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SMEs: Opportunity in an overlooked, under-serviced economic sector?

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Small and medium enterprises (SMEs) constitute more than 99% of UK private sector businesses according to the Federation of Small Businesses (FSB). They are a hugely fragmented, heterogenous market that covers almost every industry, commercial sector and geographic area. They are significantly more numerous and diverse than any other sector, and they experience and cope with all the major business challenges and economic crises their larger siblings do, without any benefit that massive scale brings.

In recent years, the role of the SME in the economy has only continued to increase – now accounting for 35% of all turnover and 39% of all employment. The reasoning behind this growth is multi-faceted - from the challenges inflicted upon larger companies due to economic uncertainties such as Brexit and COVID-19; the increasing appeal of self-employment and, for example, the so-called ‘gig economy’.

Why then, with such a clearly vital, enormous and growing economic sector, is there a continued issue of service providers and organisations struggling to meet the demands and needs of this critical sector?

Of course, many products and services do exist that target SMEs. The issue is not simply access to offerings, but the efficacy of available offerings. In recent years, one consistent gap has been access to suitable banking for SMEs. Tellingly, in a recent Telegraph survey of over 1,000 SMEs, more than one-third (35%) of respondents said they would be willing to move banks if they could secure a better service overall. Given the difficulty and business disruption of transitioning a core business function, this only enhances this narrative.

With technological advancements and an increase in competition we are seeing access to offerings only increase – examples within SME Banking include Tide and Monzo Business - but only time will tell if these genuinely provide a better offering. Ultimately progress is slow, and this is just a single example of advancement amongst a broader ecosystem of engrained issues SMEs experience. Over the last 30+ years we’ve seen large organisations effectively service other large corporates – EY being no exception, but they have been unable - or unwilling - to adapt their offering to this more diverse sector. In short, the opportunity to tap into effectively servicing SMEs appears huge.

To answer the question above, we must understand SMEs at their core. They are human constructs bound by all the rationalities, irrationalities, opinions, cultures, attitudes and behaviours of the people that internally make them up – both the decision makers and their employees. From this point, we can begin to understand how a typical SME ‘thinks’ and makes decisions.

We must build an understanding of the SME through two lenses:

  1. An awareness of what an SME fundamentally wants from a service provider. Not just in terms of the tangible offering itself, but more broadly, the all-inclusive experience. This provides the conscious lens and gives insight to what SMEs directly feel they value most.
  2. An understanding of the behaviours, attitudes and characteristics the SMEs exhibit as a result of the people within the business. This is the more difficult element and not an answer that can be found directly without inducing a magnitude of psychological biases. As we’ve just established, businesses are innately human. This is the sub-conscious lens.

As an EY employee I have had access to a wealth of both internal and external information, including surveys, reports, journal articles and other documentation to conduct a ‘mini-meta analysis’. These sources provide inputs from 1000s of SMEs and 100s of hours of interviews, workshops and other research methods, to begin to answer these challenging and divisive questions. Unsurprisingly and as mentioned previously, the SME sector is hugely diverse and consequently there is a significant deviation between what any two SME decision makers need to support their businesses. However, by focussing on the underlying behaviours, attitudes and characteristics, a much clearer picture begins to emerge.

My results of this research are summarised below.

Top 5 Requirements SMEs want from Service Providers

  1. Effective Service Offering Commonly cited as the single most important element - if a provider fails to meet an SMEs core business needs and prove ongoing value, the SME will lose faith fast. Interestingly, SMEs feel they currently have the capabilities and technology required for operating today but are concerned about keeping pace with technological developments, which drives this as a critical priority.

  2. Stability In particular, the stability of the service that enables an SMEs core capabilities, such as its sales channels or banking, is considered a basic necessity. As a participant said in one study refering to their current bank, “stability is everything” – and this refers to the need to deilver brilliant basics consistently, before considering value-add services.

  3. Transparency This is relevant to both the service provider themsleves, as well as the offering. SMEs want to be understood and have relationships based on relevancy and transparency. Cost is the single greatest barrier to the adoption of new technology and therefore pricing transparency is particularly relevant. As to be expected, if a decision maker cannot clearly understand the long-term cost to their business, they will be less likely to invest.

    Transparency also extends to the expectations of the offering and how it will genuinely give SME decision makers greater insight into the mechanics of their own business.

  4. Time Saving Efficacy SMEs commonly cite being time poor. They feel they spend too much time managing administrative aspects of the business rather than the business itself. Data is often not shared across key business divisions and this creates challenges building a detailed understanding of business performance, as well as increased time managing the basics. SMEs are therefore increasingly looking to a single provider as a way of saving time. Interestingly, it appears the role of the ‘relationship manager’ to be diminishing in importance with convenience and time becoming increasingly relevant.

  5. Personalised Relationship A personal relationship with a provider is considered important when it comes to servicing the core functions of SMEs. They rely on this human interaction to build trust and confidence in the provider, however, after a certain level has been achieved it no longer becomes a determining factor. Business owners have the expectation that core services central to their business such as banking, take as little time out of their day as possible. If it does, they are likely to have a more successful overall experience.

Behaviours, Attitudes and Characteristics of SMEs

  1. Highly Individualistic with ‘Complex’ Needs SME owners typically think of themselves as highly individual, with a unique set of circumstances and complex problems. Whilst in reality their needs are simpler than their larger counterparts, they feel that service providers do not personalise their offering to the level they expect and frequently describe poor customer service experiences.
  2. Appetite for New Services and Emerging Technology SMEs have an elevated appetite for new services and emerging technologies to support their evolving business needs compared to larger organisations. However, the desire of a single provider to solve business needs can prove challenging.
  3. Value Relationships but Disloyal SMEs value and rely on working relationships heavily, but not over the efficacy of a service. They will be quick to move to other providers if their needs aren’t being met and there is a better alternative. On the converse, if a move is likely to result in disruption of a core service, this is likely to prevent an SMEs desire and ability to switch.
  4. Elevated Levels of Trust SMEs display greater levels of trust across all organisations, for example, data-sharing with FinTech companies. SMEs have also historically shown they trust larger, established brands more. However, once there is certain level of trust with competing offerings, it no longer becomes a determining factor between them.
  5. Heightened Risk Appetite SMEs show an elevated willingness to take on risk - sometimes unqualified such as through personal financing - compared to that of larger organisations. This suggests SMEs can struggle making appropriate, risk-adjusted decisions.
  6. Time Poor Owners of SMEs typically complain of a lack of time to achieve their organisational goals. SMEs might seek ways to improve the efficacy of their business functions but can equally lack the time to create a suitable, risk-assessed strategic plan.
  7. Core Knowledge and Data Gaps SMEs in many cases lack both the financial acumen and knowledge of appropriate risk management strategies, as well as the data required to make informed decisions. This feeds through into their worries and confidence.
  8. Growth is not always a Success Factor SME businesses use customer and staff satisfaction, and the bottom line as indicators for success and a key diagnostic for action. Few business decisions are made that are not driven by improvements to these three stakeholder groups. The perception that growth is a key success factor does not necessarily hold true for SMEs.

The struggle for suitable service providers comes from a combination of the issues raised, as well as the scale limitations organisations need to make their offerings financially sustainable. Of course, organisations will prioritise those that can financially offer them more opportunity relative to effort. However, through further technological advancements – a clear example being through further automation of the services that deliver core business functions - it might become increasingly possible to do just this.

We are beginning to see firms that can successfully tackle this challenge and provide for the complex world of the SME. There is huge opportunity to be had for the organisations that achieve this. An interesting example of a company attempting just this comes from an unlikely source – SME Financing.

Valloop, a firm operating within the realm of private markets, is beginning to tap into the SME sector by providing financial products such as private equity and private debt - products previously near solely reserved for the mid-plus market. They’re attempting this by using technology, combined with a new series of acquisition frameworks, to facilitate the creation of human-centred co-ownership models that align with the core values of the existing owners. This provides owners with the ability to retire, the cash to grow the business, or simply provide their employees a piece of the pie, whilst respecting what they have personally built. They are the first organisation to strive to effectively and sustainably service the SME sector in this capacity. Since the launch of Valloop’s first fund in 2015, analysed against their closest benchmark - Private Equity - they have been the top performing investment fund against all major comparators in the sector. This is a short-term success story to date but provides an interesting and unique glimpse into the opportunities available to organisations who can effectively service this most critical economic sector.

Only time will tell if this can be sustained.

This article was produced through a thorough analysis of primarily internal EY materials. This article covers what is a detailed and complex topic with relatively broad brushstrokes. If you would like to learn more, or you want to discuss what has been raised, it would great to hear from you. Please do feel free to contact me directly via the details below.

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