ECI Partners: 10th Annual Growth Index

27-Aug-2019

ECI’s 2019 Growth Index, the only survey focused on high growth companies in the UK, polls business sentiment and analyses what the biggest concerns for these businesses are. This is ECI’s tenth annual report and was produced in collaboration with the CEBR. The report looks back at the last decade and explores what growth companies expect will happen over the next ten years.

UK political uncertainty is unsettling businesses more than ever

80% of businesses we surveyed say domestic political uncertainty is their biggest concern, up from less than a third (32%) in 2016 and making it by far the most significant worry for growth companies right now. This reflects the sizeable shockwaves that rippled through the UK’s political environment following the vote to leave the EU in 2016 and the subsequent divisions in parliament that this brought to the surface. The results of the 2019 ECI growth survey confirm the extent to which this uncertainty is unsettling businesses. Linked to this, companies are growing more worried about an economic slowdown with almost seven in ten citing this as a major concern, up from 59% last year and reaching levels last recorded immediately after the 2016 Brexit referendum.

This uncertainty will be short-lived

Companies are much less worried about UK political uncertainty over the longer term, with only 25% citing this as their biggest concern for the next 5-10 years. Companies are also less fearful of a UK economic slowdown over time: under a third cite this as a major concern over the longer term (5-10 years) compared to 56% over the shorter term. This indicates confidence that Brexit will be resolved one way or another over the next decade.

Chronic skills shortages and cyber threats

Skills shortages are expected to remain a chronic problem for growth businesses over the short and long term. Nearly two-thirds of respondents cite this as amongst the top concerns for their business (compared to half last year), far more than those who selected a rise in borrowing costs or a decline in inward investment to the UK. This reflects a widening issue for the rest of the UK. CEBR data shows that total vacancies across UK businesses nearly doubled to 837,000 in May this year.

Meanwhile, 38% of companies surveyed cite cybersecurity threats as a top concern, up from one in five firms in 2018. We believe this reflects the increasing share of businesses’ activities, resources and assets which have shifted online in recent years, introducing new pockets of risk.

How do companies plan to mitigate these concerns?

Respondents ranked investing in staff and internationalisation first as the best ways to mitigate these concerns. A London-based business services company in particular said it would continue to grow its business in the US as a hedge against slower UK growth, whilst a respondent in the connectivity market indicates it would increase sales efforts outside of the UK and secure new backers to fund their business’ next phase of growth. Looking overseas was also a way to reduce the risk of skills shortages, with one company saying it would increase ties and collaboration with higher education institutions internationally.

Investing for the future

When asked to rank the most important skills and functions for their business over the near term and long term, companies said sales & marketing, and customer services, would remain crucial both now and in the future. However, they expect these skills and functions will decline in importance over the next ten years while cybersecurity, artificial intelligence and machine learning would become more important. Meanwhile a majority of growth companies say that over the next ten years, the trends they will invest in most are automation and artificial intelligence, eclipsing flexible working, outsourcing, and internationalisation.

It is now harder to start a business than it was 10 years ago

45% of respondents, led by business services and financial services firms, say it is harder to run a business today compared with ten years ago, while 17% said it is easier. Growth companies blame political uncertainty and more stringent regulation and compliance, suggesting that they are far more important than worsening access to talent. A third of those who said it was easier cite a stronger economic backdrop and easier access to finance as the main reasons.

Do you plan to move your office or HQ?

Almost half of companies we surveyed say they plan to open new offices elsewhere or move their headquarters, primarily to tap local skills and talent. Their top destinations for doing so are London and the South East, and overseas (with the US, Singapore, Netherlands and Ireland cited as top destinations).

North America overtakes Europe as the top export destination

Three-quarters of respondents said North America would be their most important destination for exports over the next 12 months, overtaking Europe for the first time since 2016. This comes as politicians in the UK and the US talk up the possibility of a trade deal between both countries, Asia-Pacific was ranked third, followed by South America, India, and Africa. This is despite CEBR data showing China and India’s growth will outstrip North America and Europe, looking to 2029. Companies said they would accelerate their activities in North America as a way to hedge the UK’s near-term economic slowdown.

Will Truman, founder of curated music company Imagesound (Chesterfield), said: “We previously had 90% of our clients in the UK, but now we are invited to tender for work all over the world. Our goal over the next ten years is to become the biggest provider in the world of digital media in a commercial setting. To achieve this, we will be accelerating growth in the US and Asia.”

Business confidence is close to an all-time high

In the last decade, companies have grown more confident about their revenue expectations.  In 2011, 60% of firms expected double-digit revenue growth but that number has steadily risen over the years to reach 81% by 2019 (bar a slip to 44% in 2016).  In 2017, 2018 and 2019, more than 50% of firms anticipated their revenue would increase by 20% or more over the next 12 months, a notable increase from just 31% in 2011 and 17% in 2016.

Business services represents the most confident sector of all sectors surveyed this year with 54% anticipating revenue growth of 20% or more. The business services sector is forecast to be the fastest growing sector with respect to GVA, according to the CEBR. In the ten years to 2029, it is expected to grow on average by 3.7% between 2020 and 2029, adding £348bn to the economy, up from £236bn in 2018.

Easy access to finance

Meanwhile, confidence about access to finance is close to a record high. 70% of companies expect it will be easy or very easy to access finance in the coming year, down from last year’s record 79%, but significantly ahead of 42% in 2010.

This compares positively with the rest of UK business: between 2009 and 2014, the share of banks and building societies reporting an improvement in the availability of credit to businesses over the previous three months was 9.4 percentage points higher than the share reporting a deterioration. Since then however, this figure has averaged just 0.6 percentage points, indicating that credit conditions have tightened for UK companies.

The latest strong data on credit and revenue expectations suggest that growth companies are well-placed to jumpstart the UK’s economic recovery once uncertainty decreases.

Simon Champ, executive chairman of premium pudding maker Pots & Co. (London) said: “It’s difficult for young businesses to get leveraged to accelerate growth. The banks were damaged for longer than we thought, so getting debt on board has been difficult.”

Sean Whelan, managing partner at ECI Partners, said:

“Growth companies are the UK’s biggest wealth and job creators, so it is important that we understand the challenges and opportunities they face in achieving their goals. That’s why we’ve been surveying them every year since 2010. As the clock runs down on Brexit, it is no surprise that companies are so worried about political uncertainty in the UK, and the potential economic downturn this could trigger. It’s become harder to run a business, and perennial issues such as skills shortages endure.

“However, is it a pleasant surprise to learn that growth companies expect to shrug off this uncertainty in the years to come- they seem to be saying that Brexit just won’t be an issue over the longer term.  Looking back at a decade’s worth of data, perhaps this shouldn’t come as a surprise to us after all: year after year, these growth companies have demonstrated sheer resilience and confidence, seeking out new markets and investing for the future.

“That is set to continue: growth companies are betting on artificial intelligence, automation and internationalisation to drive them forward over the next decade. The picture right now is more challenging than it has ever been in the last decade, but when you look forward to 2029, there are many reasons to be optimistic.”

About the ECI Growth Index

The ECI Growth Index was launched in 2010 with the intention of obtaining a better understanding of how successful growth companies would lead the UK out of recession and what areas CEOs of these growth companies see as their priorities.

The opinions of these CEOs matter because they lead the companies that are creating the jobs and contributing to record employment. They are also the companies that are more likely to be able to export successfully and compete on a global basis driving increased productivity. And they are the companies most likely to stay domiciled in the UK and not move to the lowest tax jurisdiction, thereby contributing to the exchequer.

ECI surveyed 307 growth companies across the UK, and across sectors (TMT, consumer, financial services, business services) between July and August 2018.