Wednesday, 18 November 2015

Swarm Economics

Whilst a lot of attention has been paid today to the BoAML fund manager survey my attention was more drawn to their lesser mentioned small business report which can be found here.  I was struck by the hugely upbeat nature of it with investment and hirings planned at a pace. This was particularly of interest because I think the world of small business is too often (always) lost in the reportage of big business.

I now run a small business. I used to work for big business. It has been eye opening.

Working for big banks dealing with big clients, analysing big companies and looking at the data that they provide gave me the impression that big business is the driving force in the world. Having left a large institution and been immersed in the small business world I can see just how misinformed and blind I was. Small business is responsible for 50% of GDP yet coverage is naturally biased towards the big companies.

Most small business is privately owned and because of that rarely gets reported on. If there aren’t myriads of investors then the audience for any analysis or reporting is reduced to miniscule. This leads the wires to be swamped with further perception bending pieces on big business alone. And then there is the matter of size distribution. Though that 50% of GDP is made up by small business it is easier to focus a biopsy on an elephant than each individual ant in a huge ant hill. Hence small business is further ignored.

Yet conditions for doing business as small business are improving and it is expanding in response. Technology is making it so much easier to establish small businesses, from cloud software to run accounts, legal functions, HR and reporting, to the internet making communication from a barn in the countryside as practical as sitting in an expensive city centre office. It is not that hard and the advantageous synergies of large business are being whittled down. In fact there are efficiencies in being a private small business compared to a public behemoth that has management sapped by and legions employed in investor relations keeping shareholders and regulators happy.

Small is good and with the model of egalitarian exposure proven for the individual through social media models it is becoming replicable for small business. Now advertising your wares is dependent as much on the viral nature of the idea or product you have rather than how much money you pay to put it through traditional costly media placements. The playing field is being dramatically levelled. I may not be unique in bypassing any tweet or facebook post sponsored by a large corporate, more likely being enticed by something novel from an unknown.

The mistrust of large corporates is not diminishing with the latest VW scandal further pushing large corporate reputation after than of bankers. The fashion for artisanal goods has naturally spread to that of artisanal companies, and the term ‘small’ normally suffices for artisanal.

The idea of a swarm of companies driving the economy, each being technologically enabled to communicate efficiently with each other is seeing the formation of a virtual super corporate and that swarm operative is exhibited in the way the swarm employ too. One of the past disadvantages of running small companies has been the inflexibility of hiring due to the huge commitment just hiring one extra member of staff can make. As a percentage of total employees that one extra body can be large making it hard to fine tune. Thinking you need half a person more results in one or zero. Yet the technology that is making swarm business possible is making swarm employment possible too. Freelancing works and though zero hours gets terrible press it is in fact the most efficient way of employing and, if onerous competitive clauses aren’t invoked by single employers, allow for huge flexibility for the employee too (though I acknowledge than many need security).

Freelancing can be considered as the water poured into that glass of golfballs, marbles and sand that time management consultants like to use as an analogy for efficient planning. I would not be able to run my current business if I couldn’t outsource effectively to specialist services and freelancers when needed. It is not just the oil in the machine, it is now part of the machine itself. Whilst many complain that employees are being exploited by big business on such employment terms, down in the swarm it can be considered as a socialisation of jobs. The relationship between owner and employee is much more entwined at a smaller level and whilst big corporations pay lip service to employee interests few really care. At the small level you have to care.

With the importance of small business and its relative size I do wonder if data is getting missed that is more easily harvested form large corporates. One, for example, is exports. 70% of my clients are overseas yet I have never been asked to report my exports. Earnings data at the small level can get clouded too where director of small businesses tray to take dividends rather than salaries. The change effected in the UK next year with increased taxation on dividends will push the balance back towards salaries so there may well be a jump in reported wage earnings

Big business will continue to monopolise big investment projects where massive R+D spends or vast equipment investmets are needed but I wonder if even there there there is an advantage to fracturing up into a swarm of smaller units. The greatest being the dissemination of risk. If VW, BP or the big banks, rather than being huge mammoths for the litigators and regulators to target, were swarms of smaller companies then corporate malfeasance would be harder to pursue. Attacking a swarm of ants is harder than killing a mammoth. One small component would be sacrificed and bankrupted for the good of the whole and the swarm would continue to function. In VW’s case it could have been the small unit that supplied the cheat software. Perhaps one day the documentation on car sale invoices will stipulate we aren’t buying one make but have separate contracts with each component supplier. Just as we do when we put together our homes.

The ants are making the elephant's life uncomfortable.

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