The future of SMEs: protectionism, diversification and digitisation

It is no surprise that our world will never look the same. But does the outlook need to be bleak? Will a global pandemic affect the trajectory of SMEs? Or is this a prime opportunity for them to shine?

As the final piece in our SME day campaign, we have discussed with a range of experts both within QinetiQ and external industry bodies, their thoughts on what the fate of SMEs might be over the next 5-10 years, in defence, security and beyond. In previous blogs we have explored how SMEs harness specialist skills, and have unparalleled agility and appetite for innovation. But now we take a look into what changes may occur, and how there could even be a silver lining to the impact of the pandemic.

Recalibrating our values

Whilst priorities outside of pure economics became ‘trendy’ years ago, there is still increasing pressure on policy-makers for more ethical procurement processes, and this is likely to show no signs of waning. The current pandemic has ushered in a greater sense of necessity for this, putting strenuous burdens on supply chains, particularly when goods need to cross borders. Even as we are inundated with negative statistics of the here and now, and almost crippling data on what could be our future society, SMEs may unlock a great deal of potential.

The economy in many regions will not be in great shape for years to come, as they build their way back out from the current crisis. There is likely to be greater analysis and refining of public money. Though this has unprecedented effects on employment and the economy, the global workforce is still due to grow. SMEs are arguably one of the best cases for investment at low cost. Firstly, they play a vital role in absorbing new jobs. Secondly, SMEs often have greater capability to adapt to change fast, owing to their generally reduced bureaucracy. Thirdly, QinetiQ’s supply chain experts Tom O’Byrne (Head of Supply Chain Development) and Stewart Smith (Supply Chain Lead) predict that, with the heightened focus on what matters the most, the social value of SMEs will be underscored even more.

We have touched on this in previous blogs, but SMEs provide diversity, talent and innovation to the sectors they are involved with. They also have a much higher growth rate than larger corporations. Their benefit to emerging economies is well documented: accounting for 70% of employment, 50% of global domestic product whilst representing about 90% of businesses.

A new era of protectionism and diversification

Not only will the social value of SMEs really come to life, but economic recovery of nations may involve a global movement towards protectionism too, a point raised by most of the experts we spoke to.

The strain that COVID-19 has placed on global supply chains has exposed the weaknesses in such a transnational, borderless system. Though more localised supply chains would inevitably be more expensive, it is likely that other advantages would be weighted more heavily. Andrew Kinniburgh, from NDI (a MakeUK organisation), explains how this would feed into the social value focus of the future: "in the UK, for example, you would be paying more tax for doing business within the country, which would, in turn, further fuel the economy. It will enable more opportunities to be given to young people, advancing innovation within the UK, instigating that positive chain reaction that has otherwise been paused from lack of investment in tech and research and development over recent years”. He also mentions how the UK’s productivity levels have not picked up since the 2008 crash; coupled with its ageing population and the incoming recession, a “step change in investment in tech and digitisation” is nothing short of crucial.

Investment within home soil may be joined by a renaissance in economies of scale. Organisations will want to reduce the number of suppliers they take on in their drive for efficiency, our QinetiQ supply chain experts concur. For defence, security and critical national infrastructure (CNI) in particular, “the emphasis on disruptive technologies and the acceleration of digital transformation in government and industry is resulting in a revaluation of where investment should be placed, and what benefits it will deliver”, says Fred Sugden, Head of Defence Programme at techUK.

How might SMEs react?

“We may begin to see clustering of SMEs, resulting in a more diversified host of offerings, all packaged into one service or product”, says QinetiQ’s Tom. SMEs may look to see what elements of the supply chain are imported from abroad, and how they could offer this locally instead, either joining forces with other SMEs or diversifying their current skills.

The latter is highly likely, according to Fred from techUK , as the proliferation and exploitation of new technologies, such as quantum and edge computing, will provide new opportunities for SMEs and non-traditional suppliers to establish a footprint in defence, security and CNI.

Both protectionism at the demand side, and diversification at the supply side, would be a mutually beneficial system; essentially a contingency plan on both ends, with the larger establishment benefitting from less reliance on volatile global markets, whilst SMEs spread the risk of dependence on one market or niche to attract a customer.

The relative strength of defence

If SMEs around the world look to diversify and expand their foothold, the defence market and its traditionally stable state - notwithstanding enduring budget cuts - may be turned to.

SMEs that sought diversification in the UK when the defence budget began to shrink around four or five years ago, will now be reaping the benefits, says Andy Johnston, the Defence Policy Advisor at ADS. Those who chose to serve both civil and defence customers would be more agile in adapting to a more defence-reliant state of play, “as the civil space is likely to experience hollowing out, with massive trepidations in investments”.

Indeed, Tim Martin, ADS’ Head of Defence Commercial, predicts that this might be defence and security’s time to shine, with the way in which they have adopted proactive contingency plans thus far, and defence SMEs have shown resilience.

Digitisation versus assurance: an inevitable trade off?

However, as traditionally risk-averse sectors, defence and security will be exposed to new concerns. “The new normal is bound to either force or speed up the adoption of new technologies”, Fred from techUK says. Not only as a result of the technological demand of the new normal, but because the drive for efficiency within supply chains might release more budget and encourage a willingness to experiment. According to QinetiQ’s supply chain experts, these changes unveil one of the key differences between other commercial SMEs and those in the defence and security markets; the requirement for assured technology is critical for the latter. “New ways of working, alongside quick acquisition of technologies, may result in unintended consequences, or, in some cases may not achieve the desired effect”, says techUK’s Fred. “There needs to be a level of acceptance towards this.”

Nonetheless, “new entrants to defence might force businesses to up their game digitally and open their eyes to risk,” says Andrew from NDI. He anticipates that “both industry and government will need to change their mind-set to accept a higher tolerance of risk, where not all investments are guaranteed to deliver benefits”. These sorts of paradigm shifts do not happen overnight, but we can agree that the pandemic has forced us to adapt at rates previously unimaginable.

Modernising the workforce and workplace

Though the benefits of unleashing experimentation are expansive, the benefits of flexible working enforced by the pandemic cannot be overlooked. Such merits of remote working are touted globally these days, but it must be noted that this working environment will indeed provide a host of opportunities, not least for fresh blood and broader skillsets, NDI’s Andrew says. We are likely to see ways of working that are more adaptable to unexpected change, in essence a more future-proofed and ruggedised workforce.

For SMEs, this move to greater remote working has arguably opened up more doors than most. Fred from techUK suggests that “since SMEs may be hit particularly hard by costly overheads such as travel and subsistence, the ability to interact and do business without such barriers will undoubtedly be a tangible positive”.

Adversity breeding generosity

So the future seems bright for SMEs, with the above trends being multifaceted and certainly generating domino effects. Still, some, like Tim from ADS, might say it is ‘too early to really tell’ the consequences of the pandemic, as the stockpiles formed for the impact of Brexit have only just been used up in the UK, meaning that only now are we beginning to see them running out, with the subsequent true economic, longer term impacts, beginning to be actualised.

We can still be sure that SMEs will likely be one of the key beneficiaries of the new world. Adversity generally breeds greater generosity and altruism across the world. The result of investment in SMEs will not likely be disregarded in years to come. Fred from techUK even suggested that the prospects are far wider and greater: “Whilst the economic impact of the new normal is likely to be negative, the new environment does present government and industry with a real opportunity to change established ways of working for the better.” We can but hope!