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Increasing UK competitiveness - a business services view

James Close, Partner, Ernst and Young

Winning at home and abroad - how the business services sector can drive UK growth and competitiveness

The business services sector can spur the development of a more competitive and efficient UK in both private and public sectors and ensure that the UK succeeds at the heart of the global economy.  As a Big Four firm headquartered in the UK, Ernst & Young are proud to be at the forefront of realising the UK’s potential in business services.  But we and the sector as a whole need support from the Government to make the UK a winner in an increasingly cut-throat global market.

However it’s defined, the business services sector is a major contributor to the UK economy.  The FTSE 100 includes several business services companies.  Many private companies, including the Big Four, have a significant presence in the UK.  Furthermore, a plethora of small and medium sized companies, as well as fast growth organisations, are involved in business services.  The Ernst & Young ITEM Club identified that the growth of the services sector in the first quarter was a major contributor to the UK avoiding a technical recession. 

Moreover, this sector is growing as UK firms expand into international markets, often as the vanguard for British business in fast growing BRIC economies.  The sector brings a huge amount of “value added” as measured by, for example, by return on capital employed.  Typically, firms require low levels of financial capital, an attractive feature in a rapidly deleveraging global economy.  By its nature, those in the sector have to use insight and innovation to support profitable growth.  Indeed, Ernst & Young runs a global Entrepreneur of the Year programme which supports fast growth businesses and attracts new and valuable clients – an example of a classic “win-win” for suppliers, customers and other stakeholders. 

The sector also has the attraction of requiring high quality human capital.  It can only attract and retain this talent by investing in the future of the brightest and the best.  Of course, the wider economy also benefits by absorbing those who leave into businesses equipping them for success. 

Much of the talk of rebalancing the economy is about reducing the UK’s dependence on financial services and the fast growing South East to high value manufacturing.  As a much less concentrated sector than, for example, financial services, the business services sector lends itself to regional clusters such as Manchester, Leeds and Edinburgh as a result to the flexible nature of the way it works.  Nevertheless, the current and potential future role of businesses services is often overlooked.  For example, according to our survey, more jobs were created in business services than any other sector (and when combined with software more than all sectors combined) as a result of foreign direct investment alone.

The sector does continually have to reinvent itself to compete in international markets.  Many cities are rivalling London and the UK as attractive locations for business services firms.  Our European attractiveness survey asked the question “which cities have the best chance of Producing the next Google or Microsoft in the coming years?”  The answers illustrate the competition from both east and west and, since we have been doing this survey, the trend is one of decline for European cities.

Shanghai

14%

San Francisco/Silicon Valley

10%

Mumbai

8%

Beijing

7%

New York

6%

London

5%

Bangalore

5%

New Delhi

4%

 

With labour costs being such a high proportion of the cost base of the business services sector there is an increasing level of “off-shoring” as supported by our survey of foreign direct investment into India which identified that the UK’s most significant investment was in business services.  This is one of the explanations of the ITEM Club observation that heavy discounting appears to be the main driver of output growth.  But the UK can benefit if it leads the provision of service and defines the business model.  The reduced cost can be passed through to clients with little or no loss of quality.  There’s also an imperative to remain “ahead of the curve” in fast growth areas such as outsourcing and technology.  There are many great success stories of UK business developing and exploiting new solutions.  The objective of innovation for business services is to retain a “knowledge premium” for the firm and the economy.

Those business services winners who reinvent themselves in the global battle for competitiveness will bring benefits for their host economies.  Governments which want to take advantage of these benefits need to create the conditions for success for the industry, business services companies and the individuals driving growth.  They also need to compete for the talent which is typically highly mobile.  A significant proportion of graduates expect to work overseas during their career and this is a key attraction of the graduate recruitment programme that a global firm like Ernst & Young offers.

But to continue to respond to these challenges, the business services sector needs the Government to create the conditions for success.  Above and beyond facilitating a stable environment for business – including, for example, high quality education, positive attitude to business, a competitive financial environment - the Government has some powerful levers to pull to create a winning business services sector:

  • The Government can act as an effective customer for business services to accelerate efficiency improvements in public services but must avoid expensive and unproductive procurement regimes. 

The Government is committed to procuring more from SMEs.  However, SMEs generally do not have the track record, balance sheet and breadth of capability.  By creating a platform to combine SME experience with Ernst & Young’s capability, we expect to create competitive advantage by driving innovation and creating collaboration between ourselves and SMEs to deliver excellent, outcome focused client service to public sector clients in a cost effective manner.

  • In areas where the UK has policy leadership, for example on transparency and addressing climate change, the Government can provide consistency so the UK can be a leader exporting to other economies faced with the challenge of catching up.

The need to address climate change by creating a low carbon economy and putting measures in place for adaption remains compelling.  It is inevitable that other economies will have to follow the UK’s leadership.  This presents a similar opportunity to the one created by privatisation in the 1980s where the UK’s accountants, lawyers, consultants and project managers became clear global leaders.  Perhaps the Government could also facilitate international secondments to accelerate the creation of networks. 

  • The Government needs to create clarity and stability in relation to regulation so that business services firms can plan ahead with confidence and focus on competing successfully in international markets rather than worrying about changes in the UK market.

In an environment of international uncertainty around regulation of the financial sector and business services firms including the accountancy profession, the UK can lead the way in creating a stable environment for its firms to plan for growth and global expansion.  Without that stability, investment becomes challenging and the best talent will potentially be deterred from joining the sector.

  • By leading the way in transparency, the UK Government is creating an environment for different forms of accountability and creating growth opportunities for business services organisations repackaging data for the benefits of citizens.

At the heart of the business services proposition is the provision of assurance around the quality of data and adding value to data by turning it into information.  There are some well documented successes already in this area.  The so called “Shoreditch Roundabout” cluster of firms is “mashing up” data to make it useful for citizens.  As Government releases more data, business services firms in the UK can develop capabilities that can be used in other markets.

These are exciting times for business services firms in the UK with excellent growth prospects internationally.  If the Government can pull the right levers and create the conditions for continued successful growth of the sector, there a significant benefits to be realised for the economy including:

  • Realising the export potential for the UK particularly in fast growing markets by acting as a bridge to other UK exporters.
  • Generating the talent the UK needs to respond to global competition including equipping graduates for their business careers.
  • Supporting British industry by providing a competitive advantage and promoting programmes that bring the very best to the fore, for example in relation to entrepreneurs.
  • Accelerating the reform of the UK’s public services both as a catalyst for change and, where appropriate, as a delivery partner.