With nearly half of 2022 behind us, the challenges facing small and medium-sized businesses (SMBs) remain significant. The COVID-19 pandemic is still very much with us, causing continuing pressure on revenue and cash reserves, upheaval in the labour market and disruption to supply chains. Energy prices, already rising due to high demand as economies began to emerge from the 2020/21 recession, have been driven up further by the war in Ukraine, leading to widespread and increasing inflation.
Tough times are very much not going away.
In December 2021, the OECD noted that “Output in most OECD countries has now surpassed its late-2019 level and is converging on its pre-pandemic path but lower-income economies, particularly those where vaccination rates are low, are at risk of being left behind”.
Inflation, which was predicted to peak in late 2021, is now expected to be 2.47% higher worldwide over the year beginning 24 February 2022 due to commodity and financial market shocks caused by Russia’s invasion of Ukraine. The worldwide hit to GDP over the same period is predicted to be 1.08%.
The latest figures for the UK economy are in line with these predictions, with GDP falling by 0.1% in March and the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rising by 7.8% in the 12 months to April 2022 — the highest 12-month inflation rate since April 1991. The Consumer Prices Index (CPI) rose by 9.0% in the 12 months to April 2022, up from 7.0% in March.
When it comes to the prices that UK producers of goods and services pay for their inputs and charge for their outputs, the trend is also rising sharply. The latest ONS figures at the time of writing show output prices up 14% on the year to April 2022 (up from 11.9% in March) and input prices up 18.6% over the same period (unchanged from March, and the highest level since records began in January 1985).
Small business health and confidence
How are these macroeconomic trends playing out among small businesses? In the US, the health of SMBs (defined as companies with fewer than 500 employees that are not sole proprietorships) is tracked on a quarterly basis by the US Chamber of Commerce/Met Life Small Business Index (SBI). The latest Q1 2022 SBI score, based on a survey conducted between 14-26 January (that is, before the Russian invasion of Ukraine), was 64.1 — the highest level since the start of the pandemic:
Inflation has risen to the top of the challenges facing SMBs in recent quarters, followed by supply chain issues. COVID-19 issues remain relevant. Meanwhile, concerns over employee wellbeing and morale have risen steadily while revenue has become less of an issue as the US economy emerges from recession.
It will be interesting to see whether the picture changes significantly in Q2, as the effect of the Ukraine war kicks in, and whether there’s any movement on the 51% of US SMB owners who believed in Q1 that the small business climate will return to normal within six months to a year.
In the UK, the Office for National Statistics (ONS) has conducted a fortnightly survey since spring 2020 from a selected sample of around 39,000 businesses, entitled the Business Insights and Conditions Survey (BICS). Among the questions asked is ‘How much confidence does your business have that it will survive the next three months?’. Here are the ‘high confidence’ responses through 2021, broken down by company size:
The general trend is clearly upward for all company size classes, but micro-businesses (0-9 employees) and small businesses (10-49 employees) are consistently less likely to express high confidence in survival than medium (40-99, 100-249 employees) and large businesses (250+ employees). In November 2021, only around half (52.6%) of micro-businesses were highly confident of survival through February 2022, compared to 79% of companies with 100-249 employees.
Another regular UK survey is carried out by the Federation of Small Businesses (FSB), which is used to generate the Small Business Index (SBI). In Q1 2022, the SBI reached 15.3, returning to a positive value — indicating more SMBs expecting performance improvement in the coming quarter than decline — after slumping to -8.5 in Q4 2021.
“The improvement in the SBI in Q1 likely reflects the economy’s return to growth in the early months of 2022 and the corresponding impact on business activity. The fall in COVID-19 cases and removal of restriction measures has improved the business landscape compared to Q4 2021, with positive SBI readings being seen across most major sectors. Manufacturing and wholesale and retail provided notable exceptions, however, with negative readings reflecting the emerging supply- and demand-side headwinds facing the UK economy,” the FSB said.
Again, it will be interesting to see whether this picture changes significantly in Q2 2022.
SMB challenges and priorities in 2022
To get an idea of the specific concerns facing small businesses in 2022, we looked at multiple (>20) surveys and forward-looking articles published within the past year and logged the mentions of different issues and subject areas. Here’s the picture that emerged.
The top five issues — Digital marketing & customer relations; Employee relations, training & wellbeing; Digital transformation and new technology; IT & business process management; and Remote/hybrid working — are all driven to some extent by the pandemic experience.
Digital marketing & customer relations
During lockdowns, the focus for attracting new customers and keeping existing ones happy inevitably tilted more towards online channels. But it’s not enough just to build a website with a functioning e-commerce solution and hope that customers will come: businesses need to boost their SEO efforts, as well as attract and convert new leads via email and social media campaigns, increasingly using video and ‘influencers’ of various descriptions. And once customers are acquired, it’s clearly essential to have efficient CRM systems in place so that SMBs can deliver a satisfying experience that builds loyalty.
Employee relations, training & wellbeing
Before the pandemic, it’s unlikely that concerns about employees would have ranked so highly as they do here. But widespread changes to working conditions and practices over the past two years have brought issues like employee burnout, mental health, work-life balance and morale to the fore. These days, employers not only need to review how they manage employees’ workflows and monitor their performance, but must also communicate efficiently with (often remote) workers and find new ways to deliver training, coaching and mentoring. Failure in these areas is a recipe for poor employee retention, and a particular concern for SMBs that lack dedicated HR staff.
Digital transformation and new technology
Digital transformation and the adoption of new technology is an important focus for SMBs as it can put them in a better position to ride out challenging economic conditions and gain an edge on their competitors. Cloud technology such as SaaS applications — particularly ones aimed at specific vertical markets — deliver obvious benefits in terms of shifting from capital to operational expenditure by outsourcing the deployment and maintenance of the underlying technology. This should allow businesses to concentrate on adding value via the agile development of bespoke products and services, and by transforming online experiences using new technologies such as AR and VR, machine learning and AI.
IT & business process management
Digital transformation isn’t just about embracing cutting-edge technology for new projects: often, it centres around the need to increase the efficiency of existing systems and processes, and this will continue to be a key focus for SMBs. Knowing how to make use of siloed data (structured and unstructured) held across the IT estate can unlock business value, for example. Implementing solutions that make an SMB appear more like a larger enterprise — by adopting an interactive voice-response system, for instance — is also an important success factor, along with increased automation, streamlined website development and maintenance, a shift towards e-commerce and faster fulfilment and shipping. Less glamorous than AR/VR and AI adoption, perhaps, but equally important.
One of the most profound changes brought about by the COVID-19 pandemic is likely to be a lasting shift towards remote or hybrid working, and the resulting demise of the traditional office as the primary workplace for many employees. Despite predictable resistance from more conservative quarters, it seems that businesses are adapting to the shifting employee expectations generated by the lockdowns of 2020/21: many workers proved that they could work productively from home, or with infrequent visits to the office, and have no desire to turn the clock back.
Going forward, work will likely fall along a continuum from fully remote through hybrid to fully in-office, with the balance depending on an employee’s role, the sector their company operates in and personal choice. SMBs will need to ensure that productivity, communication and security technology is in place to service remote and hybrid workers, because the demand for flexible working is not going away, and laggards are likely to have trouble keeping and recruiting staff.
There are no surprises among the remaining challenges and priorities listed above, although it’s likely that concern about inflation and supply chains is now higher than it was when the surveys and studies used to compile it were published (mostly pre-Ukraine conflict). It’s also pleasing to see that ‘Sustainability, resilience & environment’ makes a mid-table appearance.
The 2022 State of IT
Another survey that’s worthy of note is the annual State of IT report from SpiceWorks Ziff Davis; the 2022 survey was conducted in July 2021 and included 1,145 IT buyers from organisations across North America (57%) and Europe (43%). This survey has a distinct SMB slant, with 35% of companies having 1-99 employees and 32% having 100-499 employees.
Before the Ukraine war and recent inflation hike, there was “reason for optimism, following an overall dip in tech spending growth in 2021,” the report said, while noting that: “The COVID-19 pandemic will continue to have a notable impact on the IT industry — either directly, indirectly through bumps in supply chain issues, or through the legacy of increased levels of flexible work from home”.
Challenges foreseen for 2022, broken down by company size, looked like this in July last year:
IT buyers, particularly in medium-sized companies (100-499 employees) were most concerned about limited product availability, shipping delays or logistical disruptions, supply chain issues, product cost increases and chip shortages. Provisioning and supporting remote workers came further down the list (perhaps because these issues had largely been solved during 2020).
Just as economies were beginning to recover from pandemic-driven recession, war in Ukraine and rising inflation have created further headwinds for SMBs to navigate.
Indices of SMB health and confidence in the US and UK generally increased through 2021 to Q1 2022, but recent political and economic shocks may well be about to put the brakes on this optimism.
Key concerns for SMBs during 2021 and looking forward — pre-Ukraine war — to 2022 included digital marketing and CRM, employee relations, digital transformation, IT and business process management, and remote/hybrid working.
At the same time, IT buyers anticipated challenges around product availability, shipping delays, supply chain issues, product cost increases and chip shortages.