By Lord Gus O’Donnell and Sir Charlie Mayfield

In the years since David Cameron launched his government’s 2015 plan for fixing the UK’s productivity problems, we have learnt a great deal about the particular challenges our country faces in living up to its potential. We know that it is not just the big tech firms that hold the answers to solving UK productivity, but small businesses too. And we know that it is not just the private sector that needs to improve - the public sector has lots of work to do as well. As the UK seeks to respond to the current challenges of inflation and continuing to recover from the impact of Covid, increasing our national productivity performance has never been more important.

But when it comes to productivity in the social or third sector, our bank of knowledge is far less full. This is an oversight it is now time to correct.

The charities, community groups and volunteering organisations which make up the UK’s social sector play a vital role not only in our society but in our economy too. With 910,000 employees, the social sector represents an important and growing part of our workforce. The labour that millions of volunteers contribute even more so.

Furthermore, the social sector is a major recipient of public funds. Every year, central and local government spends around £15 billion on grants and contracts with charities. A large portion of that spend commissions charities to deliver vital public services, with research showing that between 2016 and 2020 almost 11,000 charities won government contracts totalling £27.5bn. In addition, the government forgoes around £5bn each year in charitable tax reliefs.

With a workforce as large and public expenditure upon it so high, integrating the social sector into the country’s broader productivity drive needs to become a priority. In doing so, we should be seeking to take a sector which generates extraordinary value for the communities it serves, and helping it maximise the impact it has with the limited resources at its disposal. If we manage to achieve this, the effect on our economy, society and the Treasury would be transformational.

For example, a charity supporting homeless people that begins to operate more effectively will be able to ensure vulnerable individuals access healthcare earlier. This in turn can help them to find employment more swiftly, and even reduce the incidence of crime. These outcomes benefit not only the individual, but the economy and the taxpayer as well.

Many of the answers for how to achieve this lie in measures taken in the private sector. Be the Business, the organisation set up to explore solutions in the wake of Cameron’s 2015 plan, has supported thousands of small businesses across the UK to improve their productivity. The productivity solutions identified by Be the Business for small firms are practical: skills, digital adoption, leadership and management capabilities, networks and good data. And these elements all hold back small businesses and charities alike.

At the heart of any successful productivity drive, there needs to be strong leadership. In fact, there is a proven link between the management capability of leaders and business performance. Research has shown that the charity sector is three times less likely to invest in leadership development than the wider economy, with an estimated 0.5% of annual charity income dedicated to it on average.

In both the business and charity sectors, there is also an issue with complacency and a lack of benchmarking when it comes to productivity. Research by Pro Bono Economics for the Law Family Commission on Civil Society has found that 80% of charity leaders believe their organisations are the same as or more effective than comparable organisations. We know similar numbers of small businesses say the same thing, but many don’t measure their performance or benchmark against competitors.

The use of technology is another vital component. Compared to other leading economies, the UK has lower uptake of tech proven to boost productivity. This affects both businesses and charities, with almost half of charities saying a lack of digital skills among staff is holding them back.

Be the Business also stresses the importance of tapping into networks of productivity leaders, such as the one it provides, who can share practical advice and insights. But charity sector networks have suffered badly because of the pandemic. Towards the end of 2020, the National Council for Voluntary Organisations announced it would have to cut 20% of its staff and freeze any new recruitment because of financial losses caused by the pandemic.

A first step for government to take in a bid to boost social sector productivity would be to open up its business-facing schemes. As chancellor, Rishi Sunak introduced the flagship Help to Grow programme, allowing small businesses cut-price access to technology which can help them manage online shops and databases, for example. This is something charities could benefit hugely from. Equally, the government’s Growth Hubs network for small businesses could be used to help spread management and leadership skills among charities at a local level.

Of course, a simple copy and paste approach is not the whole answer. The social sector has a chronic lack of available, usable data on all manner of measures, including productivity. And the barriers to making long-term investments are uniquely high.

If you are running a small substance abuse charity overwhelmed with demand, how do you choose between investment in leadership training or support for 30 individuals at your door? In the competition for donors - to be able to state that “95p in every £1 goes on the frontline” – there is often very little left in the coffers for long-term investment.

Grappling with these challenges requires collaboration between the social sector and the business world, which stands ready to share its expertise. It also needs funders to enable investment, crucially in capacity building for the sector. And it relies on the support of government too. By working together, we can grasp the missing piece of the productivity puzzle, a gap that has been overlooked for far too long.

Lord Gus O’Donnell is Chair of Pro Bono Economics. Sir Charlie Mayfield is Chair of Be the Business and QA Limited.