7 July 2020

How digital tech can help reboot Britain’s small businesses

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Even before the pandemic took a wrecking ball to our economy, we had our share of stubborn, seemingly intractable problems. Chief among these has been our pitiful rate of productivity growth, which has been a paltry 0.3% a year since the 2008 crash – a stark contrast to the reasonably healthy 2.3% typically enjoyed in the three decades or so prior. 

Increasing productivity is important for lots of reasons. First and foremost, as productivity is effectively a measure of how much stuff we can produce with any given amount of resources, increasing it is the only meaningful way to boost living standards in the long run. Others have commented on how growing productivity tacitly inspires confidence in our economy, while also keeping taxes low and ensuring decent returns for savers and pensioners.

It’s also worth mentioning how poorly the UK fares in terms of productivity against its international counterparts. In 2018, an average British worker produced the equivalent of $58.39 per hour – slightly above the OECD average, but a long way behind the likes of Ireland (which ranked top, with $99.71 per hour), the USA ($70.78 per hour) or France ($68.02 per hour). 

An interesting dynamic with the UK’s productivity puzzle is of how smaller businesses tend to drag average figures down – often quite dramatically. In 2017, the median average productivity of a worker in a business employing between 0-9 staff was £24,000 a year. In firms employing between 250-999 staff, the average was £37,000 – a difference of 43%.

Admittedly, among the very largest firms – those employing 1,000 or more staff – productivity does fall back down again, to £27,500 a year. But this is likely explained away by the industries in which these firms can be found, such as retail and hospitality, where a sizeable proportion of workers earn the National Living Wage or just over.

There is no silver bullet for the UK’s small business productivity malaise. Nonetheless, as we set out in the latest report from the Centre for Policy Studies, increasing SME digitisation could help such firms economise, increase sales, take on more staff, and succeed against troubling economic headwinds.

For those of you who have been working from home over the past few months, you’ve probably become acutely aware of just how integral digital technologies are to the smooth functioning of everyday business. Whether you’re having meetings over Zoom, coordinating work streams via Trello, or using Twitter to publish content, new digital technologies have been a lifeline for virtually all businesses. 

That’s before we even begin to think of more specialised ‘back end’ applications, such as those which digitise accounting processes, customer relationship management systems, or human resources software. 

Given that ‘digital technologies’ is a rather broad category, it’s difficult to say just how important they are to different businesses – but our report compiles a body of data which goes some way to illustrating their utility. For instance, a study from Deloitte found that small and medium-sized enterprises which use an above average number of cloud computing services grow 26% faster than those which don’t, while another paper found that Australian firms with a presence on Facebook had a greater tendency to export (a finding which held true across all industries, and was particularly pronounced in smaller firms).

Though the most draconian lockdown restrictions seem to be behind us, it’s likely that social distancing – either mandated or voluntarily adhered to – will mean businesses will be dependent on digital technology and online platforms for months to come. The importance of, say, Deliveroo for a local restaurant, or Amazon for an online retailer cannot be overestimated.

With that in mind, we make a series of recommendations on how the Government can ensure that small businesses are best placed to capture the benefits of workplace digitisation – hopefully allowing them to not only stay afloat during the current economic turbulence, but also exploit the opportunities which lie in store.

One area the Government can help is by liberalising planning laws on new digital infrastructure to deliver quicker internet speeds and keep companies and consumers connected. To protect businesses from online criminal activity, we recommend the UK bolsters its cybersecurity strategy, which has faced criticism from MPs and others. And to ensure that the nation’s workforce has the skills to succeed in a digitised economy, we call for tax breaks on self-funded training, as well as a general overhaul of existing skills provision schemes, like the Apprenticeship Levy.

Before the coronavirus struck, excoriating technology companies seemed to be the height of fashion. Figures on the populist left and right railed against a mythical Big Tech Bogeyman, with ill-considered ‘solutions’ of harmful regulations, punitive taxes, and talk of breaking up technology firms. 

But as we have all hunkered down to stop the spread, businesses and individuals are beginning to appreciate the blessings which the likes of Amazon, Facebook, and Google bestow. Indeed, when we polled senior decision-makers in British SMEs, we found that for every one whose impression of digital platforms had worsened, over eight now had a more favourable impression.

Bouncing back from the ravages of the virus will be no mean feat, and solving the UK’s wider productivity conundrum will perhaps be even harder. Yet at least part of the answer will certainly lie with digital technologies. It’s now time the government makes sure that Britain’s small businesses have the conditions and policies in place to make full use of them, begin closing the productivity gap and rebooting our economy.

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Eamonn Ives is a Researcher at the Centre for Policy Studies.