Small businesses and productivity Contents


Small and medium-sized enterprises (SMEs) are crucial to the UK economy both for wealth creation and for the people they employ. Productivity growth is essential for promoting long-term economic growth and higher living standards. It is therefore vital that SMEs are given the best chance of succeeding and can contribute towards the UK’s productivity.

For an SME to succeed, being paid fairly and on time is key. Disappointingly, we found that bad payment practices have led to the failure of many SMEs and have prevented others from growing and improving their productivity. Efforts to address this, such as the Government’s Prompt Payment Code, have too often been ineffective. The Government should introduce a statutory requirement for companies to pay within 30 days and give the Small Business Commissioner powers to fine those who pay late. It should also extend the Commissioner’s remit to cover the construction industry, where poor payment practices have been a problem, highlighted by Carillion’s treatment of its suppliers. Retention payments within the construction industry, while they have their place, have also been abused by many companies. Instead, independently managed project accounts should be introduced and only withhold money when there is a good reason to do so.

SMEs can also benefit from access to public sector procurement. Regrettably, the Government is on course to miss its target of awarding 33 per cent of all central government contracts to SMEs by 2022. We recommend that the Government should urgently set out how it will meet its target and ensure greater SME involvement in wider public procurement, and to protect SMEs from late payments, we also recommend that companies and their supply chains that bid for public sector contracts should pay within 30 days or be prevented from bidding.

UK productivity is falling behind its competitors. The Government has acknowledged this in its Industrial Strategy and is considering how it can address the ‘long tail’ of unproductive SMEs. To tackle this, we recommend the Government reduces imbalances between SMEs in different regions and sectors and helps small businesses to better understand what productivity is, how it can be measured and then improved.

There are a myriad of policies and initiatives aimed at helping SMEs innovate, export and address productivity issues, some of which rely on EU funding. SMEs find this landscape difficult to navigate and they worry that funding will dry up when we are outside the EU. The Government should improve online support for SMEs and urgently explain how it will match EU funding. Local Enterprise Partnerships (LEPs) and Growth Hubs should play a crucial role in helping SMEs access national and local support. The Government should ensure that their support is consistent, accessible and adequately funded.

We found that SME management skills are uneven often because many lack the resources to invest in training or are unconvinced by the benefits. Intensive training programmes and peer-to-peer learning achieve results but are expensive and time intensive. To reach more SMEs, the Government should explore how the lessons learnt from such programmes can be re-packaged into bite-size learning and how vouchers can help SMEs take up more intensive training.

Many SMEs lack basic digital skills, while others do not have the capacity to take advantage of new digital technologies, reducing their ability to become productive and innovative and allow their workers to reskill and upskill. Digital skills should be at the heart of business support and we recommend that the Government explores how financial incentives can be used to help SMEs invest in them.

While the UK remains a good place to start a business, it lags behind other states on the number of scale-ups: high growth companies that are productive, sustainable and deliver high quality jobs. We recommend that the Government ensures scale-ups have access to long-term finance and support in areas such as exports, management and digital capability and uses data to proactively support them. LEPs, Growth Hubs and online support should differentiate between and match the ambitions of both scale-ups and other SMEs.

Supporting SMEs to become more productive, whether they be ambitious scale-ups or companies that want to be more efficient, will help deliver wider prosperity and sustainable growth. However, the measures the Government have already introduced and those which we recommend in this report could be seriously undermined if our small businesses are not paid fairly or allowed to compete on an equal footing with their larger counterparts.

Published: 5 December 2018