M Institute

A hung Parliament?

Should we care that next week we may have a hung parliament in the UK? M Institute co-founder Jyoti Banerjee investigates the options.

I see that a recent study of growing businesses by the British Chambers of Commerce finds that two-thirds are concerned or very concerned about the impact of not having a majority party, while only one in seven respondents feel that it would be a good thing.

Let’s try and place the hung parliament discussion in context. The one thing that medium enterprises crave from their politicians is a stable economy so that business decisions within the firm are not constantly upset by changes without. But it is not just a stable economy that they need. Medium businesses also need top-flight transport and communications infrastructure, access to finance, and a well-educated workforce.

So ask yourself this question? Will a hung parliament actually deliver any of these hopes? Or will it stand in the way of achieving these objectives?

It is reasonable to expect the main political parties to be different from each other, and given the opportunity to exercise their policies, the UK could look very different in a Labour regime of Big Government, compared to a Tory government of Small Government / Big Society, or even Nick Clegg’s Open Government.

But reality is likely to be very different. While each of them could lead Britain into completely different economic territory, that is going to take rather a long time. I suspect Britain’s appetite for a hung parliament may not last long enough to see change on that scale. In fact, a split leadership may not even last the course of a single parliament.

Should we care that next week we may have a hung parliament in the UK? M Institute co-founder Jyoti Banerjee investigates the options.

I see that a recent study of growing businesses by the British Chambers of Commerce finds that two-thirds are concerned or very concerned about the impact of not having a majority party, while only one in seven respondents feel that it would be a good thing.

Let’s try and place the hung parliament discussion in context. The one thing that medium enterprises crave from their politicians is a stable economy so that business decisions within the firm are not constantly upset by changes without. But it is not just a stable economy that they need. Medium businesses also need top-flight transport and communications infrastructure, access to finance, and a well-educated workforce.

So ask yourself this question? Will a hung parliament actually deliver any of these hopes? Or will it stand in the way of achieving these objectives?

It is reasonable to expect the main political parties to be different from each other, and given the opportunity to exercise their policies, the UK could look very different in a Labour regime of Big Government, compared to a Tory government of Small Government / Big Society, or even Nick Clegg’s Open Government.

But reality is likely to be very different. While each of them could lead Britain into completely different economic territory, that is going to take rather a long time. I suspect Britain’s appetite for a hung parliament may not last long enough to see change on that scale. In fact, a split leadership may not even last the course of a single parliament.

Confused over the size of an SME?

The International Federation of Accountants has published a financial reporting standard applying to SME organisations. But, argues M Institute co-founder Paul Druckman, the new standard will only give rise to confusion. Paul explains why.

In July 2009 the International Federation of Accountants (IFAC) published an International Financial Reporting Standard (IFRS) designed for use by small and medium-sized entities (SMEs). SMEs are estimated to represent more than 95 per cent of all companies. The standard is a result of a five-year development process with extensive consultation of SMEs worldwide.

This has created a dilemma for countries across the world in reflecting on IFRS implementation in deciding how big is an SME? Leading to a headline in Accountancy Age magazine: Confusion over SME size could complicate international rules.

Clive Lewis, head of SME issues at the Institute of Chartered Accountants in England and Wales (ICAEW), stumbled across the curious accounting issue while in conversation with an African colleague at a function. ‘In a casual discussion we couldn’t find any company that wouldn’t fit the definition of SME in Botswana,’ he said.

Now Clive should know better than that : he should be able to provide a route to the solution, as M Institute has been in dialogue with him and the ICAEW since its formation about this definition dilemma. We at M Institute are very clear on this: it is all about the characteristics of a business, not its size.

When will they learn? When will they listen? Let's have a meaningful conversation around the definition of an SME, and our characteristics model can be a straightforward route to a solution. Come on, people: talk to us!

Mandelson initiative reaches medium business

As the government announces new support packages aimed at SMEs, M Institute co-founder and chairman Paul Druckman asks if these packages are really addressing the challenges facing medium enterprise in the UK.

M Institute welcomes the business support packages announced by Peter Mandelson, the Secretary of State for Business, Enterprise and Regulatory Reform (BERR). The packages, aimed at the SME sector (small and micro enterprise), actually do raise the game to include many medium enterprises, after much lobbying over an extended period of time by M Institute.

Mandelson’s announcement has three schemes on offer which use company turnover as the qualification criterion. By focusing on size, the government is clearly still not fully embracing M Institute’s characteristics model. However, the size definitions used in the packages show that they are bringing more medium enterprises into their thinking: 

Do we need the RDAs?

The Taxpayers' Alliance would like the regional development agencies abolished. M Institute co-founder Jyoti Banerjee studies their report - he likes their data but disagrees with their recommendation.

This month a report from the TaxPayers’ Alliance claims that the £15 billion spent on the Regional Development Agencies since their creation in 1999 has been a total waste as the RDAs have contributed absolutely nothing to the economic performance of the regions in the UK. The TPA report has three main planks of evidence: 1) The RDAs were created to improve the performance of the regions, particularly those outside London and the south-east. In 1992, London and the south-east contributed 36% of the UK economy, a figure that has grown (in the wrong direction) to 48% in 2006. 2) Employment across the country grew by 9.5% between 1995 and 2000, while it only grew by 3% between 2000 and 2005. 3) Regional inequality worsened: apart from London and the south-east, England’s regions grew faster before the RDAs were around, compared to the seven years after. To add to this lack of performance is a long account of RDA waste. For example, 39 RDA bureaucrats earn over £100,000 a year, one part-time RDA chairman had a travel expense bill of over £50,000 in a single year, and one RDA managed to spend £20,000 sending some of their team to a film festival in Dubai.

Medium enterprise and the low-carbon economy

Climate change, whether you believe in it or not, is going to change every business on the planet, either by force of regulation, or by a competitive drive towards low-carbon business models. Medium enterprises have a great opportunity to be the next generation of big winners in a future low-carbon economy. Or big losers. M Institute co-founder Jyoti Banerjee investigates the balance of probability.

Last week BBC Radio 4 featured an interview with a Canadian academic who has developed a prosthetic knee that generates electricity every time the knee flexes. It’s a great idea for helping provide power to disabled people but it turns out that there are other applications as well. The military could generate electricity for their communications devices while walking. And the rest of us could walk around to power up our iPods, mobiles and GPS units.

Walking to generate electricity is not going to turn back the tide on climate change but it is just one more example of the way clean-technology approaches are gaining traction in the market.

Medium enterprises are probably as concerned as everybody else about climate change but many executives of such organisations that I have met wonder what they can do to really make a difference. After all, the industries that have to make the biggest changes to their carbon productivity, such as energy, transport and heavy industry, are usually not populated with medium enterprises. Executives in medium enterprises agonise over installing efficient heating, or motion sensors to switch lighting in less-used locations like toilets because they know that these things make good business sense anyway, but surely none of these are going to tackle the problem of climate change.

New mezzanine finance in government strategy

The new Enterprise Strategy paper from the Department of Business, Enterprise and Regulatory Reform (BERR), published alongside the Budget 2008, announces a number of finance initiatives that are extremely relevant to medium enterprises. For the first time, the government acknowledges the need for mezzanine finance vehicles of the sort that M Institute has been campaigning for on behalf of medium enterprises.

Which regulatory burdens are the most tiresome?

87% of UK businesses believe that reducing regulation should be on the government agenda, according to the ICAEW Enterprise Survey Report 2007. Furthermore, over a third of businesses think this should be the top priority for government action to improve the business environment. But which regulations are most burdensome for medium business? M Institute knowledge partner, the ICAEW, has done research on this.

Across all sizes of business, employment legislation and health and safety regulations are the most likely areas to be considered troublesome, with 15% of businesses singling each out as the biggest administrative burden they face. However, it appears that employment legislation may be getting less onerous: in the 2006 survey, 28% of businesses pointed to it as the biggest administrative burden.

Unfortunately, this change is not reflected in the response of medium-sized businesses, of which 26% still identify employment legislation as their single biggest administrative burden. The report suggests that this may be because they "are starting to build up a significant workforce but may not yet have the critical mass for an established HR function".

Health and safety regulations and VAT are the two next most burdensome requirements for medium business, identified by 19% and 13%, respectively, as the biggest administrative burden. At the other end of the scale, business taxation and planning regulations are two areas in which medium businesses are considerably less concerned.

Aside from the 34% of medium business that believes reducing regulation should be the government's top priority for improving the business environment, 19% thinks improving the skills and qualifications of the UK population is most important and 12% thinks lowering interest rates should take precedent.

UK drifts to 11th in competitiveness league table

The UK slipped nine places to the eleventh spot on the closely-watched table of global competitiveness put forward last week by the respected World Economic Forum (WEF). United States regained the top spot, despite the current turbulence in its economic performance, thanks to its ability to innovate and the efficiency of its markets. M Institute co-founder Jyoti Banerjee checks out the league tables in competitiveness.

Coming 11th out of 131 competing countries does not sound too bad – probably a better performance than the collective achievement of the highly-paid elite that make up England’s football team. What is disappointing is the basis for the fall from second to eleventh place. According to the Global Competitiveness Report for 2007-08, four of the most problematic factors in doing business in the UK are tax rates, tax regulations, an inadequately educated workforce and inefficient government bureaucracy.

Just take a moment and read that list again. In every instance, the finger of blame points to one culprit, the government.

Now that’s disappointing.

It was only in February that this blog pointed to the deterioration in the UK’s tax environment, as we slipped from 7th to 13th spot in the WEF’s tax competitiveness league. Less than a year later, we are being told that tax has become one of the biggest problematic factors in doing business.

Conservatives challenge on regulation

The Conservative party's economic competitiveness policy review was published this month, dealing with a remarkably broad selection of topics. The report looks at the current state of transport, skills and training, regulation, energy, the public sector, ownership, and taxation, and offers extensive recommendations for each, ranging from the seemingly banal (the re-phasing of traffic lights) to the controversial (the abolishment of inheritance tax).

The proposals that deal with regulation are perhaps of most interest. Some are drastic (scrapping data protection, for example) but, overall, the focus on tackling regulatory burden is welcome. The report argues that often regulation is used to impose practices that businesses, in the interest of competitiveness, already have in place. Furthermore, it argues that some regulations achieve the opposite of what is intended: in such instances, regulation sometimes produces unintended consequences that are more harmful than the issues the regulations are dealing with.

The report proposes a governmental push for deregulation: new regulations would have to be debated before being implemented and annually reduced regulatory budgets would be given to each department.
The report advocates exemptions, where appropriate, for SMEs.

Unfortunately, in M Institute’s view, the report fails to distinguish between the very different needs of small and medium sized businesses. Medium businesses usually do not qualify for exemptions and are treated exactly the same as large enterprises.

Banks have better things to do with their money...

... than to invest in the growth plans of medium organisations. M Institute co-founder Jyoti Banerjee asks if the investment preferences shown by banks are really the results of market imperfections that need to be dealt with by policy-makers.

A few months ago, I took part in a meeting at HM Treasury organised by M Institute where a few leaders of medium organisations were invited to present their stories: how their companies became medium-sized, and the challenges they had to overcome and still have to deal with. A recurring theme for these business leaders was the way in which problems relating to access to capital impair their growth performance.

Should government be doing something about it? Clearly, the Treasury officials we spoke to did not think so as there is no evidence in their eyes of market failure. Without evidence-based market failure, how can the government generate its favoured route of evidence-based policies? (One wag recently commented that it is not evidence-based policy-making at work here – simply, policy-based evidence-making).

There is urgent need for a formal research study that can show if the evidence exists that access to finance is slowing down the growth of medium companies. This is particularly apposite in the context of a Brown government that has shifted attention from start-up enterprises to existing companies that demonstrate growth – an arena of business where medium companies are very successful. M Institute may not claim credit for engendering this shift in policy, but it certainly fits our policy recommendations. In this context, please see an earlier blog item commenting on Margaret Hodge’s enterprise policy.

UK slips against global competition

The Institute of Chartered Accountants finds that 77% of all British businesses are engaged in international activities. M Institute co-founder Jyoti Banerjee explores this finding in the light of UK plc's competitiveness in the global marketplace.

The tenth annual Enterprise study from the Institute of Chartered Accountants in England and Wales (ICAEW) has found that 77% of all UK businesses are currently engaged in globalisation to some extent. Filtering this finding to companies with less than 1,000 employees, the research indicates that as many as 44% are engaged internationally, either through having customers overseas, outsourcing, or running operations abroad. |Its higher than I would expect

Of the 1100 companies taking part in the study, 42% view globalisation positively, and 18% are concerned about it. Possibly unsurprising is the fact that it is the financial services sector that is most positive about globalisation, and manufacturing the fastest to recognise the risks, reflecting the relative strengths of these industries in the global marketplace. London continues to be a powerful global finance centre, while Britain's manufacturing is sliding away, except in certain specialist sectors such as racing cars, boats, and defence.

Empowering medium enterprise - a guide for policy-makers

A new research study, from M Institute, sets out challenges facing medium organisations and asks policy-makers to respond.

The UK government wants to see Britain as the best place in the world to start and grow a business. Yet most of its attention is on policies and measures aimed at starting businesses. A new research study from M Institute, Empowering Medium Enterprise: A guide for policy-makers, seeks to focus government attention on the challenges facing medium businesses, and the actions government can take to support their continued economic growth performance.

The research, released October 2006, was carried out by M Institute, and received support from Microsoft and the Institute of Chartered Accountants in England & Wales (ICAEW).

Key themes emerging from the research study:
• Medium business is very different from large or small business
• Medium enterprise growth is held back by certain economic factors

 

Hodge has high hopes for enterprise

Margaret Hodge is keen to kick-start the spirit of enterprise among Britain's young people. M Institute co-founder Jyoti Banerjee asks if this is wise.

Let me place my cards on the table right at the outset. Fewer than one in eight start-ups make it to their third year in Britain. In other words, seven out of eight are doomed to fail. Do we really want to get people out of jobs and employment, give them some government grants and then sit back and watch them fail?

Margaret Hodge, minister of state for the Department of Trade and Industry, will vehemently disagree with me on this but that, ladies and gentlemen, is her recommended course of action. OK, I grant you that she would not sit back and watch, but whatever she, or anybody else from government does, the rate of failure of business start-ups has been pretty steady for nigh on three decades.

Laying down regulatory burdens

As far as business is concerned, regulation of any sort is a burden. How burdensome is the burden, asks Jyoti Banerjee? And what should government be doing about the burden?

The burden of regulation shows itself in three ways.

One, business carries the burden of much of the interchange between government and its citizens, whether processing tax, tax credits, maternity pay or even alimony payments. This represents anadministrative cost on businesses for the privilege of being employers.

There is a separate regulatory burden that comes from meeting government policies that relate to public safety, correction of market failures or the promotion of a fair business environment. This is usually referred to as the policy cost of regulation.

Finally, there is a cost borne by business that relates to the policy cost – this is the administrative cost of complying with policies: getting to know the policies, keeping records on policy issues, reporting on compliance, and costs relating to government inspection and enforcement.

Each of these costs represents separate strands of regulatory burden. Although it is important to understand the components of the burden of regulation, it is fair to state that, as far as business is concerned, all these costs are taken together when it considers the costs of regulation.

Counting the uncountable

How many M organisations are there in the UK? M Institute co-founder Jyoti Banerjee ventures an estimate.

In a recent blog, Philip Woodgate opines that that there are 26,000 medium organisations, out of an SME population of 4.3m altogether.

Question: Is Philip right?

To answer that question, we need to ask what a medium enterprise is. How do we identify one that we can count it? The trouble is that different definitions give us different answers to the question of how many M enterprises are out there. But right at the outset, let me commend Philip for taking on the challenge of figuring out how many there are.

Growth in the regions

Three-fourths of British medium-sized organisations are not aware of their regional development agency, or RDA. Who cares, asks M Institute co-founder Jyoti Banerjee? Well, the RDAs should, and the government should, and - surprisingly - so should mid-sized companies.

We think of the Chinese as growing unbelievably fast. India is no slouch either. Nor is Ireland. But looking at growth stats for a country as a whole is misleading. It's not countries that grow fast - it is individual regions that grow.

All over the world, we see certain regions performing so spectacularly that the entire country seems to be glowing green with growth. But other regions in the same country lag behind. China is a case in point. In China's coastal regions, such as Dalian, Beijing, Shanghai and Zhejiang, per capita income is around $5000 per year, a figure already surpassed by Guangzhou. But in the hinterland, incomes fall away to between $2000 and $1000, and lower. If we treat regions as countries, then nine of the top fifteen Asian countries are actually Chinese regions.

Growth and finance: an imperfect relationship

Growth needs money, and money looks for growth. But the two often don't find each other in the M segment of the market. Jyoti Banerjee gives credit where credit's due...

There seems to be this special bond between growth and mid-sized organisations, or M organisations as I like to call them. Talk to most leaders of M businesses and they will tell you that they expect to grow at around 20% per annum for the next three years or so. What’s so remarkable about that anyway? After all, most small and start-up businesses probably expect to grow at around 200% per annum. Why should we care about the twenty percenters?

We should, for a number of reasons.

Extracting M from SME

Why are mid-sized businesses so invisible, asks Jyoti Banerjee? Its because they get grouped with small and start-up organisations that they are absolutely different from.

Mid-size enterprises are the powerhouse of the UK economy.

Although only 6% of UK companies are in the £10-£250 million revenue bracket, these businesses employ 30% of the British work force, and generate 20% of all corporate profits. Their annualised growth rate is at 8%, which is well above the national growth rate.

Despite this sterling performance, mid-size enterprises are nearly invisible. They have no profile in the market, government does not pay them any attention, and they are usually lumped together with small and micro enterprises via the SME label, although they are significantly different from those companies in almost all respects.

Mid-size businesses are in a different ballpark from small businesses
Mid-size businesses are categorised in most UK analytics as part of the SME grouping. This is certainly tautological in terms of size as SME seems to cover any companies that are not large, but it does not provide any analytical insight on the behaviour of such companies as they are different from small and micro enterprises in a number of significant ways.

Digging for M content

Readers of this blog will be aware that the mid segment in the British economy is badly in need of definition and recognition. Jyoti Banerjee identifies three layers of information that will help in this process.

The M sector is remarkably well-hidden in the British economy despite its sterling performance as a growth engine. Its features are well submerged under the SME definition. In order to get better definition of the M sector, we need at least three distinct layers of information, which in turn need to be configured in a way that will help two key stakeholders: executives of mid-sized organisations, and government.

Layer 1: Macro analysis on economic performance of the M sector
Macro-economic analysis needs to be generated to help policy-makers understand the benefits that the M sector brings to the economy, particularly in terms of growth, jobs and innovation diffusion. It would also cover the challenges that they face, particularly where the issues are such that policy-makers can impact on them through their actions and prescriptions.