As we bid good riddance to 2020 and look forward with optimism to a very different year thanks to the recent approval of the Oxford vaccine, the performance of small and medium sized enterprises (SMEs) will be key to any economic recovery.
That is why the recent report from the Enterprise Research Centre - The State of Small Business Britain – is an important examination of the impact of Covid-19 on businesses but also, more importantly, examines the challenges that policymakers need to focus on in 2021.
The first key issue is that of digitisation and it is not surprising that the report notes a shift in the adoption of advanced technologies with around half of SMEs introducing new digital technologies as a priority in the last 12 months. In addition, two out of five stated they had made some changes in their use of digital in response to the pandemic, with many adopting technologies they had never previously used.
Obviously, it could be argued that whilst this trend was a result of necessity rather than any strategic decision, it has not been easy for many SMEs given that new technologies require both organisational change and potential modifications to the business model.
Not surprising, the biggest impact has been the the need for new remote working practices and higher levels of online sales with 95% of firms reporting a greater use of video conferencing and collaborative working tools and 64% increasing their use of online marketing and social media.
Unexpectedly perhaps, there was also greater use of more advanced digital technologies including Internet of Things (64%), augmented and virtual reality (49%) and artificial intelligence/ machine learning (48%).
But whilst there had been investment into digital technologies in the first stages of the Covid-19 pandemic, most SMEs suggested they would not continue with this approach due a lack of digital skills. This is disappointing given that those businesses that use digital technologies have, on average, higher productivity, and are more likely to export, invest in R&D, and innovate.
With increased sustainability and the green recovery being seen as a critical part of the “new normal” for the UK economy, it is heartening that over half of the SMEs surveyed stated that ‘reducing environmental impact’ was a business priority with one in four saying that it this become an even greater priority since the pandemic began.
More importantly, 72% of SMEs stated that they had taken steps to minimise the environmental impact of their business over the past year mainly due to an effort to reduce costs, presumably because of with the financial pressures of the COVID-19 crisis. This included changed production and distribution processes, use of renewable energy, training on environmental matters, and introducing new low carbon products or services to the market.
Unfortunately, the pandemic has also been a barrier to net zero practices as it has constrained diffusion especially due to a lack of information on low carbon technology, complying with regulations, uncertain demand for low carbon products and services (27 per cent), and a lack of relevant skills. These issues must be addressed by policymakers in any developments to support the implementation of net-zero and broader sustainability practices among SMEs.
In terms of innovation, the report suggests that there has been a significant impact of the COVID-19 crisis on R&D and innovation with a third of SMEs having reduced their R&D and innovation spending in the three months to October 2020 with further reductions planned in the future.
More worryingly, other important parts of the innovation ecosystem in the UK such as higher education institutions have been seriously impacted financially by COVID-19. This could have a real impact on an innovation-led recovery unless different parts of the UK develop their own specific policies for supporting R&D and innovation that make the most of the strengths of each region or nation.
Given the different lockdowns that have taken place during the pandemic, it is not surprising that the COVID-19 crisis has had major implications for mental health in the workplace affecting not only individual workers but also business performance with research showing an association between lower productivity and mental health sickness.
In fact, firms were 25% less productive in situations where mental health impacted their performance. For employees, increased fears of stigma and job insecurity meant that they were now less likely to admit to mental health issues, an issue exacerbated by changes in working practices such as remote working that were making it more difficult to identify the changes in behaviour associated with mental health issues. Given this, there will be is a growing requirement for greater policy thinking around employee well-being as part of any policy supporting sustainable business performance.
So what are the lessons from the report? First of all, specific business advice can help firms to improve their productivity and strengthening (and simplifying) business support must a key objective in achieving this.
In ensuring recovery, another key finding is that as high-performing firms are associated with inspirational leadership, there needs to be greater investment in supporting the founders and managers of SMEs to develop the skills they need to be effective leaders of transformational change.
Finally, one of the most important lessons from 2020 is the need for SMEs to be better prepared for crises and that business resilience, a theme so often neglected by entrepreneurs, is at the heart of any future planning and support.
Given this, it is imperative that SMEs learn vital lessons from the pandemic, especially from business leaders across key sectors who will have important experiences and insights to share with their peers.