SME. It’s a term that conjures up images of elbow grease, pull-yourself-up-by-the-bootstraps business – small teams, ambitious entrepreneurs, businesses that begin at the kitchen table. But SMEs are big business.
ONS data suggests that there are over 1.6m SMEs in the UK – that’s 99% of all UK businesses – and over 70% of these are classified as micro businesses. SMEs account for about 50% of the British economy and over 60% of private sector employment – some 14.4 million people. The figures are very similar in Europe as a whole, where SMEs represent 99.8% of all businesses, employing 93 million people and generate 58% of GDP.
The SME sector is often described by government as the ‘lifeblood’ of the UK economy, but it wasn’t always this way. The definition of an SME that we are familiar with can trace its origins back to The Bolton Report of 1971, but then the prevailing sentiment was that the SME sector was in terminal decline …
“The small firm’s sector was in a state of decline in both number and in contribution to output and employment and in a few years would cease to exist. Economies of scale would make the remaining 800,000 small firms uncompetitive and doomed to extinction”. The Bolton Report of 1971
Yes, the government of the early 1970s seriously thought the SME sector was “doomed to extinction”. Fast forward 45 years, and the government was arguing that “a sustained recovery of the UK economy will rely on the private sector with small and medium-sized businesses taking the lead”. The 2015 Report on Small Firms was the first official report on the health of the sector since the Bolton Report and its author Lord Young found
“This shift in the number and importance of small businesses has not been simply a linear trend over 40 years. But within this Parliament alone I have seen a transformation. The business population has increased by 17 per cent since 2010. In 2011 we saw a record number of start-ups, and the beginning of 2014 saw a record increase in the number of firms.
This, in part, could be due to the rising number of self-employed people in the UK. And due to a culture change, more Brits find themselves “driven not by necessity but by desire”.
There is lots of fighting talk about the success of the UK economy being driven by the SME sector, but the term SME is woefully misunderstood and often mischaracterised – it has become a convenient label for motivational soundbites. The reality is that unless we actually grasp the complexity of what it is to be an SME, the economy is going to struggle
Changing aspiration and huge advances in technology are driving/enabling a complete reshaping of the world of work
- The corporate sector will need fewer employees (and offer fewer opportunities)
- The ‘independent economy’ will continue to expand aggressively (necessity or desire)
- Entrepreneurship will become a more well-trodden pathway
- Out of this eco-system, more firms will be created
Since the dark days of 1973, technology has gone a long way to leveling the playing field between huge internationals and the typical start-up. Communication, administration, marketing and management have all become more affordable and less labour intensive, while your next-door neighbour may now have a customer-pool of clients that stretches around the world.
Government initiatives have also gone some way to powering SMEs forward. The Start Up Loans company, a government-backed financial package, has lent £131m to 25,000 businesses and created 33,000 jobs, while apprenticeship grants have provided £1,500 to firms taking on their first apprentice. Then there’s the employment allowance, which hands businesses and charities a £2,000 tax cut off their National Insurance Contributions, as well as a £1.1bn package of business rates measures (although arguably the recent nationwide hikes in business rates are placing a stranglehold on SME growth).
But if SMEs are to continue to thrive, we must now take a step back and ask, what is an SME really? Only from a deep-seated placed of understanding can we ensure that they receive the support they need to continue as the UK’s backbone, especially as Brexit looms.
It’s time to rethink ‘SME’. Out with the outdated understanding. In with a more nuanced approach.
It’s time to stop tarring all SMEs with the same brush; this is a landscape of mobile hairdressers, digital agencies, garages, fishing trawlers – to understand them, it’s essential to look beyond revenue and number of employees. The government has begun to use different lenses when thinking about SMEs, focusing on business owners in terms:
- Gender (focusing on female entrepreneurs)
- Senior citizens
- New university graduates
- High tech, ex-corporate employees
- Immigrant statistics
- Those recently made redundant
Although helpful, it’s not enough.
When it comes to business owners, the government must identify and understand the emotional journey of those spear-heading the businesses in this sector and understand the differences in motivations and thinking. They must also move away from just over-focusing on the Gazelles (companies out there that have experienced 20% growth pa in the last three years). While these businesses are obviously attractive – they emerge from a positive, thriving, dynamic, SME sector of over 1.5 million businesses – all of which have a part to play.
The SME sector is fragmented, messy, diverse and distinct. We must dig deep if we’re to fully understand it.