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Leadership

Friday, November 1st, 2019

The individual wealth of business owners, and the overall wealth of the country, is being damaged to the tune of billions of pounds each year because many small businesses suffer from low productivity.

This article makes the case that the main reason for this low productivity is poor leadership.  The owners of small businesses do not generally set out with the ambition of employing lots of people, often have no formal management training and are unaware of the principles and advantages of good leadership.  Many are also oblivious to the problem; 80% of business owners rate themselves as average or above average managers, a result that has echoes of similar surveys about sex and driving.

The article suggests some leadership behaviours that business owners could adopt to make their business more productive.

Small Business Productivity is Poor

We have seen a flurry of reports in recent months that address the UK productivity gap when compared to our peers in the developed world.  Two, from the IoD and the House of Commons, refer to the “Long Tail”; the distribution of productivity by company size that shows our smaller businesses are less productive by comparison with both larger UK firms and similarly-sized small companies in the rest of the G7.

Another House of Commons paper provides further evidence as illustrated in Figure 1.

Figure 1 – Productivity by Business Size – Source:  House of Commons Briefing Paper 06152, 12 December 2018 “Business Statistics”, Chris Rhodes.  Ratios and graph by the author.

The difference in height between these bars represents billions of pounds lost from UK GDP, billions of pounds lost by business owners and billions of pounds lost by employees.

Suggested causes for poor productivity include difficulty accessing finance, lack of innovation and sluggish adoption of technology.  Since the opportunities to take advantage of these things are the same for all businesses, good or bad.  It must instead be some internal factor specific to that organisation but common across that size of company.

My hands-on advisory work with this type of business leads me to the conclusion that the difference between high- and low-productivity SMEs has a simple root cause; the quality of leadership.

(I am comforted that my hypothesis, whilst developed by the entirely unscientific method of coaching hundreds of business owners and comparing the results, is supported by research, for example, this article.)

Small Business Productivity Depends on Leadership

I should perhaps at this point define what I mean by “leadership”.  It is fashionable to differentiate between “leadership” and “management”; the former being touted as the sexy business of vision, motivation and innovation whilst the latter being rather sneered at as the menial task of organising things.  My experience is that to be successful at leading any size of business you need to be good at both; I have worked with visionaries who never completed anything whilst at the same time reducing their employees to charred embers; I have worked with business owners whose employees, whilst organised like the Brigade of Guards, had no clue where the organisation was going or why.

If we accept that good leaders must also be good managers, we cannot fail to be depressed to learn that 37% of UK business owners were “too busy” to measure the productivity of their company – and that 29% don’t even know how to measure it.  This ignorance of, or sometimes disdain for, basic management concepts is widespread amongst the owners of small businesses in the UK.  Research is limited but at least one paper suggests that management styles and effectiveness differ across countries – suggesting that better productivity in other countries may be related to a different attitude to leading.

What Do Effective Leaders of Small Businesses Do?

The short answer is: “Not much”.

The slightly longer answer is:

  • They help employees define the purpose of the organisation.
  • They help employees decide how to achieve that purpose.
  • They help employees become accountable for results
  • They let go
  • They share the rewards

I should add a couple of caveats here.  Firstly, the next few paragraphs are presented as a tidy linear sequence.  Real life isn’t like that.  The process is messy, iterative, fragmented and never ends.  Secondly, none of my clients (and no business owner of my acquaintance) has ever “finished” this or achieved anything like the leadership nirvana set out in the above bullet points.  However, those that have made even baby steps along this route have transformed their businesses and how they run them – and their productivity.

Help Employees Define the Purpose of the Organisation

I suggested to one client that he could talk to his employees about his vision for the business.  The next time I saw him he announced that he had “Done the vision.”.  Sure enough, every notice board had a sheet pinned to it with the new vision statement.  When I asked him if his staff had found it a useful exercise, he said “Oh I haven’t got time to involve them – nor have they.”.

I had clearly failed to properly explain the point of the exercise – to involve and engage the staff in creating for the organisation a purpose that they own and find motivating.

Now a typical  business owner might be thinking “Hang on – I run a plumbing business.  What if my staff decide that our mission is to cure cancer?”.  In fact, her problem is more likely to be getting them to express any kind of opinion in front of the boss.  Effective leaders make it their business to find a way to engage staff, for example, using a workshop format that is fun and non-threatening, perhaps run by an external facilitator.

The key point is that if the purpose of the organisation is to be shared and motivating then it can’t just be the owner’s purpose.  He must give some of his vision up in order to make space for what his employees believe and want.  Most business owners care as much about reputation, legacy and staff as they do about money, so even if their personal vision is to sell and retire in a few years there will still be benefits in developing a shared business vision of the future.

Help Employees Decide How to Achieve the Purpose

The vision on its own is worthless.

People will start to believe in it when it begins to turn into action.  How is the business going to win, what is its competitive strategy or secret formula, what hurdles need to be overcome and what changes need to be made?  This is usually called a strategy but once again, the leader recognises that it is the process, and involving employees in that process, that matters, not the result.  I could make a case for the actual strategy being almost irrelevant; if you have everyone wanting it to succeed and believing it will succeed – you will succeed.  Good leaders are not precious about their strategy, they are precious about involving and developing their people.

Success needs to be defined.  Often the start point will be financial outcomes, but these must be translated into measurements that are both relevant to the strategy and a basis for action; how many sales, how fast are support calls solved, how many hours per week do consultants need to be charged out, what is an acceptable level of incomplete customer deliveries and so on.

Help Employees Become Accountable for Results

Strategy is executed by people.

Leaders find a way to transfer accountability for a business result to an employee who is willing and able (or has the potential) to take that responsibility.  The start point for this is to have a compelling and credible shared purpose to which individual activities with measurable outcomes clearly relate.

In almost all small businesses, roles are ill-defined or not defined at all, success (that is, desired outcomes) are not agreed or are so woolly that it is impossible to decide whether they have been achieved or not.  Just clarifying these things will improve productivity.  Leaders go beyond this to help employees develop a sense of ownership for their results based on the sense of shared purpose.

That sense of ownership is used by leaders to encourage employees to understand and document their processes, to develop quality controls and embark on continuous improvement.  The need for new computer systems (or better use of existing ones) may emerge from this.  Simply implementing new computer systems, on the other hand, will certainly not create accountability and may make things worse.

Let Go

Business owners have trained themselves and all their employees to believe that they, the owner, must make all the decisions.  They will often control or even carry out administrative tasks such as invoicing or creating sales proposals in order to “avoid mistakes” or so they “know what is going on”.  Their psychological need to do this is reinforced by a belief that employees “don’t care as much as me” or “don’t use common sense”.  It is not difficult to see the self-fulfilling or circular nature of this mindset.

Leaders see it as their job to delegate everything, including decision-making.  They also understand that this doesn’t mean letting employees sink or swim, or abandoning them to their fate.  They understand that successful delegation is a planned and controlled process designed to ensure success.  An essential part of this process is capturing and transmitting the way the current experts do things, through process documentation, checklists, training and coaching.

Letting go requires management information – usually completely absent in small businesses where the owner manages by making every decision and checking every sheet of paper.  Process outcomes must be translatable into reviewable data that supports performance reviews, coaching and management by exception.  More broadly, leaders understand the value of information and learn how to use data to drive decisions.

Share the Rewards

Effective leaders understand that money does not motivate people, but a perceived absence of fairness and recognition will quickly demotivate.  They also understand that pay, bonus or other incentivisation schemes can send powerful messages about what is important.

If the organisation’s purpose is to be truly shared then the results and benefits of achieving that purpose must also be shared.  This does not mean that everyone gets paid the same, or that everyone gets paid the same as the owner (although there are examples of extraordinary generosity in high-performing businesses).  It does mean that the financial benefit of more productive, accountable employees should be recognised and shared.  If an employee asks “What’s in it for me?” then a good leader sees this as a buy signal from someone who is thinking through the implications and starting to see the big picture.

Conclusion

The low productivity of many small businesses is costing the owners of those businesses, their employees and the country, billions of pounds each year.

The main cause of this low productivity is the leadership of those small businesses.  Many business owners don’t recognise the problem, or don’t think of the problem in terms of productivity, or don’t see changing their leadership approach as a potential solution.

The leaders of more productive small businesses understand that their role is to get things done by others, by creating a shared purpose with accountable, motivated employees and then delegating as much as possible.  Achieving this is an open-ended, iterative and sometimes messy process that requires sustained effort and skilled support; however, just starting it can deliver immediate and tangible productivity benefits.

If you would like to learn more about leading a small business then you might be interested in these events.

This article originally appeared in the September 2019 edition of International Accountant.

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