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Predicted upturn to bring new risks for ‘growth’ SMEs

At a glance

  • SMEs emerging from recession face new challenges during their fast-paced growth phase
  • Fast-growing firms share their experiences in article of dealing with exponential growth, with rushed hiring and procurement decisions among the top logistical issues
  • Businesses may quickly expand beyond current insurance coverage

Written by the Economist Intelligence Unit exclusively for Zurich’s brokers

Rapidly expanding, so-called ‘gazelle SMEs’ need to be especially careful of managing their business expansion during any economic upturn, according to The Economist Intelligence Unit, in association with Zurich.

Figures from Experian confirm a 10% increase in the number of SMEs experiencing ‘gazelle-like’ high levels of growth.

When growth rates reach between 10%-20% annually, increased demand can bring resource pressures, capacity issues, costly mistakes and stress to SMEs, which, if not handled correctly, can result in lower-quality products and services with poor customer satisfaction (whether B2B or B2C businesses).

Melanie Clear, founder of Essex-based architectural practice Clear, is used to such rapid growth. Her business, which was founded in 2005, has been growing profitability at 15% year-on year.

“One of the challenges when you’re fast-growing is that you make snap decisions because it’s all hands on deck,” she said. “You don’t necessarily allow yourself to go through the proper processes or find the best people to hire. A challenge when you grow quickly is that you don’t have the past experience to draw from.”

Broker Tips

  • When business is booming, owners have the least time to invest in risk governance which can help deliver sustainable long-term growth. Brokers can help facilitate the proactive approach that is required to sustain customers’ growth
  • Identifying and understanding the high growth firms in your portfolio will help you to maximise that business as current or potential key accounts
  • Make sure your high-growth SME clients are reviewing insurance coverage and risk management on a frequent basis — as they may quickly grow workforce, assets and infrastructure beyond current cover
  • High growth SMEs may also quickly launch new products or services, pushing them into new areas of liability and exposure — so Professional Indemnity and D&O exposures particularly should be reviewed

She added: “We had no IT strategy. It wasn’t top of the agenda — I just knew that we needed it and needed it yesterday. That caused a lot of aborted IT costs; there were compatibility issues and it just didn’t need to be as hard as it was.”

She continued: “I’m now on my fifth IT guy, who understands that we don’t have £100k to spend on IT, so it’s important that it’s spent wisely, but that he also knows we’re growing fast so there’s a balance to be struck in terms of investing in IT infrastructure for the near future, which we’re likely to expand into, but not committing us to huge investment for the longer term, in which there’s a risk there may be cheaper alternatives in technology available by then.”

Global fund transaction network Calastone started in 2008 with 14 staff and Julien Hammerson, its chief executive, said: “We are running at 100% capacity, day in, day out. When people reach capacity, we hire at that point. We currently have 72 staff and are hiring to bring that closer to 100 within the next year.” Sourcing suitable and financially palatable office space in central London was a challenge,” he added.

For Trillion Fund, a crowd funding platform that facilitates mainstream investment into renewable energy projects, its 20% growth rate is due to a social need as well as greater acceptance of its innovative approach, said its managing director Julia Groves.

“As a fast-growing business, the problem is not identifying the opportunities; it is more about knowing which ones to pick and having the bandwidth to execute,” she said. “It’s always stressful spending more money than you earn in revenue – this period pre-breakeven is all about maximum bang for every single buck.”

Keeping pace with constantly changing financial regulation is an ever-present challenge for companies in the financial services space, but Ms Groves says Trillion Fund mitigates the risk of growing too fast by “putting the pegs in behind us as we go”, which includes writing up processes, putting in place procedures and investing in knowledge transfer among staff.

Image © Getty

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