Do advisors really help?
Our clients think we do, we may think we do, but quantitative evidence is harder to find. Should you have a business advisor at all? If so, what for and when?
Is poor advice really why the UK lags other nations?
I was reading through the rather lightweight article in Accountancy Age that opened with the shocking quote
“If the UK was a US state, it would be the nation’s poorest, research has found”
That had me reaching for my OECD Statistics Reference book, but intrigued me enough to read further:
Dwindling UK GDP has highlighted the need for accounting, finance, and business advisory professionals to help improve productivity among British businesses, market participants have said.
“Advisers have a significant role given their knowledge of different industries and success stories,” says an advisor. “They are invaluable when developing people strategy, improving recruitment, retention of talent, and training and upskilling.” He also highlights the potential impact advisers can have in connecting business to tech solution providers. This can “play a vital part” in improving productivity, said the advisor.
Dipping into the rather more nuanced and detailed supporting report from CIMA, it was clear that the comparison to the USA was looking at Median Disposable Income, which is heavily distorted by the effect of population density on UK v USA rents and property prices (69m people into 240,000 sq km in the UK versus 332m into 9,800,000 sq km in the USA tends to do that).
Does that really highlight the need for advisory professionals?
What does the report really say?
I don’t think the report really supports the argument that advisors are the answer to the UK’s chronic productivity problems, although CIMA do a moderately good job of highlighting some of the causes, some of which advisors can help with.
I found the CIMA report to be, at its heart, a fairly standard paean to the libertarian chorus of “competition good, cooperation bad”, which in itself isn’t an answer to anything much. The report also fails to indentify the one, true, deep answer to the relative lack of productivity in the UK that I hold to be true: market size and long run economics. The US has a single market of 330,000,000 consumers with a single currency, single language, more or less single legal system, and effective logistics. That makes everything vastly more effective and efficient, and alone is enough to explain the productivity gap between the UK and the USA (if not the relative productivity growth rates). If you have to stop your biscuit line and reset very 69 packets, its much less efficient than a line that runs for 330 packets. We do not need to look much further to explain over 80% of the economic differences between us.
Indeed, the underlying government data that claims to show productivity measures is pretty much a chart of “countries by size of local market”.
Going back a decade, I think the LSE got it right in 2011 when they had a look at measures to improve productivity and the general economy by having a strong focus on growth sectors, on intrinsic advantages, on relative advantages, and on technology deployment with new working practices. Those should help regardless of politics.
But what about advisors?
Genuine quantitative evidence that advisors enhance the growth of SMEs across all measures of sales, profits, cash, and innovation is quite hard to find.
A strong UK study concluded that, for UK regions
Based on our review of the available evaluations, business advice had a positive impact on at least one firm outcome in a little over half of the schemes evaluated.
But results are much more mixed when it comes to specific aspects of firm performance - with only around half of the evaluations reporting a positive effect when looking at these. For example, programmes also reported somewhat better results for sales than they do for employment and productivity.
There is also little available evidence on whether positive effects on individual firms translate in to greater local economic growth. It’s possible that gains to supported local firms come at the expense of other non-supported local firms.
UK Government studies going back a decade also found patchy and partial results. Other studies (here and here) have found specific benefits, including
small business owners who utilize growth advisors are more likely to experience a 20% growth.
70% of all small businesses that receive mentoring survive more than 5 years? That’s double the survival rate of non-mentored small business.
more than 50% of small business owners with 3 or more hours of mentoring report higher revenues and increased business growth.
Firms taking advice developed mature and effective internal processes and governance faster.
There was a strong correlation between the amount and intensity of advice and the growth rate of smaller companies.
Researchers found that an intervention in 2003 yielded its highest measured impact in 2009 and 2010, six to seven years later, when intensive assistance increased the subsequent employment rate by about 24.5 percentage points.
Firms supported by advisors who went on to possess a formal written business plans were found to be more likely to have stronger support network partnerships, formal quality assurance and the ability to lead change among employees. A positive relationship was found between an above average level of annual sales turnover and the personal vision of the owner‐managers after engaging with advisors.
Firms in more complex and risky and fast growing sectors got more benefit from advisors
Advisors increase the chance of success and reduce the chance of failure
There are also “soft benefits” to entrepreneurs from advisors:
having advisors reduces anxiety
having advisors increases psychological resilience
firms with advisors prioritised and acted faster
advisors have a much wider worldview, and help keep entrepreneurs out of cognitive ‘dead ends’
And there are benefits to avoiding negatives as well as positives:
O'Neill and Duker (1986) examined the role of managerial quality and found that failed firms have greater debt loads,relied less on the advice of accountants and advisors and offered inferior products
The more remote a firm was from its advisors and accountants, and the less it trusted them, the less likely it was to succeed and grow (Mole, 2002)
Good independent advisors avoid the risk of “ties that blind” whereby entrepreneurs overweight their friends’ advice even if it does not add value
The quality of advice also matters. There is only a little evidence of statistically significant relationships between free or UK government-backed providers of business advice such as Business Link and firm performance, but there is good evidence of effectiveness with highly experienced and trusted independent advisors for critical areas of finance, strategy, debt, fund raising and corporate change. And that persists after controlling for the influence of SME characteristics of age, manufacturing/services, high technology, innovator, level of skill of the workforce, exporter and number of competitors.
Overall, then, you might think that the evidence in support of the original article is a little thin. That would be fair, but would ignore something very important: taken together across all the studies, it is clear that good management with a high chance of rapid growth and financial success is management that takes advice at the appropriate time. And the most effective decisions to take advice on are complex and high risk decisions involving corporate strategy, hiring decisions (especially at Board level), taking on debt, and ‘crisis moments’ where it is essential to avoid corporate failure, The next most valuable advice is that which can drive sales growth and profits strategically.
How can we help you?
We advise on those last few things. The things that really matter, and where management teams often need to add independent experience to the formal relationships they have with their existing lawyers, accountants, and HR team.
Get to know us, get to trust our advice after you can see it work, and then have us on speed dial for moments of crisis, moments of opportunity, moments of change, or that long hard slog of keeping profits growth over 20% a year. Then we can help with your success story.
Ultimately it is having a slight edge over the competition by moving faster and with more certainty. That is the value of trusted advisors.
If you have one of those moments, or know a friend who does, call us anytime. We enjoy the challenges.