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Skills shortages amid full employment

Opinion Written by John Berry on 28th January 2019. Reading time: 4 minutes

Office with people and empty chair venveo-609390-unsplashIt’s bizarre. We’ve a record 32.54 million people in work in the UK. But the number of job vacancies jumped to a record high of 853,000. Despite record employment today, companies are suffering skills shortages.

For many employers, UK colleges and universities are churning out graduates in the wrong subjects – Internet marketing, not engineering, design, not mathematics and business studies, not physics. There’s a general trend to move course content from thinking, analysing and synthesising to processing, responding and supporting fuelled by a belief that low-level, practical skills are what’s needed.

And the situation is set to worsen.

Poor STEM take-up

Much of the gap is in STEM subjects (science, technology, engineering and maths). Inadequate numbers of young people are taking up STEM subjects. STEM take-up is particularly low with women. And the gap is worsened by Brexit and macro-economic change. Fuelled by a weak Pound and improved economies in their home countries, EU workers with STEM skills and knowledge who came to the UK for a better life are returning home. And with tightened immigration, EU and foreign workers with STEM skills will find it increasingly difficult to get UK employment visas, even if they were motivated to come.

The result is that many managers face vacancies in key competencies that they just won’t be able to fill.

So how can a manager maintain progress?

All about capability

First, let’s set out the basis by which we might analyse this problem.

All work requires capability. Output comprises units of capability. Capability comprises human competence and technology function. Managers generally fix both in one job and then set about hiring more of the same to achieve their desired work output. This can be seen in the organisational chart and manpower plan below. In this example firm there are eight FTE (full-time equivalent) data scientists, five software engineers, six software developers responsible for web implementation and a smattering of specialists and support staff.

In this example, an increase in business would demand more capability from the data scientists, software engineers and developers requiring the firm to hire more of each. The firm is therefore scalable.

Each worker makes use of a particular technology. That technology affords the worker the capability. Without the technology, the worker could do little, and generally, without human competence, the technology would stand idle. As we know from recent press, developments in artificial intelligence (AI) and automation are changing the ratio of technology function and human competence needed in any capability. The more AI and automation available, the less competence needed until complete automation realises a ‘lights out’ firm in which small team of workers with high human competence manages a regiment of robots.

Many firms don’t use robots per se. But law firms, for example, use the algorithms of AI to search case law and build evidence for cases. And engineers designing cell phone networks set up automatic routines to optimise the location for cell towers against coverage and traffic demands. These were once high-competence labour-intensive human jobs that have become computerised. Again, in each case, a small number of high-competence workers drive high-function computers to achieve the same or better results.

So, the balance between human competence and technology function in each job can be changed. Traditionally, the technology supply industry drives the change as the quest for competitive advantage drives its R&D. In this case, the speed of change in firms tracks but lags the speed of technology introduction to a firm’s market. But it can be changed too by any manager seeking their own competitive advantage – or seeking to overcome skills shortages.

That’s the first freedom available to the manager.

But improving productivity works too

Of course, those units of capability that make up what the firm can do can be re-organised in search of increased productivity.

Productivity is the output for a given unit of capability applied over a specified time. To assess whether or not their firm has good productivity, and hence whether there’s scope to improve productivity, managers might benchmark their firm with competitors and with others that they admire.

Improved productivity is quite literally, doing more with the same, or doing the same with less. As such, it’s an obvious focus for a solution to a skills shortage.

Productivity can be measured in various ways. One way is to calculate productivity as £k turnover per head. Another, relevant particularly to labour intensive organisations like law firms, surveyors and consultants, is to measure the £k per processing unit of capability – excluding indirect or support heads like marketing and sales.

One example is between estate agents. Some have productivities of £220k per annum for all heads and £250k per annum for direct heads alone. This indicates a very high productivity with a meagre indirect support activity. Others have as low as £90k per head for all heads and £150k per head for direct heads.

The point is that before a firm can contemplate re-structure to root out inefficiency, it must have a measure of productivity from which to start improvement.

Productivity improvement is a second freedom, improving the human competence and machine function in search of efficiency.

Essential modelling

Productivity at the level of the firm is useful, but it doesn’t point to anything within the firm that might change to improve productivity.

Most firms are complex. In all but the simplest, it’s impossible to look at a firm and tell what to do. The creation of a model is essential to be able to look in any significant detail at any of the firm’s activities and complete an analysis of what is, and what might be, if productivity improvements were made.

We discuss modelling in various blogs and papers.

Modelling allows the human competence and technology function to be considered in each business activity and for productivity to be assessed. Actions to improve can then be identified.

And for greater capability

So, to conclude: whilst the UK has near full employment, we also have huge skills gaps. Managers who need to hire people with scarce skills have three options.

First, they could accept that hiring those with scarce skills is difficult and compromise – reduce the human competence sought and accept lower productivity. With that comes deflated wages but sustained costs and hence deflated profit. That’s the do-nothing option.

Second, and following on from the first, they could address the human competence/technology function balance and gain the required capability by investing in technology. That’s focussing on doing the same or more with less.

And third, they can gain the required capability by investing in the people they already have thereby rooting out inefficiency and improving capability through improved productivity. Again, that’s doing the same or more with less.

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