IoD Report October 2018
Lifting the Long Tail The productivity challenge through the eyes of small business leaders Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
About
The Institute of Directors (IoD) is Britain’s oldest business representative body. It was founded in 1903 and awarded a Royal Charter in 1906 to promote professionalism in business, by supporting the skills and interests of directors, and by driving forward the development of a climate favourable to entrepreneurial activity and strong corporate governance. The IoD consists of over 30,000 members, predominantly the leaders of small- to medium-sized enterprises (SMEs).
In this research, the IoD has conducted a comprehensive microanalysis of the productivity challenge facing UK firms. This includes a survey of around 700 business leaders1, 25 structured interviews with start-ups, small enterprises and business transformation specialists, and consultations with accredited IoD Professional Development course leads and industry representatives. The study assesses the firm-level factors that influence the diffusion and adoption of management and technological best practice in SMEs, and evaluates related policy considerations for the public and private sector – mirroring the Department for Business, Energy & Industrial Strategy’s Business Productivity Review.
Contents 5 The Productivity Challenge 6 The Long Tail 7 Catching Up: Adopting Best Practice 9 The Firm-Level Hurdles to Adoption 9 Mindset: Establishing a Need 10 Productivity and Performance 13 Diagnosing Solutions 14 Business Advice & Support 16 Implementation 18 Training 18 Absorption 20 Policy Recommendations 21 Financial Incentives 22 A National Business Support Framework 26 Cultural Shifts 29 How the IoD can help you 30 The Small Business Productivity Ecosystem
1 Institute of Directors, Policy Voice Survey in November 2017, June and July 2018. IoD SME members are likely to be more engaged on productivity issues than the general business population, but the challenges they face are indicative of the wider issues facing the UK’s small business community.
2 IoD Report October 2018
Foreword It is well-established that the UK has a “long tail” of low-productivity companies. Indeed, this tail is both longer, and has lengthened by more, in the UK than in its competitor countries. This long and lengthening tail helps explain why the UK has a one third productivity gap with the likes of the United States, Germany and France and why UK productivity has recently under-performed, both relative to its historical past and relative to other countries.
Less well-understood is why it is the long tail exists in the first place. As the technological wave of the Fourth Industrial Revolution begins to break, why is it new innovation and technology has not diffused down to the long tail? This valuable report begins to answer that question. It provides a detailed, step-by-step, explanation of the practical process of technology diffusion within firms, drawing on the experience of the Institute of Directors’ network of SMEs. This helps pinpoint barriers to companies taking-up technological opportunities to boost productivity and performance. Andy Haldane Chief Economist The barriers to diffusion comes in various shapes and flavours. Some are Bank of England informational, others cultural. Some are financial, others managerial. Different barriers apply in different firms depending on their size and sector, ownership and location. That means understanding these barriers is key if they are to be lifted effectively and the productivity potential of the long tail unlocked.
The report goes on to set out a sequence of recommendations of what might be done, policy-wise, to lift these barriers. A great many excellent initiatives are already underway to support businesses and promote innovation. A key theme in the report is that these initiatives may need in future to be better integrated, to deliver a comprehensive diffusion architecture for the UK. These recommendations offer useful food for thought for government, as it begins to put in place the next stages of its important and ambitious Industrial Strategy.
3 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
Executive Summary
Research and development pushes the frontier of economic opportunity. Yet if the new ideas, methods, and technologies uncovered by the country’s leading innovators face barriers in their diffusion across the wider business community, their impact on overall economic growth will be largely contained.
The slow adoption of existing best practice in management and technology among the UK’s small and medium-sized enterprises2 in particular has been established as a key reason for our relatively ‘long- tail’ of underperforming firms. Unlocking this hidden potential can support small businesses to scale- up, create more jobs and, above all, help drive much-needed wage growth in the economy.
The prevailing policy discourse has largely conceptualised the take-up of productivity-enhancing measures into UK businesses as a binary: to adopt or not. This overlooks the manifold reasons why the process of embedding new-to-firm processes and technologies in SMEs actually fails. The transfer of ideas and knowledge to small businesses is just one part of the overall challenge. To actually lift the long-tail we must promote ‘productivity mindsets’ in SMEs and go beyond simply echoing what ‘best practice’ is by supporting firms to effectively integrate, combine, and optimise it in their firms.
Small business leaders however face varying skills, time, knowledge, and financial demands in the scoping, diagnostic, implementation, and absorption stages of business improvement projects. Overcoming each of these barriers is essential to the successful adoption of best practice in SMEs. Efforts to lift the ‘long tail’ will therefore need to consider the challenges businesses face in the process of improving their organisation, by understanding how SME behaviours, management skills, and organisational dynamics are driving weaknesses in adoption, which will also better inform the Government’s Industrial Strategy.
The UK needs to develop a more formal national business support framework to assist SMEs on the journey of absorbing existing productivity-enhancing initiatives into their organisation. This, alongside targeted financial incentives and provisions for boosting management and leadership skills, can provide the vital framework for enabling the significant potential of private institutions including business groups and social enterprises to help deliver a self-sustaining SME support system that facilitates the ongoing diffusion of current and future ‘best practice.’
Overview of Recommendations
Create a new Enhanced Capital Allowance to support productivity growth in SMEs
Provide support to develop a more formalised national business support system
Support greater knowledge transfer between higher education institutions and small businesses
Revamp the training infrastructure with a focus on leadership, management, and digital skills by broadening the scope of schemes such as the Apprenticeship Levy
Create a culture of SME networking, mentoring and coaching
Drive a culture of technological leadership in SMEs
Equip the proposed independent Industrial Strategy Council to help assess and monitor small business productivity policy
2 This study defines SMEs as businesses with 0-250 employees (Micro 0-10, Small 11-49, Medium 50-249). Unless otherwise broken down, ‘small’ refers to all businesses with fewer than 50 employees 4 IoD Report October 2018
The Productivity Challenge
Since the financial crisis most developed nations have suffered from a slowdown in productivity growth, but in the UK the slump has been particularly stark and prolonged. It has essentially amounted to a ‘lost decade’ of growth in our workforce’s output per hour, which has in turn underpinned much of the UK’s recent economic woes.
The only way to sustainably increase individual incomes – and ensure long-term economic growth, and improvement in living standards – is to get more out of the same quantities of labour. Indeed, productivity is the ability of the economy to produce more from the same bundle of inputs, and therefore crucially relies on growing, diffusing and optimising our mix of skills, capital, technology, and knowledge.
Amidst an uncertain climate, weak economic growth and the spare capacity built up over the past decade, British industry has largely held back from investing in the new equipment, technology, or organisational improvements that would drive up firm-level productivity and salaries. Cumulative growth in business investment has in fact been considerably weaker in comparison to the recoveries seen in the decades after other recent recessions3. At the same time our national skills and training agenda has fallen behind in its support of enterprise, while the diffusion of best practices across the business community has also been impaired.
Against this backdrop many firms have preferred to meet demand by taking on more workers or increasing working hours, rather than investing in their productivity. But, with limited pick-up in gross domestic product (GDP) per hour of those employees alongside (Figure 1), the UK economy is now some 14% smaller than it would be had it maintained its pre-financial crisis rate of growth4, and wage growth has also flat-lined as a result. In short, support for productivity growth matters.
Figure 1 UK GDP growth rate by component, %
4.0 Average hours worked per person
3.0 GDP hour/worked
2.0 Employment 1.0 GDP 0.0
-1.0
-2.0 2001-2007 2007-2010 2010-2012 2012-2014 2014-2016
Source OECD Productivity statistics database, June 2018
3 Bank of England, Dave Ramsden, The UK’s Productivity Growth Challenge, February 2018
4 Institute for Fiscal Studies, Spring Statement 2018: An Assessment, Paul Johnson, March 2018 5 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
The ‘Long Tail’
There is no silver bullet. Any response must involve business leaders themselves as well as policymakers, and take into consideration both the firm-level behaviours and macroeconomic barriers to productivity growth. Yet, while there are numerous lenses through which the challenge can be analysed, assessing it through the perspective of business leaders offers a unique insight into the weak performance at the level of the economy.
In fact, despite being home to some of the highest performing multinational corporations, the UK has a particularly high proportion of less productive companies – also known as the ‘long tail’ – when compared with our international peers (Figure 2). Moreover, research by the Office for National Statistics shows there is greater variation within, rather than between regions and sectors for business productivity5, which suggest there are intrinsic challenges facing this ‘long tail’. The top performing quartile of corporates are roughly between two to five times more productive than the bottom6 and, since the crisis, the gap between the leading and lagging performers appears to have widened more in the UK in comparison to peer nations7.
These underperforming firms share a number of traits. They are typically smaller organisations (Figure 3)8, weak adopters of existing ‘best practice’ in management and technology9, and are less likely to engage in exporting and innovative activities10.
Figure 2 Distribution of business productivity by country, percentage of firms (a) The UK has more highly productive firms than Germany and France, but also a greater proportion of underperforming firms 12% UK 10% Germany 8%
6% France
4%
2%
0% -220 -200 -180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200 Difference from expected productivity Source: Mckinsey & Company (a) Relative to expected productivity, as measured by gross value added, of a peer firm of the same size and sub-sector as a proportion of the peer group median productivity. Data last updated in 2013.
Figure 3 Distribution of UK productivity by firm size, density(a) Small businesses underperform larger firms on average 0.016
0.014 Small
0.012 Medium 0.010
0.008 Large 0.006
0.004
0.002
0 -50 0 50 100 150 200 250 -0.002
Gross Value Added per worker, £000s Source: Bank of England, Andrew Haldane, Productivity Puzzles, March 2017 (a) Kernel density distribution of real gross valued added per employee across Great Britain. Data last updated in 2017.
5 Office for National Statistics, Understanding firms in the bottom 10% of the labour productivity distribution in Great Britain: “the laggards”, July 2017 6 Ibid 7 Bank of England, Andrew Haldane, The UK’ Productivity Problem: Hub No Spokes, June 2018 8 Office for National Statistics, Understanding firms in the bottom 10% of the labour productivity distribution in Great Britain: “the laggards”, July 2017 9 Confederation of British Industry, From Ostrich to magpie, November 2017 10 Enterprise Research Centre, Goldman Sachs, & British Business Bank, Unlocking UK Productivity, November 2015
6 IoD Report October 2018
Reducing the gap between the weakest and strongest performers could boost UK productivity by 13% – and raise around £270billion in terms of GDP11. Targeting this, on its own, will not solve the puzzle. Broader challenges facing UK start-ups in survival and scaling, the wider business environment, and even headwinds facing large established organisations remain integral pieces.
Rather, the interest in lifting the long-tail should be to alleviate the unique, and evident, barriers that SMEs face in raising their performance, given that they comprise some 99% of the business community and employ 60% of our workforce. Unlocking this hidden potential can support them to create more jobs, innovate and, above all, help drive much-needed wage growth in the economy.
Catching Up: Adopting ‘Best Practice’
Overall, the take-up of existing technology12 and the quality of management skills13 across UK firms is weak in comparison to our international peers. In particular, the slow take-up of tried-and-tested organisational practices14, strategies15, and technology16 in UK SMEs has been established as among the key reasons why many find themselves in the ‘long-tail’.
Unlocking this over the long-term can drive wage growth, business expansion, and job creation, and help deliver the economic model of both high productivity and employment, that many consider impossible17. Indeed, around 55% of potential productivity gains in developed countries could come from the adoption of existing best practice18.
Strong leadership and management practices drive more value from workers, products and processes. Technology such as Enterprise Resource Planning (ERP) software can streamline operations, while websites and real-time data analysis tools can unlock additional sales online and help identify new opportunities respectively. Meanwhile new strategies such as exporting can drive new sales and competitiveness.
As such, unsurprisingly, investments in management and investment in technology were identified as the primary means to boost productivity among IoD SME members19. Reflecting that, there is a broadly positive correlation between firm size and the current adoption of established products and practices along these dimensions among our members (Figure 4).
While making individual improvements can improve performance, it is often a combination of IT, software, management styles, and strategies that deliver higher productivity gains20. Indeed, small and younger enterprises are often more reactive to business developments. As they mature, many are able to take greater control of business processes and improve them by importing more, and innovating upon, best practice from outside their organisation21.
That said, the prevailing policy discourse has largely conceptualised the integration of these productivity-enhancing measures as a binary choice: to adopt or not. This approach has overlooked the manifold reasons why the diffusion of ‘best practice’ into the small businesses actually fails. To actually lift the long-tail we must promote ‘productivity mindsets’ in SMEs and go beyond simply echoing what ‘best practice’ is by supporting firms to effectively integrate, combine, and optimise it in their firms, addressing the multiple challenges to adoption.
Small firms face varying skills, knowledge, time, and financial demands in the scoping, diagnostic, implementation, and absorption stages of business improvement projects. Overcoming these barriers is essential to the successful adoption of best practice in SMEs. Adoption is better modelled as a process (Figure 5), with numerous hurdles.
11 Bank of England, Andrew Haldane, The UK’ Productivity Problem: Hub No Spokes, June 2018 12 OECD, Science, Innovation and Technology Scoreboard, 2015 13 Measuring and Explaining Management Practices Across Firms and Countries, Bloom and Van Reenen, The Quarterly Journal of Economics, 2006 14 National Institute of Economic and Social Research, The Impact of Management Practices on SME Performance, Bryson and Forth, March 2018 15 Enterprise Research Centre, Goldman Sachs, British Business Bank, Unlocking UK Productivity, November 2015 16 Bank of England, Andrew Haldane, The UK’ Productivity Problem: Hub No Spokes, June 2018 17 McKinsey & Company, Why US Productivity can grow without killing jobs, February 2011 18 Mckinsey Global Institute, Global Growth: Can Productivity Save the Day in An Ageing World, January 2015 19 Institute of Directors, Policy Voice Survey, November 2017 20 ONS, Information and Communication Technology intensity and productivity, October 2018 21 ChangeWORLD, Steve Goodman and Tony Ericson 7 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
First there are mindset hurdles preventing businesses from being aware of performance improvement opportunities from the outset. Next, there are challenges in diagnosing the right solutions for productivity growth and in successfully executing business change programs. Few business leaders for example say their improvement projects wholly meet their intended goals, with research suggesting as high as 70 percent of change programs fail22.
As such, there is no guarantee a business leader can effectively adopt tried-and-tested business improvement measures even if they are fully aware of what it is. And while management competencies can influence the take-up of best practice, it has remained unclear what, and how, skills and organisational dynamics impact the adoption process. Lifting the long tail therefore requires a firmer understanding of the various challenges smaller businesses face in the journey of adopting and absorbing performance enhancing measures into their organisation, which will also better inform the Government’s Industrial Strategy23.
Figure 4 (a) Percentage adoption of selected ‘best practice’ technology among IoD members Small firms are generally weaker adopters of established web-based tools and data analytics software
100% E-commerce 90% Social media 80% Website 70% Cloud computing 60% Supply Chain Management (SCM) software 50%
40% HR Management software
30% Accounting software
20% Customer Relationship Management (CRM) software
10% AI/Machine learning
0 Automated machinery Micro Small Medium Large
Figure 4(b) Percentage adoption of selected management ‘best practice’ among IoD members(a) Larger firms are more likely to have adopted targeting, monitoring, and incentive techniques, as well as staff and management training
100% Staff incentives 90% Performance reviews 80% Targets 70%
60% Implementing flexible working
50% Management/leadership training 40% Employee training 30% Staff engagement initiatives 20%
10% Implementing remote working
0 Micro Small Medium Large
Source: IoD Policy Voice Survey, June 2018, 720 respondents (a) Question for management ‘best practice’ is specific to adoption over the past 12 months.
22 Mckinsey & Company, Changing change management, Ewenstein, Smith and Sologar, July 2015 23 This paper elaborates on the Institute of Directors’ response to the Department for Business, Energy, and Industrial Strategy, Business Productivity Review: https://www.iod.com/Portals/0/PDFs/Campaigns%20and%20Reports/Economy/IoD%20Response%20-%20Business%20Productivity%20Review. pdf?ver=2018-07-10-153929-210
8 IoD Report October 2018
The Firm-Level Hurdles to Adoption
Figure 5 Best Practice Adoption Process 1 2 3 4 Mindset Diagnosis Implementation Absorption Awareness & Research, Technical Costs & Business Leadership Attitudes Skills & Expertise Disruption & Training Time Outsourcing Change & Project Operational Expertise Management Organisational Management & Culture Strategic Leadership
1 Hurdle 1: Mindset: Establishing a ‘Need’ for Improvement
The first step to boosting productivity in the ‘long tail’ is encouraging businesses to see a need for introspection, external awareness, and, ultimately, continuous improvement in their organisations. Numerous studies have reflected the importance of instilling this mindset. For example, an analysis of the Swedish Business Development Program which provided advisory services to organisations finds that the initial time set Figure 6 aside by firms to assess business problems and strategies, in application for support, had a greater impact on performance IoD SME Members than the actual support itself24. That said, there are numerous reasons for not interlocking business-specific barriers impeding the cultivation of these strategic mindsets across UK enterprises: monitoring productivity, % Awareness & Attitudes When it comes to attitudes toward growth and productivity, there are broadly three categories of business: active, ambivalent, and resistant25. Active firms continuously look for improvement opportunities, while ambivalent firms tend to be more passive in their approach and resistant enterprises are largely closed to change. Instilling a more active attitude across all businesses is a key part of lifting the long tail. This means Time constraints building a better understanding of what productivity is, what it 17% means for performance, and how it can be monitored, in order to promote a ‘productivity mindset’ in SMEs (Box 1). 35% Complexity Around 60% of IoD SME members do not formally monitor productivity in their organisation. Complexity and not seeing its relevance were considered to be the key reasons for not doing so 16% Insufficient data (Figure 6). Many small business leaders prefer to frame productivity as ‘working smarter’ but opt to focus directly on targeting other financial measures and priorities, including profit 4% Other and revenue (Figure 7). Admittedly, while these measures may indirectly lead to improvements in productivity, an outright focus on them could crowd-out the time and investment needed to Not relevant drive long-term business value. Supporting businesses to 28% understand and monitor their productivity is therefore important. Source: IoD Policy Voice Survey, June 2018, 720 respondents
24 The Swedish Business Development Program: Evaluation and some methodological and practical notes, Mansson, Widerstedt, 2012 25 Enterprise Research Centre, Goldman Sachs, British Business Bank, Unlocking UK Productivity, November 2015
9 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
Figure 7 IoD Members’ top 3 business priorities, %
Revenue growth
Profit growth
Small Expansion into new markets
Medium Digital/Technological Large Organisational agility
Improving staff performance
Cost reduction
Market consolidation
0% 10% 20% 30% 40% 50% 60% 70%
Source: IoD Policy Voice Survey, June 2018, 720 respondents
Box 1 Productivity and Performance
What is Productivity? Gross Value Added per worker = [Turnover/sales – Intermediate consumption (non-capital purchases)] Workers (employees and working proprietors) 26
The Business Case Efficiency is about doing the same with less, while productivity is about doing more with the same27, according to one useful framing. That means understanding how to drive higher turnover by introducing new products and services, adjusting business strategies, adopting new management techniques, and engaging in technological investment and innovation to extract more value from a business’ workforce and processes. Measuring and monitoring one’s business productivity against the industry standard is an important step in assessing organisational performance28.
Thus, harnessing a ‘productivity mindset’, which focuses on continuous improvement, is crucial in helping businesses to meet their priorities (Figure 7) in the long-term. It encourages a more dynamic business-wide awareness – which is needed to manage risks, remain agile, and be competitive29 – than a single focus on basic financial metrics (Figure 8). Solely targeting profitability can however detract from making necessary, but costly, investments, which help to underpin long-term growth, while an emphasis on cost reduction, can divert attention from value creation.
26 Office for National Statistics, How productive is your business? July 2018 27 Harvard Business Review, Great Companies Obsess Over Productivity, Not Efficiency, Michael Mankins, March 2017 28 Office for National Statistics How productive is your business?, July 2018, Be The Business, https://app.bethebusiness.com/ 29 The Impact of Total Quality Management on Financial Performance: Evidence from Quality Award Winners, Singhal and Hendricks, March 2000
10 IoD Report October 2018
30 Figure 8 Productivity ‘Best Practice’ Overview
Organisational Enablers Technological Enablers
Structured Practices: Monitoring, Website Incentives, Targets E-commerce Leadership: Performance Reviews, Strategy, Continuous Productivity-Boosting Mobile Technology Improvement Opportunities Social Networks, Marketing Management: Staff Engagement, Operational Efficiency Wellbeing, Team Building, Improvements Enterprise Resource Strategic Recruitment Planning software: Raising Output from Employees Customer Relationship, Operations: Lean Processes, Human Resources, Supply Flexible Working, Outsourcing Enhancing Value Added Chain Management
Networks & Relationships: Other Adoption of New Business Accounting Software Businesses, External Support and Models Expertise, Supply Chain, Clients Data Analytics Software Driving Business Agility/Ability Training: Employee, to Pivot Cloud Computing Management, Leadership Digital Leadership & Strategy Innovation: Product, Process, R&D Digital Skills, Outsourcing, & Training Internationalisation
This is crucial as around 80% of SME business owners believe their business to be as productive or more productive than their peers31, also many tend to overestimate their management skills32. While confidence is an important component of business success, overconfidence can inhibit firms from both seeing, and making, the necessary performance enhancing changes to their organisation.
The ambition to improve and the awareness of improvement measures are closely linked. For example, according to one estimate one-quarter of small businesses do not feel that digital solutions are suitable for them – but this is primarily driven by an assumptive mindset rather than any underlying irrelevance of digital technology to the firm’s business model33. As such, it would be a mistake to entirely dismiss firms that may have an ambivalent or resistant approach to investing in their organisation. Active ambition can be unlocked with greater awareness. What’s more, there are low-cost quick wins in ‘best practice’ (Figure 8) – which do not require more involved consultancy support, once this active ambition is unlocked.
Through interviews it transpired that many IoD SME members who were previously sceptical about the scope for, and associated costs of, improving their organisation had opened up to developing management styles and technology in their firms following information events, training programmes and networking with peers. Even SME leaders who do not seek major expansion plans can boost their job satisfaction in their businesses by developing best practice, and inadvertently, their productivity.
An attitude of ongoing improvement and awareness can also vary in businesses depending on numerous factors. While many are idiosyncratic – such as business ownership and structure, and the demographic background of SME owners34– there are overarching common factors inhibiting a more proactive ‘productivity mindset’. These are namely time, personnel and skill shortages.
30 Department for Business, Energy, and Industrial Strategy, Business Productivity Review: Government call for evidence, May 2018, Mckinsey & Company, Solving the Productivity Puzzle, February 2018, Measuring and explaining practices across firms and countries, Bloom et al, 2014, Institute of Directors, Professional Development Competency Framework (2018), Enterprise Research Centre, Goldman Sachs and British Business Bank, Unlocking UK Productivity, November 2015 31 Be the Business, Overconfidence on productivity is hampering British performance, May 2018 32 London School of Economics, What drives good management around the world?, Bloom et al, 2007 33Lloyds Bank, UK Business Digital Index 2017 11 34 Enterprise Research Centre, Goldman Sachs, and the British Business Bank, Unlocking UK Productivity, November 2015 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
Time Time constraints are considered one of biggest barriers to embarking on productivity enhancing projects even once attitudes are aligned to continuous improvement. For IoD microenterprises, 1 in 2 cite it as the most significant impediment. Business leaders in smaller firms typically spend disproportionately more time working ‘in’ their organisation versus ‘on’ their organisation, and struggle to find the capacity to put their head ‘above the parapet’ to scan for business improvement activities or even monitor productivity. This is reflected in technological improvements, staff performance, and organisational agility taking less priority for small businesses (Figure 7).
Relatedly, around 1 in 2 IoD small business members evaluate their organisation’s processes and methods to identify areas for improvement on a quarterly or less frequent basis (Figure 9), and over 1 in 2 have fallen short of even devising a strategy for absorbing new-to-business technology and management practices. This is clearly an impediment to remaining competitive in the face of rapid social, economic, and technological changes. Small business will need greater support in the day-to-day operations of their organisation if this is to change.
Figure 9 Frequency of assessing processes and methods for potential improvement among IoD small business members, % 30%
20%
10%
0
Weekly Monthly Quarterly Once every Once every Once every Never 6 months year 2 years Source: IoD Policy Voice Survey, June 2018, 720 respondents
Operational Management & Strategic Leadership Insufficient time to invest in a ‘productivity mindset’ is intrinsically linked to the skillsets available, especially for those in the early stages of growth. Small business leaders often have to fill in for absent human resources and finance expertise. Yet it’s not just operational experience that is scarce; many also are yet to acquire the leadership and managerial experience to channel a culture of continuous improvement. As such it’s unsurprising that IoD SME members consider skills challenges to be among the top 3 barriers to increasing productivity.
SMEs also suffer from a bifurcated labour market. They find it harder to attract and retain workers with the right skills compared to large established firms35. What’s more, job moves tend to occur between firms with the same level of performance, so underperforming firms gain limited exposure to skilled and experienced workers36. This makes plugging operational and managerial positions harder, notwithstanding the cost of hiring workers in the first place.
A culture of business improvement is also instilled from the top down in organisations. Yet small businesses often find it harder to attract the guidance of experienced non-executive directors. With their networks and experience, board members can play a crucial role in lifting productivity according to Bank of England research37 and in their role of providing long-term strategic oversight38.
Strategic clarity, communicating a shared vision, and being outward facing – including engaging with clients, supply chains and partners – are key factors in the overall health of on organisation according to McKinsey’s Organizational Heath Index (OHI)39. Yet many of our SME members had limited capacity – including little bandwidth to undertake management or leadership training (Figure 4b) – to focus effectively on these issues.
Given that these skills also develop through experience, and by learning from trial and error, getting businesses confident enough to start on the improvement process is a big challenge, particularly in uncertain economic climates when risk aversion is even higher40.
35 Aldermore, Future Attitudes, March 2018 36 Bank of England, Andrew Haldane, The UK’ Productivity Problem: Hub No Spokes, June 2018 37 Ibid 38 How do independent directors influence innovation productivity? Jiraporn, Lee et al, 2017 39 McKinsey’s Organizational Heath Index, https://www.mckinsey.com/solutions/orgsolutions/overview/organizational-health-index 40 University of Kent, Firms concerned they are underinvesting amid economic uncertainty, May 2018
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2 Hurdle 2: Diagnosing Solutions
If a culture of improvement is in place, and products, processes, and strategies have been marked for transformation, identifying the appropriate organisational or technological solutions is the next step. As such, the success of this investigative stage will ultimately determine whether a firm proceeds with investing further in the adoption process, and whether it will even be fruitful for productivity. Our interviews with business transformation experts highlighted that firms often forgo improvements altogether, or jump straight to an unsuitable solution. Indeed, while information on best practice may be abundant in the online age, businesses still need to understand it in the context of their organisations.
While there is an array of best practice measures (Figure 8), these should not be prescriptive. Successful adoption projects need to be tweaked and fitted to business needs, to ensure they maximise productivity gains. Time taken to fine-tune the chosen practice can be crucial. Bearing this out, a randomized control trial of 116 start-ups in Italy who took part in a ‘business experimentation’ program – which trained organisations to diagnose in fine detail business challenges using a scientific framework – found that the approach led to performance improvements and more effective project diagnosis compared to non-participants41.
Yet, there are several interrelated barriers hindering effective diagnosis in British SMEs. Many firms suffer from an inability to match, and convert, business needs and information around best practice, into implementable projects and investments. Reflecting this, around 30% of IoD micro and small business members consider ‘difficulty measuring the potential benefits’ a big initial challenge in developing technology and management styles in their organisations (Figure 11).
Research, Technical Skills and Expertise The ability to adequately research and test organisational changes, software, and new hardware can greatly help business leaders de-risk transformation investments. Yet ‘insufficient time to test or research solutions’ to given problems, was notably among the top challenges for developing management practices and technology in SMEs (Figure 11).
Choice can also overawe smaller businesses. There are a range of potential measures, including financial incentives and flexible working initiatives, for example, to boost employee motivation. On the technology side there is a high variation within each type of product – including several different suppliers and versions of the same software or hardware – tweaked for various functionalities and interoperability.
In SMEs risk aversion can limit investment in physical assets like IT equipment and machinery altogether, but many also find it considerably harder to make business cases for intangible investments like training programs, management style changes, and software. This is inherently a skills and knowledge challenge. Furthermore, while investing in single technology and management style changes (Figure 4) may deliver immediate productivity gains, it is often their combination with other programs and techniques that optimises their benefits.
While awareness of management and technological ‘best practice’ is important, many firms require greater technical understanding to know how to begin researching for the most appropriate solutions. Estimates suggest around 1.6 million small businesses in the UK also fall short on rudimentary in-house digital skills42, making it challenging to understand even basic technological products and strategies. Moreover, many businesses also cite the complexities of regulation, legacy equipment, and cybersecurity as additional information barriers43.
Additionally, many SMEs need the support to conduct informative tests, focus groups, experiments, and surveys – whether to assess the potential impact of new incentive structures on employee productivity or new product designs for customer satisfaction. On the digital side, many firms take the opportunity to trial software packages for free. However, effectively quality-assuring products, and more involved mobile, hardware and big data solutions is considerably harder, particularly when businesses need bespoke requirements for performance, functionality, ease-of-use, and security44.
Relatedly, many need greater access even to the basic business data, analytical software, and skills to turn information on their business into actionable insights. This is a significant disadvantage in the
41 Bocci University, A Scientific Approach to Entrepreneurial Experimentation: Evidence From a Randomized Control Trial, Camuffo, Cordova, and Gambardella, April 2017 42 Lloyds Bank, UK Business Digital Index 2017, 43 Made Smarter Review 2017 44 Capgemini, Micro Focus, and Sogeti, World Quality Report 2017-8
13 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
diagnostic phase, with research showing that firms adopting data-driven decision-making (DDD) can have 5-6% higher output and productivity45. That partly explains why ERP software, which facilitate DDD can lead to subsequent improvements in productivity, beyond their initial purpose.
The ability to conduct ongoing, wide-ranging, and enterprise-wide analyses influences the ability of organisations to learn and digitally mature46. Smaller organisations are often at a disadvantage here, given resources constraints. Reflecting this, large IoD business members are around twice as more likely to conduct both small experiments and big enterprise-wide efforts, for new technological and management solutions, than micro ones.
Outsourcing Expertise Finding the right advice and external partners is often the next step to filling capability gaps in the diagnostic stage of business productivity improvement. Having access to strong external networks for basic business advice, operational support and implementing improvement projects, as well as referrals to potential partners are important to resource-constrained SMEs. In fact, small businesses are more likely to adopt high performance work practices when they are part of an external business advisory network47. That said, the small business community overall still faces several challenges in finding the right help (Box 2).
Box 2 Business Advice & Support
It is estimated that SMEs spend over £60 billion per year on external consultants and experts48. Yet, finding suitable external support is itself quite resource intensive, with indicative projections suggesting that UK SMEs spend over 570 million hours per year both researching and briefing advisors to help skill up staff49. Our interviews with members also found that many avoid consultants altogether because they cannot afford the fees – whilst several also hold back because they cannot ascertain whether support would be helpful in the first place.
As such, our small business members overwhelmingly prefer to source external advisers from recommendations through existing networks, contacts, and face-to-face meetings, as this helps to overcome a major trust issue they have with finding consultants through existing portals. That is, even with accreditation and rating systems on online freelancer style platforms such as Fiver, UpWork, and PeoplePerHour.
Our discussions with IoD members found that sourcing external advice can be difficult. The quality of available advice for small businesses is also highly variable, with many falling outside the target market for well-established consultancy firms given their focus on big-ticket projects and larger firms (Figure 10a). Moreover, most private support is too generic, lacking the crucial bespoke and hand-held support that enables them to connect solutions to their business model and strategy, and guide them through implementation. As a result many lean heavily on advice from web-based searches, business membership organisations, and business networks (Figure 10b).
Figure 10a Balance of IoD Members describing the quality of available business advice positively, net%
50% Investment in technology
40%
30% New management practices
20%
10%
0 Small Medium Large
45 Strength in Numbers: How Does Data-Driven Decision-making Affect Firm Performance, Brynjolfsson et all, April 2011 46 Deloitte Insights, Achieving Digital Maturity, Kane, Palmer et al, July 2017 47 The adoption of High Performance Work Practices in small businesses: the influence of markets, business characteristics and HR expertise, Wu et al, 2014 48 Zeqr, UK SMEs spend £60 billion per year accessing expert consultants, Smallbusiness.co.uk, 2017 49 Ibid
14 IoD Report October 2018
Box 2 Business Advice & Support(continued)
Figure 10b IoD Members’ key sources of advice for best practice, % Technolog y Management Web-based searches Web-based searches
Business membership Business membership organisations organisations
Other business Other business Micro networks (e.g. supply- networks (e.g. supply- chain, peers) chain, peers) Small Micro Accountants Accountants Medium Small
Private consultants Private consultants Medium Local Enterprise Local Enterprise Partnership/Growth Partnership/Growth Hubs Hubs
0% 20% 40% 60% 0% 20% 40% 60%
Source: IoD Policy Voice Survey, June 2018, 720 respondents
In addition, awareness of Government-led support schemes is particularly low, with many finding it confusing navigate the plethora of, and criteria for, support, notwithstanding the fact that its quality and accessibility is also described as ‘patchy’. The regular chopping and changing of the public support landscape plays a significant role here. In fact, just 6% of our small business membership consider local enterprise partnerships/growth hubs among the top 3 sources of support to improve their organisation’s performance through new technology or management practices. Similar viewpoints were echoed about the public training infrastructure (See Box 3).
Figure 11a What are the top 3 challenges to developing technological solutions in your organisation? IoD Members, %
Upfront costs
Skills/expertise
Insufficient time to test/research solutions
Difficulty measuring the potential benefits
Disruption to business
Speed of technological change
Digital communication speed/reliability/cost Medium
Small Employee skills/training Micro Lack of good quality advice
Organisational culture
Lack of information
0% 10% 20% 30% 40% 50% 60%
15 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
Figure 11b What are the top 3 challenges to developing management practices in your organisation? IoD Members, %
Insufficient time to test/research solutions
Difficulty measuring the potential benefits
Skills/expertise
Organisational culture
Disruption to business
Upfront costs
Employee skills/training Medium
Small Lack of good quality advice Micro Lack of information
0% 10% 20% 30% 40% 50% 60% Source: IoD Policy Voice Survey, June 2018, 720 respondents
3 Hurdle 3: Implementation
Once businesses have identified suitable organisational initiatives and technologies to invest in, the next challenge lies in actually implementing them. At this stage businesses face the challenges of financing their chosen solution, actually integrating new systems and processes, and navigating business disruption with their existing operations and employees.
Cost The upfront costs for investing in technology can vary greatly. There can be small outlays involved in merely upgrading software, yet enterprise-wide software solutions, including holding licenses, involve small instalments for an extended period, while incorporating new hardware altogether can involve large one-off payments. Added to this are the fees required to pay for external expertise and advice.
Altogether, these are significant expenditures for small businesses, and over 1 in 3 SMEs consider costs to be a top challenge in developing technological solutions (Figure 11a). Indeed, many IoD members interviewed were aware of the upgrades and investments that would drive them forward in their digital transformation but had held back because of costs. Given that many non-technological business improvements such as staff engagement exercises and tweaks to performance reviews involved little additional expense, upfront costs were not considered a major challenge for a significant number of members in developing management practices (Figure 11b).
Basic changes to management style may incur no more than small administrative expenses, particularly if they do not require external support. But the advisory and research expenses are higher in bigger strategic business changes, for example in product redesign, implementing remote working programmes, and finding, and selling into, international markets. Furthermore, while initiatives, like the Apprenticeship Levy, are in place to support the cost of training, SMEs still consider even subsidised fees to be expensive (See Box 3). This is also partly as many consider the time spent on staff and management training to be an opportunity cost.
16 IoD Report October 2018
Business disruption The overall cost of adoption goes beyond upfront expenditures. Transitions to new management practices and technology may involve hidden costs in terms of reduced revenue flows, cannibalisation of revenues, and the diversion of management attention50 – which may ironically hamper short-term business productivity. Over 1 in 5 SMEs consider these types of disruptions a core challenge for both technological and management investments (Figure 11).
Minimising disruption and providing clarity on what the implementation process will involve is therefore important. This is inextricably linked with ‘de-risking’ during the diagnostic stage and gaining confidence that a project is ‘value for money’, and, ultimately, having access to skilled and experienced technicians during the integration phase.
Change and Project Management Small businesses need support to develop, and source, the technical skills to successfully implement performance improvement projects into their organisations. For SMEs the ‘skills/expertise needed’ was a key challenge in developing technological solutions in their businesses (Figure 11a). For example, while downloading software is fairly intuitive, firms will still require specialists to install and integrate wider programs and new hardware, execute web designs, and ensure new technology is secure and interoperable with existing data, processes, and systems.
Again, businesses struggle to find the most appropriate partners for this stage (See Box 2) and successful implementation often hinges on having a long-term support partner that understands the business’ needs from the diagnostic phase or can at least connect firms to the relevant web designers, software engineers and programmers. While those that do attempt implementation independently may forgo delivery partner costs, there’s a greater chance of getting things wrong during installation – as well as spending more time.
With the right information and diagnostics SMEs can easily incorporate staff engagement exercises, performance reviews, and targets into their organisation without external assistance. Indeed, only around 1 in 5 small businesses consider private consultants a key source of advice in this space. Yet, larger strategic transformations and business model changes, will require sector-specific experience in setting diagnostics for success, organising teams, and breaking implementation into tasks51.
Given the expenses and difficulty of finding partners, small business owners prefer to execute the advice they obtain from their networks. So the successful incorporation of new practices hinges on internal implementation and change management skills. But these skills are often still developing in micro and small enterprises where founders struggle to make the transition from setting-up a business to managing people and processes. The Chartered Management Institute (CMI) estimates there are 2.4 million of these ‘accidental’ and unskilled managers in the UK52.
Moreover a CMI study find that while almost all managers had experienced change in their business, just 27% said productivity had increased as a result of it53 – often reflecting weaknesses in communication and implementation during transformation management. This impacts both the efficacy of technological and management best practice adoption, because if changes are not diffused effectively within the firm itself, through employee coordination and communication in particular, most projects will be unable to meet their potential.
50 McKinsey & Company, February 2018, Solving the Productivity Puzzle: The Role of Demand and the Promise of Digitization 51 Mckinsey & Company, How to beat the transformation odds, April 2015 52 Chartered Management Institute, The Business Benefits of Management and Leadership Development, 2012 53 Chartered Management Institute, The Quality of Working Life, Exploring managers’ wellbeing, motivation and productivity 17 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
Box 3 Investing in Training as ‘Best Practice’
Compared to larger firms, fewer micro and small IoD business members invested in training last year, though this was starker for management/leadership than general staff training (Figure 4b). Encouraging businesses to take up wider training opportunities requires a better understanding of the challenges they face when considering it as a means to raise their game.
Given pressing day-to-day challenges, and costs, many business leaders are unwilling to invest in training for themselves or their staff, particularly if they have any doubts about its underlying value. By focusing on short- term business goals SMEs are less than half as likely as large businesses to provide management training54.
With the array of training schemes, providers and modules, employers find it difficult to identify what programme would be the most beneficial, particularly when factoring in relative costs, duration, availability by geography, and finding programmes with sufficient flexibility – including short courses and digital access. Moreover, employer engagement during the training process can influence how effective any programme is. If courses are not flexible enough to accommodate the in-office demands of the employee during the training period, it can often lead to a lack of commitment55.
Finally, the benefit of training is in its ability to be effectively utilised in the workplace. This depends on how practically-focussed the course is, and the trainee’s ability to train others. The ‘know how’ developed through these means also need to be effectively diffused into organisations. Often SMEs may not have the necessary processes in place to ensure this. Here, crucial access to experienced business networks can help small businesses better understand how to effectively embed capabilities into their organisation through, for example, training manuals and standard operating procedures.
4 Hurdle 4: Absorption
Even once businesses have implemented new technology, management practices, and strategies into their organisation, the extent to which it actually leads to productivity gains will depend on how well it is integrated and embedded into their enterprise. Our discussions with business transformation experts reiterate that businesses fail to fully capitalise on their investments due to challenges in their own internal diffusion processes:
Leadership and Training Ensuring staff know how to effectively use new software and hardware, and training them in for example new sales strategies, and line managers in new performance monitoring approaches, is one part of absorbing best practice into an organisation. Business leaders often rely on external training offered through implementation consultants, particularly for digital solutions, or proceed to train staff themselves.
In the former case, the training focuses on generic operational issues rather than how to maximise the use of new software and equipment as per the business strategy. Bespoke training is often lacking. In the latter, there can be a breakdown in the ability of managers to effectively train their wider staff. This is due to a combination of limited technical understanding on the staff’s side and limited training skills on the manager’s.
As such, businesses often suffer from post-implementation ‘troubleshooting’ issues, which can slow down its effective use. Furthermore, our discussions with transformation experts highlighted that businesses are often unaware of how to maximise the wider benefits of new software. For example, while a new CRM system may lead to some productivity gains by speeding up some administrative processes, users may be untrained in how its wider functionality, such as its data analysis capacity, can be used to drive sales growth.
Much of this pivots on the ability of management to communicate business strategy, transfer knowledge, and understand how to seize the benefits of new technology. Yet as outlined, many SME leaders need greater support to aid their transition from a start-up owner with an innovative business idea, to someone who can manage people and the operations to bring that idea to life. Often SMEs,
54 Chartered Management Institute, Growing your small business: The role of business schools and professional bodies, September 2015 55 Chartered Association of Business Schools, Degree Apprenticeships, June 2018
18 IoD Report October 2018
particularly those outside the digital sector, do not have the tech experts and chief technology officers to navigate digital transformation projects, whilst more generally they have a limited pool of skilled middle managers to help cascade changes through their organisation.
Organisational Culture For small and medium-sized firms in particular, organisational culture is considered a notable barrier in successfully developing technology and new management practices. In fact, a number of businesses tend to struggle with getting buy-in from employees who have grown used to old IT systems, administrative processes and strategies. That said, it tends to be a greater challenge for organisational changes compared to technology investment (Figure 11). This is often a result of difficulties in communicating strategies with clarity and forging a shared vision among employees.
This can also be impacted by hierarchical and generational differences. For example younger ‘tech savvy’ generations have different workplace values, and tend to be driven by innovation, flexibility, and developing new skills56. Strong collaboration and communication both from the top down and bottom up, across generations, in businesses can therefore be crucial in driving quality and determining staff buy-in into change projects and more generally in getting the best out of the workforce.
Managers can also be responsible for failing to build on existing improvements. There can be a tendency to sit back once a single change has been made. This is often the difference between the adoption and penetration of best practice in businesses, the latter referring to the extent to which technology or new management styles and strategies actually reshape processes and products in a organisation57. Single improvements need to be combined with other investments and changes to extract greater change.
Penetration depends on how widespread new technology and practices are in a business. For example, managers may be averse to adding more users to software licenses, given costs, or fail to capitalise on productivity gains from cloud computing investments without considering remote or flexible working provisions. Moreover, the ONS highlights that the productivity gains of certain technologies can depend on the intensity of its usage, such as for website sales, and whether it is complemented by other products, for example combining ERP, CRM and SCM software58.
Many transformation experts highlight that there is a common assumption that new technology alone will drive performance, but it needs to be combined with the right culture, strategies and leadership in order to be optimised59.
56 Deloitte Millennial Survey 2018 57 Bank of England, Andrew Haldane, The UK’ Productivity Problem: Hub No Spokes, June 2018 58 ONS, Information and Communication Technology intensity and productivity, October 2018 59 State of Digitisation in UK Business, Strategic Labour Market Intelligence Report, SQW, UK Commission for Employment & Skills March 2016 19 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
Policy Recommendations
Efforts to lift the ‘long tail’ will need to consider the various pressure points SMEs face in the process of improving their organisation (Figure 5). While individual interventions may assuage the challenges these organisations face in successfully absorbing ‘best practice’, productivity gains can only be optimised if businesses can successfully clear all subsequent hurdles.
As outlined, these obstacles are multifaceted and tackling them will require a systemic policy approach, encompassing incentives, institutional development, and cultural shifts, and take into account the varied challenges different SMEs face. Moreover, this approach will need to encompass a wide-range of stakeholders, including businesses themselves.
Fortunately, the UK already has a plethora of existing initiatives which provide business improvement and skills support. Unfortunately, these exist in a fragmented state and need to be better resourced and integrated so that the UK has a more formalised national business support framework.
Once in place, alongside targeted financial incentives, and effective provisions for boosting management and leadership skills, it can provide a vital ecosystem for enabling the huge potential of private institutions including business groups and social enterprises, to help deliver a self-sustaining SME support system that facilitates the diffusion of current and future ‘best practice.’
Overview Create a new Enhanced Capital Allowance to support productivity growth in SMEs Provide support to develop a more formalised national business support system Support greater knowledge transfer between higher education institutions and small businesses Revamp the training Infrastructure with a focus on leadership, management, and digital skills by broadening the scope of schemes such as the Apprenticeship Levy Create a culture of SME networking, mentoring and coaching Drive a culture of technological leadership in SMEs Equip the proposed independent Industrial Strategy Council to help assess and monitor small business productivity policy
Figure 12 Which initiatives are most likely to boost productivity in your organisation? IoD Members, %
Digital/technology investment incentives
Mentor/coaching programmes
Tailored support to access customers in other countries
Digital/technology training support
R&D advice and incentives
Back office support (e.g. HR, accounting, compliance)
Collaboration schemes with firms Medium in my supply chain Small Management training support Micro Subsidised access to private consultants
Government business advisory service
Accelerator programmes
Support for finding consultants/contractors
0% 10% 20% 30% 40% 50% Source: IoD Policy Voice Survey, July 2018, 750 respondents 20 IoD Report October 2018
Create a new Enhanced Capital Allowance to support productivity growth in SMEs Investing in productivity improvement efforts is not a priority for many SMEs, particularly when factoring in upfront costs, other potential disruptions, and difficulties making a business case. Moreover, the preconception that investment in best practice is inherently expensive also prevents them from even considering their options. As such ample financial support, and driving awareness of it, can be a significant factor in pushing businesses investment decisions over the line.
Incentives for investing in technology were overall the most popular initiative among IoD SME members for boosting productivity in their organisation (Figure 12). That said, while innovation has been the focus of much recent funding and incentives, there are few obvious avenues of support for businesses wanting to invest in existing practice and technology.
Given cash flow concerns, according to our discussions with IoD SME members, many would not consider taking loans to fund technology investments. Moreover, banks can also be more cautious in lending money for investment in intangible capital60. That said, favourable capital allowances have been shown to encourage investment in equipment in several countries61, while a UK-specific study highlights how changes to the cost of capital have had notable impacts on influencing both the rate and timing of business investment62.
Currently, given weak signposting and technical complexity, only SMEs who hire a professional accountant are likely to understand, and take advantage, of existing capital allowance support in this space. As such, given the economic benefit of encouraging technology investments, there remains significant scope – in fitting with other G7 nations, including France, Italy and Germany, which offer specific tax incentives to invest in established digital technologies63 – to enhance tax reliefs for productivity – enhancing investments in the UK.
As a base, the Treasury should consider creating a new Enhanced Capital Allowance (ECA) for defined productivity-enhancing technologies specifically for SMEs. The aim would be to create an additional incentive, above and beyond what is already available64, as well as a clear signpost for making best practice technological investments that can drive business productivity, such as enterprise resource planning software, data analytics, and cloud computing (Figure 4a):
• A new ECA for this purpose will need to consider the optimal write down rate to incentivize and support capital expenditure (e.g. on IT equipment) and ‘on-going’ operational expenditures (e.g. on software licenses), alongside the dynamic nature of what ‘best practice’ technology encompasses
• Appropriate technologies to be determined by an independent body, such as the Industrial Strategy Council
• This should take place in the context of also continuing to drive investment by extending and simplifying existing capital allowances
Of course, advisory fees are also a barrier to adoption. Subsidies, and support for finding relevant help, would increase the usage of consultants for specialist diagnostic and implementation support, according to our discussions with members. Discounted consultancy policies have been offered in various guises abroad65, and the UK itself previously ran a Growth Voucher scheme, which suffered from low usage and complexity, leading to its short shelf life66.
A new formalised business support framework outlined below (Figure 14) would help drive awareness of productivity ‘best practice’ and will likely, and necessarily, raise the demand for more advanced ‘downstream’ advice, including in things like web design, software engineering support and systems implementation. Financial incentives layered over this can help cut SME expenses associated with using external support for operational support and the more specialised skills and expertise they need (Figure 11).
60 Federal Reserve Board, Capital misallocation and secular stagnation, Caggese and Perez-Orive, 2017 61 Corporate taxation and capital accumulation: Evidence from sectoral panel data for 14 OECD countries, Bond and Xing, February 2013 62 The impact of investment incentives: evidence from UK corporation tax returns, Maffini, Xing and Devereux, January 2016 63 Made Smarter Review 2017 64 In addition to the Annual Investment Allowance, and above the 100% upfront allowance available 65 Singapore’s Innovation and Capability Voucher Scheme, Ireland’s Innovation Voucher Scheme, Netherland’s Index Voucher Scheme, https://www.oecd.org/innovation/ policyplatform/48135973.pdf 66 GOV.UK, Growth Vouchers Programme, https://www.gov.uk/government/collections/growth-vouchers-programme 21 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
The Treasury, with support from BEIS, should also consider supporting the costs associated with advisory services for ‘best practice’ adoption through the tax allowance system for SMEs, for example by incorporating it into the proposed ECA:
• These should ideally focus on consultancy fees for operational management tasks, such as in human resources and finance, and the diagnostics and implementation of best practice productivity projects
• The criteria for eligible tasks and projects should be clearly defined, and combined with a concerted marketing campaign to raise awareness
• Applications should take place through a simple and streamlined process
• Suppliers should ideally be members of professional bodies, and LEPS/Growth Hubs are encouraged to find suitable delivery partners to refer SMEs to
Provide support to develop a more formalised national business support system As evidenced, SMEs struggle for time, skills, and expertise throughout the adoption process. Yet the business support available to jump these hurdles is patchy at best. Many of our SME members find public support confusing to navigate, as well as highly variable in terms of its quality and openness. Meanwhile, those able to find, and afford, relevant private consultants do so largely through informal networks (See Box 2).
The regular chopping and changing of institutions and initiatives by successive governments has created an incoherent business support network. As such, the existing institutional infrastructure requires significant reshaping, gap-filling, and ultimately more resources to grow its effectiveness. In particular, in comparison to Germany’s trifecta of business support institutions encompassing finance, innovation, and diffusion67, there is clear scope to better organise the UK’s currently uncoordinated assistance for the diffusion of best practice (Figure 13).
Indeed, the UK’s finance and innovation ‘prongs’ are more formalised than its diffusion architecture. The British Business Bank is the UK’s development bank, while Catapult Centres, operating via Innovate UK, assist in the research and development of new products, process, and technological solutions through funding and expert support mainly for more advanced SMEs. Both have a significant function and on-going support to grow their capacity is important, but better-connected institutional support is also needed to ensure new ideas and practices are adopted across the business community.
Figure 13 Mapping the UK’s Current SME Support Framework The UK needs to better integrate LEPs/Growth Hubs and private institutions to create a more formalised business support network
Coordination Department for Business Energy and Industrial Strategy
Innovation Finance Diffusion UK Research and Innovation British Business Bank 'Business Support Network'
Innovate UK Research LEPS/Growth Hubs Councils, Private Research England —Universities, Business Schools Catapult Centres Be the Business —Business Partnerships, Business Groups, Social Enterprises
—Consultants Knowledge —Banks, Incubators and Accelerators Transfer Partnerships
Source: IoD Policy Unit
67 Bank of England, Andrew Haldane, The UK’ Productivity Problem: Hubs No Spokes, June 2018 22 IoD Report October 2018
The dissolution of Business Link and the Manufacturing Advisory Service—alongside the Regional Development Agency set-up – which were effectively ‘one stop shops’ for core business issues, has added to the lack of coordinated SME support. Currently, the UK’s institutional architecture for diffusing existing best practice is fragmented informally between the LEPs/Growth Hubs system – which just 6% of our small members utilise for advice (Figure 10) – and private entities. Business partnerships, social enterprises, business groups and private consultants have all helped to plug gaps in support, and tend to be more popular forms of advice among our members (Figure 10).
Given their regional presence, LEPS/Growth Hubs can provide an important foundation for a national business support ecosystem, which connects public and private business support at a local-level, and assists small businesses on the journey of absorbing productivity-enhancing initiatives into their organisations. This can broadly be segmented in 5 distinct layers of support which need to be available locally, on a national scale (Figure 14). These considerations ought to be integrated into the wider ongoing review of LEPs as part of the Government’s broader and local Industrial Strategy.
The Department for Business, Energy and Industrial Strategy (BEIS) alongside the Ministry of Housing, Communities and Local Government (MHCLG) should develop a more coordinated national business support system building upon the existing resources, programs, and brand of LEPS/Growth Hubs, and connecting to private institutional support across the country:
• The system based on, and coordinated by, LEPs/Growth Hubs –and delivered through private institutional partnerships such as with business groups, consultants, social enterprises and universities – should provide regional coverage to tackle the specific hurdles SMEs face in raising their productivity (Figure 14)
• LEPS/Growth hubs should be adequately resourced to provide initial free support, through delivery partners, on best practice information (Layer 1), basic business issues (Layer 2), simple diagnostics (Layer 3), and in directing and referring SMEs to private consultants and relevant training programs (Layer 5). Trials will play an important role in understanding what works best at each layer
• This framework will likely drive demand for more advanced consultancy and implementation assistance across Layers 3 and 4. LEPS/Growth Hubs should then assist SMEs in finding external support (Layer 5), the fees for which could be supported through tax reliefs, as recommended above
• Existing capabilities and resources need to be assessed at each layer and geography, particularly given the potential loss of European Regional Development Fund funding for existing programs
• LEP/Growth Hubs may need to be combined at a more regional-level
• This ecosystem will need long-term government support, and marketing, if it is to prove successful and raise awareness levels
23 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
Figure 14 IoD 's Proposed National Adoption Ecosystem68 LEPs/Growth Hubs need to be adequately resourced to coordinate business support delivered through private institutions – including business groups, consultants, social enterprises, business partnerships and universities – at a local level, and across five core layers
LEP/Growth Hub Layer
1 BEST PRACTICE COMMUNITY: A coordinated community-led movement to inform businesses about ‘best practice’ in management and technology, and driving ‘productivity mindsets’ at a local level. It should ideally include an online portal showing supporting events, networking, mentoring, and training programs, navigable to the regional-level
2 ENQUIRIES: General business advisors, and operational management support, on day-to-day issues, including HR, tax and regulatory compliance, and financial management to free-up business leaders to think about business improvement
3 DIAGNOSTICS: Research, business experimentation, and technology specialists to help SMEs ‘diagnose’ opportunities and problems, and ‘de-risk’ business improvement projects
4 CONSULTANCY: ‘Hand-held’ bespoke consultancy support to assist in executing business improvement projects and transformations
5 REFERRALS: Assist in identifying relevant partners, consultants, and training schemes
Source: IoD Policy Unit
Support greater knowledge transfer between higher education institutions and small businesses Knowledge Transfer Partnerships (KTP) currently enable businesses to bring in academic skills to deliver a specific, strategic innovation project through a knowledge-based partnership – combining a business, academic or research institution, and qualified graduate. Businesses effectively employ the specialist for longer-term research at a discount, with many partnerships often ending in a permanent job69. With the UK’s share of the global top 100 universities four times its share of global GDP70, there is greater scope to use KTPs to ‘commercialise’ the UK’s wider research excellence for the adoption process too – alongside its current focus on more innovative activities.
SMEs often struggle to compete for graduates, and can benefit hugely from digital, quantitative, and qualitative research support for strategic decision-making, business experimentation, data analytics, market research, and assessing ‘best practice’ projects. International students can also provide valuable insights to boost small firms’ knowledge of global markets. More broadly, alongside helping to raise the capacity of SMEs to reflect on their business and growth opportunities, it can also provide a pathway to future employment
BEIS should consider widening the scope of, and provide more funding for, KTPs to help provide broad and easy access to specific graduate skill-sets, including research, digital, and other business competencies, to help raise the capacity of SMEs to take-up best practice, particularly in the diagnostic stage of adoption (Layer 3, Figure 14).
68 Modelled on Manufacturing Advisory Service 69 Gov.uk, Knowledge Transfer Partnerships: what they are and how to apply 70 Jim O’Neill, How Universities Can Soften the Brexit Blow, Project Syndicate, May 2018 24 IoD Report October 2018
Revamp the training infrastructure with a focus on leadership, management, and digital skills by broadening the scope of schemes such as the Apprenticeship Levy
IoD SME members cite skills challenges among the top 3 barriers in raising their productivity. Given their size, small enterprises have a limited array of human resources to drive business improvement. Moreover, they often find it hard to attract graduates and experienced talent. This can be supported through the provision of external support, and training. Indeed, one in five SMEs consider management/leadership and technology training support an important initiative to boost their productivity (Figure 12).
SMEs have access to a wide-range of training options from the national to the local-level (Figure 15), but not on the scale of peer nations. Moreover, the infrastructure for training is both confusing to navigate and variable in its quality and accessibility (Box 3). Assessing and finding the right program is also often a challenge for SMEs. As such, to lift the long-tail the Government should focus on building a diverse, integrated, and accessible leadership, management and digital training landscape. Indeed, small businesses tend to prefer drawing upon the less cost and time intensive training outlined toward the bottom of (Figure 15)71.
Figure 15 Training Options for SMEs
Training Type Typical Providers
Business School/Postgraduate Qualification (e.g. MBA) Universities/Business Schools
Management Apprenticeships Professional Bodies Professional Body Qualifications (e.g. Chartered Manager Degree)
Management/Leadership Programmes (e.g. via Accelerators, Incubators) Universities/Banks/ Business Partnerships/ Social Enterprises Short Courses on Management/Leadership
External Conferences, Workshops and Networks Business Groups/Independent Practitioners Mentoring and Coaching
Source: IoD Policy Unit
Businesses can already access high quality management courses – including MBAs, the Senior Leaders and Chartered Management apprenticeship degrees – via business schools and other executive programs through private institutions. But, while these are valuable courses, they are both time intensive and expensive, even considering available support. Moreover, improving the take-up of ‘best practice’ would require a more targeted, flexible and accessible course offering.
At the national-level, BEIS, alongside the Department for Education (DfE), should build greater focus on the skills challenges SMEs face in adopting best practice through the existing national training infrastructure, such as the Apprenticeship Levy and National Retraining Partnership. This includes:
• Access to strategy, change management, communication, people management, and digital leadership courses, ensuring wide-geographic availability, building on the recently £11million announced training programme for management skills in SMEs72
71 Chartered Management Institute, The Business Benefits of Management and Leadership, 2012 72 Gov.uk, https://www.gov.uk/government/news/government-support-to-boost-skills-and-prosperity
25 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
• Broadening the Apprenticeship Levy beyond 2020 to ultimately become a wider training levy as recommended by the OECD73, alongside recent reform announcements74
• Emphasising practical application, with on-the-job training, so learnings can be quickly embedded and applied
• Incorporating flexibility to fit-in with the day-to-day resource requirements of SMEs, including digital offerings and in-office training
• Continuing to support the cost of training for SMEs, including reducing the amount they are currently asked to co-invest as part of the Apprenticeship Levy and by extending the proportion of the Levy that businesses are able to transfer to other organisations in their supply chain
• Support at Layer 5 of the national adoption ecosystem should guide businesses to suitable training support (Figure 15)
• Continuing ‘what works’ pilots, tests and simulations to improve and tweak offerings
Create a culture of SME networking, mentoring and coaching Low intensity, local-level support, alongside a national training infrastructure, is also important to drive- up skills and knowledge in the long-tail. SMEs have little time to reflect on their performance or engage in longer training, and are often unaware of the improvements and investments they can make to their organisations.
Light-touch coaching, learning through peers, business networks, and mentors – particularly through supply chains and experienced business leaders – can be the driver to unlock this mindset and provide vital support. Small business directors also need informal networks to build non-transactional relationships with fellow leaders, with the trust built through these opening them to valuable external partners and advice.
In fact, small businesses in Britain are more likely to adopt high performance work practices when they are part of an external business advisory network75. Meanwhile, Growth Hub-led schemes like the High Performance program, which centralise the use of peer learning and exemplar business, so firms can see how others have benefited from best practice, tend to have a strong track record76. This is also recognised internationally. Belgium’s PLATO Networking Program found that participation led to a 2.5% increase in productivity77, while indicatively in Germany it is compulsory for all registered companies, with some exceptions, to join a business group78.
Indeed, over 1 in 4 IoD SME members said mentoring and coaching support would most likely boost their productivity (Figure 12). More specifically, 80% of UK scale-ups say they would be able to grow their company faster if effective mentoring and support services were available79. Businesses do have access to relevant schemes and networks through LEPs/Growth Hubs, Mentors Me, and business groups, for example. Yet, there needs to be a more concerted push to raise awareness around the importance of these forms of business support, which subsequently drives demand for diagnostic and practical consultancy.
BEIS, LEPs/Growth Hubs, business groups, and industry should play a leading role in building awareness of productivity ‘ best practice’ and support SMEs in their communities, through an emphasis on networking, mentoring, and coaching (See How the IoD can help you) to develop a wider ‘best practice community’ (Layer 1, Figure 14) by:
• Developing diverse mentoring and networking programs, including connecting SMEs to large established enterprises, other businesses in their supply-chain and experienced business leaders, building on the recently announced £20 million funding for networks to boost mentorship between small and large businesses80
• Driving awareness of the importance of business networks, non-executive directors81, and the boardroom in improving SME performance, importing best practice and supporting long-termism
73 OECD, Getting Skills Right: United Kingdom, 2017 74 Gov.uk, https://www.gov.uk/government/news/government-support-to-boost-skills-and-prosperity 75 The adoption of High Performance Work Practices in small businesses: the influence of markets, business characteristics and HR expertise, Wu et al, 2014 76 North East Local Enterprise Partnership, BEIS Business Productivity Review, July 2018 77 An evaluation of public spending: the effectiveness of a government-supported networking program in Flanders, Camuffo et al, 2017 78 The Association of German Chambers of Commerce and Industry, https://www.dihk.de/en 79 The Scale-Up Report, On UK Economic Growth, Sherry Coutu, November 2014 80 Gov.uk, https://www.gov.uk/government/news/government-support-to-boost-skills-and-prosperity 81 Bank of England, Andrew Haldane, The UK’ Problem: Hubs Productivity No Spokes, June 2018
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• Collaborating with Be the Business and national mentoring schemes to raise their profile and partnerships, including by promoting the dual benefits of knowledge transfer across sectors and generations
• Targeting and disseminating ‘best practice’ information by potentially utilising HMRC’s existing correspondence and database
Relatedly, BEIS and MHCLG should review and ensure there are local-level, light-touch, networking, mentoring and coaching initiatives available through LEPs/Growth Hubs –sourced through private partnerships (Figure 13) – as an alternative to more intensive training forms, with an emphasis on:
• Adopting ‘best practice’, and strategy, change management, communication, people management, and digital leadership skills, in particular, delivered through a focusDelivery on practical application and peer learning
• Continuing ‘what works’ pilots, tests and simulations to improve and tweak offerings
Drive a culture of technological leadership in SMEs The UK is a world-leader in research, and ranks among the top 15 nations globally for technological readiness and innovation82. As a result it has become a global hub for tech start-ups and international digital leaders. Yet while the UK pushes the technological frontier, it ranks 30th for knowledge diffusion83 – with the adoption of existing best practice technologies lagging many EU peers84.
In other words, innovation is failing to percolate through the economy, and the business landscape is bifurcated between the leading innovators and a large number of laggards. This is largely due to the lack of any overarching diffusion architecture, and insufficient technological skills, expertise and awareness among some SMEs. Improving this in small businesses is crucial. In fact, recent ONS research highlights how three basic ICT resourcing strategies – direct employment, outsourcing and providing ICT training to employees – are all associated with a productivity premium for firms, alongside other combinations existing technologies85.
BEIS, LEPs/Growth Hubs, business groups, and industry should initiate a dynamic, joined-up and targeted national campaign to broaden awareness of best practice technologies and create a new technology management cadre with SMEs, with an emphasis on:
• Providing SMEs with digestible information about the most widely used technologies – their practical uses, benefits, costs and how to optimise and combine them – while signposting firms to adoption delivery partners, and ensuring content is updated as innovation shifts the goalposts for what ‘best practice’ means
• Building digital skills and awareness within SMEs through aforementioned training, mentorship and peer-to-peer programs, including promoting collaboration with digital mentors and networking with experienced technology leaders
• Encouraging SMEs to have their own in-house technological leadership and transformation personnel, either by considering the creation of Chief Technology Officer or other senior technology positions. And, driving awareness of the importance of data-driven decision making
• Targeting and disseminating ‘best practice’ information by potentially utilising HMRC’s existing correspondence and database
82 World Economic Forum, Global Competitiveness Index, 2017-2018 83 Global Innovation Index 2018, Cornell, INSEAD, WIPO 84 OECD, Science, Innovation and Technology Scoreboard, 2015 85 ONS, Information and Communication Technology intensity and productivity, October 2018 27 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
Equip the proposed independent Industrial Strategy Council to help assess and monitor small business productivity policy While this research focuses on the firm-level barriers in adopting best practice – as outlined in BEIS’ Business Productivity consultation – policymakers cannot ignore the impact of wider macroeconomic factors, and how they interact with business behaviours. Costs, regulation, economic uncertainty and the quality of regional and national skills, digital, and physical infrastructure play a crucial role in business investment decisions and time allocation, which in turn influences the adoption of best practice (Figure 16). These issues require reform and ongoing consultation.
Furthermore, alongside backing SMEs to take-up existing ‘best practice’, it’s important to continue supporting innovative activities in these organisations, including through R&D advisory and incentives. This enables more advanced smaller organisations not only to follow, but also to lead in driving new productivity ‘best practices’. Several studies stress the link between product and process innovation and productivity growth86. Finally, driving internationalisation in capable and willing SMEs is also an important endeavour in boosting productivity. With exposure to new sales streams, greater competition, and different ideas, firms that export tend to be more productive than those that do not87. Policy recommendations in this space are outlined in the IoD’s Policy Report Going Global88.
As such, small businesses need continuity, coordination, and long-term thinking from the Industrial Strategy. Indeed, the regular chopping and changing in initiatives can impact levels of awareness, while firms also require policy stability in order to plan years ahead.
Small business productivity, and the diffusion of ideas, knowledge, and technology throughout the business community, should form a central pillar of the independent Industrial Strategy Council's89 activities, with an emphasis on:
• Highlighting the firm-level and macroeconomic(Figure 16) challenges for small business productivity, and ensuring reform in this space stays on the agenda by monitoring and evaluating the progress of the Industrial Strategy, as well by providing advice to the Government through consultations with the business community
• Acting as an independent long-term body that can support the on-going diffusion of best practice as it evolves and as governments change. This includes potentially defining which best practice technologies should be included in the proposed ECA
86 Enterprise Research Centre, Goldman Sachs, British Business Bank, Unlocking UK Productivity, November 2015 87 Office for National Statistics, UK trade in goods and productivity: new findings, July 2018 88 Institute of Directors, Going Global, Trends in Trade, April 2018 89 HM Government, Industrial Strategy: building a Britain fir for the Future, November 2017
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How the IoD can help you
Professional Development: Skills, mindset and knowledge training from experienced course leaders to build management and leadership competencies, including a digital academy to learn on the go and support for in-company training. 1 www.iod.com/training
Information & Advisory Services: Access to specialist business information and guidance, including legal and tax helplines, research support, confidential one-to-one expert advice sessions, and a comprehensive business library. 2 Factsheets for IoD members covering advice and checklists on productivity and business best practice, including setting key performance indicators, finding consultants, and managing time. www.iod.com/information
A Network of Experienced Business Leaders: Over 30,000 business leaders to exchange ideas, contacts and learn about ‘best practice’ through 3 workshops and thematic events across the country.
A Start-Up Network: The ’IoD 99’ community supports growth, expands networks and boosts skills and knowledge in start-ups. Over the past year, the community is estimated to have created over 7,000 jobs and has generated over 4 £150mn in investment, while around 1 in 4 joiners in the past year have doubled their turnover. www.iod.com/99
Policy Advocacy: Advances the case for tackling wider business environment and firm-level productivity challenges with government, parliament, the media and other influencers. 5 Sharing best practice advice with members in collaboration with our professional development course leads. www.iod.com/about/policy-team
29 Lifting the Long Tail: The productivity challenge through the eyes of small business leaders
Figure 16 The Small Business Productivity Ecosystem, IoD Members, %
Top SME Business Challenges UK economic Cost burdens including business rates, and late conditions payments – with estimates suggesting small firms are Uncertain trading still chasing around £14billion – significantly impact SME status with the EU cash flow and finance available for ‘best practice’ (The Federation of Small Businesses, May 2018) Compliance with Government Skill shortages/ employee skill gaps Delivery Business taxes The quality of digital infrastructure, including broadband Difficulty or delays connections and Government Digital Services, impacts obtaining payment the processing speed online sales, business diagnostic Broadband cost/speed/ tools, and overall technological speeds reliability
Employment taxes
Transport cost/ speed/reliability 41% of IoD SME members consider compliance with Global economic Government regulation a considerable challenge. The conditions time spent in compliance can reduce productivity, while Access to, or cost of, complexity around measures such as R&D incentives, finance can stifle attempts to boost it Cost of energy
0% 10% 20% 30% 40% 50% Skill shortages are a top concern for over 1 in 3 IoD SME SME Priorities for Increasing members. Without the necessary talent, business UK Productivity productivity suffers, shifting emphasis on an effective education, training, and immigration system Invest in digital infrastructure Invest in physical infrastructure Lower the regulatory Uncertainty influences SMEs ability to execute burden investment decisions. UK economic uncertainty has Support investment exceeded its European peers in recent years, and in R&D around 20% of UK companies consider a lack of confidence as a main reason for not investing Lower tax burden (Mckinsey Global Institute, Solving the United Kingdom’s Productivity Puzzle in A Digital Age, September 2018) Improve education Improve training support Support for business costs Physical infrastructure, including road, rail, and Improve access housing, impact where businesses locate, their rental to foreign labour fees, costs of operation and how quickly orders can be processed 0% 10% 20% 30% 40% 50%
Mindset Diagnosis Implementation Absorption
Source: IoD Policy Voice Survey, November 2017, July 2018
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Author Tej Parikh is a Senior Economist in the IoD’s Policy Unit. He holds a Bachelor’s degree in Economics from University College London, and a Master’s degree in International and Development Economics from Yale University. Prior to joining the IoD, he worked as an economic analyst at the Bank of England in roles across monetary and financial policy. Subsequently, he moved to Cambodia where he was a journalist focusing on economic and private sector development for a national newspaper. He has since been a freelance political risk consultant and journalist, covering Europe and Asia. He has published for numerous international media outlets including Foreign Affairs, Reuters and the Guardian.
Tej Parikh Senior Economist
Skill shortages are a top concern for over 1 in 3 IoD SME members. Without the necessary talent, business productivity suffers, shifting emphasis on an effective education, training, and immigration system
31 Institute of Directors For further information on this report, please contact: Tej Parikh Senior Economist +44 (0)20 7451 3263, [email protected]
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