Irish SMEs going for growth SME Pulse Survey

www.pwc.ie Irish SMEs going for growth SME Pulse Survey What SMEs in Ireland are saying...

Introduction John Dunne I am delighted to introduce our latest SME Pulse Survey which reflects the views of over 60 business leaders representing Irish private and family businesses on a range of areas central to the SME sector. The results are extracted from PwC s CEO Pulse Survey. Following a strong performance by the Irish economy in, the survey shows that the vast majority of Irish SMEs are confident about the economy and about the future prospects for their own businesses into 2016. With a significant surge in capital investment and over half planning to grow headcount, Irish private and family businesses are poised for growth. A third are planning this growth in foreign markets and a further one in four are planning new product and service innovations. With an approaching general election, and the degree of uncertainty generated by potential political change, this is now featuring at the top of the list of threats for business growth. While still high, many of the challenges of the past are now beginning to show signs of easing up such as access to finance, skills and the overall tax burden. In particular, one in five SMEs are planning new borrowings, up from 12% last year and more are looking for alternative sources of finance. We hope that this improvement in credit will continue to finance growth and promote entrepreneurship into 2016. Similar to other sectors, the survey reveals greater disruption for SMEs in the years ahead. Driven by digital, over two-thirds expect organisations to increasingly compete in sectors other than their own. However, less than half of Irish SMEs recognise the value that digital technologies can create across a number of important areas such as operational efficiencies, customer experiences and cybersecurity. There are indications that greater investment in digital is needed for competitive advantage. As a small open economy, heavily dependent on foreign markets, there is no time for complacency and Irish private businesses should continue to keep a close watch on all areas of operations and look to really exploit the benefits that digital technologies can offer. John Dunne Partner, PwC Private Business Services SME Pulse Survey 3

Ireland has one of the most friendly environments for SMEs in Europe European Commission, 20 November Irish home-grown companies are overly dependent on the domestic market leaving them particularly vulnerable European Commission 20 November Growth in the Irish economy is being driven not just by foreign multinationals, but by Irish SMEs, which are exporting more due to the weak euro and improved access to finance European Commission, 6 Nov Much more is needed to help change the mindset of Irish companies so as to encourage them to internationalise their horizons, ambitions and client base European Commission, 20 November SME Pulse Survey 4

Confidence and business performance Confidence amongst Ireland s SME business leaders is on the increase. Confidence is high amongst Irish SMEs with a significant surge in capital investment. Leading the way in driving much of this surge in growth and confidence is new export markets, products and innovation. These are some of the key findings in PwC s SME Pulse Survey carried out amongst Ireland s SME community (defined as organisations headquartered in Ireland with less than 250 employees). This is the second year of the survey. Nine out of ten (91%) Irish SMEs are confident about the prospects for the Irish economy in the year ahead, up from 87% last year. Furthermore, eight out of ten (81%) SME CEOs are favourable about the prospects for their own businesss. This reflected in the significant surge in capital investment being made, with over two-thirds (68%) now planning to invest in their businesses when compared to 51% last year. This confidence is seeing a third of Irish SMEs looking to new or existing foreign markets, while over a quarter (26%) expect new products or service innovation to be the main driver for their business growth in the year ahead. Chart 1: Outlook for economy and for own business in the year ahead Irish economy No change 9% Own business No change 17% 91% Unfavourable 2% 81% Favourable Favourable No change 12% No change Unfavourable 1% 2014 87% 4% 14% 2014 Favourable Unfavourable 82% Favourable SME Pulse Survey 5

Acquisitions and alliances will also drive significant growth in the year ahead with over one in ten (13%) saying an acquisition, joint venture or strategic alliances will be key to their growth strategy. The majority of SMEs see these acquisitions and collaborations as offering significant opportunity for their businesses to access either new customers (53%) or new geographic markets (42%). Despite this and although still remaining strong, plans for growth in revenues, profits and employment are slightly behind last year. For example, over three-quarters (76%) expect to increase revenues in the year ahead, compared to 85% last year, while just over half (58%) plan to increase headcount, again down from 60% last year. At the same time, fewer SMEs expect cost increases compared to last year, highlighting greater certainty over anticipated costs and/or easing of cost pressures generally. Chart 2: Main opportunities for business growth in the year ahead Chart 3: Anticipated growth in the performance in Irish operations in the year ahead Organic growth in existing domestic market Organic growth in existing foreign markets New geographic markets New product or service innovation New M&A/Joint Venture/ Strategic Alliances Grow internet/ digital sales channels 8% 2% 1% 15% 13% 12% 17% 16% 18% 27% 26% 45% 2014 Growth Revenues Annual Costs Annual net profit Annual capital investment Employee numbers 51% 58% 60% 68% 70% 66% 68% 76% 85% 73% 0 20 40 60 80 100 2014 0 10 20 30 40 50 SME Pulse Survey 6

Business challenges Many of the challenges for business growth are easing compared to last year. Chart 4: Top business, economic and policy threats for business growth (% concerned) Political change Inadequate basic infrastructure Cyber threats including lack of data security Government response to fiscal deficit and debt burden N/A 68% 66% 61% 63% 64% 63% 72% With an approaching general election, and the degree of uncertainty generated by potential political change, this is now featuring at the top of the list of threats for business growth (68%). The top challenges are now political change (68%), inadequate business infrastructure (66%) and cyber threats (63%) once again fuelled by recent cyber-attacks on businesses globally. Despite this, many of the challenges for business growth are easing compared to last year. Concerns around increasing tax burdens, exchange rate volatility and overregulation have eased compared to last year. The war for talent also continues globally. Irish CEOs as a group are now more concerned about the impact of a skills shortage than at any point in the last ten years. However, the level of Irish SMEs that feel the availability of key skills is a threat to business growth has fallen compared to last year (: 55%; 2014: 69%). While somewhat at odds to their peers globally this may be explained by the significant movement once again in the Irish jobs market as domestic businesses try to ensure they have the key talent in place for future expansion. Concerns around rising labour costs have also fallen substantially since last year. 2014 N/A: Not asked last year Increasing tax burden Exchange rate volatility Over-regulation Availability of key skills Uncertain or slow growth in key markets High unemployment Inability to finance growth Speed of technological change N/A 44% 55% 53% 50% 44% 51% 62% 60% 68% 60% 61% 69% 74% 84% 83% Shift in consumer spending and behaviours 44% 50% Concerns around rising labour costs have also fallen substantially since last year High or volatile energy costs Lack of trust in business New market entrants Rising labour costs Supply chain disruption 31% 26% 42% 50% 42% 50% 39% 41% 38% 78% 0 20 40 60 80 100 SME Pulse Survey 7

Improvement in credit The survey shows that many Irish SMEs are still struggling to get finance, albeit the situation has eased a little compared to last year. This improvement in credit should ultimately help finance growth and promote entrepreneurship. The inability to finance growth has eased with only 44% now viewing this as a business threat compared to 61% last year. At the same time one in five (20%) are planning to raise new borrowings in the year ahead, up from 12% last year. A similar proportion (20%) are also planning to raise new equity, up from less than one in ten (8%) last year. The survey also suggests that more SMEs are planning to use alternative sources of finance within their overall capital structure, up from 11% last year to 15% this year. One third of SMEs say that access to affordable capital should be a key Government priority (Chart 10, page 11). Chart 5: Changes in managing capital structure in the year ahead Raise new equity New borrowing Restructure existing borrowings 8% 12% 5% 10% 20% 20% 2014 Other sources of finance 15% 11% No change expected 40% 59% 0 10 20 30 40 50 60 SME Pulse Survey 8

Digital disruption supercharging business Changes in customer behaviour is the greatest business disruption for Ireland s SMEs With even greater business disruption expected in the years ahead, over two-thirds (69%) of Irish SMEs reveal that they expect organisations to increasingly compete in sectors other than their own over the next three years. Changes in customer behaviour (42%), increases in competition (37%) and changes in industry regulation (34%) are trends that will cause the greatest disruption, according to the survey. The benefits of digital technologies are front of mind for Ireland s SMEs. The survey reveals that mobile technologies for customer engagement (63%) is the most important strategic digital technology followed by cybersecurity (60%) and data analytics (55%). At the same time, less than half feel that digital technologies are creating value for their organisation - for example, just 48% said that digital technologies are creating operational efficiencies; 47% said that digital technologies are improving the business brand and reputation; 42% feel that they are creating value in the areas of cybersecurity and customer experience. What the digital age has done is supercharge the opportunities for business transformation and demonstrates how vulnerable companies can be if they don t fully understand and adapt to their customers needs. The companies that best adapt to meet their evolving relationship with customers will have to embrace fundamental changes in their organisations DNA rather than approach digital technologies as merely a marketing and brand-positioning exercise. Given the increasingly integral role technology plays across all business functions and sectors, the ability to harness it effectively is becoming a key differentiating capability, presenting both opportunities for those who can and threats for those who cannot. 69% expect organisations to increasingly compete in sectors other than their own Chart 6: Strategic importance of various digital technologies - Digital technologies include mobile technologies, socially enabled business processes, cloud computing, wearable computing, 3-D printing etc) - % who said very or somewhat important Mobile technologies for customer engagement Cybersecurity Data mining and analysis Cloud computing Socially enabled business processes Internet of things Battery and power technologies Wearable computing Robotics 3D printing 11% 10% 19% 34% 47% 47% 55% 52% 63% 60% 0 10 20 30 40 50 60 70 80 SME Pulse Survey 9

Chart 7: To what extent are digital technologies creating value for your organisation in the following areas? (% who said quite high or very high value) Operational efficiency 48% Brand and reputation 47% Customer experience 42% Digital trust including cybersecurity 42% Internal/external collaborations 40% Strategic decision-making 35% Innovation capacity 32% Distribution capabilities 29% Sourcing and supply chain management Risk-taking decisions 22% 24% Finding, developing and retaining talent 21% 0 10 20 30 40 50 SME Pulse Survey 10

Talent constraints easing for SMEs Talent constraints are still high but the pressure is somewhat easing with over half (55%) of Irish SMEs confirming that the availability of key skills is a significant threat to business growth, albeit down from last year s 69% (Chart 4, page 7). Over a third (38%) reveal that talent constraints have significantly impacted their company s performance over the last year, including the cancellation of strategic initiatives and a fall in production/service quality and is down from 40% last year. Despite high business confidence and over a half of SMEs in hiring mode, SMEs are still struggling to find the right people with the skills to achieve the organisation s growth plans. Today s organisations need to think differently about how they attract young talent and the skills they need to develop. Having a good mix of talent and the ability to alter the mix depending on business needs is critical as companies look to apply their capabilities in more innovative ways, partner successfully and harness technology effectively. These approaches require people who can think and work in highly different ways. Equally important are people who can adapt the way they think and work, as circumstances require. A one-size-fits-all approach won t work to get this broad mix of talent and we see top performing companies employing a diverse range of strategies to find and develop the people they need. Deploying intelligent analytics to predict this demand also positions them to proactively meet talent acquisition needs. It is somewhat surprising therefore that only a quarter (26%) of Irish SMEs use data analytics to inform decision-making on talent strategies, while just over a quarter (29%) look for talent overseas. Almost two-thirds (60%) recognise the need to rethink their performance management tools. Nearly half (47%) of Irish SMEs reveal that their HR function has no presence on the executive team or top table where key business decisions are made. 60% will rethink their performance management systems Chart 8: Have talent constraints significantly impacted your company s performance over the last year? SMEs 62% 38% Chart 9: How did these talent constraints impact your business? (% who experienced talent constraints) Cancelled or delayed a key strategic initiative Unable to pursue a new market opportunity Reduced level of innovation Overseas growth plans not achieved Fall in production/service quality standards Profits below expectations 11% 13% 11% 19% 22% 26% 30% Yes No 44% SMEs 60% 2014 50% 44% 48% 50% 0 10 20 30 40 50 40% 2014 SME Pulse Survey 11

Government priorities Continued support for Irish indigenous businesses (58%) is the top ask from Government by Irish SMEs. This is followed by reducing personal tax (47%) and a continued focus on job creation (38%). One third (33%) called for access to affordable capital. Chart 10: Priorities of the Irish Government in the year ahead Continued supports for SMEs/indigenous businesses Reducing personal tax/widen the tax bands Continued focus on job creation and incentives for the unemployed 38% 47% 47% 55% 58% 58% Ensuring access to affordable capital Reducing public sector costs 33% 32% 31% 37% Continued promotion of Ireland as having an efficient, transparent and competitive tax regime 25% 24% Ensuring adequate digital infrastructure N/A 18% Continued focus on incentivising and supporting export markets 11% 18% Ensuring adequate physical infrastructure Creating and fostering a skilled and adaptable workforce Creating and fostering a skilled and adaptable workforce Developing an innovative ecosystem 16% N/A 11% 19% 11% 19% 7% N/A 2014 N/A: Not asked last year 0 10 20 30 40 50 60 SME Pulse Survey 12

Survey Methodology The survey reflects the views of Irish business leaders representing private and family businesses and companies having less than 250 employees. The survey had over 60 participants, covering a range of sectors. SME Pulse Survey 13

Contacts Paraic Burke Private Business Services Tax Partner +353 1 792 8655 paraic.burke@ie.pwc.com Brian Bergin Private Business Services Deals Partner +353 1 792 8735 brian.bergin@ie.pwc.com John Dunne Private Business Services Assurance Partner +353 1 792 6856 john.a.dunne@ie.pwc.com Colm O Callaghan Private Business Services Tax Director +353 1 792 6126 colm.ocallaghan@ie.pwc.com SME Pulse Survey 14

www.pwc.ie PricewaterhouseCoopers. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. 05640 SME Pulse Survey 16