Item No. 5 is a discussion with representatives of the Small Business Forum. I welcome Mr. Joe Macri, chairman of the forum and managing director of Microsoft Ireland, and Ms Marie Bourke from the secretariat to the forum and department manager of the enterprise division of Forfás. Before asking Mr. Macri to commence his opening statement, I draw attention to the fact that while members of the joint committee have absolute privilege, the same privilege does not extend to witnesses appearing before the committee. Members are also reminded of the long-standing parliamentary practice to the effect that they should not comment, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.
Small Business Forum: Presentation.
Mr. Joe Macri
I thank the joint committee for giving me the opportunity to make this presentation.
Members will note this is a PowerPoint presentation.
Mr. Macri
That is correct. I would like to spend approximately ten minutes setting the scene for the report and taking members through the process in which the Small Business Forum engaged and its key findings in that regard. We can then have a question and answer session.
The Small Business Forum was established in the summer of last year by the Minister for Enterprise, Trade and Employment. It has 12 members and a chairman. The 12 members include seven small business owner-managers, two members from the academic world and three members appointed by the Government — a broad representation of business, Government and academia. Forfás provided the secretariat.
The first thing we did, as a matter of course, was to look at the literature available on small business, of which there was a great deal. We then sought submissions from the public. We reviewed each submission and over the course of three days we met face to face with 21 of the 74 people who had made submissions. We wanted to get a sense of small businesses so we travelled from Dublin to Galway, then down to Cork and returned to Dublin via Carlow and met 100 small business owners-managers to get their views.
To ensure that the work and recommendations were founded on empirical evidence, we contracted DKM to produce a report entitled The Economic Impact of Small Business. Some very important findings from that part of the report are in the next slide. We decided to work with three advisers as the themes of the issues started to emerge. We worked with Indecon Consulting on the burden on business; with Mr. Paul Tansey on improving productivity and with Ms Paula Fitzsimons on stimulating growth and entrepreneurship.
We presented our report to the Minister in April 2006 which was subsequently published in May 2006. When we put all the data together what astounded us was the importance in terms of economic impact of the small business sector. Much is said of the multinational sector, the sector in which I work.
There are some very important statistics that I want to share with members. There are approximately 230,000 small businesses in Ireland which represents a 50% increase in the number of businesses in ten years. Those businesses employ more than 54% of the private sector workforce and represent a 79% increase in employment in the past ten years. Let us look at the gross value added of that sector. Small business owner-managers dominate the very important construction sector. They are very significant in both the services and manufacturing sectors. They account for more than 50% of VAT; a significant portion, 37% of income tax and 11% of corporation tax. The theme of our report that "Small Business is Big Business" is very apt and was a concept we wanted to get across as part of our work.
One of the issues that people raised was that if everything is so good then what do we need to focus on? We decided to focus on three core challenges, costs were clearly well documented and well argued by many lobby groups, commentators and was an issue in the public domain. However, the second issue, which I think is more important, is productivity. We leveraged work by EUROSTAT, so this is work based on its statistics, and what we found is that if one strips out the foreign direct investment sectors, specifically pharmaceutical and ICT and looked at the rest of the sectors, specifically the small business sub-segments, Ireland's competitive position in terms of productivity was much worse. We are not as productive as our counterparts in Europe in this sector. This is a very important finding. Owner-managers, especially as we travelled around the country were vocal on the penetration of the local market by foreign competition, especially in the retail sector. The foreign competitors come from countries with higher productivity and are more able to compete. This point was clearly coming through in the outreach research. These are the reasons we focused on this sector.
In all we made 15 recommendations. We made a number of conscious decisions before compiling our report. First we looked at small business at a national level and not at regional specific issues. We recognise that regional issues are of major importance, but if we focused on every specific issue we would have had 1,000 recommendations. The system could not have dealt with that. Equally we decided not to focus on specific sectors. We looked at the small business sector as a whole. If we focused on sector specifics we would get drawn into very detailed issues. We wanted to focus on the top ten issues and went for a very good process to get to those top ten issues. We wrapped those ten issues into the three core areas. The first on which we focused was the business environment. What were the top five issues that affected all small businesses? The first was regulation and the burden of regulation. Although Ireland fares well, ranking 11th in the OECD in terms of good regulation, we found studies that showed that the burden of regulation on business accounted for 3.6% of gross domestic product. Two surveys carried out, one in the US and one in the UK, showed that small businesses bore the brunt of that burden. In fact, on average, a small business would incur 60% more cost than a big business such as Microsoft. That is logical. I would have a HR department, a finance department and a legal department so that when a regulation came into force I would have teams of people in a big business to deal with it but a small business does not have that. They have the same regulation so that was a big issue that came across. We made three recommendations in that area.
The second issue that was critical was rising local authority charges. This was based on the work commissioned by the Department of the Environment, Heritage and Local Government, and by Indecon. That report found that in the past ten years the cost to business in the form of local authority charges had risen 111%. As that was clearly unacceptable in the business environment we made a specific recommendation in that area.
What became clear in the outreach was that access to advice and information was at best inconsistent, sometimes it was good and sometimes it was bad. We leveraged an international best practice from New Zealand and made one recommendation there. Clearly there were many issues around infrastructure. There is the physical infrastructure of roads, rail and air; and the technological infrastructure of broadband and energy. We made a conscious decision not to make a specific recommendation in that area as we thought enough reports had come before us that made recommendations in that area and there was nothing new we could add to the debate, while recognising it was still important.
In the final area the forum and I felt the policy makers, the Government and its advisers had incomplete data. DKM gave us wonderful data so that we made a recommendation to the Central Statistics Office for example, to have an annual small business register. Those were the five issues that affected all small businesses.
We also wanted to focus on the issues that face growing businesses because they are the most important as they are the businesses that will create economic growth, employment and value to the economy. There we found four issues: difficulty in accessing finance, not its cost or availability but accessing it. In particular, businesses that had a low ratio of capital found it difficult to get finance from banks because of the risk exposure. Those who were not operating in manufacturing or internationally traded services were unable to get information, advice or financial support from the State and there were real challenges. We made four recommendations in that area.
The OECD published an excellent report on the importance of management capability. The expert group on future skills needs also published an excellent report that we leveraged that showed that management capability in Ireland is not what it should be. We made a specific recommendation in that area.
Research and development is a big priority focus for the Government and rightly so but we found that most small businesses do not have the capacity, or are not in the right sector, to invest in research and development and innovation so we made some specific recommendations in that area.
Under the theme of growing businesses there is sufficient and significant research to show the link between growth and productivity and the use of technology. We also made a recommendation in that area. We also looked at the issues that face the start up companies. Clearly they are the future of the business and the economy going forward. Although Ireland fares well, according to the GEM study on entrepreneurship, we identified two important areas, the first being female entrepreneurs. We lag in terms of the number of females becoming entrepreneurs, but our overall entrepreneurship is good and, second, in regard to our attitude to risk, we are more risk adverse than many other countries. As some work needs to be done in this area, we made a very specific recommendation on it.
No report is worth anything if its recommendations are not implemented. If we were requested to make one demand of the Department, we would recommend that the forum should stay active for the next three years and that every six months a progress report on implementation should be undertaken with the Department and reported publicly. The first implementation review will happen next week. I look forward to the findings of the forum on progress made. The Minister clearly committed his Department to the recommendations that fall within its remit, to which the forum and I hold him accountable. There has been a follow-up in recent weeks. There are other recommendations that affect other Departments. We will see progress in this area in the next several weeks.
The committee will take on board many of the recommendations made in this excellent report. It will use its influence to ensure they are implemented as speedily as possible.
Mr. Macri has much experience as chairman of the Small Business Forum, an expert on productivity for the Paul Tansey report and general manger of Microsoft in Ireland, which employs thousands directly and indirectly and also has many small business suppliers. What, in his view, is the largest challenge facing the economy? The forum's report identifies management development as presenting one of the main challenges for small business. The report identifies the scarcity of strategic management skills. Why is this so and how can it be remedied?
Mr. Macri
I appreciate the Chairman's comments on the forum's work.
The report came from the Small Business Forum and Microsoft worked with Paul Tansey. We can look to minimise the rising costs challenge, but the reality is that it is a given. In most cases it is a result of economic success where one expects, say, wage inflation. The main single issue facing not only small business but also the economy is productivity. Germany is an excellent example. It has faced economic challenges since reunification. Its manufacturing sector has faced challenges from Poland with much lower labour costs. It struggled with this competition but did not fall on its knees. The reason for this is it focused on productivity. From the latest results, it is powering ahead in productivity improvement at a time when productivity is decreasing in Ireland. This is dangerous for the economy because of high costs.
The combination of high costs and low productivity makes a dangerous cocktail, especially when the effects of international competition are felt in the domestic market. I heard this from many small businesses. I see it in my business but we have the wherewithal to deal with it. We have highlighted three areas that we would advise the committee and the Government to examine. Finance is a given because it is separate issue. To drive productivity, there is sufficient and compelling international evidence that one should focus on improving three aspects — management capability, innovation and the use of technology.
If I recollect correctly, the Chairman's question was why is it an issue. In talking to small business owner-managers, there is probably a lack of awareness of the benefit of management development. That is not to say they do not have the abilities — clearly they have — otherwise we would not have seen the growth in the economy we have seen. However, a job of work has to be done to make the right connection. This is not about going on a management course at a college for two nights a week. It is not that sort of thing. This is about peer networking and learning from each other's experience. It is about improving profitability because that is what is important to small business owner-managers.
The first issue is probably a lack of awareness. That is a big issue for us and that is why it is one of the recommendations we made. The second issue lends itself to the nature of owner-managers who do not have the time or the inclination to attend a course in a classroom. They are busy people with businesses to run. We have to design and structure management development in such a way that it lends itself to peer networking, social networking, and having people on site in their businesses. The aim is to have different forms of delivery. Part of our recommendation is that not only does one have to raise awareness one also has to ensure that what is delivered is appropriate to management.
The third issue — which is not an issue for Ireland — is funding. The State has invested more than enough money in it. If that were not available I would have said that was the third issue but that is not the case here.
The presentation is most important. I agree this is the core of where we need to look in the economy. The phrase has been used from the forum, that every big business was a small business once, but it is too often forgotten. The implementation structure was referred to and it would be useful if we could revisit this in six months time and see how it is progressing.
I do not question it but I am amazed at what was said about productivity. I had not looked at those figures previously with the FDI taken out of the equation. When I travel I always keep an eye on these things. I never stop working when I am abroad. One of the issues to which Mr. Macri referred in terms of productivity and how poorly we have ranked against other countries related to hotels and restaurants. The next time he walks into a restaurant in Ireland or anywhere else I would urge him to see how many plates the server can bring to the table at any one time. It is a very simple exercise. It drives me mad the number of restaurants I go into where the staff have had absolutely no training. I have seen cases where it took five minutes to serve a table of six people. If one goes into a Chinese restaurant one will see how it is properly done. This is a fair point. I am not being clever.
The next time Mr. Macri walks out of an airport he should try to rent a car without a gold card or his numbers and see how long it takes to fill in a form 24,000 times one after the other. Where does training come into all this? I am sure it is included in one of Mr. Macri's recommendations but it does not appear in this documentation and I would consider it crucial.
I would also like to see figures on one other area. I take a strong view that when single operators, be they plumbers, chefs or whatever else, do not succeed, it is because when the business grows they promote themselves to be managers rather than continuing with what they are good at doing. That is one of the reasons small businesses go to the wall. Another reason is not keeping up to date with one's tax affairs. A third is the question of regulation. The committee recently visited Ennis where the local county council was putting together a programme to centralise support for small businesses in dealing with regulation, start-ups and the paper trail that is involved in setting up or running a business. Has the forum examined this? We are keeping a very close eye on it.
On the question of cost, when I travel I look at the cost of three items — pizza Margherita, Mac3 blades and fuel. I have found that in recent times Irish prices are levelling off. Five years ago prices here were higher but that is no longer the case. One can buy a pizza Margherita in a local restaurant in Dublin, even in the city centre, for approximately €8.
Is that the Senator's shopping basket?
Yes; everybody has his or her own way of comparing prices. I would like to be able to talk to people about it in one way.
I concur with the point made on management attending courses and upgrading, etc., particularly on appointment skills. Management in Ireland has lost the skill of making appointments. Managers do not to it any more. They get others to do it for them. Very often the appointments made are the wrong fit for their company and the first appointments are crucial.
I want very much to hear the forum's proposals on innovation. Has it ever thought of looking at where Irish education develops innovation? Has it found any place in the education system where innovation is developed when people are still without inhibitions, before they gain success and doctorates by regurgitating information they have been taking in for the previous 20 years?
Mr. Macri
We covered training and service in two parts of the report. One part deals with innovation. When we look at how one can improve service level, be it in a hotel or an airport, it involves innovations around how service delivery happens. We have addressed that issue.
The second point revolves around the issue of management development. We did not go for broader skills training but focused on management capability. We made a conscious decision to do this. The theme of management capability came up a couple of times. This is paramount and something on which we are clearly focused. Looking at the work done by the chambers of commerce, the Small Firms Association and ISME, working in partnership with FÁS specifically, I see real improvements, although there is still much work to be done. We refer to this in the report.
On the theme of regulation and all the information that comes with it, one of the recommendations we made specifically revolves around a knowledge base. It is based on best practice in New Zealand where an excellent job was done in providing user-led information, mainly on regulation, but also on anything to do with the state and interaction with it. We felt we could learn something from this.
New Zealand does change its mind on everything eventually, whether it be with regard to banks or its national carriers.
Mr. Macri
I take the Senator's point but at least on this one it was well accepted by the forum that New Zealand followed good practice. On the theme of cost, I note the Senator's shopping basket. I defer to the National Competitiveness Council which does an excellent job in tracking costs across a variety of items. One of the things it has done since we published the Tansey report on productivity 18 months ago is to talk in the last two reports about productivity, as well as cost. There was reference to the productivity question. The data are not mine but EUROSTAT's. That gives them significance.
I accept that.
Mr. Macri
Let me talk a little more about innovation. For most small businesses, research and development mean a person in a white lab coat and technological innovation, for example, a new piece of hardware or software. Some 99.9% of small businesses turn off because it has nothing to do with them. Most small businesses are in the services sector so technological innovation does not make sense for them and, as they are small businesses, they do not have the wherewithal for such innovation. That is why the report focussed on the theme of innovation, which is clearly an important area, particularly with regard to what we call non-technological innovations. The example the Senator gave with regard to service delivery in hotels and restaurants is a good example of how a business can become more productive by changing how it operates. Much more work is needed in that regard.
The Senator asked whether innovation exists in the system at present. We believe it does but we have found there is no real connection between business and some of the work happening at university and institute of technology level. This is why we recommended what is known as the innovation voucher, which is one of the suggestions the Minister responded to publicly when he stated in the past week the Department would fund the voucher scheme. It is suggested the scheme will operate on a first come, first served basis. If a business has an idea, the next step is to draw up a one-page submission and the business will then receive, let us say, €5,000 to fund a transfer of innovation from a local institute of technology or university. What is missing is the connection with business.
We can debate whether innovation exists or not. My opinion is that it does. However, until we create a mechanism whereby small businesses can access it, we cannot debate the value of it, if the Senator understands me.
When he speaks of innovation, is Mr. Macri referring to a near-market idea or to a business beginning at base 1?
Mr. Macri
It is whatever one wants it to be. The system is based on a practice we identified in the Netherlands which has been working well for approximately 18 months.
Does Mr. Macri intend to use the institutes to carry out research on many of the new proposals and ideas?
Mr. Macri
They are already working on it. The question is how we help small businesses to access it. That is the idea of the innovation voucher.
Is this already in operation in the Netherlands?
Mr. Macri
A lot of work on service delivery is already happening.
It is happening in the institutes of technology but I am not sure it is happening in the universities. The incubation centres are doing well in the ITs.
The last area to which Mr. Macri referred is the one in which I would be greatly involved, namely, research and development, or innovation, as he called it. Some businesses are so small that one would need somebody to go into the business and explain that to do A, B and C would improve productivity. One would have to work at that level because the businesses cannot afford to do so. Mr. Macri's company can afford to fund a research and development programme but a small business cannot do so.
I agree with the tie-up with the universities because some fine research and development is taking place in that area. However, small businesses are slow to pick up on this issue. There is a need for trust between the business and the person who would go into it to carry out the research. Many small businesses would feel that if that person learned something of the business, he or she could start up his or her own business.
Mr. Macri knows the committee is closely involved with work on insurance. Is that issue now off the map? It was a major issue some years ago with regard to costs for small businesses, and was said to be one of the factors putting them out of business. Improvements have been made, however. I would like Mr. Macri to elaborate on this issue.
Mr. Macri
It is probably worth taking a step back with regard to the Deputy's first point on innovation. The first step in the process is that there is an innovation and a new concept is born, be it technological or non-technological, such as a new widget or a new way of doing something. The next step is to commercialise that innovation, for example, through a mechanism for patent protection. It is then necessary to diffuse that innovation through technology. It is a well accepted three-stage model, namely, make the innovation, commercialise it and diffuse it.
A good example of diffused technology is the mobile phone. One cannot do business without it. When I went to the K Club for the Ryder Cup, I felt naked without a mobile phone. There are certain technologies one cannot live without.
The Deputy is correct that in the process of innovation, commercialisation and diffusion, we must take a different approach to small business. The innovation vouchers can help facilitate that. We also recommend that a person go on site with a small business owner-manager to audit his or her use of technology and produce a one page report rather than send the owner-manager off to do a course on technology.
Insurance came up in discussion and the sentiment at the outreach meetings around the country and among small business owner-manager members was that this has improved. It was not a top ten issue.
Ms Marie Bourke
There was a feeling that this was being addressed and was not the major issue it had been 12 or 18 months previously.
This committee was appointed four years ago. It took on the issue of insurance because that was the greatest challenge and the Taoiseach was concerned about the difficulties small businesses were experiencing. I take pride in the work and achievement of this committee in bringing the industry and the Government together, and introducing the four Bills that were urgently needed.
I am extremely impressed by the submission this morning and have no hesitation in proposing to the committee that our next big challenge should be to assist the Small Business Forum in helping industry and creating the opportunities Mr. Macri has highlighted. He brings a professional expertise to the issue, both as chairman of the forum and managing director in Ireland of one of the most successful companies in the world. His words to the committee and the work he has done in such a short space of time are uplifting.
I welcome the Small Business Forum. A few weeks ago, in my Clare constituency, Shannon Development launched thee-towns project. This morning in Spanish Point, near Miltown Malbay, there is a large local authority conference to discuss the future of e-technology in small firms and industry in rural areas.
People come to us regularly saying they want broadband but cannot get it in their area, whether they want to work from home or in e-towns such as Shannon Development proposes. These comprise rooms built on to people's homes from which they can work with a few people.
There is 95% broadband roll-out in homes and small industry in Northern Ireland. How much does our lower roll-out hamper small firms here and people who want to set up in business?
Mr. Macri
This came up in submissions and at outreach meetings. The problem manifested in two ways. First, people in the regions spoke about access so there is clearly a market failure in this area. My crude interpretation of how roll-out of broadband was achieved in the North is that, commercially, the incumbent made a decision to make a certain level of investment and, when it became economically non-viable to provide for the last 15%, the state intervened. The issue of availability, especially in the regions, was highlighted.
To come back to my generic point on infrastructure, we did not make a specific recommendation on broadband, but that does not belittle the issue. The more interesting aspect is that where broadband is available, we have found that small businesses still do not take up the offer. It is almost a catch-22, which implies that even if there were 100% availability, take-up would continue to be an issue. That is why we made an ICT audit recommendation rather than just an IT one, as broadband is part of the former. Work is required to educate and demonstrate the value of broadband to small business. It is two sides of the same coin. The work of the Department of Communications, Marine and Natural Resources to raise awareness of the value and importance of broadband is a step in the right direction. It is absolutely correct that these were the two issues identified.
The lack of broadband does not help, especially those who want to work from home. It is also a problem for Shannon Development at small business parks it has established.
Shannon Development is a wonderful organisation. I stood side-by-side with its representatives in India and China on the last two major trade delegations led by the Taoiseach and three Ministers and was proud to do so. It is a source of inspiration in terms of what it has achieved and is attempting to achieve. Its staff are wonderful.
I must leave as I have to do a radio interview.
The Order of Business is coming up in both Houses, which is why the attendance has fallen. It is not due to any lack of interest. The committee is keen to get involved.
I noted the reference to female entrepreneurs, the percentage of whom is very low compared with that in other EU member states. How can we address this problem? We have very dynamic, energetic and focused female personnel available in Ireland. Most of the middle management positions in my other lines of business are held by females and I find that they stay focused and are completely committed. What are the forum's recommendations to increase the representation of women among entrepreneurs?
Mr. Macri
According to the analysis in the GEM study, one in ten considers entrepreneurship, which gives us the generic high level of entrepreneurship activity. Among women, however, the number is only one in 17, a significant difference. We find the issue to be one primarily of culture and education. While there are a number of useful State initiatives on entrepreneurship, there is no interdepartmental policy. Therefore, we recommended the creation of a single interdepartmental policy to address three specific issues. First, there is a need to drive awareness, interest and exposure of female entrepreneurs to create a halo effect. Second, policy must address the education system and the use of transition year, an issue we have discussed with the Department of Education and Science, to help stimulate entrepreneurism among females as well as males. Third, we must address our culture and risk averse nature as a people. We must celebrate success to a greater extent, as well as learn from failure rather than hide behind it. In the USA, culturally, it is almost like a badge of honour to have failed. I have failed in certain areas in the past but learned greatly from those failures. This is an attitude we must promote. We must celebrate success in entrepreneurship, among females as well as males, while recognising the good which can come from learning from failure. In answer to the Chairman's question, it is a matter of having the one core policy document. I know a policy document is being prepared and will be reviewed next week.
While the transition year would represent the starting point, given that the students would be somewhat more mature, the institutes could play a major part, especially in classes with a higher percentage of females than males. At a later stage perhaps the chambers of commerce could play a major role, as they are centre stage in business. The Taoiseach is anxious that this would continue to be the case, as he said on a recent visit to Mullingar. We should get the chambers of commerce to become involved as much as possible. Mullingar Chamber of Commerce has more than 400 members, 90% of whom are business people. The next generation of business people should be the entrepreneurs to create the further employment we all seek.
I thank the delegates for attending this morning. We look forward to working with them for many more years. The country is fortunate to have Mr. Macri to chair the forum. If the electorate is in the mood and I am involved in this committee in some way or another after the general election, I want to pursue this matter as our priority for the next four years. I thank Mr. Macri and Ms Bourke for attending and assisting the committee. It has been very enlightening and uplifting. I know we can do an enormous amount together to enhance and create jobs in tens of thousands.
Next Wednesday the Minister for Transport, Deputy Cullen, will attend the committee to discuss reform of the insurance market.