Metrics: Four Types of Productivity

Productivity is a classic economic metric that measures the process of creating goods and services.  Productivity is the ratio of the amount of output from a team or organization per unit of input. Conceptually productivity is a simple metric. In order to calculate the metric, you would simply sum up the number of units of item produced and divide it by the amount “stuff” needed to make those units.  For example, if a drain cleaning organization of three people cleans 50 drains per month, their labor productivity per month would be 50/3 = 16.6 drains per person. The metric is a sign of how efficiently a team or organization has organized and managed the piece of work being measured. There are four types of productivity.  Each type of productivity focuses on a different part of the supply chain needed to deliver a product or a service.  The four types are:

• Labor productivity is the ratio output per person. Labor productivity measures the efficiency of the labor in the transformation of something into a product of higher value. In software development terms, labor productivity is a measure of the efficient use of the effort needed to write and implement the code.
• Capital productivity is the ratio of output (goods or services) to the input of physical capital.  Improving physical capital (known as capital deepening) typically yields an increase in output.  In software development, physical capital includes the equipment, buildings or other items like computers needed to develop and implement the code.
• Material productivity is the ratio of output to the input of materials (also known as natural resources).  In software development, there are very little material or natural resources that are used. Material productivity plays a larger role when considering the manufacture of hardware/software packages, such as an ATM.  
• Total Factor productivity (TFP) is not a simple ratio of output to input, but rather it is a measure that captures everything that is not captured as labor, capital or material productivity. Factors included in total factor productivity include attributes like changes in general knowledge, the use of particular organizational structures, management techniques, or returns on the scale. The components in TFP are often the sources of productivity changes in software development.

Three of the four types of productivity are typically important in a software development or IT departments.  Generally, raw material productivity is less of a factor in developing software development (most of the raw material is human knowledge and observable in labor productivity or TFP), but it becomes more of a factor when the software product includes hardware manufacturing. Most software organizations, IF they measure productivity at all, tend to focus solely on labor productivity. Labor productivity is often the easiest of the four productivity types to measure and understand. In many cases, organizations use changes in labor productivity as a proxy for measuring the impact of factors that would be more accurately reflected either as capital productivity or total factor productivity. The use of a proxy makes it more difficult to trace an input to a change in the amount of output.  For example, if all employees get new computers (capital) while the organization adopts a new team approach to software development (TFP) and productivity increases it will be difficult to determine the impact of each change if we only measure the proxy of labor productivity. This is not an esoteric discussion if productivity improvement was used to justify either of the changes.

Each type of productivity is important in their own right.  Each asks and seeks to answer a different set of questions. Labor productivity focuses on the impact of people on a number of products or services delivered. Labor productivity is useful for answering whether changing the mix of coders and testers on a team has an impact on the amount of completed software a team can deliver. Capital productivity would be useful in answering whether a new building, computer or network helps or hurts the amount of goods and services delivered.

Productivity is important because it defines the efficiency of an organization in converting inputs into output.  In the 20th century, we got used to productivity being a relatively simple concept.  Steel makers take raw materials, people, and machines and create steel.  If we calculating the productivity of a steel maker, we would measure the amount of steel created and then divide it by the amount of raw material, cost of machines or the amount of effort needed.  Calculating software productivity is not substantially different.  

An organization that is more productive will tend to outperform other organizations, helping to ensure organizational longevity. 

At a more personal level, we care about productivity because unless a team or organization becomes more productive there will be no incentive for increased pay.

Next:

• Metrics:  Complexities of Productivity
• Metrics:  Total Factor Productivity Basics
• Metrics:  Mistakes Often Made Measuring Productivity