Deloitte Shift Index: Advances in Labor Productivity Fail to Drive Profit
Only the most heavily-regulated U.S. industries insulated from intense competitive pressure and plummeting return-on-assets
SAN JOSE, Calif., November 10, 2009 — Despite major improvement in labor productivity over the last four decades, many industries in the United States have experienced alarming decreases in their return-on-assets (ROA). This according to Deloitte’s Center for the Edge, which today released industry-specific findings from its 2009 “Shift Index,” a new economic indicator identifying three waves of disruption that are shaping today’s business landscape.
The findings also indicate that only the most heavily-regulated industries have experienced an improvement in asset profitability.
The 2009 Shift Index recently revealed that on an economy-wide level, U.S. companies’ ROA has plummeted 75 percent since 1965. Today’s “2009 Shift Index: Industry Metrics and Perspectives” report analyzes a broad array of U.S. industries and tiers them by level of corporate performance disruption. While most industries are being impacted by the convergence of long-term trends, playing out over decades that the Shift Index measures, some are experiencing this change — termed the “Big Shift” — much earlier and more severely than others. The tiers are summarized as follows:
“Executives understandably believe that productivity drives higher returns, but that assumption appears flawed,” said John Hagel, co-chairman of Deloitte’s Center for the Edge. “Looking across industries, there doesn’t seem to be any relationship between productivity improvement and increased asset profitability. Companies focus on automation and scale economics to squeeze continuing improvements in labor productivity, but these efforts yield diminishing returns over time. In part, this is because the cost savings are passed through to customers as competition intensifies. Given this performance paradox, firms need to re-evaluate how they create and retain value.”
Shift Index findings suggests that the most promising way to reverse performance erosion is to find more creative ways to harness the proliferating knowledge flows enabled and amplified by the nation’s digital infrastructure. This is a key driver of the growing bargaining power of customers and creative talent — which in turn is increasing competitive intensity across many of the industries surveyed. The Shift Index metrics suggest that most companies across these industries are participating in a small fraction of the potential knowledge flows.
“We are adopting the digital infrastructure two to five times faster than previous infrastructures such as electricity, railroads and telephone networks,” said Hagel. “Yet most of our institutions and practices are still geared to earlier infrastructures. Businesses need to learn how to create more economic value by more effectively participating in new knowledge flows to refresh their existing knowledge stocks more rapidly, rather than simply exploiting existing knowledge stocks with greater economic efficiency.”
The Shift Index also found, with variations across industries, that more than 75 percent of the workforce is not passionate about the work they perform on a daily basis. This is particularly significant given the strong correlation between worker passion and more active participation in knowledge flows.
The technology, media, telecommunications and automotive industries are currently experiencing the full force of the Big Shift and represent the best examples of the type of disruption other industries are likely to face in the future.
With dramatic increases in productivity — upwards of 800 percent — telecommunications and technology in particular are prime examples of sectors that experienced innovation and productivity improvement that did not translate into improved corporate performance.
Many sectors of our economy are feeling early effects of the Big Shift but are not yet exhibiting the full impact of the performance pressures.
Banking: Highly vulnerable because the commercial banking side of the business has historically benefited from public policy which has regulated prices for banks over time. Recent trends suggest that there is decreasing protection from public policy resulting in erosion of the industry’s ROA over the past couple of years.
Two industries have actually experienced an increase in asset profitability: healthcare and aerospace and defense. These least affected industries are associated with high levels of regulation and government purchasing activity.
“The answer to thriving in this environment is not going to be found in product innovation or traditional cost reduction,” said Hagel. “Rather, executives need to focus on driving institutional innovation – redefining roles and relationships across large numbers of institutions. This will be the only way to effectively address the profound trends shaping profitability and competitive success well beyond the current economic downturn.”
Deloitte’s Shift Index pushes beyond cyclical measurement and looks at the long-term rate of change and its impact on economic performance. The Shift Index tracks 25 metrics across three sets of main indicators: foundations, which set the stage for major change; flows of knowledge, which provide more powerful ways to drive productivity; and impacts, which help gauge progress for firms, customers and creative talent. The Shift Index will continue to be updated to track changes over time and compare performance trends across countries.
For a deeper look at the Shift Index methodology and findings, please go to www.deloitte.com/us/shiftindex.
As used in this press release, “Deloitte” means Deloitte LLP and Deloitte Services LP, a separate subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.