Owners and executives at small and midsized businesses are generally optimistic about their prospects in the near term, but most acknowledge that the combination of a dearth of qualified workers and the abundance of compelling new technology options is forcing them to make some hard decisions heading into the second half of the year and beyond.
These two realities are not unrelated, and they present some interesting challenges for SMBs looking to find that elusive balance between investing time and money in people and software without crimping cash flow in the process.
As a general rule of thumb, small businesses are defined as those with between one and 100 employees while medium-sized businesses have between 101 and 1,000 employees. In revenue terms, small companies check in with less than $50 million in annual sales (often significantly less) and the “M”s in SMB fall between $50 million and $1 billion.
These companies are the lifeblood of the economy. According to U.S. census data, roughly 39% of Americans worked for companies with fewer than 100 employees at the end of 2017 and another 25% worked for midsized firms.
While the stock market continues to soar — the S&P 500 surged up more than 17% overall for the first half of this year, its best first-half performance in 22 years — and the national unemployment rate of 3.6% is near a 50-year low, there’s still a surprising reluctance among SMB companies to hire new workers to keep pace with the roaring economy.
Economists predict the gross domestic product for the second quarter will check in somewhere around 2%, down from the sizzling 3.1% recorded in the first quarter.
So if the economy is doing so well — and has done so well for most companies for several years — what’s keeping these companies from staffing up?
The Catch-22 of a booming economy
According to an SMB finance report compiled by ScaleFactor, a developer of software that automates accounting, tax and finance tasks for small and midsized businesses, 53% of very small businesses with less than 20 employees didn’t hire a single new worker in the last year.
And despite the fact that 79% of the 500 companies participating in the study reported improved profits and sales in the past year, only 35% of companies with between 20 and 99 workers hired between four and 10 new staffers last year.
Among the medium-sized firms with between 100 and 500 employees, only a little more than half (54%) added at least four new employees.
This lack of new hires is simultaneously surprising and understandable. Executives at the companies surveyed said rising salary costs (18%), a shortage of specific skills (13%) and the cost of employee healthcare and benefits packages (10%) were the top reasons companies have increased headcount at such a sluggish pace.
With a national unemployment rate below 4%, SMBs looking to hire are not only competing with peers in their industry but with the whole of American industry. Not only are there fewer skilled and experienced applicants, the few that are on the market looking for a new opportunity are demanding higher salaries and better benefit packages to jump ship.
Outside of their immediate competitors, SMBs in the imaging sector are also fending off flirtations from multinational enterprise companies that have the deep pockets, stock options and recruiting infrastructure to lure away top performers and snap up promising new entrants before the smaller players get a crack at them.
“With unemployment low, big businesses tend to poach and attract workers from smaller companies that don’t have the financial resources to keep up,” Mark Zandi, chief economist at Moody’s Analytics told USA Today. “All the evidence suggests that small businesses are the principal casualty to the tight job market.”
It’s a conundrum: invest in people or invest in the technology that might do the work in a more efficient and cost-effective fashion than employees could?
ScaleFactor’s report found that chief financial officers (CFOs), for example, are a dying breed among the SMB crowd. Seventy-six percent of SMBs said they are getting by just fine without a full-time CFO and have no plans to hire one.
Meanwhile, only 7% of very small businesses (less than 20 employees) and 24% of small businesses said they plan to contract with an accounting consultant or fractional CFO this year, and exactly 0% of the midsized companies surveyed are in the market for a head bean-counter.
Technology, of course, is one of the main reasons for this personnel trend.
“Small businesses are able to scale in new ways, which provides them with new opportunities for growth and the ability to succeed without having to fall back on the traditional hiring methods and markers for success,” ScaleFactor CEO Ken Rathmann said in the report. “Though small businesses’ hiring is often incremental, we see that they are more willing to adapt to new waves of technology being introduced to the workforce, which empowers small businesses to be leaders of innovation.”
SMB IT budgets set to explode
The mantra of “doing more with less” appears to apply mostly to headcount in the modern SMB universe. While the vast majority of companies of this size are hiring at a slower pace than the current economy would suggest, they’re not hesitating a bit to invest in applications — particularly cloud-based tools used for everything from managing customer relationships and inventory to accounting, finance and employee training and onboarding.
Between now and 2021, SMB firms are projected to increase their total IT budgets by a compounded annual growth rate of 4.7%, bringing total spending to more than $684 billion — up from $602 billion in 2018, according to an IDC report.
Hardware, software and various IT services will account for 30% of total SMB spending over this period. Software is expected to be the largest subcategory of IT spending for the next two years before yielding to services expenditures in 2021.
“SMBs around the world are increasingly interested in investing in resources to improve employee productivity and improve their competitive positions,” Ray Boggs, vice president of SMB Research at IDC, said in the report.
“While SMBs, especially smaller ones, have immediate tactical needs to sharpen performance, they are also looking to coordinate resources in a meaningful way,” he added. “For many, this will be an important step in their digital transformation.”
Breaking it down a bit more, devices were the largest category of technology spending last year, checking in with $115 billion invested in personal computing devices, peripherals and mobile phones. Applications accounted for roughly $100 billion in spending, led by investments in enterprise resource management (ERM), customer relationship management (CRM) and content application.
IDC notes that content applications and CRM will enjoy robust growth through the next three years with growth at 10.6% and 10%, respectively. Collaborative applications — think cloud-based productivity tools like Slack and Box among many, many others — will see the most growth in this category at roughly 12.2% per year.
Indeed, the worldwide public cloud services market is expected to surge more than 17.5% in 2019 alone, to more than $214.3 billion, according to the latest figures from Gartner, and a good slice of that will be spent by SMBs looking for an inexpensive way to improve the productivity of existing employees without ramping up headcount.
This trend is only going to intensify over time.
“We know of no vendor or service provider today whose business model offerings and revenue growth are not influenced by the increasing adoption of cloud-first strategies in organizations,” Sid Nag, a Gartner research vice president, said in the report. “What we see now is only the beginning, though. Through 2022, Gartner projects the market size and growth of the cloud services industry at nearly three times the growth of overall IT services.”
Seeking balance in a digital economy
Most SMBs are planning to spend more money to acquire technology to remain competitive. Artificial intelligence, machine learning and automation have transformed just about every industry, and those that have yet to get on board will be following suit in the near future.
But competitive differentiation — particularly in a sales-driven industry that still requires a human touch and the ability to engage and interact with other human beings beyond their phones or their email accounts — inevitably will boil down to the quality of the employees an SMB hires and retains to operate all this extraordinary technology.
Using AI for automated service chatbots and lead prioritization or predictive analytics for marketing are surely useful, but SMBs are going to need talented employees to capitalize on all this data and, if nothing else, will need experienced IT staffers to manage and curate all the technology options available to small and midsized firms.
Automation, according to a McKinsey study could displace between 400 million and 800 million workers worldwide by 2030, and not all of these positions are of the blue-collar variety. That’s an alarming figure, but it’s important to remember that implementation of AI and automation technologies will be creating new jobs (albeit a much smaller number) at SMB firms that embrace them.
To compete in the digital economy, SMBs might not necessarily have to choose one or the other when it comes to investing in people or technology. In fact, the two need to be used in a complementary fashion to improve overall business performance.
A recent survey by HR software vendor BerniePortal found that only 64% of SMBs surveyed were currently using HR management software, and of that group, most weren’t using it to take advantage of the full scope of its capabilities.
While things like onboarding and benefits administration were the top tasks entrusted to these apps, most companies weren’t using it for applicant tracking, COBRA administration and compliance management.
Investing in and using these types of tools for recruitment, training and skills development will be critical if SMBs are to remain competitive within their industry as well as the overall employment market.
“Businesses will be on the front lines of the workplace as it changes,” the McKinsey report concluded. “This will require them to both retool their business processes and reevaluate their talent strategies and workforce needs. Many companies are finding it is in their self-interest — as well as part of their societal responsibility — to train and prepare workers for a new world of work.”