Or, why utilization and specialization are the metrics that matter
Warning: This post will oversimplify a problem complex enough to have economists stumped. I won’t apologize for that. Please don’t comment telling me I’ve missed something unless that something is really important. I’m simplifying the problem so you can see how my proposed solution is directionally correct. Maybe somebody else will study it. Anyway…
In America, productivity growth has been falling since 2004. It dropped below zero in 2016.This is despite digital technology becoming mainstream, apparently making us all more productive. This paradox has sparked a huge debate among economists. Nobody knows why productivity is falling. As the economy becomes more service based, productivity becomes more closely tied to GDP. We should feel worried.
There are many theories as to why this has happened. Some include: lack of investment by private companies, retirement of highly-skilled baby boomers, digital technology not being that great, or just a failure to measure effectively. We don’t know. When that happens, I find it helpful to return to first principles.
First, some math. Productivity is the measurement of output per labor hour. How much value does the average person create in one hour of work? To increase productivity, we either need to increase output faster than hours worked, or decrease hours worked faster than output. Or maybe even both. This is done through two simple concepts that have gone largely overlooked in the productivity debate.
Specialization is the concentration on a particular skill. In a factory, each worker is a specialist, performing the same task repeatedly on each widget as it comes down the line. This specialization allows that worker to create the maximum possible value during their working time. Contrast this with most office settings. A sales executive, for example, may only spend 70% of their time selling — their specialist skill. They spend the other 30% of their time replying to emails, scheduling appointments, and chasing paperwork. Those tasks aren’t as valuable. Their productivity would be higher if all they did was sell.
Utilization is the proportion of available time that a resource is in use. In human terms, it is the proportion of the working day that a worker is actually working. For the sales executive, this figure might be 80%. In an eight-hour work day, it is quite common to lose over 1.5 hours to a lunch break, the bathroom, and social media. Of course, everybody needs a break, but then why are we paying and measuring the whole eight hours as work?
Enter the freelancer
The current solutions to this productivity problem lack imagination. They’re based on complex modelling rather than talking to workers. If they had, they might have met one of the increasing population of freelancers in the US. Independent workers who are highly specialized. It is the growth in the freelance economy over the next ten years that will increase productivity in the US.
Freelancers are more specialized. When a client hires a freelancer, it is for a specific task. The client is paying — either explicitly or implicitly — by the hour. The client ensures that the freelancer is focused on the highest value tasks, to get the best value for the work. Full-time employees, however, are given lower-value tasks to fill their day, reducing their specialization. Sophisticated clients will break a project apart into component pieces and spread them to different freelancers that specialize in each. For example, for a research paper, the client could first outsource the research at $15/hour, and then send the research to a writer who charges $60/hour. If the client isn’t smart, and gives the whole project to the writer, then it is the writer who can benefit from this price difference. They outsource the research, ensuring specialization stays as high as possible.
Freelancers having higher utilization almost goes without saying. They only charge for time worked. They stop the clock for lunch breaks or workout classes. The freelance mentality is that time is money. The freelance way of life is to get the work done so you can get back to enjoying your free time. Either way, the autonomy of freelancers drives them to be efficient, highly utilized working machines.
Now imagine the world in 2030 where the only employees in organizations are executives and managers. All of the work is outsourced. A manager wants to introduce a new product line. They map out everything that needs to get done for the product line to be introduced. They work with an account manager at the freelance talent platform to distribute the work to the best people. Then they monitor that work as it is completed by freelancers all over the country, and maybe beyond. Utilization is over 95%. Specialization is higher than has been seen before. Productivity is finally rising again.
What will it take?
I believe there are two fundamental technologies that will enable this shift to a higher productivity, freelance labor force. The first is the ability to disaggregate jobs into tasks. It is impossible to increase specialization if we don’t know how to disaggregate the role of the full-time employee. This may be a technology that automates job disaggregation. It may be a training program teaching HR managers how to rethink how work gets done. Either way, we are currently missing this key capability in our organizations.
We also need a platform that makes freelancing a sustainable career path. Currently, the majority of freelancers have to accept work below their true market rate to make ends meet. This is most apparent on the freelance marketplaces like Upwork where freelancers are in a race to the bottom to secure new projects. This undermines the specialization argument. A new type of platform needs to emerge that better manages the demand for work with the supply of freelance labor to ensure that freelancers are only given work suitable for them. As it happens, I’m building that platform right now. Follow me for updates as we look to launch in a few months’ time. It’s going to be great.
It’s hard to say how fast the freelance economy will grow. The existing survey results are often misrepresented. If these enabling technologies take-off, then we could see a majority freelance workforce within the next ten years. With that growth rate, it shouldn’t be long until productivity increases steadily once again.