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Invest to Grow: Why invest in technology and machinery?

Greater Birmingham Chambers of Commerce

This blog post is part of the Greater Birmingham Chambers of Commerce’s Invest to Grow campaign. Invest to Grow aims to inspire and inform businesses around investment in R&D, innovation, technology and machinery and how it can help boost productivity through case studies, expert opinion pieces and briefing information. Click here to find out more and don’t forget to join the conversation on social media with #I2G18. Part 2 of Invest to Grow focuses on investment in technology & machinery and is sponsored by MCS Corporate.

Keeping up to date with the latest trends in the tech and machinery can be pretty tricky for businesses.

Every week it seems there’s some new advancement in robotics or AI or autonomous vehicles hitting the headlines. And that’s not to mention the millions of new pieces of software, apps and bits of kit being developed that all promise to save costs or help make doing business easier.

However, investment in this area represents a tantalising opportunity for the UK; in fact the CBI estimate that the UK economy could grow by £100bn just through better adoption of existing technologies.

Done properly, in line with an organisation’s overall objectives and business plan, investing in upgrading or replacing technology and/or machinery can represent a significant boost to productivity. It can cut down on the amount of staff time dedicated to work such as admin or basic production activities (freeing staff up to focus on higher “value add” activities) and improve the quality and reliability of products or processes.

The alternative, the “make do and mend”, “sit and wait” approach can only take you so far. Eventually firms that don’t invest find them outpaced by the competition. They may also find themselves exposed to risky situations by operating tech and equipment that’s past its best. Just ask the organisations (including big name brands like the NHS, FedEx and Renault) who were affected by last year’s Wannacry ransomware attack. Analysis by security firms suggests that the overwhelming majority of the over 400,000 devices affected worldwide were running an old operating system: Windows 7. Not investing in keeping pace with advances in technology may have been a short term saving, but a great big cost in the long term.

Why don’t businesses invest in technology & machinery?

Regrettably, UK firms do lag behind other competitor nations in investment in tech and machinery. The UK has the lowest average non-government capital investment of any G7 nation as a percentage of GDP and, to quote the Productivity Leadership Group’s report How good is your business really?;

“British businesses rarely rank highly on a wide range of measures: whether using cloud computing, adopting business applications like customer relationship management (CRM), enterprise resource planning (ERP) or even making use of social networks, British businesses rarely break into the top five among EU economies… [and] many British manufacturers are often some way behind their counterparts overseas in investing in automation”

Looking back at the GBCC’s flagship Quarterly Business Report surveys, Greater Birmingham businesses’ appetite for investing in capex doesn’t appeared to have recovered since the 2008 recession. Back in Q4 2007 37% of firms reported that their investment plans for equipment had been revised upwards in the last 3 months and only 2% reported a decrease. Flash forward over a decade and we’ve yet to see results matching these. Last quarter for instance, 30% of businesses reported an increase but 15% reported a decrease.

There are a number of reasons for this:

  • In times of uncertainty, businesses hold on to their wallets.

And with Brexit and whispers of an impending global economic slowdown looming at some point on the horizon (how near or far depending on the economist you speak to) it is safe to say businesses are experiencing more uncertainty than would be ideal. In their Defying Gravity report released earlier this year  Mills & Reeve found that two thirds of mid-market companies are holding on to increased cash reserves in response to heightened economic uncertainty.

 

  • Investing in tech and machinery can be seen as just an upfront cost rather than a long term benefit to the business.

Research by IDC and Virgin Media Business last year showed that more UK SMEs still view IT as a necessary cost (45%) as opposed to a driver of competitive advantage (20%). When businesses only have finite resources to invest, too often upgrading or exploring new technology and machinery can fall to the bottom of the to do list in favour of more instantly pressing demands. Furthermore, as discussed in my last blog post on investment in innovation and R&D, businesses report having seen significant increases in tax related burdens (financial and administrative) in recent years, further squeezing limited time and financial resources for exploring these opportunities. Businesses also still face challenges accessing the finance they need to invest. Ipsos Mori, in their report to the British Business Bank earlier this year, found that 58% of SMEs who had attempted to raise finance between 2014 and 2017 had had a worse experience than expected.

 

  • Many businesses lack the knowledge of how best to invest and implement effectively.

Earlier this year, Deloitte’s Digital Disruption Index revealed that less than half (45%) of executives are confident in their own digital skills and ability to lead their organisation in the digital economy and  just 16% believe their talent pool has enough knowledge and expertise to deliver their digital strategy.  In order to achieve potential productivity gains, businesses need to navigate, not only identifying the most relevant technology and machinery to invest in but also how they are going to ensure staff embrace it. For minor upgrades and improvements, the latter is less of a problem. However, for major investments in areas such as digital and automation for instance, it can have a major impact on staff morale. A recent joint study conducted by Microsoft, Goldsmiths, University of London, and YouGov found that 61% of staff were anxious about new technologies at work. Creating a culture that embraces the adoption of the latest technologies, rather than fearing their impact on job security, is not easy.

 

What can we do about it?

With this in mind, the Greater Birmingham Chambers of Commerce have a number of recommendations:

For stakeholders:

  • Reduce input costs for businesses arising from taxation (including business rates reform)

As mentioned above, in my last blog post I touched on the need for Government to bear in mind the “law of finite resources” - if the Government could successfully overhaul the UK’s tax system to reduce its reliance on input taxes and streamline admin, it could help encourage investment in innovation and R&D. The same also applies for encouraging investment in technology and machinery.

There is also one specific tax that needs reform; business rates. In our opinion, business rates are an outdated tax on bricks and mortar in a digital age but one of the specific issues is the inclusion of many categories of plant and machinery in business rates calculation. There’s nothing like risking an increased tax bill for dis-incentivising investment. A sensible review of what’s excluded from rates, or better yet, root and branch reform of the tax, is much needed.

  • Give businesses the confidence to invest

The Government has a fundamental role to play in creating a political, regulatory and economic environment in which businesses have the confidence to invest. As discussed above, where businesses begin to have doubts about stability, they hold off investment and at the moment a significant number are holding on to their wallets. The Government needs to reinvigorate business confidence by delivering a Brexit deal as soon as humanly possible, managing the move to post-Brexit Britain calmly, clearly and effectively and cut questions about political stability by showing clear direction and unity if it wants to see an upsurge in investment.

For businesses:

  • Make investing in technology and machinery part of your business plan

It is easy for exploring new technologies and keeping you tech and machinery up to date to fall off the to-do list. Keep investing in technology and machinery front of mind by creating a strategy that fits your business and making it a key part of your business plan. Review it regularly and hold yourself and your business to account on whether you have delivered against your plans.

  • Make the most of the support available

There are a number of grants, tax incentives and support services that can help part fund or inform your approach to investing in technology and machinery. Make sure you are maximising your usage of the support on offer.

  • Get involved in Invest to Grow

It’s packed full of inspiration and information.

Remember to:

  • Check out the case studies, expert opinion pieces and briefing information on the support available for businesses here.
  • Join the conversation on social media and share your views and experiences of investing in technology and machinery using #I2G18
  • Take part in our latest Quarterly Business Report survey here (closes 17th September) - we’re asking some additional questions on your views on investment in innovation, R&D, tech and machinery.