(SMEs) are the lifeblood of economies worldwide, contributing significantly to employment and GDP .

In the U.S., SMEs employ nearly 60% of the workforce and contribute almost 40% of national value-added.

In the U.K., SMEs account for over 99% of all registered businesses and employ over 16 million people. Despite their undeniable importance, SMEs face challenges that hinder their productivity and growth potential.

At NorthStar, we’ve continually emphasised the importance of SMEs and their role as drivers of innovation, economic growth, and job creation.

However, to truly unlock their potential, SMEs must overcome key barriers in productivity, skills development, management, and technology adoption.

In this article, we’ll explore actionable solutions to these challenges, offering SME owners and managers a unique road-map for achieving sustainable growth.

SMEs in the U.S.

The State of SMEs in the U.S. and the U.K.

SMEs in both the U.S. and the U.K. are integral to their respective economies.

Yet, they face a significant productivity gap compared to larger companies, with U.S. SMEs being about half as productive as their larger counterparts, translating to a GDP difference of 5.5%.

Similarly, U.K. SMEs account for over 60% of private sector employment, generating a combined turnover exceeding £2.5 trillion, with businesses employing fewer than ten people contributing over £1 trillion.

However, despite their impressive contributions, they face challenges like funding, technology adoption, innovation, and operational efficiency, leading to a productivity gap that hinders their full potential.

Barriers to SME Productivity

SMEs often encounter barriers that larger corporations can overcome more easily.

These challenges typically stem from limited access to resources, talent shortages, underdeveloped management structures, and constrained financing. Let’s dive deeper into these obstacles:

1. Skills Shortages and Training: A lack of skilled talent is a persistent issue for SMEs. Many struggle to recruit employees with the necessary expertise, limiting their capacity for innovation and operational efficiency. This skills gap is often exacerbated by underinvestment in training and development, leading to a low-skill, low-wage cycle that stifles growth.
2. Management Constraints: SMEs frequently report management challenges, with leaders often lacking the time, resources, or strategic focus to implement productivity improvements. In many cases, management capacity is underdeveloped, with insufficient investment in leadership training or productivity-focused initiatives.
3. Access to Finance: Financial constraints are a major obstacle for SMEs. According to a survey by the British Chambers of Commerce, nearly half of U.K. SMEs struggle to secure financing due to cash flow issues. This limits their ability to invest in the technology, talent, and processes that would drive productivity growth.
4. Fragmented Policy Support: SMEs also face fragmented policymaking at national and local levels, with a lack of coordinated efforts to help them benefit from government programs. This creates inconsistencies in accessing resources or support that could enhance productivity.

Practical Solutions for Boosting SME Productivity

Despite these barriers, there are clear, actionable strategies that SMEs can adopt to improve their productivity and ensure long-term growth. Below, we outline unique, practical solutions tailored to SME needs.

1. Internal Skill Development and Leadership Training

While recruiting skilled talent can be difficult, SMEs can overcome this challenge by focusing on internal skill development. Instead of relying solely on external hires, SMEs can:

• Create mentorship programs that allow experienced employees to pass on their knowledge to newer staff.
• Partner with local universities and training institutions to offer apprenticeships and vocational training programs. This not only addresses the skills gap but also fosters long-term employee loyalty.
• Invest in leadership training for managers to enhance strategic decision-making and improve management capacity. By developing leaders within the organization, SMEs can boost productivity without external recruitment.

2. Technology Audits and Smart Adoption

For SMEs, technology is a powerful driver of efficiency, yet many fail to leverage it effectively. Conducting regular technology audits helps SMEs identify inefficiencies in their processes and make informed technology investments.

Here are the key steps:

• Map current workflows to identify areas where manual tasks can be automated, such as invoicing, inventory management, or customer relationship management (CRM). Automation frees up employees’ time to focus on strategic growth activities.
• Implement industry-specific tools that cater directly to your business needs. For example, retailers can benefit from advanced inventory management software, while service-oriented SMEs might focus on CRM solutions.
• Adopt project management and collaboration tools to streamline communication, enhance teamwork, and ensure project alignment across the company.

Additionally, SMEs can explore affordable, off-the-shelf AI tools for customer service automation, workload management, and financial optimisation (e.g., chatbots, and AI-powered analytics for managing inventory or marketing strategies).

3. Leverage Local and Alternative Financing Options

Instead of relying on traditional bank loans, which can be difficult to secure, SMEs can explore alternative financing solutions:

• Crowdfunding and peer-to-peer lending platforms offer flexibility, allowing SMEs to raise capital without the stringent requirements of banks.
• Revenue-based financing models provide funding in exchange for a percentage of future revenues, easing the cash flow burden.

Moreover, SMEs should also consider partnering with fintech companies, like Funding Circle or Kabbage, to access more flexible and faster financial services that align with their growth needs.

4. Collaborative Technology and Resource Sharing

A unique approach to technology adoption is for SMEs to form strategic alliances with other businesses, pooling resources to share the cost of cutting-edge technology or training programs. For instance, SMEs in a specific region or sector could create a technology consortium, enabling them to access innovations that would be otherwise prohibitively expensive.

5. Fostering Innovation through Sustainability

Integrating sustainability practices can be a unique driver of productivity. By reducing waste, optimising energy use, or implementing sustainable supply chains, SMEs can increase operational efficiency and unlock new revenue streams. Additionally, SMEs can benefit from government incentives for green innovation, making sustainability an appealing growth strategy.

6. Agile Management and Productivity KPIs

To ensure continuous improvement, SMEs should adopt agile management frameworks like Scrum or Kanban, which enable teams to operate with greater flexibility and responsiveness. This approach encourages faster iteration, better project tracking, and improved productivity.

SME leaders should also establish clear productivity KPIs (Key Performance Indicators) to track performance and growth. KPIs such as employee productivity, revenue per employee, and technology use rates offer a tangible way to measure progress and make informed strategic decisions.

Conclusion: A Roadmap to Sustainable SME Growth

Unlocking the full potential of SMEs requires a holistic approach that addresses skills gaps, enhances management capacity, leverages technology, and fosters financial resourcefulness. By focusing on internal skill development, regular technology audits, innovative financing solutions, and collaborative resource sharing, SMEs can bridge the productivity gap and set themselves up for long-term success.

Additionally, by integrating sustainability-driven innovation and adopting agile management frameworks, SMEs can not only adapt to market changes but thrive in an increasingly competitive environment. The future of SME growth lies in innovation, resilience, and adaptability, and by implementing these targeted strategies, SMEs can continue to play a pivotal role in driving economic prosperity and innovation across industries.