At a glance
- SME sector clearly split between ‘high-performing’ and ‘low performing’ following challenging economic times
- Many low performing SMEs yet to emerge from economic downturn
- High performing SMEs provide better opportunities for brokers who must carefully look for successful traits
The SME sector may be primed for growth, but the challenge for brokers is to identify both the right SME opportunities and the risks to their book in a market where some businesses are still struggling.
In July, the International Monetary Fund revised its economic growth forecast for the UK from 0.7% to 0.9% for 2013 – its first upward revision for the country in 15 months. The British Retail Consortium reported healthy sales growth in June, while UK house prices reached new highs in July, according to property website Rightmove, which also doubled its 2013 forecast to 4% price growth. But do SME owners share the optimism?
How some SMEs became ‘high-performing’ and what it means for brokers
Diversified products and services — SMEs that added new products or services to their proposition are likely to have new insurance requirements. For example, a distribution business that has started advising on logistics might now benefit from professional indemnity cover.
Expansion into new markets — many SMEs over the past few years have grown through expansion into new regional or national markets. This may increase risks for some assets, such as motor fleet. Entry into new national markets may also bring different liabilities and regulatory requirements.
Reduced overheads and improved productivity — Many SMEs have made cutbacks to have lean operational costs during challenging economic conditions. These businesses may now need advice to make sure their insurance programme is still adequate.
Successfully adapted their business strategy — identify those SMEs that have been able to report good news, pitch wins, great client case studies and award successes. These are hallmarks of growth and the possibility that it is time for a broker to perform a re-evaluation of their risk programme.
Adopted a more flexible operational cost base — As economic growth returns, SME that have made cutbacks could be particularly vulnerable around their sums insured. Casualty exposures and liabilities may also have changed due to potential increased use of part-time / ‘zero hours’ / contract workers.
Reduced targeting of new clients to concentrate on adding value to existing clients — As these SMEs return to chasing new business, their expansion could be rapid. If they fail to re-evaluate their insurance programme during this rapid expansion, then they run the risk of underinsurance. Claims pay outs calculated using the law of average could be insufficient for the business requirement.
Growth or downturn?
A recent survey of 549 small and medium enterprises (SMEs) owners was conducted by the Economist Intelligence Unit on behalf of Zurich. It revealed a two-tier SME economy emerging. In response to the post- economic crisis stagnation, “high performing” SMEs were those which have successfully adapted their business strategy; diversified products and services and markets; downsized their debt; and implemented productivity improvements.
“Low-performing” were those characterised by negative shifts across the majority of financial metrics: turnover growth, cash flow, reserves and operating costs. Additionally, low performers were delaying business investment and reducing prices.
Of all the industries represented in the survey, the threat from economic stagnation was the sharpest for professional and financial services firms (at 63%), followed by media, marketing and entertainment (54%) and other consumer and business services (53%).
David Atkinson, chief executive and founder of London-based marketing consultancy SPACE, says: “The broad market trends that I experience are reflected in the economic data I read and vice-versa.”
The company, which fits the definition of a high-performing SME, adapted its business model on the basis that “it was redundant to look to a period when conditions would improve and instead we should work out how to thrive in this environment,” according to Mr Atkinson.
In the short term, SPACE followed several of the key resilience strategies identified in the survey, such as diversifying products and services (as did 55% of SME respondents), improving productivity and adopting a more flexible operational cost base.
Unlike 49% of respondents who diversified their customer base, Mr Atkinson reduced the targeting of new clients and concentrated on adding value for existing clients. “We also worked harder to make more of the good news, pitch wins, great client case studies and award successes,” he says.
The risk to SME survival posed by operational costs was the second most pressing challenge for survey respondents, which Mr Atkinson says introduced an enforced pragmatism.
The key was to reduce overheads to the lowest realistic and sensible level
David Atkinson, chief executive and founder of SPACE
“The key was to reduce overheads to the lowest realistic and sensible level. We worked through every line of the profit and loss accounts to work out what was necessary and what we could cut back,” he says. “We’ve got a lot better at understanding our business model — how to create as well as maximise profit. Profitability can be achieved by maximising income from what we sell, and what we sell costing less.”
According to recent surveys, which have found UK business confidence to be at its highest for six years, that growth “feeling” may be returning. A global survey of 11,000 firms by Markit, a financial information services company, found UK companies to be enjoying business optimism not seen since before the financial crisis and subsequent recession, bucking a global trend of renewed pessimism.
This may be the first step on a long, pot-holed road to recovery, one in which the fortunes of UK SMEs may be polarised as never before.