Recently the blog and website www.bdln.co.uk kindly published a short note from me on why SME’s are ignored. I thought I would to publish the longer version and there are good reasons for doing so today. I originally asked one of my summer students , Annette Muller , to have a first go at the piece below , and she , interestingly, chose to focus on why many of those looking for training contracts in law firms focus initially on the bigger firms.
We wrote the piece in the mid-summer when the idea of the SMEalliance was still just that, an idea ..and now “It’s here ! “
So before launching into this piece , I would like to say that within a few days of this blog appearing, anyone interested should be able to read about and join the SMEalliance. I have prepared a separate blog for the new website so won’t repeat it here . I will only say ( because this is my blog so I can !! ) that we hope this new organisation will be unlike any other and will genuinely help SMEs in many ways.
And now ………….
Why Are SMEs Ignored—a personal (and not a legalistic ) overview intended to stir up some discussion.
The main needs of SME’s (as defined at the end of this note) from the institutions they interact with include ( among many other things) access to money, specific advice , whether financial , employment, contractual and so on; and qualified leads to potential sales. I suggest that banks, and other financial institutions have historically under-served SME’s. While the size of the SME market in the UK remains relatively constant, although growing significantly at the moment ( huge number of new start-ups), there is on the whole a high turnover with a far greater birth and mortality rate compared to more established firms. This perhaps makes them unattractive to…
– High-risk loans are unattractive and due to the uncertainty of SMEs success banks are reluctant to provide financial support.
– Banking regulation has become increasingly strict (regulators require ever higher capital ratios) and tick-box driven, so why take the risk (from their perspective) when they can simply loan to a larger business and ensure a much safer return?
– SMEs have limited brand recognition and tend not to be a focal point. Are they perhaps at times to blame for not approaching banks for loans for fear of rejection… this seems to be a vicious cycle
– ‘Missing middle’ debate , SMEs have financial requirements too large for microfinance yet too small to be served by larger corporate banking models. This to my mind is a key problem. Where is the funding between start-up levels ( say up to £20,000) and £250,000. It can’t all come from Dragon’s Den !
[ This part particularly from Annette Muller who deserves much of the credit for this paper] Another major issue is that SMEs have limited access to talent due to their weak brand presence. Students ‘ignore’ SMEs for a number of reasons. Students are conditioned to be competitive and aim for the best, the best being the Fortune 500 companies and thus SMEs tend to be the ‘back-up’ plan. (Sad but true, especially in the top universities). Secondly, and now we need to look at the way SMEs market themselves, students often do not know that an SME is looking to hire. This applies to SME professional firms as well as those in other sectors. Established firms spend far more on their hires and their graduate schemes are often world-renowned and as such attractive to students. SMEs tend not to have the financial means to implement such schemes… BUT this is not always the case. The counter argument would be that working in a smaller company actually teaches much more as the student is given a greater variety of tasks with much more responsibility etc… Often the larger corporations are only attractive to a student because they provide funding and tend to offer greater salaries. It is also much easier to find a job later on if you have worked at a well-known brand at the outset.
Price is perhaps a core reason for SME failure to draw customers. In the economic downturn it is unsurprisingly the case that price is the highest priority and SMEs simply cannot compete with the largest companies due to economies of scale.
Loyalty – it takes time, consistency and reputation to generate loyal customers and because most SMEs do not have this, loyalty lies with larger corporations which we have all been using for years and all ‘trust’… But… there is hope… as customers are becoming increasingly aware of the unethical practices of large corporations. Slowly but surely customers are realising that huge sacrifices must be made to achieve such low prices… (Rana Plaza in Bangladesh). As someone said to me while I was writing this piece” I believe and hope that over time the more knowledgeable the customer becomes, the more likely the trend will change and SMEs will stop being ignored… Customers do not want to eat hormone-pumped, battery foods anymore (grocery stores) and so smaller local farm stalls are becoming a growing trend. SMEs in this sector have a chance to flourish..” In your dreams , who knows? I am less optimistic.
Ambiguity and perspective
Is it also as basic as many people simply not knowing what an SME is. In certain African countries SMEs are defined by receipt of loan size rather than actual size and profitability , causing further confusion. No one has a clear definition and so they are all lumped together and shoved aside. The SME sector is massive (99.% of all businesses in the UK by number ) but oh SO diverse…
The article above classifies SMEs into four sectors:
The lifestyle business;
The churn business;
The innovating business; and
The high-returns business
Quite an interesting summary explaining why, for example, in the ‘churn’ sector SMEs, like the local fish shop, are of no importance because they compete with every other fish shop on the street and are simply ‘churned’ up when their time is due…again sad but true , on the whole.
Similarly in the ‘lifestyle business’ sector these SMEs are of great importance as they essentially provide vital services to the public BUT they are ‘invisible’ as they are not seen as opportunities for investors and are not seen as innovative. They do not provide new business revolutions and so focus remains elsewhere…
Sustainability / Environmental
Another issue with SMEs being ignored is that they too are not targeted by environmental programmes. Again the ‘perspective’ issue, whereby companies believe a small SME being sustainable/ eco-friendly has such a minor impact compared to a major corporate and its £50m plus savings through sustainability. These figures can make many SMEs feel insignificant and so they do not begin to approach such an idea (sustainability) YET they account for 99 percent of businesses! It’s proven that even the smallest change in a company’s cost and sustainability structure will inevitably reap financial benefits.
The sheer volume and possible power of the SME segment is finally being realised by many and overtime it appears a shift in this attitude of ignorance towards them. Emerging economies, such as India , have an SME segment of around 25-30 percent, much less than the UK but growing exponentially.
There are hopes that a new ecosystem is emerging and SMEs are finding funding more achievable. Regulations are changing and allowing great dissemination of banking products and services which could change matters. The advent of new digital technology is also promising as it allows new services and strategies to be created at a much lower cost. Along with this technological boom and the increased competition from new entrants, banks are finally beginning to look more closely at how to create tailored solutions for the SME sector.
In summary I believe ( which why this article finishes on a positive rather than a negative manner) that the SME sector is and represents a massive potential and should not be ignored.
At the start of 2013 according to the Federation of Small Businesses
- There were an estimated 4.9 million businesses in the UK which employed 24.3 million people, and had a combined turnover of £3,300 billion
- SMEs accounted for 99.9 per cent of all private sector businesses in the UK, 59.3 per cent of private sector employment and 48.1 per cent of private sector turnover
- SMEs employed 14.4 million people and had a combined turnover of £1,600 billion
- Small businesses alone accounted for 47 per cent of private sector employment and 33.1 per cent of turnover
- Of all businesses, 62.6 per cent (3.7 million) were sole proprietorships, 28.5 per cent (1.4 million) were companies and 8.9 per cent (434,000) partnerships
- There were 891,000 businesses operating in the construction sector – nearly a fifth of all businesses
- In the financial and insurance sector, only 27.5 per cent of employment was in SMEs. However, in the agriculture, forestry and fishing sector virtually all employment (95.4 per cent) was in SMEs
- Only 22.5 per cent of private sector turnover was in the arts, entertainment and recreation activities, while 92.7 per cent was in the agriculture, forestry and fishing sector
- With 841,000 private sector business, London had more firms than any other region in the UK. The south east had the second largest number of businesses with 791,000. Together these regions account for almost a third of all firms
micro: 0-9 employees, small: 10-49 employees, medium: 50-249 employees