Skills crisis holding back the majority of SMEs from scaling up

Nearly seventy per cent go UK SMEs say that recruiting and developing adequately skilled staff is their biggest barrier to growth, a think tank reveals today.

The Social Market Foundation – a cross-party think tank – has warned that a lack of focus on the skills crisis is limiting the UK from being a place for not just start-ups, but also scale-ups, where businesses are able to grow to their full potential. In a new report from the SMF, sponsored by OakNorth Bank, analysis of a survey of SMEs over time found that staff and skills was the leading barrier to success for 69%, rising to 76% among ‘high-growth’ SMEs (See notes).

The SMF says that the current political focus on access to finance is unlikely to bring substantial rewards unless it is combined with a more strategic and joined-up approach to supporting business growth. In particular, it calls for the establishment of a cross-governmental scale-ups unit, with the mission of creating £50 billion of value (measured by the market capitalisation of scale-ups) by 2028.

It also recommends that scale up policy should aim to foster economically productive ‘hubs’ – key sectors in particular parts of the country, where the UK has a reasonable chance of developing world beating firms. For example, this might involve greater focus on climate and green science, financial technology, therapeutic care services and creative industries.

Recent months have seen intensifying focus on the finance system as a route to growth. The Chancellor’s Mansion House speech in July 2023 focused on boosting the supply of investment capital available to support the growth of high potential businesses. The Shadow Chancellor has also signalled the Labour Party’s intent to push pension funds to pump cash into UK start-ups and high-growth firms.

Even prior to these plans, there have been a series of reviews and policy changes – like the creation of the British Business Bank – attempting to make it easier for SMEs to grow over the last decade.

The SMF argues that there is mounting evidence that the government needs to broaden this approach. From 2016 to 2021, ‘staff recruitment and skills’ was the most frequently reported obstacle impeding the success of ‘high growth’ companies, cited as a problem by three-quarters of such firms, according to SMF analysis. (See notes) Planning regulations that make it harder to house workers and establish firms’ premises are another obstacle.

These findings should not be taken to mean that there is no issue in accessing finance, rather that more targeted interventions are required, the SMF emphasised. Regional inequalities in equity funding, and overall weak investment from institutional investors in SMEs are a few issues that require targeted intervention.

John Asthana Gibson, a Researcher at the SMF, and lead author of the report, said: “There are growing concerns that the UK has lost its competitive edge as a thriving business environment, and this is demonstrated by  our inability to grow and scale the many high potential businesses that have started here.”

“But focusing on capital as the solution above all else has been the wrong approach. It’s high time that we listen to scaling businesses, who are clearly telling us that the greatest obstacle to growth is the difficulties obtaining talented workers.”

Rishi Khosla, co-founder and CEO of OakNorth, continued: “OakNorth sponsored this report because we know first-hand the disproportionally positive impact that successful growing businesses have in the UK – the c.£10bn that OakNorth has lent to date has directly contributed to the creation of more than 40,000 new jobs and 29,000 new homes. We also know from our customers that so many innovative businesses across the UK still face multiple barriers holding back their growth. We’ve had many reviews and much commentary over recent years, but those barriers remain. As this report has shown, access to capital is just one challenge and not even the primary concern. It’s time for fresh thinking and practical measures, and the Social Market Foundation has not disappointed in providing these. It will take political will, clear strategy, and a concerted, well-resourced effort, but if the Government of the day takes the challenge on, we will all benefit.”

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Skills crisis holding back the majority of SMEs from scaling up