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UK's “forgotten middle” powering economic recovery

The UK's mid-sized businesses* (MSBs) are its "secret success story", strongly outperforming smaller and larger companies and driving economic growth -despite lacking an official support network - according to the new 'Agents of growth' report, from leading business and financial advisers Grant Thornton UK LLP.

Over the last few months Grant Thornton has held a series of Agents of growth summits that have brought together MSB leaders to discuss their strategies for growth, as well as their barriers. What was heard at these events, combined with in-depth research**, helped form a series of recommendations to leaders in government and medium-sized businesses which will, if implemented, help the UK’s MSBs to emulate the successful German Mittelstand and significantly boost growth. The proposed measures include tailored support for medium-sized businesses (as distinct from their small and large counterparts), further work to tackle the skills shortage and boost apprenticeships, and recommendations to increase access to finance for medium-sized companies. ***

In turn, Grant Thornton recommends that medium-sized businesses must forge their own collective identity, think big on exports and take advantage of high growth economies in the Middle East and Asia, and explore a range of finance options if they are to compete with ambitious and growing MSB sectors in Europe.

The firm's 'Agents of growth' research finds that overall MSBs contributed £270 billion to the UK economy in gross value added terms, almost the equivalent of the real estate (£158 billion) and financial services (£108 billion) sectors combined. Total turnover is currently estimated at £712 billion, up, by 7.5% year on year – ahead of the 6.5% growth for large businesses and 0.8% increase for small businesses.

The UK's MSB population has expanded by more than 5% since before the 2007 financial crisis, outpacing the number of larger (+1.6%) and smaller firms (-0.9%). The segment has also seen rapid productivity growth over the past two years, with turnover per employee increasing by 10.6% between 2011 and 2013, faster than the 6.5% growth seen by large firms and the 2.9% decline among small businesses.

Moreover, MSBs’ future projections from the report – now in its second year – reveal they expect growth to remain buoyant and outpace that of larger and smaller businesses. Over the next 12 months, MSBs also expect faster growth in turnover, exports and employment than the UK business population as a whole:

  • Turnover per MSB is projected to increase by 5.0%, which would translates into a further £35 billion
  • Average export growth is anticipated to be up 4.4% (up from 4.3% last year), which is ahead of the 4.0% growth expected by businesses as a whole
  • Employment per MSB is expected to rise by 1.6% (up from 1.4% last year), equivalent to 68,000 workers, which compares to 1.3% expected growth across the private sector.

Scott Barnes, CEO of Grant Thornton UK LLP, commented: “The UK's mid-market is an often neglected segment of the market, poorly defined and lumped together with SMEs or large corporates. It's often the 'forgotten middle', yet when you look at the segment in relation to its larger and smaller counterparts, its importance in driving UK economic recovery is crystal clear. The shape and size of these businesses meant they were able to navigate the economic storm of recent years better than the rest of the market, and have made the most of the few growth opportunities that were out there. Impressively, they've been doing so with relatively limited government or peer support, and with little recognition of their efforts.”

John Cridland CBE, director-general, CBI commented:

“The dynamo of growth is mid-sized businesses. If we are to achieve our aim of growing the economy, the CBI recognises that we need to focus on this segment of business.

“The biggest barriers for UK MSBs is actually appetite and strategy, they have got to want to grow and they have got to get the partners to help them grow. We are arranging MSB export missions and running M-clubs around the country so that the mid-market is no longer the forgotten army. And along with Grant Thornton, we hope to persuade government to focus on MSB issues."

Barnes added: "Documenting the sector is only the beginning. As well as conducting research, our Agents of growth summits held with MSB leaders, and other key local and political stakeholders, helped us to understand what the barriers to growth are and to start turning analysis into action. There are four key areas, which is why we have made key recommendations to both the government and MSB leaders as part of our report. With a better defined infrastructure and support network, MSBs could be making an even bigger economic contribution." 

Additional statistics from the 2013 report show:

  • despite a contraction in 2012, the UK MSB population has expanded by more over the past five years than other sizes of business
  • MSBs have outpaced their larger and smaller counterparts in spending on R&D in 2013
  • MSB productivity has grown faster over the past two years than either small or large businesses, and now stands just above productivity at large firms
  • growth in capital spending among MSBs has recovered more robustly than large businesses following the 2008-09 recession
  • within the estimated £270 billion contribution of MSBs to UK gross value added, £160 billion is estimated to be going into the household finances of their employees.

MSBs interested in helping shape their future and drive growth and momentum in the UK mid-market can request further information on Grant Thornton’s Agents of growth summit and research by contacting agentsofgrowth@uk.gt.com.

* The definition of the mid-sized business (MSB) segment is businesses that typically employ 50-499 people. Grant Thornton refers to them as ‘dynamic organisations’ – as they are focused on improving their own performance in every way: products, procedures, costs, management and structure. MSBs form a crucial part of the country’s employment pattern, often representing a cornerstone of the local economy and an essential prospect for those seeking to enter the workforce.

** Produced in partnership with the Centre of Economic and Business Research (CEBR).

***Recommendations written below, in their entirety

About the research:

This research was produced using analysis of government statistics, such as the Department of Business, Innovation and Skills Business Population Estimates, as well as proprietary datasets. These included Bureau van Dijk’s FAME database, Grant Thornton’s International Business Report and the ICAEW / Grant Thornton’s Business Confidence Monitor. Further analysis was conducted using Cebr’s proprietary modelling.

** Agents of growth – Recommendations to Government and MSBs

Recommendations to Government

Sharper definition of the MSB sector, and consistent engagement

  • We recommend that BIS, the Office of National Statistics, MSBs and business advocacy groups such as the CBI agree an accepted, standard definition of MSBs. Agreeing the size and characteristics of MSBs will help everyone promote and support the sector more effectively.
  • We recommend BIS continues to collect and collate MSB-specific data, including on the differences in MSB ownership structure. This should be used to identify why the best MSBs succeed, and to review BIS support designed to stimulate MSB growth. In this spirit, our Agents of growth report (and the data sets behind it) will be shared formally with BIS upon publication. 
  • We recommend BIS and Number 10 engage with mid-tiers directly by appointing CEOs from the MSB sector to all relevant business advisory groups, including the Prime Minister’s Business Advisory Group.
  • We recommend HMRC assign Customer Relationship Managers to MSBs. This will help bolster in-house tax resources, reduce the administrative burden for mid-sized companies and minimise inadvertent tax and reporting errors made by business.

More and better targeted support on exports

  • The Agents of growth report reveals UK MSBs are less ambitious about exporting than their Turkish, German or Indian rivals, with only one in five expecting to expand their international operations. So we welcome UKTI's recent pledge to boost support for 8,990 businesses which it defines as mid-sized. In addition, we recommend UKTI works with business groups and industry to ensure the support provided by its forthcoming advice scheme is as effective as possible.
  • We recommend extending UKTI support to potentially include up to 34,100 high growth MSBs, as identified in this report.
  • We recommend that BIS explores incentivising corporate mentoring schemes: this would involve large corporates with significant international reach providing coaching and access to networks to support smaller, non-competing companies.
  • Of those MSBs looking to expand internationally, the vast majority are focused on Western Europe and North American Markets. UKTI should continue to increase the volume of trade delegations to higher growth emerging markets, and ensure MSB representation on these trips.
  • Education and coaching should focus on overcoming the specific cultural and linguistic differences that remain big barriers to these markets. We therefore recommend that UKTI and British Embassies work more closely together in supporting potential MSB exporters.
  • Our conversations with business leaders revealed export finance support may help to boost MSB exports, but in 2011-2012 only 52 SMEs received direct support from UK Export Finance (UKEF). The doubling of the number of specialist export finance advisers will go some way to improving this and we recommend BIS and UKTI promote existing schemes more vigorously, and ensure they encourage long-term investment for MSBs looking to set down roots in foreign markets.

Closing the skills gap and finding the talent

  • Apprentices are a good resource for MSBs looking to improve their productivity. A 2013 report by the National Audit Office and CEBR demonstrated that completing an apprenticeship raises the productivity of that employee by an average of £214 per week. We therefore recommend HM Treasury explore an NIC exemption for apprenticeships of all ages in MSBs (both employers and employee) for the duration of the apprenticeship.
  • We recommend HM Treasury explores incentivising training and development with tax reliefs, particularly for under 25s, and for graduates without any work experience, similar to the preferential tax arrangements provided to incentivise research and development.
  • We recommend industry and BIS work together to introduce more ‘vocational accredited education’ under trade bodies.
  • BIS and HM Treasury should explore further devolving the funding for apprenticeships to businesses, not national bodies – to reflect the demands of individual companies (as per the Richard Review).

A continued focus on access to capital

  • We recommend finance initiatives enjoyed by smaller business are extended to MSBs. Significant growth could be created if the Government doubled the Enterprise Investment Scheme funding to companies that have 500 employees and gross assets of £30 million.
  • According to the Bank of England, only 257 out of 1.2 million private firms have a financing mix that includes public bonds. We recommend the Government continues its work to explore creating an aggregation platform to allow MSBs to access the UK bond market.
  • The FCA begins regulating crowdfunding in April 2014, offering more protection for investors. We recommend BIS works with business groups to help promote crowdfunding as a possible alternative to traditional finance, and continues to support the Business Finance Partnership.
  • We recommend HM Treasury explores a reintroduction of the Corporate Venturing Scheme, aimed at MSBs, to unlock capital, and considers introducing support for the equity gap on large capital expenditure projects

Recommendations to MSBs

Take a collegiate approach to issues within the MSB sector, and consistent engagement

  • MSBs need to carve out a clearly defined collective identity.  We recommend building on the success of the CBI "M" clubs by forming an umbrella organisation encompassing the best from trade associations, Chambers of Commerce, Local Enterprise Partnerships and other more informal groupings. This will help provide MSBs with a stronger collective voice.

Work with local partners on skills agenda

  • To help close the skills gap highlighted by MSB leaders, we recommend that MSBs explore partnerships with their local University Technical Colleges. These partnerships allow MSBs to help design the curriculums of their future staff, and will also help MSBs to start actively considering what their future skills needs might be.

Develop MSB talent

  • MSBs typically have a less structured approach to talent development than larger companies, especially amongst their senior management. We recommend MSBs support their personnel with MBA type development where appropriate, and explore partnerships with local business schools.

Think big on exports

  • We recommend MSBs take advantage of increased support from UKEF, UKTI and the Government’s global “GREAT Britain” advertising campaign, and explore exports to the higher-growth markets beyond Western Europe.

Explore financing options

  • MSBs need stable and cost effective finance in order to grow, but are sometimes reluctant to access longer term equity finance.  We recommend MSBs explore different forms of finance (including equity finance) where appropriate. 

  • Our research shows that many MSBs have sufficient capacity to take on more debt, to fund possible acquisitions and fuel faster growth or larger market share. At a time when the costs of additional debt are low, we recommend MSB leaders explore increasing their debt levels to power growth, where appropriate.