What Is Productivity? Why It Matters & How to Measure It

The productivity of a company’s workforce plays a key role in its profitability and competitiveness. It makes sense: Increase productivity levels and you can expect to generate higher profits without adding headcount. That boosts the likelihood of long-term success in competitive markets.

So it’s important that business leaders understand how to measure productivity, then use that data to identify and overcome obstacles to making their workforces more productive.  

What Is Productivity?

Productivity is a measure of economic or business performance that indicates how efficiently people, companies, industries and whole economies convert inputs, such as labor and capital, into outputs, such as goods or services. Productivity can be measured at any of these five levels:

Personal productivity:

The term “personal productivity” is often used to describe how much individuals can accomplish every day in their personal lives, not just in the workplace.

Workforce productivity:

Workforce productivity, the focus of this article, is the aggregate productivity of all individuals in a company’s workforce.

Sector productivity:

The aggregate productivity of all companies in an industry or sector is an expression of the sector’s productivity.

Team or department productivity:

The collective output of one or more individuals united under a common goal.

National or global productivity:

The aggregate productivity of all industries in an economy is an expression of the economy’s productivity.

Key Takeaways

• Productivity is key to a company’s profitability and ability to thrive.
• Workforce productivity is a measure of how efficiently a company converts inputs, such as labor or capital, into outputs, such as goods and services.
• Obstacles to increasing productivity include too much email, too many meetings, too many manual processes and industry-lagging technology. Simple fixes can help address these problems.
• Identifying and tracking productivity metrics can help companies manage and improve workforce productivity.
• Performance management software can make it easier to measure and manage productivity.

Productivity for Businesses Explained

Productivity is calculated by dividing output by inputs. The basic formula is:

Productivity = Output / Input

Output is typically measured as the dollar value or the units of products and services that a company produces. Inputs are any resource used to create products and services. The two most common types of input are capital — which includes investments in assets used for production, such as manufacturing equipment and computers — and labor. Other inputs may include energy, technology, materials and purchased services.

• Labor productivity measures the output per hour of labor.
• Capital productivity is the productivity attributable to the money invested in assets used to produce your company’s output.
• Multifactor productivity, also known as total factor productivity, takes into account multiple inputs. The U.S. Bureau of Labor Statistics calculates national multifactor productivity by dividing an index of output by an index of combined labor and capital inputs.

How Does Productivity Work?

Productivity goes up when output increases at a faster rate than inputs or when a company can generate the same output with lower inputs. Here’s an example that shows how this works, exploring the effect of different inputs.

Suppose you own an apple orchard, and you’re looking at ways to increase the productivity of your annual apple-picking operation. Currently, your company’s 50 workers can pick a total of 10,000 large apples per hour by hand, on average. Your hourly labor productivity is therefore 10,000 apples/50 people = 200 apples per hour per picker. Not bad, but you see four options to do better, beyond just pushing people to work harder:

1. Technological improvements: You can add inputs in the form of technological improvements that expand output by more than their cost. If you provide each apple-picker with Acme’s Super Duper Apple-Picking Machine, labor productivity jumps twofold: They can each pick 400 apples per hour.

2. Technical efficiency: Companies can improve technical efficiency by using their existing technology or skills more efficiently. Perhaps your workers can do better than 200 apples per hour if they become more skilled at picking apples by hand.

3. Organizational improvements: You may be able to improve hourly output by reorganizing apple-picking teams so they more efficiently cover the entire orchard.

4. Increasing scale: You may be able to increase productivity by expanding your operation. Doubling your apple output may require you to double the size of your orchard, the number of pickers you employ and the number of machines they use. But it won’t require you to build a second headquarters building, hire twice as many administrative workers or double your marketing and advertising budget. Your output will double, but your inputs will not.

Why Is Productivity Important?

Because it’s a measure of efficiency, productivity is key to winning in a competitive marketplace. Increase your productivity and you can generate higher profits — or charge lower prices and take customers away from your competitors. On the other hand, if your productivity declines or increases more slowly than competitors, you may be unable to operate profitably or suffer from sluggish growth.

Benefits of Increased Productivity for Businesses

The basic advantages of higher productivity — greater competitiveness and profitability — can generate a broad range of additional business benefits. They include:

• Higher customer satisfaction: Customers will be happy if your company’s increased efficiency enables you to reduce prices or deliver goods and services faster.
• Better terms from suppliers: If greater productivity enables the company to increase production, it can buy raw materials and components in larger quantities, which usually means it can obtain them at lower prices.
• More attractive wages: Higher productivity can make it possible to pay higher wages, which can help attract employees.
• Increased access to capital: When improved productivity translates into higher profits, that can pave a smoother path to obtaining funding, either by issuing equity or borrowing.

Common Business Productivity Challenges and Pitfalls

Most companies don’t operate at maximum productivity. We’ve all heard the stats about disengaged employees who “work” only a few hours per day — and that’s only one of many challenges to achieving greater productivity. Some are easier to overcome than others.

Here are six common pitfalls:

Achieving “busyness” rather than productivity. People often tell themselves that they are being productive because they’re working long hours. But they may actually be working harder instead of “smarter, faster, better,” as bestselling writer and productivity guru Charles Duhigg describes it. Companies that reward people for merely looking busy may not achieve high productivity. The answer is to measure outputs and focus on improving them.

Inefficient meetings. Inefficient and unnecessary meetings can eat into productivity for everyone involved. Companies can increase efficiency by starting and ending meetings promptly, requiring a clear agenda, ensuring all attendees come prepared and assigning a to-do list of tasks at the end.

Email. In 2019, the average office worker spent over three hours a day on work emails — many of those messages not directed primarily to them. That’s often time that could be spent more productively. Companies that discourage unnecessary cc’s and bcc’s can reduce this problem.

Poor time management. Time spent on emails and meetings often masks a larger time-management problem. If your company’s employees don’t have daily to-do lists and organize their time accordingly, many will default to being reactive — responding to a badly managed calendar, incoming email and whoever demands their attention during the day. Some people are good at managing their time, while others need assistance and closer supervision.

Putting off technology improvements. Companies sometimes delay technology upgrades that can radically improve productivity. For instance, investing in collaboration tools can help employees work productively from anywhere. Enterprise resource planning (ERP) systems can tie together many business processes, automating the flow of data and reducing manual effort. And any technology that helps companies stay abreast of KPIs that measure productivity, such as Order Picking Accuracy in a warehouse, will pay off.

Manual processes. The amount of time a worker spends importing, exporting, entering, reconciling and manipulating data between one or more information systems can slow down productivity. Additionally, the amount of time needed to assemble reports or analyses for decision makers can lead to less productivity.

How to Measure Productivity in the Workplace

Speaking of KPIs, a company must be able to measure productivity if it hopes to gauge the effectiveness of its efforts to improve productivity. There is an enormous range of productivity metrics in common use, depending on the industry and the type of business function you’re measuring. Here are some of the most common:

• Revenue per employee. This is a core productivity measure for many companies. It is typically calculated as the most recent 12 months of revenue divided by the current count of full-time equivalent employees. Revenue per employee may be a particularly relevant KPI for consulting services firms.
• Number of parts produced. This fundamental measure of manufacturing productivity is usually measured in parts per worker per hour.
• Customer satisfaction score (CSAT). This is the average customer rating, generally gathered from surveys and measured on a scale that may range from 1-5 or 1-10. Low scores may be a warning that customers will defect. CSAT is a core element of a customer experience (CX) focused strategy.
• Downtime. This is the percentage of time that an important business system is unavailable. Unplanned downtime will compromise productivity.
• Employee turnover rate. This is the percentage of employees who leave an organization during a certain period of time. High turnover is often associated with low productivity due to the time required to find and train replacements. Fortunately, companies can take steps to minimize employee turnover.
• Labor utilization rate. This ratio assesses the proportion of workers’ time that is spent on productive tasks. It’s calculated as the time spent on productive or billable hours divided by the total number of employees’ available hours and, like revenue, is important for services firms to track.
• Gross profit margin. This profitability metric reflects the efficiency of a company’s core business operations. It’s calculated as net sales revenue minus cost of goods sold or services delivered. A business whose gross profit margin is consistently below others in its industry risks being overtaken by more productive competitors. Thus, it’s important for all companies to track their gross profit margins.

Calculating National Productivity Trends

National productivity is typically tracked via a country’s gross domestic product (GDP), the total value of all the finished goods and services produced within a country’s borders in a specific time period. Between 2010 and 2018, global annual productivity growth measured on this basis ranged between 1.8% and 3.9%; it was lower for advanced economies and higher for emerging economies.

U.S. Productivity Trends 

In the United States, businesses produced nine times more goods and services in 2013 than in 1947, with only a modest increase in hours worked, according to the U.S. Bureau of Labor Statistics.

What Productivity Means for Job Growth

The relationship between productivity and job growth is complex. At many companies, productivity improvements drive job growth. A company that increases its productivity can generate additional profits and invest that money in business growth, or it can increase demand for its products by cutting prices. Either of these paths creates an opportunity to hire more people.

On the other hand, technologies such as manufacturing automation can enable factories to increase output with fewer employees. Automation could displace an estimated 15% of the global workforce by 2030 — but it can also create new jobs, and many people will gain employment in categories that do not exist today.

6 Tips for Improving Productivity in the Workplace

How can you improve productivity in the workplace? There’s no single cure-all, but certain approaches can help managers at any company boost output — such as helping staff better plan their time, reducing distractions and applying the right technology. Here are six workplace productivity tips:

1. Help your staff plan more effectively. Encourage employees to supplement their daily to-do lists with lists of longer-term goals. Make sure everyone has a long-term plan and encourage people to align their daily tasks with that plan. Help workers track their time, and hold them to deadlines, which will identify higher performers as well as those who need more support.

2. Provide clear direction. Whether you are supervising two people or 200, communicate very clearly what your priorities are in the short, mid- and long term. If there are people between you and the front line, make sure the message reaches them, rather than becoming distorted as it filters down through organizational layers. Some effective managers hold regular town hall meetings with all their staff to ensure that communication happens.

3. Show staff you trust them through delegation. As a manager, delegating select jobs to carefully chosen people is good for employees’ morale and professional development, and for your own efficiency. Start with tasks that are not mission-critical, which makes it easier to ratchet back responsibility if someone doesn’t deliver. If you don’t delegate, you’ll never find out what your employees can do.

4. Give people the tools they need. Issuing people the right tools — including technology — makes them more productive by eliminating tedious manual work and providing better access to information. For example, All-Safe Pool, a maker of pool fences, nets and covers, doubled its productivity across the board by deploying a cloud ERP solution. Real-time access from any location to financial, inventory and customer information helped the 40-person company achieve strong and steady growth in sales to businesses and consumers. In addition, within the limits of what you can afford, make sure that your employees’ computers and printers are up to date, and that they can access company systems securely from home.

5. Create the right workplace environment. Companies can maximize productivity by paying attention to the work environment. Some businesses reduce distractions by encouraging employees to turn off their phones and check them only during breaks, and by offering soundproof headphones to employees as needed. They make the environment physically comfortable and pleasant by providing attractive workspaces and managing the temperature: Between 68 and 70 degrees usually keeps people comfortable. And they encourage employees to take breaks, stretch and walk around — preferably outside.

6. Help employees create productive home workplaces. Working from home has many benefits: no commute, a more flexible schedule and potentially lower stress. But it’s important to take steps to ensure your people remain productive when working remotely. Creating a dedicated, distraction-free workspace, scheduling the day and using time management techniques can help.

Monitor, Measure and Improve Workplace Productivity With Software

Performance management software can make it much easier to measure and track improvements in workforce productivity. Performance management is included in leading HR software packages that allow you to manage training, recruiting, budgeting and a number of other areas. Performance management software allows employees to set goals and track progress against them. It shows who is performing better than expected and who is lagging behind, helping companies identify which employees may be ready for more responsibilities and which need more help.

Crucially, tracking performance in a software system allows leaders to conduct workforce analytics that show whether productivity justifies the company’s level of investment in employee development — and to identify where the problems are. Are employees taking too much time over some tasks but not others? If so, what’s getting in the way? Do you have the wrong tools, the wrong processes, undertrained employees or something else? Cycles of analyzing the data and conducting reviews can help improve efficiency as well as employee satisfaction.

Productivity is key to a company’s competitiveness and long-term survival, so it’s important for any company to measure and track productivity improvements. Identifying common pitfalls and focusing on performance management can help companies drive productivity improvements that increase profitability and drive business growth.

Productivity FAQs

What is meant by “productivity”?

Productivity is a measure of how efficiently a company converts inputs, such as labor and capital, into outputs — products and services. It’s calculated by dividing outputs by inputs.

What is a productivity example?

Productivity is commonly measured in output per worker or output per worker per hour. For a manufacturing company, a measure of productivity might be the number or value of the finished products each worker can produce within a given time.

What is productivity, and why is it important?

Productivity is key to a company’s profitability and long-term success. It measures how much output a company can produce from resources such as labor, capital or raw materials. If a company improves its productivity, it can generate more output from its resources.

What is productivity, and how is it measured?

Productivity is calculated by dividing output by inputs. Output is usually measured as the value or quantity of products and services that a company produces. Inputs may include labor, capital and raw materials. Common productivity metrics include revenue per employee and number of parts produced per worker per hour.