Management quality key piece of productivity puzzle

The quality of management is increasingly coming under the spotlight as a potentially important piece of the productivity puzzle. The Bank of England’s chief economist, Andy Haldane, argued in a major speech in March this year that a lack of management quality is a plausible explanation for the UK’s long tail of low productivity companies and suggested that there are potentially significant returns to policies that improve the quality of management within companies.

However, while evidencing management quality as potentially material to the UK’s productivity problem is fairly straightforward, identifying how to address this issue, particularly among small businesses, is more difficult.

Many SMEs are preoccupied simply with business survival and ‘getting the job done’ rather than investing in their management skills to increase productivity and growth. However, with SMEs accounting for 99.9% of UK businesses and generating 47% of turnover, unless small and medium-sized firms can raise their game in this area, the UK’s productivity problems cannot be tackled.

Micro and small businesses have particular challenges in how they invest in and manage their people to support business growth because they do not have dedicated HR support and owner-managers have limited time or capability in this area.

However, the provision of existing low-cost or no-cost business support and advice available for small business is typically inadequate or poorly marketed, with the recent BEIS Select Committee inquiry into industrial strategy concluding that business support for SMEs provided by the Growth Hub network needs to be improved.

People skills

It is against this backdrop that the CIPD, supported by JP Morgan, developed and piloted its People Skills initiative which provided HR support to more than 400 small firms through local partners such as a chamber of commerce, Local Enterprise Partnership, Growth Hub and councils in Hackney, Stoke-on-Trent and Glasgow, from July 2015 to October 2016.

The evaluation report People Skills: Building ambition and HR capability in small firms, published in September, provided some fascinating insights into the type of HR support SMEs need, how much it is valued, and its impact.

One of the most significant findings from the evaluation of the research project was that the first step to business improvement for many small businesses is getting the very basics of people management in place; for example, establishing workers’ terms and conditions and job descriptions. The research suggests that until these people management ‘foundations’ are in place, owner-managers don’t have the capability, interest, or time to invest in value-added activity like training staff. While the typical type of support delivered to SMEs through the People Skills service was fairly transactional, the evaluation found evidence that the initiative added significant value to participant organisations.

Boosting managerial quality/productivity

The data from the pilots suggest that owner-managers were more likely to report that their organisation was better or much better than similar organisations in their sector on measures of workplace relations, labour productivity, and financial performance after using the People Skills service than they were prior to using it. Of course, this does not provide hard evidence of a link between the People Skills service and SME productivity improvements; however, together with the positive feedback from managers taking part in the deep-dive case studies, the overall weight of evidence in the research corroborates the suggestion that a link is plausible.

Creating coherent local skills ‘ecosystems’

One of the challenges of providing high-quality low-cost or no-cost business support to improve the people management capability of SMEs at a local level is the lack of co-ordination of existing services, an issue which was highlighted by the 2017 BEIS Select Committee report on Industrial Strategy. The findings from our three pilots amply confirm this view. The degree of success of the pilots was dependent on there being a local infrastructure in place that provided an effective mechanism for engaging SMEs. Where such networks were relatively well developed, as in Glasgow and Stoke, the initiative was successful, compared with Hackney, where these networks were less developed.

We therefore recommend that local institutions such as LEPs working in partnership with others such as local authorities and chambers of commerce should evaluate the strengths and weaknesses of their local networks as part of an assessment of the quality of business support.

Bespoke face-to-face support makes a difference

Apart from considering the strength of local networks and links with SMEs, bodies such as LEPS, Business Growth Hubs, and local authorities should consider the quality of the support available. A key finding from the People Skills programme was that owner-managers want and need bespoke support that goes beyond what is available on the internet. The delivery model adopted in People Skills of locally-based HR consultants offering face-to-face advice proved successful, not least because of its flexibility, and because the consultants were well versed in local challenges and opportunities facing SMEs and understood the needs of the owner-managers they worked with.

Long-term commitment to building SME capability required

A further important finding is that the nature of business support for SMEs does not lend itself to quick-fixes. The pilot projects ran for 12 months, and the evidence from participants is that in some cases this was not long enough to build up trust and reach SMEs who have not previously engaged with business support programmes. Glasgow has nonetheless decided to continue with its own funded programme adapting the People Skills approach, and we understand Stoke is also considering changes in its own support programmes. We recommend that at least three years would be needed in any follow-up programme developing the new approach.

Boosting demand for improving people management capability

The data from the evaluation shows that the vast majority of owner-managers that used the People Skills service had never received support from an HR consultant previously because of a lack of awareness of how valuable this type of support was for their business, or because of cost. There was some evidence in the report that a People Skills-type of initiative, providing SMEs a limited amount of free, high-quality support, could over time help build demand for further investment by SMEs in improving their people management practices. There was no evidence of SMEs using People Skills to avoid paying for HR support already on the market.

Employment of young people/apprenticeships

Finally, the research suggests policymakers need to rethink how they seek to encourage SMEs to employ and train young people in the workplace. One of the original aims of the People Skills programme was to encourage SMEs to invest more in young people and develop apprenticeships; however, while there were a limited number of SMEs that took action on this agenda as a result of the programme, a large majority did not.

This suggests that unless more is done to boost SMEs’ basic HR capability and capacity, it is unlikely that the traditional government approach of offering a mixture of subsidies and programme support to encourage SMEs to take on young people and offer them apprenticeship-level training will ever have much traction for the vast majority of small and medium-sized businesses.

Next steps

The CIPD has recommended a national rollout of the People Skills initiative in England as part of a renewed focus in industrial strategy on enhancing workplace productivity by boosting managerial quality, increasing investment in skills and strengthening the quality of business support through local-level institutions. Our provisional estimate is that if the CIPD-JP Morgan delivery model were adopted by all LEPs, it would require initial funding of about £13 million per year for at least three years. This could be funded by allocating £40 million from the £23 billion National Productivity Investment Fund.