How digitization is impacting productivity growth in the UK
At the McKinsey Global Institute, we analysed why productivity growth has been at record lows in recent years in the United Kingdom. One factor has been the impact of digitization which promises to boost productivity growth but comes with adoption barriers, lags, and transition costs.
Here’s a hypothetical example which highlights how this is playing out across firms and industries today.
Picture a small but exclusive hotel in a beautiful part of England.
They have about 20 rooms, a staff of about 10 people, and want to start marketing and selling their capacity online. (At the moment, they only have a website for marketing purposes, but bookings are still handled via email or telephone.)
They have decided that at the same time, they should integrate the booking system with their staff planning system, and give their staff an easy app to show their availability and choose their shifts.
One of their staff happens to be an IT engineer, so he works overtime on the project. It turns out that before they can digitize anything, they need to document and review their pricing strategy and assumptions about staff roles and availability. The owner-manager asks another young, bright staff member, who currently works in marketing, to help with this.
Eventually, they realise that a dedicated person will be needed to drive this project, so they advertise for the role and find a qualified individual to take it forward. This whole process takes about a year, during which their labour hours have gone up by about 10 percent (assuming base level of staff is 10 people; add one new person for 6 months, plus owner-manager and the other 2 people working over-time by about 20 percent), but revenues and profits have not changed.
As a result, the hotel’s productivity declines by about 5 percent in the first year. In the second year, they are able to increase their occupancy ratio by about 10 percent, so their revenues go up. But they still have one extra person running the IT system, so their productivity is now back to what it was before starting the process.
In the third year, they are able to use the system to optimise their staffing levels, and reduce staff by 20 percent. They are still benefiting from the higher occupancy, so their productivity is now 10 percent higher than in the beginning. As a result, in this case, it has taken 3 years to realise the productivity benefits of this digitization project.
Our example of a small, boutique hotel in England is not unique. We find these types of decisions and impacts occurring across industries and indeed across other advanced economies. While the potential for digitization to boost productivity growth is real, companies and policymakers can make a difference.
The United Kingdom has the potential for at least 2 percent productivity growth a year over the next ten years, if policy makers and companies provide supportive action. Read how in our new discussion paper, “Solving the United Kingdom’s productivity puzzle in a digital age.”
