The lack of growth in productivity in the UK economy is a well-recognised issue. The UK has a bit of a problem – there has been very little productivity growth since the financial crisis. We now lag behind our competitors. A worker in France delivers the same output by Thursday lunchtime that a UK worker does in a full working week. Before I set a load of hares running, I am not saying that the UK workforce is lazy – it’s just that we are, well, unproductive.
Productivity is a measure of efficiency, producing more not by working more hours, but because you’ve got the right tools to do the job. All governments are keen on driving up productivity. The more productive the economy, the more it boosts prosperity, and therefore living standards – what’s not to like?
Leaving aside the vexed subject of what is measured and how it is measured, there is a reasonable consensus on the broad trend of productivity numbers. Given this, it would seem that UK companies are chronically unproductive. Dig a little deeper, however, and it’s a bit more complicated.
Analysis by Andy Haldane the Bank of England’s Chief Economist, shows that the UK has some of the world’s most productive companies. They tend to be high tech, “born global” businesses, working in sectors that include advanced engineering, design, pharma, creative tech, AI, and robotics. Some provide services; others manufacture.
But alongside this, there is a ‘long tail’ of businesses that aren’t innovating – or, on the face of it, not doing much at all to future-proof their businesses. The finger is being pointed at smaller businesses. At least it would appear that way, given the Government’s current Business Productivity Review, and the BEIS Select Committee’s inquiry into the issue.
At Newable, we have identified three distinct areas that are combining to constrain productivity and hold back smaller businesses. These are Access to Advice, Access to Finance and Access to Opportunity. Or “AAFO” for short – I’m still working on the acronym!
Access to Advice
To put it bluntly, businesses do not know where to turn for advice. We are told by businesses that they are unaware of the existence of support, face too much complexity in accessing it, and perceive it to lack relevance to their specific business needs.
Business owners worry that the support will be unavailable in a few weeks’ time, as much of it is “pilot” in nature. The support itself can be of variable quality. To cap it all, most business owners feel that the ‘opportunity cost’ of the time required to access the support outweighs the benefits.
Access to Finance
The British Business Bank reported that the ‘high street’ banks refused 100,000 SME business loan applications from smaller businesses creating a £4bn funding gap.[ii] We believe these figures are understated, and don’t reflect the wider implications to the economy and the multiplier effect that such a level of investment could generate.
All lenders look at the ability of a company to service interest and return the principal sum. If your cash is tied up in a late payment cycle, it’s financing the working capital of your larger customer and not your own growth plans. The upshot is that smaller businesses find themselves unable to satisfy lenders, and therefore fail to secure finance for their own growth.
The Responsible Finance movement – of which Newable is a part – seeks to advance funding to smaller businesses refused by the traditional sector. As a result, we see thousands of business plans every year, the vast majority seeking to improve, develop and expand their businesses. We believe the outcome of these business plans, if implemented, would be to dramatically improve UK productivity.
Access to Opportunity
Finally, there is Access to Opportunity. The irony of smaller businesses facing the issue of late payment is that they have at least tackled this challenge. In fact, most smaller businesses are denied access to public and corporate contracts.
Earlier this month, the Cabinet Office released figures showing that smaller businesses won only 22.5 per cent of central Government spending last year, down from 24 per cent in the previous 12 months. There is an official target for smaller and medium-sized companies to win 33 per cent of public work by 2022. To put this in context, smaller businesses make up over 99% of the total number of companies in the UK, and generate over half of the UK’s GDP.
We have made three recommendations to the Government that – if adopted – will resolve the issues I have outlined above:
- The Government should lead on reforming the current “patchwork quilt” of SME business advice, and create a scaled-up version of the current international trade advisory service with a focus on raising productivity, increasing exports and maintaining imports.
- The Government should implement substantive measures to increase the availability of SME finance – adhering to Responsible Finance principles – so the resources to invest in developing a business to improve productivity become available and conditional.
- The Government should introduce measures which enable unfettered access to corporate and public sector supply chains, and ensure that the payment terms are equitable and timely.
Late payment is seen too often as an issue that exists in a silo. It clearly doesn’t, and the implications of this profoundly undermine productivity. Implementing Newable’s recommendations would help to start resolving this, but more would need to be done. This could form the basis of a review of the future role of the Small Business Commissioner, giving the position a very pertinent and helpful place in delivering the UK’s Industrial Strategy going forward.
Guy Nicholson is Group Chair at Newable Ltd.