the previous two years - 22% reduced expenditure on capital equipment and 30% reduced expenditure on L&D.

‘Cost-cutters’ – 19% said that they are ‘a leaner business now because they took cost out during the recession and the productivity of their workers has improved as a result’. This group is most likely to have maintained a stable level of investment. ‘People-focused investors’ – 16% said that their business ‘has continued to invest in its people, but they need to invest more in equipment and technology to see real productivity improvements’. ‘Capital-focused investors’ – 13% said that their business has’ continued to invest in equipment and technology but they haven’t invested enough in staff to maximise the value of this investment’.

Mark Beatson, chief economistat the CIPD, and author of the report said: “The recession has cast a long shadow over many British businesses and residual fears about a future downturn have left many organisations with a ‘glass half empty’ mindset which has held them back from investing, despite improved economic conditions. We need these businesses to recognise the current opportunities for growth, innovation and investment, to raise their sights and break through their ‘ambition ceiling’. Unless they can do this, it’s questionable how many companies will be able to absorb the planned National Living Wage without an adverse impact on employment levels."

CIPD Chief Executive, Peter Cheese, said: “This is the latest in a series of reports the CIPD has produced over the last 18 months arguing that we need a stronger focus on improving workplace productivity if we are to sustain real wage increases for all. The National Living Wage could ‘pay its way’ if employers increase the productivity of their workers. However, if businesses fail to provide better training and redesign jobs and adopt better systems and equipment, so they add more value per hour, it’s likely that the UK’s productivity problems will persist and companies will struggle to deliver improved wages without making some job cuts.”

When asked about their future plans and productivity potential:

• 55% of organisations expect to produce more goods and services in the coming year, 32% expect to produce the same and 8% expect to produce less.
• 34% of organisations consider themselves high performers that don’t see the need for major change and lots of investment.
• A further third (33%) fall into the category of intending to make up lost ground, with 17% saying that they will now be able to make the investments in equipment and technology they haven’t been able to do in the last few years’ and 16% saying that they will now be able to make the investments in people that they haven’t been able to in recent years.
• However, a fifth (20%) thought they wouldn’t be in a position to improve existing poor performance because they lacked the finance to invest (reported by 16%) or the skills and ambition to improve (reported by 4%).

Beatson comments: “This report shows the characteristics that differentiate high productivity businesses from low productivity ones.  Businesses that focus on quality, have an internal culture that fits their intended direction of travel and take a balanced approach to investment in both capital and equipment and in their people are likely to have higher productivity now as well as being more optimistic about the future."

The CIPD’s report, which is published as the Low Pay Commission’s initial consultation on the National living Wage closes, highlights the need for Government to work with businesses to help them to break through their ambition ceiling as some firms may not understand how to change, or lack the capability to innovate and improve. This means that measures intended to help business such as lower business taxes or greater employer ownership of Apprenticeship funding are unlikely to benefit them. In response, the CIPD is calling for a joined-up approach to business support centred on networks, for example the new Business Growth Hubs, and collaborations that help businesses learn from each other and create virtuous circles of investment and improvement.

The report also raises alarm bells for the Government about the ability of public sector organisations to deliver the improvements in productivity needed if the intended cuts in funding of public services are to be met without damaging service quality.  Whereas 14% of private sector organisations say they lack the finance or skills to increase investment and productivity, almost triple (38%) the proportion of public sector organisations see themselves in this position.

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