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Is ‘long tail’ of small businesses to blame for poor UK productivity?

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Is ‘long tail’ of small businesses to blame for poor UK productivity?

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Is ‘long tail’ of small businesses to blame for poor UK productivity?

Minnows tend to be less productive than large companies but they are growing faster

Sarah Singh is a personal injury lawyer who left a Manchester firm to set up on her own in 2016 © FT Montage/Jon Super

It is a sweltering summer morning in the school holidays, but it is still hard to park at the bustling Atlantic Business Centre in Altrincham, a market town on Manchester’s prosperous southern outskirts.

Growing demand for offices and storage from small business has pushed up rents at sites in north-west England run by workspace provider Bizspace to almost the same charged in some of the wealthiest parts of the south-east.

The Altrincham site draws an eclectic mix of businesses. Inside the Bizspace building — a former factory recently refurbished with bold paint, industrial-chic lighting and exposed brickwork — there are consultants and recruiters, digital agencies and kitchen designers; even a numismatic dealer and a couple making props for the film industry.

It is in many ways a microcosm of the UK’s small business scene. It is also a good place to test the hypothesis that Britain’s feeble productivity growth is primarily due to a “long tail” of inefficient companies — in which smaller businesses are more likely to figure.

Andy Haldane, the Bank of England’s chief economist, argued last year that much of the UK’s weak productivity growth can be explained by the large number of “snails”: companies that are often slow to adopt new technology, less sophisticated in their management practices, less able to raise finance and more domestically focused.

This theory has had a big influence on policy, with the government backing initiatives to boost management skills in small businesses and spread best practice through supply chains.

However, small companies do not always think in terms of productivity — they may be more focused on profitability, revenue growth or sheer survival. And while productivity may be the end goal for policymakers, maximising output per hour worked is not always the priority for business — as the occupants of the Atlantic Business Centre can attest.

Take Sarah Singh, a personal injury lawyer who left a Manchester firm to set up on her own in 2016. It is not her first career gamble — she first worked as a cashier in a bank, but after her first child was born, she funded herself through legal training. “I’m used to juggling things,” she said.

Getting to grips with regulation, tax, marketing and the myriad other aspects of running a small business has nevertheless been daunting: it has left her with time to take on only less complex work.

Productivity inevitably suffers when a single person does a wide range of tasks, which a larger company would handle in specialised departments.

Yet in some ways, Ms Singh is more efficient than her previous employers — using case management systems to keep records, for example, where they had filing cabinets groaning under the weight of paper archives.

Steve Madden has big ambitions for Hamilton Cross, the recruitment agency he set up in 2014, which hires temporary workers for care homes and the private healthcare sector. Acute staff shortages have made it a profitable niche: he said he offers above average pay, helped by tax rules that favour self-employed contractors.

Steve Madden's recruitment agency hires temporary workers for care homes and the private healthcare sector © Jon Super/FT

Like Ms Singh, Mr Madden initially ran every aspect of the business himself, but he expanded fast with private equity backing and now has 10 branches across the country.

This dynamism is not atypical of small businesses: their average level of productivity is lower than larger companies — in some cases, even negative — but their average growth in output per hour worked is higher.

One of Bizspace’s longer term customers is Robert Tucker, owner of Northern Power Ups, who is doing his best to modernise a business founded by his father, providing back-up power supplies. For example, he has dragged the company into the digital era with a website, a social media presence and cloud-based accounting.

The UK productivity crisis

The FT examines why Britain is suffering from weak productivity growth

Part one in the series
The many facets of the UK productivity crisis since the financial crisis, in eight charts

Part two
Is the British economic model driving poor productivity growth?

Part three
A report about the small companies that are accused of endemic inefficiency

Part four
Why the construction industry is a poster child for feeble productivity growth

But it is hard going: Mr Tucker and his wife Stephanie — who quit her education job to join the company — know they do not have all the skills that Northern Power Ups needs, but cannot afford to recruit specialist sales staff on current turnover of £150,000.

The couple, and others on the site, would no doubt appreciate the help of organisations such as Be the Business, a government-backed initiative that aims to boost UK productivity by offering mentoring to small companies to improve their performance.

“For smaller businesses there is very little free time to get information on how to do things better,” said Diane Coyle, a professor at Cambridge university. “Any process making it less costly . . . is helpful.”

Emma Long, Bizspace’s commercial director, said work-life balance was a priority for even its most successful customers.

One has expanded so rapidly that he plans to buy the entire site Bizspace runs in nearby Cheadle.

“He has been outbid on land twice,” said Ms Long. “He could easily find a site 20 minutes away . . . but he doesn’t want to drive for 20 minutes. All our customers have that mindset.”

As part of this series, we want to hear what you think is the main solution to the UK’s weak productivity growth since the financial crisis. Share your ideas in the comments below and we may publish the best in a follow-up piece. You can also share your thoughts directly with us at ask@ft.com.

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