Back in 2020, a House of Commons committee report noted that small and medium-sized enterprises (SMEs) are crucial to the UK economy both for wealth creation and for the people they employ. In addition, it reinforced the view of many economists that productivity growth is essential for promoting long-term economic growth and higher living standards.
Given this, it is no surprise that the MPs sitting on that committee concluded that it is vital that SMEs are given the best chance of succeeding and can contribute towards the UK’s productivity. However, three years on and with the world having faced a global pandemic, a European war in Ukraine, and inflation at levels not seen for fifty years, what is the current state of productivity within SMEs in the UK?
One indicator of this can be found in the latest edition of the Productive Business Index published by Be the Business, a body which brings together companies to improve small business productivity. The index is based on a survey of one thousand founders, owners and leaders of the UK’s SMEs which tracks changes in five areas of business activity namely management capability, technology adoption, training, development and human resources, operating efficiency, and innovation.
According to the index, SMEs have reported significantly lower capabilities in areas linked to high productivity, a situation that is driven by uncertainty about current conditions and the future. For example, whilst two thirds of business leaders say that they have the skills needed to succeed, two out of five businesses are finding it difficult to attract new skills into their organisations.
Regarding the management competences of those running UK SMEs, a third of business leaders had taken action to improve their management skills in the past 12 months although this is a decline on the previous survey. More worryingly, only 34% of business leaders are planning additional investment in management skills in the next 12 months despite this being critical to not only company growth but business productivity as a whole.
With increased business investment and skills being seen as a key to the recovery of the UK economy over the 12 months, it is disappointing that there has been a fall in the number of business leaders who are investing in training in digital skills and the amount of investment in physical production equipment and operational or commercial software.
This situation is also reflected in future investment plans with the percentage of leaders planning on investing in additional digital training for employees and physical technology solutions being the lowest since the index was first published three years ago.
Another key input into improving productivity is innovation and the current economic climate is having a detrimental effect on this important area with only 28% of business leaders introducing new methods of improving internal innovation. There was also a decline in the number of businesses introducing new internal processes and co-creating with customers and suppliers.
The study also examines the new ways of working that have emerged since the pandemic and looks at whether operating from a workspace, working from home or a hybrid mix of the two has impacted on the management performance of businesses.
Interestingly, it seems that business leaders operating a hybrid model or mostly working from home tend to report higher levels of confidence in management and leadership capabilities than those working from a dedicated workspace. In contrast, those business leaders with a remote model have fewer plans to improve their capabilities as compared to hybrid or office-based businesses. Not surprisingly, hybrid and remote working leaders report high levels of confidence in their technology and digital skills.
One unusual finding is that where employees mostly work from home, seven out of ten business leaders think their company is good at coming up with new ideas and implementing them quickly. This is considerably higher than those predominantly involved in office working. Given that many have argued that one of the main reasons in getting people back into the workplace is the scope for greater collaborative working in teams, this finding is unexpected especially in encouraging a more innovative culture within businesses
Another important area for many SMEs is accessing external advice and support to help develop their businesses and the study shows that those leaders who seek advice are more likely to have a strategic plan in place and to undertake activity or investment in management and leadership capabilities. More relevantly, a higher proportion of leaders receiving external advice report increased revenues and jobs as compared to those who get no advice.
Therefore, there are a number of lessons from the Productive Business Index which could boost productivity. Unexpectedly, businesses implementing a hybrid model seem to be more likely to be working on the skills linked to higher productivity levels and therefore the rush by some politicians to get workers to return to the office may have a very different effect than expected.
The findings also reinforce other recent studies by demonstrating that one of the victims of the recent economic slowdown over the last 12 months has been productivity within SMEs with lower investment in key areas such as management skills, digital skills, and technology. If this is to be improved, then the UK Government could and should provide greater incentives to support investment in these areas especially given that external advice has also been shown to have a positive effect on business performance.
