Posted on Monday 1 February 2016 by Ulster Business
Paul Terrington, Regional Chairman of PwC in Northern Ireland
One of the recurring requests I get every New Year is to provide one or other media outlet with a forecast for the year ahead, a critique of the local economy and an assessment of how to close the prosperity gap with the rest of the UK. Hot on the heels of that comes the annual assessment of the Top-50 or Top-100 Northern Ireland businesses and the media attention that attends even a modest move in the league table.
We have something of a fixation with size and, as regional chairman of PwC, I’m regularly asked to comment on our growth plans, our job targets and how we plan to continually compete successfully in global export markets. The same goes for the chairs and CEOs of Northern Ireland’s biggest companies. Yet, as big employers, we are a significant minority. A mere 65 companies based in Northern Ireland have more than 250 employees; only two percent are exporters and 10 firms deliver 53% of total regional exports.
What I’m rarely asked is how we manage to remain a market leader in our core domestic market in Northern Ireland and how important our local clients are to the regional economy. Big we might be and a major exporter we are, but what a lot of people don’t now is that we also have more family-owned and owner-managed clients based in Northern Ireland than any other professional advisor in the region. Maintaining that relationship is important, but helping to sustain and grow a dynamic small business sector is vital – both to us and to the local economy.
Northern Ireland’s small firms – those employing between one and 249 people - account for over 75% of private sector turnover, 76% of all private sector employment and should deliver around 89% of all new private sector jobs created by 2018.
That compares with the entire UK, where SMEs contribute only 50% of private sector turnover and 60% of all private sector employment. According to the Ulster University report, The Contribution of Small Businesses to Northern Ireland, our 118,000 SMEs contribute 0ver 80% of non-financial gross value added (GVA) and nearly half of the Northern Ireland’s total GVA.
But the Ulster University research, undertaken for the Federation of Small Businesses (FSB) also says that total turnover in the SME sector is declining and there has been a sharp drop in survival rates, with around 70% of undertakings established in Belfast and Castlereagh during 2008 not surviving beyond 2013. In short, the local economy is over-reliant (relative to the UK as a whole and other UK regions) on an SME sector which faces serious growth constraints and emerging new challenges, both of which it is struggling to overcome.
By way of contrast, the Belfast Telegraph’s Top 10 Northern Ireland business news stories of 2015, ranged from the problems of Michelin, Bombardier and Volkswagen to the triumphs of the Chinese market opening to Northern Ireland pork and the passing of the Corporation Tax Act.
There’s no doubt that the potential fallout from global market pressures on Michelin and Bombardier are probably of greater interest to the Belfast Telegraph’s readership than the collapse of a small retailer in west Belfast or a micro manufacturing business in Castlereagh. But if Belfast created over 1,000 new SMEs in 2013 (which it did) and 700 of those fail by 2018 (the same proportion that collapsed between 2008-2013) that’s a lot of investment lost, a lot of jobs gone and a bad news story on a par with some of the worst large company closures we’ve experienced in recent years.
Given the importance of Northern Ireland’s SME sector and its contribution to employment and GVA, it probably gets less attention than it deserves. Possibly that has something to do with scale. Around 73% of all local SMEs are sole traders and have no employees and that same percentage applies even to manufacturing SMEs, even though total regional employment in manufacturing is around 45,000. And while many of these sole traders either won’t grow, or won’t grow rapidly, PwC’s experience is that there are real opportunities to scale-up businesses that have already demonstrated even modest growth potential.
These scale-up undertakings have now even been defined nationally as businesses with 10 or more staff that are experiencing average annualised growth in employees or turnover greater than 20% per annum over a three-year period. Translated into Northern Ireland numbers, around 5,000 undertakings in total have between 10-49 employees (4% of total SME numbers). In sectoral terms that’s around 630 in manufacturing, 470 in construction and 390 in professional, scientific and technical services.
Just 12 months ago an independent report into the potential of scale-up businesses concluded that a UK-wide boost of just 1% to the scale-up population would create an additional 238,000 jobs and £38bn to gross value added within three years. Again, the PwC client experience amongst local small firms is that undertakings that have already experienced growth first-hand are more ready, willing and able to take the next steps in scaling-up. According to Sherry Coutu CBE, one of the contributors to the national scale-up report, “competitive advantage doesn’t go to the nations that focus on creating companies; it goes to nations that focus on scaling companies.”
Successive reports into the Northern Ireland economy over the past half-century have identified a direct correlation between innovation, exports and skills and productivity, growth and sustainable job creation. Unfortunately the theory has not been put to the test sufficiently frequently. That’s why we launched the PwC Ignite accelerator programme last year - to identify some of Northern Ireland’s most dynamic, technology companies and make them internationally competitive. We wanted to demonstrate that it is possible to develop an accelerator programme that breaks the cycle of sluggish growth amongst technology companies and, through mentoring, sharing advice and accessing PwC’s global networks, to help them grow faster, sell further and perform better.
So far, so good, as our four Ignite companies: Ardbrin Ltd., Datactics Ltd., DisplayNote Technologies Ltd., and Flowlens Ltd, are well advanced on a year of PwC support, mentoring and advice that will culminate in a visit to Silicon Valley to experience the US technology market and build technology and export contacts.
But growing the SME sector, even where scale-up companies are identified and mentored, is challenging. That Ulster University research identified barriers to growth that ranged from political and economic uncertainty to skills shortages, access to finance and marketing. These too, are issues we have identified amongst those clients and contacts we are helping to scale-up and, despite the potential of lower corporation tax to attract new foreign direct investment, it won’t significantly benefit SMEs if they can’t attract skills, don’t have high-speed broadband and lack online marketing skills.
But with Northern Ireland’s growth currently overly reliant on SMEs, we need to maintain a focus on researching, understanding and mentoring the sector. Scaling-up those companies that have already demonstrated growth potential offers a real growth accelerator, but it needs as much political, media and business investment to make that work as is already being invested in the 0.1% of the business community that has already broken the 250 employee barrier.