In 2020, a House of Commons committee report noted that small and medium-sized enterprises (SMEs) are critical 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 have the best chance of success and can contribute to the UK’s productivity. But now, three years later, and with the world facing a global pandemic, a European war in Ukraine and inflation at a 50-year high, what about SME productivity in the UK?
An indicator of this can be found in the latest edition of the Productive Business Index, published by Be the Business, a body that brings companies together to improve small business productivity. The index is based on a survey of 1,000 founders, owners and leaders of UK SMEs, tracking changes in five areas of business activity, namely management capability, technology adoption, training, development and human resources, operational efficiency and innovation.
According to the index, SMEs report significantly lower capabilities in areas associated with high productivity, a situation driven by uncertainty about current conditions and the future. For example, while two-thirds of business leaders say they have the skills needed to succeed, two in five companies find it difficult to attract new skills into their organization.
In terms of the management skills of those running SMEs in the UK, a third of business leaders have taken action to improve their management skills in the last 12 months, although this is a decrease from the previous survey. More worryingly, only 34% of business leaders plan to invest additionally in management skills in the next 12 months, despite this being critical not only to company growth, but to business productivity as a whole.
With increased business investment and skills seen as key to the recovery of the UK economy over the past 12 months, it is disappointing that the number of business leaders investing in digital skills training and the number of investments in physical production equipment and operational or commercial software.
This situation is also reflected in future investment plans, with the percentage of leaders planning to invest in additional digital employee training and physical technology solutions the lowest since the index was first published three years ago.
Another key input to improving productivity is innovation and the current economic climate is having a detrimental effect in this key area with only 28% of business leaders introducing new methods to improve internal innovation. The number of companies that introduced new internal processes and co-created together with customers and suppliers also decreased.
The study also examines the new ways of working that have emerged since the pandemic and looks at whether working from a workspace, working from home or a hybrid mix of the two has impacted companies’ management performance.
Interestingly enough, it seems that business leaders who adopt a hybrid model or mostly work from home are more confident in management and leadership capabilities than those who work from a dedicated workspace. In contrast, corporate leaders with an external model have fewer plans to improve their capabilities compared to hybrid or office-based companies. Not surprisingly, hybrid and remote leaders are highly confident in their technology and digital skills.
An unusual finding is that where employees mainly work from home, seven in ten business leaders believe their company is good at coming up with new ideas and implementing them quickly. This is considerably higher than for those who do predominantly office work. Given that many have argued that one of the main reasons for getting people back into the workplace is the opportunity for greater team collaboration, this finding is unexpected, especially as it encourages a more innovative culture within companies.
Another important area for many SMEs is access to outside advice and support to help develop their business. The research shows that leaders seeking advice are more likely to have a strategic plan and undertake activities or invest in management and leadership capabilities. More pertinently, a higher percentage of leaders who receive outside advice report more income and jobs compared to those who do not receive advice.
Therefore, there are a number of lessons from the Productive Business Index that could increase productivity. Unexpectedly, companies implementing a hybrid model appear to be more inclined to work on the skills associated with higher productivity levels and so the rush by some politicians to allow workers to return to the office may have a very different effect than expected.
The findings also bolster other recent studies by showing that one of the casualties of the recent economic slowdown over the past 12 months has been SME productivity with lower investment in key areas such as managerial skills, digital skills and technology. If this is to be improved, the UK Government could and should provide more incentives to support investment in these areas, especially given that external advice also has a positive impact on business performance.
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