Bring in professionals to unlock the potentials of medium size businesses, and the North East economy could be £4bn a year better off. “What a transformation that would be for the economic viability and provision of jobs in our region,” says Lucy Armstrong, the new David Goldman visiting professor of innovation and enterprise at Newcastle University Business School.
It’s a view held also by the CBI, in which she has had a key role, and one she promotes as chief executive of The Alchemists, the Gateshead based consultancy upraising fast growing family and entrepreneurial businesses.
Delivering the David Goldman lecture at the school, in her succession to Roy Sandbach (now leading an innovation team at the North East LEP) she countered arguments for concentrating support on small businesses (SMEs) as top trump in raising the North East’s economic game.
Armstrong told a packed lecture theatre: “Some SMEs are perpetually small, some are growing, some declining and some static. We’ve been desperate to throw money at them. Yet they do little training and are rarely held to account.”
Describing the term SME as a convenience to governments and institutions, she warns: “We have to train and develop business leaders, not just anticipate they’ll spring out of thin air. We need more professionally run businesses than owner managed businesses.”
Statistics accompany her argument. In the North East, medium size businesses (MSBs) are only 2.2% of the total yet employ 13.5% of the private workforce. They provide 47.5% of the region’s private sector turnover. Digging deeper, she finds our region has 445 businesses per 10,000 population, against an all English average of 655. Creating 200 start-ups gives basically 200 jobs, she argues.
“But if you get some MSBs in that 445 to double in size you create thousands of jobs. They’ve proved they won’t be here today, gone tomorrow.
“Only a few hundred businesses are capable of the transformation. We’ve a duty to challenge them to stay in business, grow, be ambitious, invest in their leadership. The entire North East economy and its society will really benefit.”
Who, then, are the professionals? She admits to BQ: “I wish I’d a better term for them. Hallmarks of a well run business are qualitative rather than quantitative. But there are some quantitative ones, including a professionally qualified finance director, as the CBI has observed and the BIS endorses. Also their share ownership spreads beyond one individual. Presence of a third party investor or non-executive director is another hallmark. So additional voices and demands are made and you never just look in the mirror.”
She’s noted since coming to the North East in 1989 how professionals with degrees and expertise in specific disciplines scare some owners. Yet moulding them within a team is latent businesses’ key to advancement. Moving from owner managed to professionally managed is challenging but, she points out, something that Goldman himself identified, enabling Sage to become the quintessential example of a spectacular journey from start-up to plc. “Few businesses rise at that speed and get that far,” she observes.
She believes the change possible without losing in subsequent generations the early family gene of enterprise. She exemplifies Ringtons, also British Engines which, several generations on, finds Alex Lamb, in his early 40s, in new offices building tens of millions of turnover, running things differently from his father before - investing, growing and developing people, markets and products.
Harry Banks, head of the long established family business of that ilk, is putting professionals into place. Armstrong says: “When you see him preparing them for further development of businesses he started by digging the first hole in the ground, it’s amazing. His business will live long with his family still custodians.”
Can’t all entrepreneurs operate professionally? “It depends how you define entrepreneur,” she replies. “If you mean someone starting up on their own and gradually adding people, they’ll infrequently make the change in my experience. But entrepreneurial start-up flair, if held collectively, is more than capable. Professional behaviour’s there from the start.”
She cites Tariq Nasir who, from day one, wanted a team around him at Thi_nk who’d be mostly older and experts in their field. “By government statistic, Vertu under Robert Forrester, was a start-up. But it raised £20m on the AIM and had a management team instantly, most having run a plc already. Within six months they had 40-odd franchises. Seven years on it’s 106 with £1.5bn turnover.
That’s probably the North East’s fastest growing start-up ever. I think imagining an entrepreneur as one man on his own a rather narrow definition.
“In family businesses you need entrepreneurship in every generation – in different forms. Our society sometimes gets that wrong. Business schools too. Entrepreneurs, we love to think of as Superman. Actually they come in all shapes and sizes.”
While reeling off entrepreneurs with academic qualifications, she also finds most start-up entrepreneurs have struggled with formal education – “maybe because they leap chasms and gaps and have different perceptions of risk. Our schooling and education is as much about how we’re socialised as about how we’re educated. And people doing turnarounds must be hugely entrepreneurial,” she declares.
What about university spinouts, whose managements probably have skills and academic qualifications but less commercial experience?
“I find under 40s setting up, particularly students, do so in small groups, seeking external advice from the start. A lot of that may be due to how they’ve been taught. I think universities are accepting a spinout doesn’t necessarily mean miraculous inventions or technology advances – new biochemistry, new enzymes. It might. But most are businesses taking away pain or otherwise solving problems in people’s lives.”
People must work on, not in, their business, she suggests. “A parent treating a teenager as it did a baby will get negative responses. Carry on running your business as if it’s six months old when it’s now 16 and your business will be less successful. Stand aside and study all of it.”
The North East has a rare chance now to drive professionally run MSBs with existing leadership and ambition.
Fewer than 54% of private businesses are currently financed externally. Says Armstrong: “This 13.4% of employment, and half the turnover in medium business, is ungeared. Confidence was shaken by the financial crisis. But MSBs’ ability to invest, grow and do business hasn’t been affected. They already do lots on little – a skill vital for some time yet.”
Also, she feels, it will be hard for some time to sell businesses satisfactorily. “The UK is obsessed with selling businesses. It creates no value – just transfers it with some leakage to accountants, bankers and lawyers.”
Could SMEs be more accountable? Armstrong suggests: “If you move away from scores on doors and, as a society, are prepared to put resource behind certain organisations saying ‘here are the business outcomes we’d like and they’re sensible’, that would be possible.
“But doling out bits and pieces here and there, we see people good at gaming the system.
“I think we’ll get better at measuring incomes rather than outputs. RDAs were measured on how much they’d spent. Jeremie Funds will be measured on jobs created – social not economic outcomes, but also making returns to taxpayers on money invested.
“Sometimes spending public money wisely means not investing in company A but putting twice as much into company B. We’re not in that culture yet. But, with fewer resources and greater focus on partnerships, trust will grow.”
In doubting that throwing public money at SMEs will match the job creating and enterprising effect of professionally managed MSBs, would she suggest cutting SME funding or diverting more to MSBs?
“Money has been cut,” she points out. “Anyway, support and encouragement for businesses is not measured in pounds. I feel – something national and local government find hard to accept – that money isn’t the only unlocking resource. There’s sharing of ideas.
“The Government’s accelerator programme is trying to emulate Lottery money into the Olympics, shifting from an ‘all must have prizes’ to targeting. But because it’s public money, the crude measure remains scores on the doors.” One example working well, she thinks, is Ian Livingstone the new trade minister’s targeting of MSBs as exporters.
“He’s offered every MSB among some six and a half thousand he has labelled a one-to-one to assess their export potential. From there the extent of public sector support, if any, will be determined.”
She suggests: “In our compact region – the only one in the UK with a positive export balance though fewer than 1,000 businesses export – you and I could easily assess and list additional companies with export potential and not be a million miles off. With a grand national plan you must have numbers. Did the regional development agency do it any better and will the LEPs do it any better?
“I’d say as long as purse strings are held in London, where the same set of measures is applied, unless a really compelling argument is made, it will be hard to have a different set of metrics accepted for what’s public money, and what has to be accountable to taxpayers.
If you took the cover off business plans of the seven former RDAs you’d see they were interchangeable.
“Ministers decided priorities. They all had a digital strategy, an infrastructure strategy, they all looked and read the same and had only slightly different logos. I don’t believe we have one economy. Nor do I believe with LEPs we’ve 39. Seven across England was probably closer. As for two LEPs in the North East, originally five? Our region is one economy of 2.6m people – too few, and too few of them young. It has some national assets like process industries on Teesside, three rivers whose deep ports are major strategic assets. Nissan, and Hitachi shortly, are major manufacturers, then there’s a solid medium size business structure with relatively decent public transport…
“That in the 21st Century is just about a credible size of any economy - but still on the smaller end. Greater Manchester with the M62 corridor collectively is much more credible.
At a LEP level, as small as a few hundred thousand people isn’t an economy.”
Reasons not to sell on
Armstrong says selling on a business may look attractive. But the UK needs more tax revenue and a business sale does little for economic development, wealth, tax or jobs generation, whereas retaining and nurturing private businesses with steady and sustainable growth improves everyone’s life.
She compares the NHS budget of £437m at its launch in 1948 (£9bn in today’s money) with last year’s budget of £108.2bn. “We’ve 12 times the expectation of the NHS that we had in 1948. We’ve longer life expectancy, greater health care. That’s why you need economic growth – people’s expectations keep rising. It’s not about getting richer. It’s also about getting healthier, better educated. Or living longer or having a better quality of life.”
Only the private sector pays tax, she reminds us, yet less than 25% of the turnover among FTSE 100 companies is in the UK. For many, less than 25% is in Europe. “So they’re not British businesses,” Armstrong argues. “And many international businesses don’t pay tax here. If we want universities, hospitals etc, we need more businesses paying significantly more tax.”
Yet in the North East only 11% of private businesses have more than 20 employees. The three biggest employers in Newcastle in fact are in the public sector: the two universities, the council and the NHS. Most small businesses in the UK are shell companies employing no-one. Even start-ups don’t pay tax for a long time, hence Armstrong’s focus to MSEs once more.
Lucy Armstrong, born in Manchester of Teesside parents, is Oxford educated, holds an MBA and joined The Alchemists in 2003 after an early career in private equity, corporate development and headhunting with 3i plc, Courtaulds Textiles and Tyzack. She has served numerous bodies in business and academia. The Alchemists help high growth mid-corporate businesses to speed development and success through focus on shareholder and management, and succession.