Episode 25: The UK Productivity Puzzle: Strategies for SMEs

Are you curious about how productivity impacts the economy? In this episode, we dive into the definition of productivity and how it affects small and medium-sized enterprises (SMEs). We also discuss the challenges facing businesses in terms of skills, infrastructure, business investment, and innovation.

This episode was as a response to Roger Martin-Fagg's April Economic Report, you can download it here.

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Read the transcript

Please note: Whilst all transcripts are double checked for accuracy, they are transcribed via Otter.AI so may contain errors.

David Parry 03:23

Hello, and welcome to The SME Growth podcast produced by Wellmeadow here in Shrewsbury. Today's episode, we're going to be talking about something that's come out recently on the Roger Martin-Fagg reports, the economic reports that we publish. So here to talk with me about that is Richard Buckle and I'm Dave Parry. So we're going to talk about productivity the country's productivity puzzle. That's something to get everybody out of bed in the morning, isn't it? Talking about that one. We thought about because we publish the Roger Martin-Fagg reports every quarter, they're getting quite well done.

Richard Buckle 04:23

They do get them very well. People seem to enjoy them. But we've never really spoken about them on podcast before. We now have we probably touched on some of the areas that Roger sort of brings out of the economic data. 

David Parry 04:37

Well, I did do some summaries of the reports as well for a while but I think this is probably a better way of using the thoughts that that triggers. So this this subject would appeal I think to most of our listeners, definitely those in the SME world. How does productivity at a national level impact us and what can we do about it at a company level? Yeah, so that's kind of where we're getting it from. 

Richard Buckle 05:03

So probably start by defining what productivity is. 

David Parry 05:09

Yep, productivity. So there's a lot, I think it's worth noting, this is not an economics lecture. And if we even tried, exactly. And if we even tried, we will get ourselves into a lot of hot water, I think because we're not economists. But we do know that productivity is kind of output over input, it's the output you get for every hour worked at its simplest level. But it's not quite as simple as that. Because there are other measures of productivity, which include non labour elements, so machines and capitals, total factor productivity. And it's also worth noting that each country has got its own method of measuring it. So you could get a bit tied up in knots trying to compare but, you know, government tries to do this thing. So that's what is its output per hour worked. And wouldn't it be great if that was a high number, because then we're all going to be paid more and all that sort of stuff. 

Richard Buckle 06:03

I did read something about this today. There was a big boom in productivity. , it is mostly American focused, the, the, the book I was reading, but, which post-capitalism, I can't remember who, wrote it. But it was quite interesting summary of, of how productivity improved post World War II up until about the 1970s and how that drove consumer growth. Because as wages increased, people were purchasing more consumer goods. And how that reached a kind of tipping point in the seventies. And we haven't seen real wages increase since then. And that's about the, as much as I can remember without straying into dangerous territory. 

David Parry 06:42

Well, it's also tied into increasing globalisation, of course, because even Roger talks about this, when he came to talk to us last year, we've increased the available labour pool with the ability to ship goods reasonably cheaply, until recently, anyway, but you know, normally, from all the way from China, and it can displace workers here, so that keeps wages down. Whereas in the past, that would have crept wages up. So I think there's, there's, if you look back at productivity, it used to be not bad. It's not as if it's been forever a problem. There was a phrase used 20/30 years ago about Britain being a sick man of Europe and all that. But up until the crash in sort of 2008 or so productivity was going okay. 2% a year growth or something is stellar. But you know, it's not bad compared to other countries. But then it kind of fell off a cliff, the wheels fell off in around about 2008/2009. 

Richard Buckle 07:38

And is that is that because of the financial crash? Or is there some other reason? 

David Parry 07:42

Well, there are a lot of reasons which we'll come on to the whole productivity back, which were certainly true before the financial crash. But if in any part of this sentiment plays a role, then that's what's definitely changed since that. And I do wonder as well, if there's a momentum to these things, if you just get used to investing or improving your ways and then there's that big sudden stop and everybody gets scared. You know, even in our clients now, people talk very differently about borrowing money from the banks. They never used to. You just assumed that if you need some money, go to the bank and borrow it. But suddenly because the banks change their behaviour around the crash and then suddenly wouldn't lend to people that previously they would've done, everybody's starting to think of it differently 

Richard Buckle 08:23

I suppose that plays into some of what, you know, Roger is a behavioural economist, isn't he? And that's a lot of what he talks about when we have him come and speak. When he get wants to hear in Shrewsbury or if you ever hear him somewhere else, he, he talks about the kind of, you know, the way that people act and how that influences the economy.

David Parry 08:41

The behavioural bit, you can't predict it, we just the numbers like the economists try to do. So where are we at now? We're not the worst, Japan's a lot worse than us. Both in growth and absolute numbers. They've had a really tough time, had decades of stagnation. But in terms of the leading competing economies, you might like to think we were keeping up with, we're worse than Germany, France and America. Slightly better than Canada, apparently. But Germany 10% and behind France 18%. Behind and depending how you measure it, the US something in the 20s, you know, 23/25% behind 

Richard Buckle 09:14

So what drives that? Is it, so France has higher wages, don't they?

David Parry 09:22

Well, there is an argument that both the high wages but also the social laws, making it very difficult to dismiss people means that you're less likely to take them on in the first place. And therefore you have an easier case to make before investing in certain if we're talking about machines, replacing humans type of productivity. Now, that isn't all of it as we're going to come on to but wherever that takes part, yeah, that's gonna have an impact. In America, they're doing quite a lot at the moment in a new act they bought in this year called the Inflation Reduction Act, and that's encouraging a lot of investment into the US from other countries. It's not affecting UK quite as much because we have a sort of quasi trusted trading partner status but a lot of companies are relocating to the US to bring in more domestic supply. And that's bringing productivity up.

Richard Buckle 10:11

Is there a cultural element here as well? Because we tend to say, there's a lot of office chatters in the in the UK. Come in this kind of a social elements being at work which perhaps Yeah. Isn't there in other cultures maybe?

David Parry 10:25

Yeah, that probably plays out on both ends of the day. I think you're right. And Roger was going on about this wasn't in one of his recent reports, he talked about the fact that we tend to come to work in the UK and we have a bit of a coffee machine chat and catch up and did you see the footy last night and then gradually settled into work? And the perception is or whether there's data to back this up? I don't know that in other harder working countries, if we're to call them that in inverted commas, then you come to work and you're at your desk, and by nine o'clock, you're at work. But then there's also a culture in maybe those countries where they will leave quite promptly as well. Yeah, 4:30/5 o'clock out the door. Big focus on home life. Whereas in the UK, it's not uncommon, especially for small businesses and business owners to be working much later than they should be. And weekends as well. And goodness knows what. So yeah, definitely a cultural element to it. So anyway, there we go, we've got a problem, there is a thing, and it's well documented that we have a productivity puzzle, and no one has yet managed to work out a solution. So if you listen to this podcast, it will all be solved

Richard Buckle 11:25

By the end of 30 minutes time.

David Parry 11:28

we will have cracked it! So there are lots of reasons talked about there's several loads that relate to SME world. So if you're running a business or working in a small business, you will relate some of these. And whilst there's a long list of potential reasons, there's probably four big ones that I think it's worth us expanding on, in terms of what impacts it. So one is skills, the availability of skills and the level of high skills, where you need them for sure. Uh, the general infrastructure of the country, which is everything from roads and broadband. And there's a trigger here,

Richard Buckle 12:02

Don't get me started. 

David Parry 12:03

I knew it would trigger Rich, we'll come back to that, pur the heckles down, business investment. An d that is something that all of us in SMEs can relate to, how much do we speculatively invest in things with the intention of producing some sort of return becomes better? And then the other one that I think we'll talk a bit more about than the others is r&d, r&d, and innovation, combine those together. And there's a load of other is a tale of all sorts of other stuff. Aging populations and things like that. But, but they're probably the four that that most impact us all that we see the most. So should we pick each of those? 

Richard Buckle 12:38

Skills? So when we're talking about skills, we're talking about training expertise in the workforce? 

David Parry 12:46

Yeah. Yes, it's most if we did a bit of recruitment support, didn't we? And we know exactly what it's like from that whole cycle. We talked about the life cycles, even attracting the right candidates, skills, and selecting them and so on. So nowadays, it's really hard when you're putting an advert out for a job to get a good number of candidates, the workforce has shrunk hugely, compared to say 10 years ago. 

Richard Buckle 13:11

Well, and that's, again, to, you know, refer back to Roger's reports, I think it was nearly 5/600,000 people retired early from COVID, post COVID and haven't come haven't come back into the workforce because 

David Parry 13:24

the government are trying to counter that now. And there are a few measures in the budget. I'm not sure if they're gonna work, especially that rather puzzling one about increasing the lifetime limit on on pensions designed to get the doctors come back. But now, surely, it'll encourage everybody else to retire earlier. Because you can reach your retirement fund quicker If you earn enough.

Richard Buckle 13:43

And then there's 1.8 million fewer 18 to 25 year olds, 

David Parry 13:49

Yes, the missing generation. This is really puzzling one because my children were born in this period that it talks about sort of late 90s, early noughties, the birth rate just plummeted, not just a bit off. Below, you said this was at 1.8 million fewer people in that age bracket, while each 10 year bracket in the UK is probably got about 10 million people in it. So 1.8 million is like a fifth of wwhat should have been there wasn't just because the birth rate was low, and no one's worked out why

Richard Buckle 14:19

So the early 2000s?

David Parry 14:20

2000s, late 90s, early 2000s. Yeah.

Richard Buckle 14:23

Millenium bug?

David Parry 14:24

Go back 25 years? Well, that was something Roger mentioned, doesn't it? I'm not sure I buy into that. But he said maybe all the angst about the change of the millennium stopped people wanting to have kids. I mean, maybe it was possibly a more plausible argument is if the economy is doing reasonably well. And you're growing up the career ladder and you've not been made redundant and you're getting pay raises every year. There's more of an incentive to stick stay working down especially for mums and mums to be you know, women who have decided not to have kids yet. So maybe that had an impact and then it goes back to normal in more normal times. I don't know but whatever has happened. We haven't got enough 18 to 25 year olds now. And then some of that would have been made up by EU workers, which, of course, is now a lot harder to get into the UK, we found this even take trying to recruit a 50 Something employee from France with exactly all the right skills. It's been difficult in post Brexit, so all sorts of reasons why, but the skills available when you try to recruit aren't there like they used to be?

Richard Buckle 15:29

And how much without wanting to get into the weeds too much on this, but you do quite a lot of work with schools around education, getting them people skills for careers and things. Anything on that that you think, 

David Parry 15:43

Yeah, I suppose I've got a few strong views on this and I can't back them all up, but I do see that teachers are ridiculously overworked. They are constantly in fear of the next Ofsted inspection. Which for a long time they were being given a bit of a by. You know, if you've got a good, good Ofsted inspection, you could live year to year known you weren't getting another one. And of course Ofsted had been in the news a lot recently after that very sad story about the, the head teacher committing suicide after a report. But it just goes to show the pressure that teachers have got and therefore what they're doing all the time is just get kids through the exams. . And my work, as you say, through schools that I tried to do is to counter that as much as I can in my one man way. And say yes, it's okay, it's important to get your exams, but there's a load of life skills, work skills that you're going to need to learn, which the schools just don't have time to develop, you know, proper team working skills or arguing and debating and persuasive writing, maybe using a spreadsheet. And then even the skills that you tend to learn when you get into the workplace, just how to network, how to dress and shake hands, and make eye contact and all that sort of stuff. So I'm not sure maybe every generation thinks that the country's going to the dogs, and it's worse than it was when they were were young. But it does seem to be now that the school system is so pressurised on getting exam results and missing out on these other things. 

Richard Buckle 17:04

I don't know It will be interesting. I mean we did have a couple of, I was thinking back at some of the futurist type people that we had come speak. We used to run a networking event that we had people come speak and we had a few futurists come and it was about, you know, what are the jobs of the future and what are the skills that would be required for those, you know, my kids are probably 10 or so years younger than yours and you know, they will just talk about, well I'll just use ChatGPT to do it type of thing. And I don't let them on it. They know about it, but because I'm well, that's a slippery slope, right? If at 10 years old you're using ChatGPT to do math homework, well, you know, you, you, you may or you may not have a problem later on who knows 

David Parry 17:43

I sort of check myself on that opinion a bit. Because I would agree, we can't let that run amok, because the exam system hasn't caught up yet with the fact that it exists. But when handheld calculators became available, you know, surely kids were using those at home in a way, whereas before they would have to take their slide rule into school. I had a slide rule when I was at school 

Richard Buckle 18:05

I don't even know what that is.

David Parry 18:06

You don't even know what that is? Well, it's a calculator made up a piece of wood.

Richard Buckle 18:11

Excellent.

David Parry 18:13

I'll have to bring my slide roll in. Anyway, so that, you know, that's happened, and then Google happened and you can look stuff up, you know, yeah, maybe in 10 years time, we'll we'll look back and laugh at the fact that "Gosh, they're even trying to stop kids using ChatGPT." You know, it's a part of, you know, we don't expect people to walk around with log tables in their pocket anymore. Do you know, we've now found better ways of doing stuff? So the whole skills problem now, we're not saying that the UK is that much worse than other countries. But I do remember McKinsey did a study on the ability effectiveness of the education systems across a whole range of countries. Because some countries are famous for being very good system, Singapore, for example, some of the Scandinavian countries and so on. And then they compared it to the whole scale of those from from good to less good. And you'd expect things like class sizes, or length of school day or exam systems to have an impact. And it turned out that they were all quite low in impact. And the biggest single predictor of whether an education system was as good or not as other countries was the calibre of the teachers, you attracted into the profession, right? Which you could measure, in part by salary of teachers. If you imagine in your class at school, there were always some bright kids and some less bright kids. Surely, you'd want the bright kids to go and teach the next generation because you leverage their their abilities when you but instead, of course, we let them go off into the finance sector or something and, and then maybe people who have a calling for teaching go into it, rather than necessarily maybe the better ability of the subject aren't very good teachers. I don't know. But we don't tend to attract those into teaching.

Richard Buckle 19:44

I need to be careful what I say here, but I think there are teachers I know teachers who are absolutely passionate, and they're almost like educators, it's the passion to educate the kids. And I think there are all those a culture I think, particularly when I finished my degree it was almost like, right, if you can't get a job, then we'll pay off some of your student loan and give you a teacher training, you know, cause PGCE, or whatever it was. And, and I think that's almost the wrong behaviour there. Because you're almost getting the people that can't get the job to say, Well, if you can't get a job, just come and be a teacher, which is seems a little bit. I don't know.

David Parry 20:21

Yeah I wasn't aware of that incentive.

Richard Buckle 20:23

It's always, you know, I've always thought about that for a while, I'm not sure. are you attracting the best there in terms of, you know, maybe it's a needs must I know, that huge shortages of teachers, and then, frankly, you know, all the issues that were almost funnelling so many of our social ills into a school and expecting the teachers in many cases to deal with everything, 

David Parry 20:45

If the parents aren't supportive, all sorts of multifaceted things. But there's a stat I heard the other day, I can't read the exact number, but the percentage of math teachers that haven't got a maths degree is higher than you'd like to think. You'd like to think that people teaching a specialist subject at least had studied it to a higher level themselves, but they just haven't got the choice, you know, haven't got enough teachers back to our skills shortage problem again. So we've got a really long term, multi generational problem on the skills. And I can't help thinking there's a bit of an attitude, the problem as well around celebrity culture, you know, some not all kids, but some kids might think that you don't have to do really well at school to be successful these days. 

Richard Buckle 21:23

Yeah, you do. They start, they start young with the Tiktok and Instagram, influencer wannabe 

David Parry 21:30

An interesting stat. And this is a bit of an aside. But I read a study the other day that they did in Sweden, with conscripts after the war, from the sort of 1950s through to 70s, and 80s, because they kept constriction going for much longer. And one of the requirements for being called up was to do an IQ test, they had a huge amount of data over decades of mainly men who have been conscripted, and their IQ at the age of 18. And then they're able to look at what did they do in life by the time they were 50, or 60? Because their data going for so long, and that they attempted to correlate or see if there was a correlation between the IQ of an 18 year old, and what ended up with them in life. Okay, it turns out that the curve, if you draw one is in two very distinct parts, and that there's an almost linear relationship between IQ and financial success, right up to a moderate level, okay, let's say roughly one and a half to twice the average salary, right. So in the UK, that'd be about a 50k. salary. So to get to a salary of about 50k, there's a reasonably straight line relationship between IQ at 18 and when you get there. Beyond it, the relationship almost disappears, doesn't soften, it just disappears. So to become more successful than that, your 100 grand plus type salary, it almost doesn't matter what your IQ was. It's more down to personality and luck, and grit and culture, and maybe network and whatever else.

Richard Buckle 22:49

Another interesting aside on the IQ thing, so the American army all says the same thing. So you have to have an IQ of above 85, to be able to join the American army. Now, that's, you know, respectfully, quite low, 

David Parry 23:01

100 is the average by definition,

Richard Buckle 23:03

Yeah, it's, you know, you think that you see, so you can't have an IQ of below 85 to join the army, but apparently something like 15% of the population in the US, and I guess it's probably mapped roughly over across to other, you know, other countries. Other 15% of the of the US population has an IQ of under 85. So you think, what jobs do those people, you know, what skills do those people kind of do? What what, you know, there's quite an interesting conversation around well, what, what kind of economy what skills do we need in the economy, particularly as we talk more about automation, digitalization, all of that type of thing 

David Parry 23:44

That's where schools have got to adapt over long term times, because there would have been a point where it didn't matter what your IQ was, if all you can do is work in the field, then laterally go down a mine. Whereas now we've got much more knowledge workers, there's still a place for people with a different level of IQ have got talents in other areas, and they might be incredibly dexterous, or very good at problem solving, pattern recognition. Yeah, there's lots of very clever people, but wouldn't get picked up in an IQ sense of clever, and we need them in other ways. But as you become less manual, and able to use things like dexterity,

Richard Buckle 24:17

or there's a McDonald's that's just opened in The States that doesn't have anybody working in it. You literally use an app to get the phone and there's some robots doing something crazy flipping the burgers, bit like the Amazon shops, 

David Parry 24:29

Yes I saw one in London the other day

Richard Buckle 24:31

so increasingly, we're kind of,

David Parry 24:34

So before we drown our sorrows even further in our Guiness Zero, we'll have to get some of the proper stuff. And we'll move on from skills. But needless to say, there's a skills problem, we'll come back to what we think we might be able to do on some of that stuff, some of that stuff in a minute. So apart from skills, the next thing I mentioned was infrastructure. Now we can, I know this is a trigger. We could moan all day long about the lack of suitable infrastructure, for doing business and even for just you You know, existing as a person hospitals and stuff, there's probably he all we can do about it as individual citizens and business owners as you're gonna get into government. Yeah, make some different decisions and even then I'm not pretending the decisions are easy to make. It's a zero sum game, isn't it?

Richard Buckle 25:15

Just the fact I'm gonna have to go straight into the fact you cannot even make a phone call in this country on a major motorway network without it breaking up multiple times, 

David Parry 25:26

I must stress you're talking hands free phone call,

Richard Buckle 25:28

absolutely. It's just, it's just crazy. This is absolutely crazy.

David Parry 25:34

But we both drive around a bit. And we and we tend to catch up with each other when we're on journeys between meetings, and the amount of times our calls drop, and we know where they all those places are

Richard Buckle 25:43

You can almost triangulate where people are

David Parry 25:46

Oh, so you've just come off the M6 onto the M 4. You've just gone down that

Richard Buckle 25:50

It could almost be a math question couldn't it for you know, back to the skills thing, Rich is travelling at 55 miles an hour, Dave travelling at this, where are they when they both lose signal? 

David Parry 26:03

So you're right, yeah, traffic jams, trains, you know, the ability to move around and do stuff. You don't have time we waste setting cars, or you're not able to work on trains. So infrastructure, broadband, even in our office, you know, forget about travelling around. We're not too bad here. Actually, we get about 80mg signal, but you know, here's a lot of us in here you could do with more. Yeah, but one of our team, Lewis, the other day was saying that the, the plan to dig up the town center and put the fiber in has just been shelved cause the logistics are too difficult. Too many old grade listed buildings, or whatever. So there you go. So that's definitely a, something holding back the UK infrastructure. Now business investment, the last two really are really much more up up our street in terms of what SMEs are. We've talked about skills, but business investment and then innovation and R&D. What, what do we, what do we know about our client's attitudes and business's attitudes to investing?

Richard Buckle 27:00

And I don't know how much this follows on from the, in terms of the kind of the attitude around the infrastructure piece, where you know, what I think if you see a lack of investment in infrastructure, and even in your drive to work, if you're driving to work, and you can't make a phone call, and potholes everywhere, and all this stuff, and then you get into work, you're not exactly in a frame of mind that says, hey, let's, let's take some risks. Let's invest. Let's build something for the future. And I do think there's almost a bit of a, you know, national psyche, maybe

David Parry 27:32

if the government took a lead, you mean, we'd all more likely to follow? Yeah, be a bit braver with with some things, 

Richard Buckle 27:38

I mean I I think it takes confidence as well, wouldn't you in terms of thinking well yeah, this is, this is what we're trying to go for here. We're gonna have some great infrastructure so that we can build a business and we can move around the country without it. 

David Parry 27:50

I mean, certainly, if you've got governments changing quite frequently, and even if they're not changing colour, but the ministers are changing, and then the policies are changing, you never know from one minute whether the capital allowances are going to suddenly go up or down, because they've just changed those again. Or whether you're gonna get some Chancellor coming in, you know, corporation tax in the UK has just gone up from 19% to 25%. Okay, they're pre announced it, but all of these big changes, you can't plan for five years ahead on this sort of stuff, interest rates. You don't, they are pretty predictable this year now, I suppose. But a year ago, didn't know whether they're going to go up to nearly 5% or not 

Richard Buckle 28:26

I suppose an interesting one is around electric vehicles. So a lot of businesses are moving that way. And what impact does that have? So a friend of mine, he's travelling around a lot around the country probably does, I would imagine 25/30,000 miles a year all over the place. And his business has just gone to electric vehicle fleet, but not sort of a Tesla or something like that, where you've got the range? I can't quite remember what it is. But you think well, what impact does that have on the productivity of a business where, okay, for particular reasons, sustainability or eco credentials, or whatever it is that you're going for electric vehicle now. But if that means that people have got to, you know, can't just get around the country quite in the same way that they were before? 

David Parry 29:12

Isn't it funny how we're more likely to invest, if that's the right word in something like that. It's a very tangible asset you can see and employees benefit from having it. But it was that's not an investment that makes somebody more productive is it might make them happier, because they've got a new car, and maybe they want an electric car, it might make them worse, as you say, if the range isn't there, you may have to allow a lot longer to get somewhere to a client meeting or whatever, than you were before. But companies are more like I see it myself more likely to invest in electric car fleet probably from the environmental credentials. And yet if you ask them to buy everybody a new laptop every four years or three years because they're old ones slowing down, or make sure everyone's got the latest smartphone because what you can do with them these days, let alone buying the next machine on the shop floor that runs at 50% faster rate than the old one. You know, you If you why wouldn't you do that? And yet you would go and increase the fleet? And sometimes don't do either. So I do see that as a real mental block, I think that a lot of people have got, and maybe some companies can't afford to invest. So is there an argument there about are we propping up zombie companies? Another one I've Roger Martin-Fagg's points.

Richard Buckle 30:21

That was a big part, when he came to speak to us in November, which was a few months ago now. But yeah, but his whole piece around zombie businesses was quite interesting. 

David Parry 30:31

He was convinced that companies were going to be going out of business faster than I think has transpired so far, but it could still be happening, the banks haven't pulled the rug yet. But we know that companies that tick along maybe lifestyle businesses, where the owners don't want to invest, they just want to carry on taking the money out and going on nice holidays, and they're interested in improving their productivity, or they can't do it, or they because they can't afford it. And then it's being propped up. And then there's just a kind of a risk appetite thing, a lot of people I think here have got, we've probably, like you said earlier about finding the government's lead, you're probably a bit like your neigbour, you know, other business people, you know, if they're being risky, maybe you're more likely to be risky as well, 

Richard Buckle 31:13

We don't have that culture, do we, like they do in America around business risk, and, you know, almost, they see failure as a step to success. Whereas here, you know, if you sort of went bankrupt, that's almost like, Okay, that's it. Whereas in the States, it's almost like, that's expected if you're going to be successful, 

David Parry 31:31

Not quite a badge of honour, but a badge of experience.

Richard Buckle 31:34

Like, well, you kind of make an omelette, break some eggs type of thing. 

David Parry 31:38

And I think the right there's a stigma to a business failure here, even though it was what we say give it a go. And even to that new business, you in Britain, you see a lot of established in 1850 times signs above businesses to make a virtue of how long they've been around. Whereas you get the impression that in countries like the US, you know, a new business will be given more credit. Whereas here, it maybe, will be a bit more, 

Richard Buckle 32:02

I remember someone saying to me, in The States, if you see someone had a Ferrari or whatever sports car, the kids around that will be looking at it almost in an aspirational way. Whereas in the UK, they'd be keying it, It's not quite true maybe very general

David Parry 32:21

I think we need to rename this podcast, the grumpy old men SME Growth podcast

Richard Buckle 32:25

I grew up with a lot of Americans. So I have that as in my formative years, I grew up with a lot of Americans. So that was probably shaped my outlook on life quite significantly. 

David Parry 32:35

I can imagine it would. Yeah. So

Richard Buckle 32:38

I can I see that as a, that American way of business is probably

David Parry 32:42

I can't help thinking just as a thought experiment, if we took people we know or indeed ourselves and dropped us into a Silicon Valley type thing. And I'm not putting Silicon Valley on a pedestal. I'm sure this, you know, and as we were talking earlier, there's a bit of a move away from California now, isn't there a little bit in terms of other into other parts of the US Boom. So if you took UK talent and put it into that environment, you can never do the experiment. But how different would people turn out to be? Would 20 people in the UK that stay here end up being risk averse? And would the same people but in an environment like that be more risk taking? 

Richard Buckle 33:18

Yeah, I wonder how long you'd have to be in the environment for that to finish by osmosis you pick up either? You know, this is the way we do things, either way, isn't it?

David Parry 33:29

Well, I think even back to our evolution as a company here, when we've say applied for grants in the past, or the grant awarding body is worried about is how many jobs you're going to create from the grant. And I've over recent years, especially I've been complaining about that method, when we're at full employment with a skill shortage. Why do you want me to create more vacancies? We've got 1.1 million vacancies we can't fill already. Why don't you reward me instead for investing in something that increases productivity, because it's the country's got a productivity problem, not an unemployment problem. And your policy is stuck in the 1970s. They just want me to create more vacancies that I can't fill. So if even our grant system is like that, the banks have got an attitude as well. They're very risk averse. You know, I'll lend you your money, if you can prove to me that you don't need it. But if you need it, then I'm afraid you're gonna have to mortgage your house. Yeah. And I'm sure that's different in other more aggressive growing countries. So there's probably all sorts of reasons around around that. But I'm, I'm sure that political uncertainty we went through last autumn with a sort of crazy change of Chancellor's every couple of days, the Kwarteng budget and all that sort of thing. So, so goodness knows what sort of impact all that sort of has. So anyway, that's some business investment. It's interesting to note, by the way that that was going up reasonably steadily up till about 2016. And if you look at the graph on that, and it's in Rogers report, if you download and look at it is actually flat, actually perfectly flat apart from around COVID? Where it goes obviously, hugely negative. Yeah, but all it is bounce back up again to the flatline. There it was before, you couldn't draw almost more of a cartoon style graph to say things were going okay and now they're going really badly.

Richard Buckle 35:04

What happened in 2016? [Laughs]

David Parry 35:09

We know what happened in 2016. Now, I'm not sure if we can draw all lines back to that it's, is it coincidental? It certainly changed attitudes. It polarised society 

Richard Buckle 35:23

Anything that creates that level of uncertainty isn't that's what businesses crave certainty? 

David Parry 35:29

Well even people who tried to invest and remember this, when Brexit finally came into being in 2020? Was it the was that the transition period or whatever, but lead times for things were going up to almost a year if you wanted to buy a new machine or something? And now of course, we've got the chip shortage. So then buying computers was not and so it's become harder to invest, even if you want to, assuming you can borrow the money and you want to do it. Yeah. So I think the other thing we want to touch on the impacts productivity very much in an SME is innovation and R&D. Now, this doesn't have to cost a lot of money. Okay, R&D might but it doesn't have to, does it? 

Richard Buckle 36:07

No, no. And I think, again, this is another area where, you know, bringing it back to sort of Rogers reports and Rogers thoughts on these is that SMEs can actually have a real impact here. Because the agility and the ability to make decisions quickly, that is within within the kind of the remit of an SME, maybe compared to a larger company, 

David Parry 36:30

Well, you can do it on the day. 

Richard Buckle 36:35

The ability to leverage a lot more different SaaS products, build a new process around it. 

David Parry 36:43

I really pity those people we work with daily in some of our clients, where they've got IT departments and I understand why. But the fact that when we've got a problem, we can just search on the internet, find the plugin that we need install it and we're off and running again. And within five minutes of having a problem, we've solved it, that would take either forever, or a long time to get approved, to get somebody to be allowed to install something different. Yeah. It's just crazy when thinking about things like Otter that we just use all the time to do transcripts of things or or ChatGPT, we've talked about getting it to solve problems I was looking at, I do some data cleansing work for a client the other day, and the data was a bit messy, and there's a fuzzy lookup plugin for Excel, it's brilliant, just plug it in, and come up with us your VLOOKUP thing like in the past, but it instead of being an exact match, it says it's close enough. That's that's a 70% probability of being a match. Fantastic. It's a free plugin. But I know that several of our clients wouldn't allow you to use that. Because you mean installing software? 

Richard Buckle 37:42

And I think, in a way as well, that that does, you know, impact on how people think back on some of those other areas. So, you know, my wife works for the council within the council. And it's, you know, archaic in some ways, the IT and all, but that there's that attitude then of well, you know, that's the system. 

David Parry 38:07

That's a good point does, it just browbeat you into accepting a low innovation? So if the culture around you is low innovation? Why would you fight against that and try and break all the rules, if it's just gonna cause you heartache? 

Richard Buckle 38:20

But it's designed so that you don't so you know, I go in and say, Well, what have you, you know, why wouldn't you use this piece of software? Or this? Oh, well, itITsays we can't and then you can't do this, you can't do that, you can't do the other. And you think? Well, I don't know. It's quite large percentage of people that are employed in public sector in this country. Yeah. And again, you know, if that's the kind of the, you know, a representative of the whole 

David Parry 38:42

The size of the state is about 40%. of the UK or not, that's not all employees as services provided as well.

Richard Buckle 38:50

Interestingly that's more than China as a percentage. Well, but but I think it's yeah, it's almost you know, if you're not myself, I'd say this, controversially, but I think I probably save, on average, about an hour a day, using things like ChatGPT at the moment. And I think increasingly, that's going to, you know, not just for work things, but give me a recipe for this evening or something, whatever it is that you're going to spend looking at time doing, things like that. People and businesses that are going to take on that type of innovation are going to be the ones that end up with the productivity gains and the competitive advantage.

David Parry 39:28

And you try it. I mean, I got ChatGPT to answer a reasonably long email from me the other day, and it came up. Fantastic, resulting in 20 seconds. And we use we talked I know this episode isn't really about HubSpot and our marketing work but we do do a lot of automation, within HubSpot around our marketing. So lots of things happen while we're sleeping. If somebody goes onto our website or applies for a job or download something, then things are still triggered 

Richard Buckle 39:53

I said to someone the other day, I think I probably saved between 50 and 70 hours on our last recruitment round just by automating all the processes involved. And you know, and that took me probably about 200 hours to do [Laughs]. They didn't take me anywhere close to that. But yeah, that's, that's where that innovation attitude probably needs to. 

David Parry 40:20

Okay, so we've talked a lot about innovation, now R&D. I think R&D has got a really weird relationship with small businesses in the UK as a result of the R&D tax rebate. Now there's been around since the early 2000s, like Peter Mandelson introduced it. But it's made everybody think that R&D Is that thing that you can claim R&d tax rebate on. And that's not R&D in that sense

Richard Buckle 40:41

I was always a bit of a purist of it, I suppose having a science background and, you know, kind of being doing research, proper research, some of the things that, you know, you would see that would pass as R&D. Yeah, well, that's not really R&D.

David Parry 40:56

Well, maybe, thankfully, but I know HMRC are tightening up on some of the more frivolous claims, like inventing a new cocktail being eligible for R&D expenses now, but I didn't think we've got still the right culture, again, on investing in companies prepared to take a risk. So you know, we've talked before about our minute taking software that we developed Magic Minutes, don't mind telling our audience that that's cost us well north of a couple 100,000, maybe a quarter million pounds over a long period of time, including employees, and so on to develop it. But that's a reasonably big investment. But even we decided we were going to do that out of retained earnings, rather than borrowing the money for it. And certainly, we couldn't find anybody albeit on a cursory search, who is going to come in and pile in half million quid to let us do it properly. So you've almost got to prove that you don't need the money first, and then you're going to attract the investors. So they got this innovation already. So we've covered the sort of four main areas as we see them the whole back productivity, that SMEs experience you know, the skills bit which see that through our recruitment and retention, the infrastructure, business investment, and then your innovation and r&d. There's loads of other stuff, as I said, in the opening, which also is implied the ageing population, you know, in all Western economies are suffering from this, the low birth rates and all that sort of thing. 

Richard Buckle 42:12

Apparently, it's the decade I was saying earlier, depressing everybody with this earlier, it's the decade where the Western economic model collapses this decade, according the chap called Peter Zeihan worth looking up on YouTube. And he's a geopolitical strategist. And, you know, he talks a lot about this, just how this was always going to be the decade where the economic model had issues, right, just because of population, 

David Parry 42:37

So many things happening on its own, with population having gone over hill, and going down again, in Western economies, that all of this AI are coming about this change of attitude post pandemic about work and hours of work, who knows what's gonna happen. So just to close, as an SME, either owner or someone who works in SME, what can we do about it? Well, from the National Infrastructure bit, we can't go and build roads and hospitals and broadband can we, you can try and find tech to get around the problem. We've got a 5G dongle that's 10 times faster than anything we can get by digging up the pavement. So you find ways around it doing that sort of thing. But apart from that, you can't do much about infrastructure. skills. I think this is one area that we can all collectively do an awful lot about. And it's not about blaming the education system, it's taking what the education system outputs, and then accepting that you may have to recruit people that aren't there yet. And either using the apprenticeship scheme, or just in house training of any sort, develop your own people, and then keep them you got to look after people well, so they stay. There's a huge cost of people turning up just the inductions, the training and introducing the clients then if they leave again. So that's around skills, we can definitely do a lot about that 

Richard Buckle 43:50

Investing in automation. Another big thing I think that'll become increasingly important over the next years 

David Parry 43:58

And encouraging innovation, generally. 

Richard Buckle 44:00

Innovation culture 

David Parry 44:01

Whether it be processes in a more industrial sense or you know a lot more people working offices and then doing factories. What about all the automation in an office? How many people do you watch over the shoulder see them struggling with a spreadsheet or how to do something in Microsoft Word or even using rules in Outlook you know, basic stuff about sending emails, people are still struggling with doing that sort of stuff? 

Richard Buckle 44:23

Yeah, I saw something that he had a test for an interview that was doing mail merge. 

David Parry 44:30

And we still know clients were that typists. Amazingly in 2023. And then I think it's about risk. I educate yourself about what risk you really are facing if you take some brave decisions. And, and bear in mind, to be honest about the potential reward you know, nothing is risk free, and nothing is necessarily free to do but we're only going to grow that way if we can invest 

Richard Buckle 44:53

I think that's a mindset thing, particularly for this country. We're naturally cynical, or at least currently I am. 

David Parry 45:01

I think all grumpy old men are. 

Richard Buckle 45:02

At the same time, I do think there is a you've got to embrace a, you know, for any any dent in productivity nationally, there has to be a cultural embrace of like, it's okay to fail. Yeah, so long as it's not, you know, as long as a longer term goal insight then 

David Parry 45:20

Well, we've talked quite openly before about failing our way to success. We talked in the Phil Caudle podcast last week, which has been phenomenally well received a couple of weeks ago now, isn't it? And the fact that we've done the same we've we've created businesses that haven't succeeded, but we're quite open about it. We're not trying to put ourselves up there saying everything we do touches to gold. We try lots of different things we experiment. And sometimes it works, which is great, and we get rewards from that. But sometimes it doesn't. And you get to try different stuff. Okay, so as you promised half an hour ago, we've just solved the productivity puzzle. And we had a very nice, nice glass of Guinness zero. While we're at it, I look forward to next week so we can start working through the row of other beers we have available 

Richard Buckle 46:08

Citrus and floral aromas, I can see

David Parry 46:11

Have you seen that one made with mushrooms at the end. It looks a bit dodgy

Richard Buckle 46:16

The Fungtional Brew company

David Parry 46:20

Do you get it? So there we go. That's another episode of The SME Growth Podcast from Wellmeadow. Thank you very much for listening or watching. And please, as I ask every week, do share and follow our podcasts on whichever platform you get your podcasts from. But more importantly, tell your friends send them an email with a link or just chat about it in the pub and tell them that it's sometimes useful to listen to you might trigger a few debates. But in the meantime, good luck with the business

Further Resources

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