Written evidence from the Federation of Small Businesses (FSB) (TDE 25)

The Federation of Small Businesses (FSB) welcomes the opportunity to respond to the above named inquiry.

The FSB is the UK’s leading business organisation. It exists to protect and promote the interests of the self-employed and all those who run their own business. The FSB is non-party political, and with around 200,000 members, we are also the largest organisation representing small and medium sized businesses in the UK.

Small businesses make up 99.3 per cent of all businesses in the UK, and make a huge contribution to the UK economy.  They contribute 33 percent of private sector turnover and employ 48 per cent of the private sector workforce.

Small businesses are also increasingly likely to participate in the digital economy.  This can either be via new digital start ups, or can simply be more traditional businesses deciding to start integrate digital technology into their business.  The evidence suggests that this offers a significant opportunity for the UK economy, both through promoting growth and productivity.

Despite the positive steps which have been taken to improve the ability of small businesses to compete and grow in the digital economy, more remains to be done across a variety of policy areas.

This timely review offers an opportunity for the committee to address some of these challenges and to help small firms take full advantage of the digital economy. We trust our evidence is useful and will be taken into account.

Mike Cherry AIMMM FRSA

Policy Director, Federation of Small Businesses

29 October 2015

Executive summary

Digital technology is increasingly vital for small businesses across the country.  Our recent research has found that small businesses are already integrating both fixed and mobile technology into their business operations.[1] This is providing small businesses with new opportunities to grow, connect with customers, employees and suppliers, and to access new markets.  The most digitally advanced businesses are using the internet to transform their business offering.  These businesses are not necessarily what would traditionally be thought of as digital businesses, but can also be traditional businesses which are taking advantage of the internet to offer goods and services in new ways.

Small businesses are increasingly using digital technology within their business. Our recent research has found that almost all small businesses view the internet as being important to their business. 94 per cent of small businesses view the internet as being critical or highly important to them.  51 per cent of small businesses are using the internet to sell goods or services online, with another 15 per cent planning to do so in future. Different evaluation reports[2][3][4] carried out by different county based superfast delivery bodies have also found that access to superfast broadband increases employment opportunities, protects existing jobs and increases revenues and profitability.

Increasing the use of digital technology therefore represents a significant growth opportunity for the UK. The UK is in a relatively good place in comparison to international competitors in terms of the use of digital technologies, and was ranked as one of the top global innovators in a recent report.[5] Despite the concerns raised in this, and other reports, the UK also compares well on the availability and price of digital services, albeit whilst faring less well, until recently, on creating a long term strategy for delivering ultrafast broadband.[6] The British public has embraced e-commerce, buying and selling more online than consumers in any of the other G20 countries.[7] Small businesses are increasingly taking up the opportunities offered by these trends. 

There are clear benefits to the wider UK economy if the demand and uptake of digital services by small businesses increase. The evidence presented from multiple sources shows that increasing the use of digital services will help small businesses to grow. The previous Government estimated that for every £1 of investment in broadband, the UK would see a £20 benefit.[8] McKinsey estimated in 2011 that small businesses could increase productivity by 10 per cent through doing more online.[9]  Similarly, Booz and Co estimated that if all small businesses maximised their use of digital services, growth would increase by £18.8 billion per annum.[10]

It is clear that the internet is a key driver of growth in the modern UK economy. According to a report from the Boston Consulting Group (BCG), in 2010 the UK Internet economy contributed £187 billion to the overall UK economy, which equated to 8.3 per cent of GDP. This was a higher figure than that contributed by the construction or education sectors and is projected to rise to £347 billion by 2016 (12.4 percent of GDP).[11]

The same applies for mobile services.  The BCG recently found that the mobile economy already generated around €90 billion in revenues in just five European countries in 2013.  They anticipate that by 2017, these revenues will have more than doubled to €230 billion by 2017.[12]   It is positive to see that the Government recognises that the internet can serve as a driver for growth and innovation within the wider economy.[13]  We agree that there is significant growth potential which could be unlocked through getting small businesses to do more online.  This growth could best be delivered through a concerted effort between government, industry and business groups to overcome some of the barriers identified within this report. 

Despite the opportunities which the above research identifies and the positive evidence the FSB has found of small businesses participating in the digital economy, there remain barriers stopping small businesses from becoming fully digitalised.  Based on a survey of over 1200 FSB members - which was followed by in-depth interviews with a representative sample of 65 small businesses - we identified several issues which need to be addressed before all small businesses can take full advantage of the opportunities offered by digital technology.

In brief, small businesses need more support in order to make full use of digital tools.  We present detailed analysis of the different questions of interest to the Committee in this submission, however our responses to the questions posed in this inquiry can be summarised as follows:

• Small and micro businesses require additional support when engaging with digital technology, primarily because they tend to interact with these markets in much the same way as the residential market (as opposed to larger firms). Information barriers stop small businesses from making full use of digital technology.  Quality of service issues can lead to disengagement from the market, as business owners seek to avoid making damaging and potentially costly mistakes.  Whilst out of the scope of this inquiry, small businesses also suffer from lower availability of superfast broadband compared to the residential market, which must be addressed by the Government as a priority. New independent sources of information, and a new Code of Practice which we discuss in more detail in our submission, would help small businesses better participate in telecoms markets.

• Financial support for the digital economy is improving, but more remains to be done to harness the economic benefits and ensure that the digitisation of finance benefits small firms. The work of the British Business Bank will be fundamental to scaling up markets with alternative/non-bank financial products, including digital platforms.

• Existing business support schemes are often time-bound and subject to policy churn and duplication, hindering their effectiveness. Small businesses often struggle to identify what support is available that meets their needs, as a result – including schemes designed to improve digital capacity or capabilities. Government should take a long-term view when it comes to business support, rather than a stream of initiatives from different Ministers – however well-intentioned and justified each new scheme might be.  Regional economic priorities could be better supported through effective local and national coordination and signposting of the business support offer.

• A quarter of small business which hold IP rights have experienced infringement within the last 5 years. To ensure a greater adoption of existing protection mechanisms, challenges around accessibility, costs and awareness of such support need to be further addressed. The growing value of intangible assets in small businesses also needs to be a real consideration in the on-going development of the IP regime.

• A lack of digital skills - both among small business owners and among their employees - poses a significant barrier to small businesses participating in the digital economy. Our evidence demonstrates that small businesses struggle to find potential employees with the right skills – further action to improve digital skills within the wider workforce, particularly older business owners and their workers, would be valuable.

What are the major barriers to UK business success in the digital economy? What steps could the Government take to help businesses to overcome these barriers?

The FSB has carried out substantial research into the ability of small businesses to participate and succeed in the digital economy. It is important to make the distinction between digital start-ups, whose business model is focussed on digital technology from the outset and the more traditional businesses which are now using digital technology to realise efficiencies within their business.

Our research has found that there are some significant barriers stopping small businesses from making full use of digital technology. These are:

• Satisfaction with the status quo:  Many small businesses remain unable to effectively assess their telecoms requirements, and are unable to quantify the potential benefits of being online.  This can lead to missed opportunities where potential gains for small businesses are not identified or acted upon.
• Quality of service issues affecting small businesses as consumers:  Other businesses lack the skills and understanding to effectively engage with the telecoms market.  A variety of quality of service issues lower satisfaction with the market, and can result in disengage.
• Infrastructure availability:  As Ofcom have found, the availability of superfast broadband is significantly lower for the small business market.  This leaves many small businesses unable to access sufficient upload and download speeds to carry out business functions online.

We recognise that this inquiry will not be focussed on the provision and availability of infrastructure as other Select Committees are already investigating this.  This is however a key issue for small businesses, so must be considered within the wider context of the digital economy. 

Our research also found concerns about digital skills availability and cyber security which we address in later questions to this inquiry.

For more information about this research, the full findings are available online.[14] Previous research carried out by the FSB, “The Fourth Utility”, which we published in July 2014, also uncovered concerns about the availability of fixed and mobile infrastructure for small businesses, along with the structure of the market.[15]

Based on the evidence received from interviews with small businesses, along with the results of different surveys we have carried out over the past two years, the FSB would like to see the following policy interventions:

• Renewed central and local Government focus on providing support for small businesses to help them understand the potential benefits of being online and using digital technology.

• Small business consumers lack the ability to effectively engage in the telecoms market, leading to sub-optimal economic outcomes. Increased transparency and information sharing would help to empower small business consumers. We have suggested that a new source of independent advice - modelled on the British Banking Insight survey - would help empower small businesses to make informed choices based on their requirements.

• The quality of service received by small businesses does not currently meet the expectations of small businesses.  We have called for a new Broadband Code of Practice for telecoms providers, which would help to improve a variety of different quality metrics and increase certainty and confidence for small businesses when interacting with the market (see page 11 of our submission for further information).

• Despite the increase in the availability of superfast broadband and mobile coverage, further policy interventions are required to close the gap in availability between small businesses and the residential market.  We agree with Ofcom that a Universal Service Obligation (USO), set at 10Mbps and explicitly including small businesses would be the most effective way of achieving this.

A lack of available information and awareness stops small businesses from accurately assessing their own digital requirements

Our research has found a low lack of understanding among small businesses about how digital technology can benefit their business.  Without this understanding, small business owners may not be willing to make time or financial investments in integrating digital technology into their business.

This is most clearly demonstrated by our finding that only 36 per cent of small business owners were aware that superfast broadband was available in the area of their business premise.  This is significantly lower than the superfast broadband availability found by Ofcom, which found 56 per cent availability. This obviously serves as a key barrier stopping small business owners from taking up superfast broadband.  Among the 36 per cent of small business owners who were aware of superfast broadband, the take up of these services was 56 per cent.  This compared to take up of 27 per cent among the entire small business community.

There is interest among small business owners in upgrading their broadband package to superfast broadband, with 46 per cent intending to do so in future. What needs to be better understood by policymakers is what is stopping these businesses from taking advantage of the potential opportunities that upgrading to superfast broadband can offer.

If small businesses were to better quantify what the benefits of being online offer, their willingness to pay for telecoms services will be higher.  Further Government support to help businesses make this decision would be helpful.

Small businesses interact with telecoms markets in much the same way as residential consumers, and can struggle without additional support

The telecoms market is fast moving and changing.  New technologies and methods of access have emerged in recent years. For many consumers, including small business owners, these changes can be complicated to understand.

At the same time, and as a consequence of the growing importance of telecommunications services, small business owners increasingly need to engage with this market.  Small business owners often struggle to do so, especially as many smaller businesses and sole traders will not have an IT manager as a member of staff.

71 per cent of the small business owners said that they were the main decision maker when it came to setting up their telecoms services. An additional 22 per cent said that they were the joint decision maker.  Just 3 per cent employed an IT manager who made those decisions.  There is a substantial jump in the number of businesses employing an IT manager between those who employ less than 20 members of staff and those who employ more.  Among businesses with between 11-20 employees, only five per cent had an IT manager.  This figure rose to 24 per cent for those employing 21-50 members of staff.  It should be noted that these figures remain low even for larger small businesses. 

These statistics demonstrate the challenges which many small business owners will experience when interacting with the telecoms market. As well as running the core business, business owners will often need to make decisions about procurement, HR and IT issues.  Without support, it can be difficult for them to make these decisions effectively.

Chart One: Main decision maker for IT issues (by number of employees)[16]

The lack of in house support is a challenge for small businesses, and requires further action from a range of stakeholders.  As our research has shown, small businesses struggle to act as effective consumers as they do not possess the skills, knowledge or experience to effectively assess their own requirements, how they could better integrate technology within their business, or how to overcome any challenges they might face when engaging with communications providers.

An independent advisory body, modelled on the British Banking Insight survey, would be beneficial to small business consumers

The British Banking Insight survey offers a model which could help small business owners navigate communications markets more effectively.  This survey provides data and ratings which allows small business consumers to make informed choices about a range of different finance providers, based on the experiences of their peers.  The data gathered is based on what small business owners report is important to them, and is sortable by business size and product type.  This allows small businesses of all sizes to effectively make informed decisions about what service would best meet their needs. 

The quality of service received by small businesses often does not meet consumer expectations

The overall quality of service experienced by small businesses was generally rated poorly. Our research shows relatively low satisfaction levels with the quality of service being delivered at present by different communications providers.  This matches some of the data which was found by Ofcom.

Table One: How satisfied are you with the following elements of different telecommunication services your business uses?[17] 

Fault repair emerged as a major concern for small businesses, as has been identified by Ofcom in the recent SME action plan.  Many small businesses reports frequent problems with their broadband connection.  Whilst many of these will have been caused by internal rather than network issues, there was a clear appetite for further intervention to address this. As the table above illustrates, many businesses were dissatisfied with the speed with which their faults were resolved.

The main area of concern was the ‘long tail’ of faults which were not addressed, rather than the average time taken to resolve faults. As the importance of broadband services increases to small businesses, the costs of failure to resolve faults can escalate dramatically. 

Table Two: On average, how often does your business experience problems with your broadband connection? (by number of employees)[18] 

As demonstrated in previous answers, clearer information would give small businesses the ability to demand better quality of service. However, we also believe that there is a case to be made for increasing the quality standards currently imposed on Openreach.

Small businesses can also struggle to understand who is ultimately responsible for fault repairs, especially when the retail provider of their service does not have the ability to fix faults on the Openreach network.   

The findings by Ofcom that different levels of fault repair offered by Openreach are not always passed through for the retail market is worthy of further investigation. Again, education and awareness raising is important.  Small businesses need to be able to understand what the potential costs of a lengthy unresolved fault would be, as well as to understand what service level their contract offers.  A better understanding of the importance of these issues would be likely to increase the willingness to pay for quality improvements.  Clearer contracts which make this information more transparent would help small businesses to better understand the potential value of paying more to increase their service level in this area.

A new Code of Practice could also help to empower small business consumers

Many small businesses report that they do not fully understand their rights or what means of redress they could use if the quality of the service they received did not met their expectations or requirements.

We believe that a new Code of Practice, modelled on the Code for Broadband Speeds which is currently being developed between Ofcom and communications providers, would provide additional support and certainty for small businesses.

Among the areas which could be covered within this new Code of Practice would be new protections relating to:

• An expectation that communications providers provide clearer information about the service on offer to enable a better comparison of these products.  In the field of banking services for sole traders and small firms, the Business Banking Insight survey and website[19], supported by the FSB and BCC, offers a model which could be replicated by the telecoms industry.
• A requirement that contracts should be clear, transparent and easy to understand.  If necessary, enhanced scrutiny of contracts would increase small businesses confidence in engaging in the contracting process.
• In cases where one provider is unable to provide required services, there should be a requirement for communications providers to provide referrals to other providers who may be able to provide this service. 
• Clear guidelines to ensure that communications providers give more accurate information about installation dates and appointment times.
• Ofcom should also consider whether to introduce escalating penalties for failure to repair faults within previously agreed service level agreements (SLAs), and introduce further penalties for persistent failure to resolve faults.  Small business consumers also need more accurate information about what is causing a fault, and clear timescales for fixing the issue.
• Ofcom should challenge all suppliers to adopt a more consistent approach when assessing and advertising achievable speeds in a given premises, using minimum instead of maximum speed as a benchmark.  This could alternatively be introduced within the existing proposals to bring in a Code of Practice focussed on available speeds.

We recognise that some elements of this Code will likely instead be incorporated within Ofcom’s existing work programme, such as the different market reviews and the work of the Consumer Policy team.  However, the benefit of including various measures within a comprehensive Code would be to provide small businesses with a single document which sets out the quality of service in different areas which they should expect from communications providers.  This would help to improve confidence in interacting with the market.

The availability of superfast broadband to small businesses lags the residential market

We recognise that the availability and provision of superfast broadband is outside the scope of this committee’s inquiry. Despite this, it is important to note that the provision of superfast broadband to small business premises is significantly lower than the availability level for the residential market.

Ofcom found in December 2014 that just 56 per cent of small business premises were in areas where superfast broadband was available.  This was in comparison to 75 per cent availability for the residential market.[20]   Further research by Ofcom estimated that by the end of the BDUK programme in 2017 when 95 per cent of the residential market is expected to have access to superfast broadband, 18 per cent of small business premises will still not have access.[21]

Ofcom have stated that a Universal Service Obligation would be an effective way of reducing the gap in availability between the residential and small business markets.  We agree that this - along with other policy interventions - is required in order to reduce this gap.

How effective are UK financial markets in supporting the digital economy? What actions could the Government take to improve their effectiveness?

There are two areas where the Government and UK financial markets could more effectively support the development of the digital economy. 

These are:

• Diversifying funding options: UK financial markets are fast recognising the commerciality of digital businesses such as FinTech and the market for more diverse financial products than those traditionally provided by the high street bank such as angel co-funds, patient capital and venture capital.  The work of the British Business Bank is fundamental to scaling up the markets with these alternative/non-bank financial products. The EU is also working to further diversify the sources of funding through the Capital Markets Union.

• Enabling the utilisation of digital technology:  Where digitisation provides financial providers with a cost effective benefit and / or meets investor/customer expectations they are more likely to adopt and drive the development of more innovation in digital technology such as online investment and referral platforms and comparison sites.

In our view, digitalisation of processes can make it easier and more efficient for small businesses to engage with financial institutions. However, many of the benefits offered by digitalisation could be reduced if certain steps are not taken to make it as simple as possible for small businesses to use these processes.  These can include:

• failing to use standard definitions, terms or methodologies;

• incorporating analogue processes such as wet ink signature or requirements for paper copies.

In general we would also note that competition across financial markets tends to encourage adoption of new technology. Where one financial services provider gains a commercial advantage from digitisation, we would generally expect that other providers will follow.

There are several different steps which would help to improve support for the digital economy by the financial sector.

The FSB believes that there are a series of steps which could be taken to help ensure that financial markets in the UK fully support the digital economy in the most effective way possible.

• Ensure regulation is proportionate;

• Financial mechanisms such as platforms and transparent financial products should have comparable standardised components so investors can better assess what suits their investment needs;

• Give investors certainty when they are determining whether or not to invest in digital businesses by maintaining tax reliefs for investors such as SEIS and EIS;
• Include specific measures to improve effectiveness within the Government’s Digital Economy Strategy such as ensuring that the measures are implemented and evaluated;[22]

• Continue to support initiatives such as open banking data and in particular the use of standardised definitions across all banks to increase transparency of the data and enable it to be more easily used to compare goods and services online

• Enable diversification of finance providers across finance markets to drive competition by confirming the long-term standing of the British Business Bank, and progress work on referral platforms and the release of bank data to credit reference agencies.

As is explored in our response on the intellectual property regime, there are a series of steps the financial services industry could take to ensure that small businesses are able to use intangible assets such as intellectual property in any applications for finance which they make.

What lessons can be learned from the Government’s support of tech start-ups and other measures targeted at the digital economy?  How is this developing around the regions and nations of the United Kingdom?

The FSB has long advocated for a more consistent and co-ordinated approach to delivering business support. Our views and key recommendations can be found in two papers - ‘Enterprise 2050, Getting UK enterprise policy right’[23] and ‘A New Design: making local support work for business’[24]. These papers examine the current business support landscape at a national and local level, respectively, and offer top line principles for effective business support design which apply equally to support for the digital economy

The key lesson derived from both these reports is that current business support is characterised by confused, complex and congested delivery of such support, with high levels of policy initiative ‘churn’, duplication of provision and a weak evaluation culture. This weakens the efficacy of these programmes. 

While neither report is focused on the digital economy, the overarching principles we present below will be relevant to any business support targeted at the digital economy. At the very least applying these principles would ensure that any new business support works in harmony alongside existing support measures, reinforcing best practice.

Existing business support initiatives have not been delivered effectively

‘Enterprise 2050’ emphasises the lessons that can be learned from the development of business support through history, demonstrating a real unworkable complexity to the approaches taken by government over various periods.

This is evident in three main ways.

Large numbers of existing schemes: There is a large number of existing business support schemes available. The Government’s own ‘GRANTfinder’ service identified 891 support schemes available to small businesses. 

Policy churn: Initiatives to improve business support have gone through high levels of policy churn.  Some support schemes only survive for a few years before being abandoned or refashioned depending on political decisions. 

Duplication of initiatives: Some initiatives have been duplicated with little justification. For nearly three decades the Prince’s Trust has provided a package of both soft and hard support to disadvantaged young people who want to set up their own business. Despite the Prince’s Trust being seen as a policy ‘success’ (Lord Young, 2012), this did not prevent the previous Government from developing the ‘StartUp Loan’ programme for young people which also offers hard and soft support.

The end result of these different factors is a business support system which can be difficult to navigate for small businesses.

Business support initiatives at a regional and local level exhibit many of the same issues as national initiatives

‘A New Design: making local support work for business’ assessed the local support landscape and, in particular, focused on the role of LEPs. The report argued that the Government should be wary of looking solely at the UK’s national economic performance, as there are significant differences in regional and local economic performance.

These regional disparities increase the importance of well-targeted business support, and should also affect strategic choices about, and the design of, business support that will effectively boost local economies. Looking specifically at local economic performance, both growth and incomes per head vary markedly across local economic areas. Evidence suggests most of the differences in output are due to differences in productivity rather than differences in levels of employment, which therefore should be a good starting point to inform the choice of business support. Moreover, local areas also experienced very different patterns of growth through the recession and post-recession period.

Our research shows how business support could best be improved

In our view, the goal for national and local Government should be to dovetail support provided at the local level, whether private or public, with national schemes. Further efforts to simplify and better signpost the offer and thereby reinforcing their effect would also be beneficial.

Other principles which would improve local business support would be to:

• Review existing provision in relation to local growth objectives. Take stock of the current provision, whether national or local, public or private sector, to avoid duplication.

• Consider local economic conditions. Ensure that support reflects the varying local economic dynamics, and local business need, and how that might change the mix of interventions required.
• Consider the local economic ecosystem you are trying to impact. Think about the local business support system and the other organisations that will be involved, so that interventions have a clear purpose and extent.

• Develop co-ordination across the system. Establish governance frameworks and delivery mechanisms to ensure aligned and consistent goals between key partners, and a coherent landscape.

• Focus on a limited number of initiatives, and get the design right. Concentrate on a small number of schemes to ensure things are easier for business to navigate, and it is easier to assess and get delivery right.

• Check targeted programmes against key principles. Targeted programmes aimed at developing small firms into growth businesses should follow key principles based on the evidence:

• Enabling self-selection – setting up the scheme so that it gives a clear indication of what is required and who should apply
• Selecting participants – making sure those who participate are likely to complete the training and successfully benefit from the programme
• Recognising impact on wider economy – selecting to increase the potential for positive spill-overs while minimising displacement
• Sustained engagement – the need to provide continuing engagement over a number of years
• Holistic approaches – looking at the whole of the business and its needs
• Partnership based – drawing on the expertise and networks of a range of local support organisations using and building on existing private sector provision wherever possible
• Regionally organised – providing more opportunities for event attendance and networking

• Put evaluation mechanisms in place. Establish a baseline and assess over appropriate time periods to ensure that an intervention is working and represents value for money, and to build the evidence base.

Does the UK’s Intellectual Property regulatory regime provide effective protection for the digital economy and sufficient scope for innovation and competition?

Intellectual property rights violations are a concern for small businesses

A survey of small businesses in 2013 found that infringement of intellectual property rights is a major concern for small businesses. 25 per cent of small businesses held intellectual property rights of any description.  25 per cent of this group had experienced infringement[25] within the last five years. With almost one in three small businesses (30%) who own some form of intellectual property rights reliant on it for 75 to 100 per cent of their revenue, infringements of these rights can be incredibly damaging to small businesses.

Looking more deeply into the issues faced by small businesses, the most common forms of infringement were copying of a product, experienced by 50 per cent of those who’ve had their intellectual property infringed, followed by use of a copyrighted work on a website (35%), use of a copyrighted work in a product or service for sale (32%), and use of a trademark or passing off (31%)[26].

Small businesses face several different challenges to address intellectual property rights violations

To ensure a greater adoption of existing protection mechanisms, challenges around accessibility, costs and awareness of such support need to be further addressed. The growing value of intangible assets in small businesses also needs to be a real consideration in the on-going development of the IP regime.

Time and money spent on protecting intellectual property such as patents, branding and product designs takes valuable resources away from business development, potentially putting growth and innovation at risk. 

Accessibility: There are a number of tools and services in place that have been developed by the Intellectual Property Office to help secure and protect intellectual property rights, helped by recent reforms, but our research shows that small firms continue to find it difficult to use them. A number of routes to combat infringement have already seen improvements to ensure better usability in recent years, in particular the creation of a small claims track in the renamed Intellectual Property Enterprise Court (IPEC, formerly Patents County Court).

Awareness: Easily accessible and affordable justice for those who have experienced IP infringement is key, and continuing to build awareness of the option of IPEC, and in particular the small claims track, could lead to a higher take-up. However, it cannot be ignored that for most smaller businesses, more informal forms of resolution are both the preferred, and probably most appropriate and affordable option if they are to protect their rights.

Cost of legal advice: Getting the right advice for a business seeking intellectual property rights can be a costly business. While patent fees can present difficulties for smaller businesses in particular, these are often relatively low in comparison with the cost of getting the right advice, which can be significant for a small business. The legal fees associated with a quality patent application are normally in the thousands of pounds, and so a smaller business developing an innovative product will often be put off by this significant outgoing. There are several potential solutions to reducing the cost and complexity of securing a patent.

Firstly, better awareness of free advice and more effective signposting of that advice. The IPO has worked with the Chartered Institute of Patent Attorneys (CIPA), to provide some advice, but this could be made more prominent. There is a need for the wider business community to ensure that firms are aware of the advice and support on offer. In particular, the establishment of Growth Hubs should provide a natural route to ensure businesses in need of IP advice are able to get it.  The IPO should work closely with LEPs and Growth Hubs to ensure their services are signposted at the local level. Encouragement could also be given to alternative providers of low-cost advice.

In terms of legal advice, it would be helpful to encourage alternative models of charging, for example through the use of commission-based models. It might be helpful for the IPO to consult with the industry on appropriate alternative funding mechanisms to reach those who currently feel the cost of a successful patent application is too high to explore this option. This would also ensure that the wider benefits derived from innovation are encouraged.

The following improvements would also help to make the IP regime as effective as possible for small businesses

We welcome developments which recognise the need for effective IP regimes to not create barriers to small businesses capability to innovate and compete. However, further reform is still necessary –particularly in relation to access to finance – if the potential benefits for small businesses and the wider economy are to be fully realised.

Intellectual property rights are especially important for exporters

The Government has set out ambitious aspirations for 100,000 new exporters and to double the value of UK exports to £1 trillion by 2020. Intellectual property rights will be important in a number of sectors, and are particularly relevant to innovative high-value manufacturers and the creative sector. Creative industries exported £15.5 billion of services in 2011, 8 per cent of total UK service exports[30]. Between 2009 and 2011 the value of creative service exports increased by 16.1 per cent, compared with 11.5 per cent across UK service exports[31]. Increased harmonisation and international co-operation on copyright could make it easier for those businesses to benefit.

Thirteen per cent of survey respondents said they had secured overseas intellectual property rights to help them export, and a further 21 per cent intended to in future. Eight per cent stated that they were not able to secure rights, with key concerns mainly around cost and complexity. Additionally concerns were raised about how secure these rights would be, particularly in the context of the Far East market.

Welcome steps are being taken at EU level to ensure that intellectual property is a key part of the single market, particularly through the UPC and the anticipated reforms to copyright discussed earlier in this paper. Concerns about the security of intellectual property rights in emerging markets must continue to be addressed through existing processes for international co-operation, and as Hargreaves noted, must be based on demonstrating the economic value of a stable intellectual property regime which provides a degree of certainty to businesses. Equally where countries do have stable intellectual property regimes in place, but fail to consistently enforce the rights of overseas companies, this failure should be firmly pursued.

What actions could the Government take to ensure the availability of a workforce with the skills to support businesses in the digital economy?

For many small businesses, employing staff with required skills is of critical importance.  As more and more businesses integrate digital technology into their business, the importance of having a workforce with sufficient digital skills will grow in tandem. 

Small businesses need further support to identify training opportunities

Currently there is a widespread under-use of skills meaning that employers are not maximising the productivity of their workforce. There are also well-practised arguments why many firms do not undertake training, with a fear of ‘poaching’ by rival businesses often cited.

However, more and more firms are realising that seeking opportunities to up-skill their staff is integral to business performance. In many small firms, this can happen organically as staff are often exposed to different facets of the business and learn ‘on the job’. However, formal training will continue to bring significant benefits. There are incentives for businesses to enhance the skills of their workforce including tax relief for training. However, the UK is still lagging behind other countries when comparing levels of investment in the workforce. 

Digital skills are important, but our evidence found other areas holding small businesses back from participating in the digital economy

In comparison to other elements of the skills mix, the research we carried out for our wider work on telecoms issues found that a lack of digital skills was not generally viewed as a significant issue; however, many small businesses did not feel that they have sufficient information to interact with the market.

The comparatively low level of concern about digital skills was unexpected, especially when compared to the findings from reports such as the Lloyds Business Digital Index.[32]   This Index found that a lack of skills was a major reason for small businesses not to be online. 

The Lloyds Business Digital Index identified digital marketing as a key skill which businesses thought they could use more support in utilising.  This reflected the view of the businesses we surveyed, who frequently identified this – and the use of social media - as a major gap in their skill set. 

One explanation for this is that our research is carried out with an online panel.  It is therefore likely that the businesses which we surveyed had an elevated ability to use the internet compared to the general small business population.  As a consequence, they were perhaps more likely to be unconcerned about digital skills. It is also possible that some small businesses do not view a skills shortage as important because they are already unlikely to carry out online functions, and therefore do not view this as important.  Alternatively, some small businesses who responded to the survey may also not be willing to admit that they do not have sufficient levels of skills to effectively run their business in the modern business environment.

Digital skills do however remain important for small businesses

Most small businesses we spoke did however identify digital skills as a second order issue – especially in areas where they were more concerned about infrastructure availability.  Our in depth interviews uncovered that many small businesses did not feel that they had sufficient information to make informed decisions, suggesting the existence of knowledge gaps.  This suggests that while small businesses owners may not have explicitly identified skills as an issue, they remain unsure about interacting comfortably in the telecoms market.

A separate survey carried out by the FSB in May 2015[33], found that digital skills were viewed as being important to helping in the future growth of small businesses, with 43 per cent identifying as being most important.  However, when compared to other elements of the skills mix - such as attitude to work, communications skills and people skills - digital skills were viewed as being comparatively low on the agenda.

Chart Two: Which of the following skills are most important for the future growth of your business?[34]

As our research has found, younger business owners are more likely to view their use of technology as being important to their business.  When asked about gaps in the general skills matrix of candidates being recruited, across almost all measures, older workers were viewed as more likely to have the necessary skills.  In contrast, the two areas where younger workers were viewed as being more likely to have the right skills compared to older candidates were in digital skills and languages.  The gap, as shown on the chart, below is substantial only in the case of digital skills.

Digital skills are also becoming an increasingly important attribute for young workers who are entering the jobs market. What’s more, jobs where digital skills are required provide an attractive proposition to the ‘digital native’ generation. Harnessing the potential of younger workers will therefore become increasingly important in the years to come. As such the Government should take steps to support the creation of opportunities for young people to develop digital skills - both as part of and supplementary to the curriculum – and work with employers to improve the availability and frequency of opportunities such as work experience where young people can observe the application of digital skills first-hand.

In addition, the Government should help ensure that young people have access to independent, high-quality careers advice and guidance which highlights the desirability of digital skills to employers and showcases the variety of education and training pathways (including vocational) available to those with an interest in pursuing a career in the digital sector.

At the same time, there is arguably a greater need to build the digital skills level of older workers. Faced with an ageing population and the fact that we are now working for longer, often into retirement, it is crucial that older workers have opportunities to up-skill in this area. This is critical if older workers are to be equipped with the skills that will increasingly be required of employers in the future, as digitisation and technology changes the nature of business and the labour market.

Chart Three: When recruiting, which skills, in your view are most commonly lacking in candidates?[35] (by candidates over 50 (in red) and candidates under 24 (in blue))

More broadly, many businesses expressed concern that they did not know where best to find independent advice about telecoms issues. More digitally aware small business owners recognised that the key to a successful upgrade process is to get sound, independent advice before approaching suppliers, as there is a risk of being mis-sold or being recommended an inappropriate product or package:

When a small business owner is deciding to do more online, or considering whether to upgrade to superfast broadband, a significant number of issues arise which can affect the decision making process.  Many of these issues can be challenging for a business owner based on the fact that they may not have the skills or knowledge base within their business to comfortably make these decisions.  Having external sources of business support which is tailored to small businesses’ concerns would be a valuable resource for many small business owners.