Given the right support, SMEs may prove to be the perfect way to get business booming once more, writes Bill Jamieson
Boom times enhance us, but hard times are the making of us. In all the acres of coverage of our monthly economic performance, the bigger picture can elude us. Of course it shows continuing hardship and difficulty, but it also reveals an important and unfolding change. The economy emerging from this prolonged downturn will be different in character, composition and dynamic from the one that entered it.
The private sector business world is fragmenting: it is literally going to pieces. Many big firms are continuing to downsize or go under, while the scattered diaspora of this shake-out set themselves up in smaller units and micro businesses.
We are retiring early, or being “let go” or whatever the genteel buzz phrase to mask the reality of painful and convulsive change. But we are not really “retiring”. And we are certainly not letting ourselves go into a twilight world of idleness and unproductive leisure. We are re-entering the world of work in smaller firms, or setting ourselves up as micro businesses, often self-employed or in partnership with spouses.
It is “creative destruction”, just as the brilliant economist Joseph Schumpeter famously described it. But can it really turn the business cycle?
A report last week by the Scottish Government and the Scottish Trades Union Council cited figures showing that there are now more than 300,000 self-employed people in Scotland – one-eighth of the workforce – and it is growing rapidly. While the number of company employees has declined by 97,000 during the downturn, the number of self-employed people is up 33,000.
There has been a 17 per cent rise in the number of self-employed to 94,000, while the number of self-employed men is up 10 per cent, at 207,000. Some 16 per cent of those in work aged 50 to 64 are self-employed, and nearly four out of every ten working people over the age of 65 are self-employed.
Earlier this week, a leading building industry lobby group submitted a report to the Scottish Government, describing how the downturn in the construction industry has “atomised” the small to medium-sized building sector in Scotland. Larger family-owned businesses fail and are being replaced by newer, smaller companies.
These two documents confirm a bigger picture of a business universe increasingly marked by small firm start-ups. In 2000, the number of small businesses across the UK was estimated at 3.5 million. By 2008 this figure had risen to 4.3 million. It now stands at a record 4.8 million, with a net rise of 500,000 small firms since the onset of the financial crisis and recession.
As if these numbers are not startling enough, they continue to grow. According to the website of Start-Up Britain, the number of new business start-ups across the UK this year totals more than 230,000 and is rising at more than 10,000 a month.
Here in Scotland, official government figures late last year showed that despite a struggling economy and major problems with bank lending to business, the number of enterprises in 2011 rose by almost 31,000 or 10 per cent – the highest annual increase in the series going back to 2000.
Dramatic changes in information technology – in particular the arrival of wi-fi, low-priced laptops, mobile phones and social networking sites – have made it easy to start up an online business. And the average cost of an online start-up is reckoned at just £325.
Set against this is the continuing dire shrinking in net new lending to business by the banks. Existing loans are being called in faster than new lending can prevent an aggregate fall. This is forcing the sector to seek innovative solutions such as crowd funding.
How many of these start-up businesses will survive? According to business lore, around half of all start-ups fail in the first year. After three years, the failure rate is reckoned as high as 70 per cent.
Now it has, of course, always been thus and better, surely, a rising business birth rate than a static or falling one. Entrepreneurialism is always at heart a discovery process, one of trial and error, innovation, adaptation – and, yes, failure. Venture capital firms can typically reckon on three businesses to stall or fail for every one success.
Poor marketing, cash-flow problems, bad planning, lack of finance, inadequate management skills and jinxed location can fell the most ambitious start-up. Others will find it just too exhausting. No paid holidays, no sickness cover, no IT help desk to scream at when things go wrong, no bad boss to blame – and hours of administrative, back-office drudge: the romance of entrepreneurial endeavour can quickly pale when reality sets in.
The reality for most who survive is a vulnerable “plateau” of modest success, veering between extremes of sudden bursts of rewarding growth and swoons into a ravine of cutbacks and cheeseparing. Yet for all its perils and frustrations, most micro-business owners who make it through the first years treasure their freedom and independence and would never wish to go back to being a hired hand.
Can an expanding micro-business universe turn the bigger wheel of our economic fortunes? Yes, it can – with the right conditions. The alchemy of transformation is not the number of such businesses per se but whether the growth in numbers brings with it an upsurge in collective self-help – enterprise networking for want of a better phrase – that enables the sector as a whole to be something greater than the sum of its individualistic parts. In addition, changes in government policy are needed to help promote small business.
The main purpose of the Federation of Master Builders (FMB) report was to point out that more than half of UK SMEs have seen their success rate fall when bidding for public sector work over the past five years, while more than 40 per cent are filing to win nine out of ten public sector contracts. According to FMB’s Scottish director, Grahame Barn, barriers to SMEs include the increasing use of “framework agreements” by local authorities that exclude small contractors. Pre-qualification questionnaires can run to more than 100 pages, often with baffling questions, and a process that can sap the will of the most intrepid.
Meanwhile, entrepreneurship promotion is fast climbing the agenda. Belinda Roberts, tireless founder and organiser of the WeDo Scotland network, is joining a Scottish Government working group to advise on its entrepreneurship and innovation promotion.
Membership of her group has grown by 30 per cent since launch in January 2013, mostly established firms in the £300,000-£1 million bracket. More than 35 are already on the High Growth Programme with Scottish Enterprise.
As with the Scottish Enterprise Edge awards supported by the Scottish Government and Royal Bank of Scotland, the innovation and creativity shown by the Young Enterprise Scotland programme is hugely inspiring and an antidote to the gloom and doom that seems the daily fare in newspapers and TV. We may be all going to pieces – but in our response to adversity, it may prove the remaking of us.