Mid-sized business a lost opportunity in Government plan

The Government is missing a trick when it comes to lifting productivity for medium-sized businesses, says Russell Moore.

The Government’s economic plan for a productive, sustainable and inclusive economy was released this week, and includes a raft of initiatives designed to address our national productivity challenges. However, an opportunity has been missed to empower a key area of the economy that has the potential to drive a significant lift to NZ Inc’s bottom line: mid-size businesses.

Grant Thornton New Zealand’s 2019 mid-market report, The power and potential of the mid-size business, revealed New Zealand's mid-sized businesses (MSBs) are not performing as well as their counterparts overseas.

There is potential for this sector to accelerate its growth, with targeted interventions by both Government and the businesses themselves. But first, there needs to be a fundamental change in the way we define and talk about the business groups that make up our economy.

The Government’s productivity report has correctly identified the need to develop skilled, adaptable people with access to lifelong learning. We know one of the trickiest areas, particularly in a small economy like ours, is finding and utilising the right skills. The Government’s Review of Vocational Education (RoVE), is also focused on addressing how we develop those skills in the workplace.

Our research demonstrates that medium-sized businesses - defined as having revenue between $5m and $30m and 20-99 employees - are acutely aware that to grow, they need skills. Employment growth within the midmarket was 24 percent across the five years to 2018 compared to 8.9 percent for small businesses and 13.9 percent for large ones. However, while mid-sized businesses are investing in people, that isn’t leading to results in terms of productivity, the report found.

Source: Statistics NZ Annual Enterprise Survey 2018

Our mid-sized businesses’ low productivity (measured by income per employee) could indicate that the right skills aren’t being found or correctly utilised.

Source: Statistics NZ Annual Enterprise Survey 2018

The Government’s assertion that access to capital is critical for growth is also pertinent and mid-sized businesses feature on the wrong side of the scales when it comes to capital investment as well. Our study found that only 9 percent of all mid-sized businesses looking for funds in 2018 chose equity financing, as against 76%  favouring debt financing. Owners are reluctant to give up a share of ownership to an investor; however, in many cases that's necessary to achieve meaningful growth.

Meanwhile medium-sized businesses aren't taking advantage of the internet to boost sales. While 99 percent are using the internet, and around 60 percent use it to receive orders, few are using it as a significant part of their sales strategy.

As John Managh, CEO of Wilderness Motorhomes said in the report: "Amazon might be using robots and drones, but for most New Zealand businesses that might as well be Dr Who. For most of us it's hard just to automate the basics."

The one thing successive governments have shared is the inclination to put small and medium sized businesses into the same bucket. With around 500,000 businesses in that bucket, it’s a big ask to both leverage opportunities and meet the needs of such a diverse group. By forming a sharper definition of what a mid-sized business is, Government can then identify and address the specific needs of these businesses, which differ greatly from their smaller counterparts.
Mid-sized businesses employ nearly 400,000 New Zealanders and contribute $35 billion to national GDP. There is a need and opportunity for Government and government agencies to provide specific support and interventions. And they need to take New Zealand mid-sized businesses into account as well.

Only then will we see the sort of economic transformation the Government’s plan is aiming to achieve.

Russell Moore is national managing partner for Grant Thornton New Zealand

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