Small and medium-sized businesses are essential to generating much-needed good jobs. But to help them realize their potential, large corporations must get involved.
Small and medium-sized enterprises (SMEs) are the lifeblood of a country's economy; they are essential to generating good jobs. And those jobs are sorely needed worldwide. Gallup's World Poll estimates that of 3 billion adults globally who report they want a good job -- one that is 30+ hours per week and provides a consistent paycheck in a legitimate business setting of any size -- 1.8 billion, or 60%, are out of work.
Having a large corporation as a customer opens doors to easier credit and other business opportunities.
Some national leaders are beginning to take this problem very seriously. Leaders of countries in the Gulf Cooperation Council (GCC), for example, are putting programs and policy initiatives in place aimed at developing SMEs and encouraging them to compete for government contracts. But too few leaders are focusing on the role that private corporations can play in helping SMEs grow.
In GCC countries, SMEs represent more than 90% of the private sector and employ between 40% and 63% of the private labor force. However, SMEs' contribution to these countries' GDP is less than 40%, primarily because SMEs are concentrated in less profitable, less capital-intensive, and low-tech sectors; they pay lower wages and produce less per employee. But this also suggests that SMEs in the Gulf region have an unrealized potential for growth. If SMEs can grow in revenue and profits, they can create millions of sustainable quality jobs.
Large corporations have a key role to play
To help SMEs realize their potential, large corporations must get involved. Major corporations spend billions of dollars annually seeking products and services from other companies, such as landscaping, cleaning services, logistics, software development, food services, and office supplies. Seven in 10 small businesses increased in revenue and size within two years of becoming part of the corporate supplier base, as shown in a study of nearly 200 small U.S. businesses conducted by the Center for an Urban Future..
When small companies interact with large corporations, these SMEs make changes that improve their organizational structures, management practices, and operations. These changes lead small companies to upgrade their technologies, increase their efficiency, and most importantly, become financially stable. As a result, revenue becomes greater and more consistent, making it possible for these businesses to add new jobs. Having a large corporation as a customer also opens doors to easier credit and other business opportunities. The biggest upside is the spillover of new knowledge, innovation, and business models. When a few small businesses improve their systems or business models, other small businesses learn from that and raise their game to stay competitive, boosting the quality of the entire SME sector.
In some Gulf countries, for instance, large state-owned enterprises, such as Saudi Aramco, Saudi Telecom Company, and Qatar Telecom are already buying services and products from SMEs, thus fostering their growth. In December 2012, the UAE government endorsed a new law that requires government bodies to allocate 5% of their budget for goods and services provided by SMEs or entrepreneurs. This mandate sends a strong message to private corporations about what is required to support business growth in the small-business sector.
The benefits of this relationship extend to large businesses too. Large corporations are beginning to realize that making small businesses part of their supplier base is more than "corporate social responsibility" -- it is good business. Smaller companies are more flexible in providing innovative products and services to meet corporate needs. They are quicker in delivering services locally, which saves on costs. Their knowledge of local markets can be extremely valuable for corporations trying to enter those new markets.
A diverse supplier base also helps establish linkages between the big and small businesses, enabling easier access to resources and creating multiple information sources and a bigger customer base for the corporations. Corporations that restrict themselves to a small network of suppliers are also vulnerable to supply chain disruptions. In 2011, the earthquake in Japan and flooding in Thailand, for example, caused major disruptions in manufacturing activities for Apple, GM, Toyota, Intel, and HP. Diversifying the supplier base by using small businesses is one way to reduce risk in supply systems.
Four ways corporations can help SMEs
Corporations can offer small businesses quick opportunities to grow by buying their services and goods and by taking these four key steps:
Identify and support talent. Not every SME has the capacity to become a supplier. Identify elite performers based on talent and operational readiness. Once large companies have identified these businesses, they can mentor talented entrepreneurs through supplier development programs. Governments also can sponsor programs to boost the management capacity of high-potential SMEs to enhance their growth and competitiveness.
The 114 companies that participated in Gallup's Entrepreneurship Program -- sponsored by state government and a local university -- show how a well-designed program can spur SME growth and create jobs. Highly talented entrepreneurs outperformed their less talented peers by approximately 19 percentage points in year-over-year profit growth. On average, companies in this program grew by 13% in revenue and 57% in profit in one year. This growth led to an average increase of 18% in headcount, creating more than 500 new jobs in a year.
Provide financial help. SMEs need support to meet large corporations' needs. Installing automated invoicing or payment processing systems can be a burden for small companies. A loan from a corporation or a community development institution could help small companies with the capital to scale up their systems, enabling them to accept their first big contract.
Make the procurement process transparent. Acquiring information on large businesses' procurement processes is a hurdle for many small businesses. Corporations that provide a simple website with basic information about goods and services they need and the procurement officer's contact information would help small businesses know where to start.
Simplify the application and selection process. Make the selection process more accessible and straightforward. The IBM-funded website, Supplier-Connection.net, allows small businesses to apply to all participating companies using a single application form, making paperwork less burdensome. The site also helps small businesses collaborate to bid on contracts.
It is not the quantity but the quality of SMEs that will ultimately lead to job creation. The small-business sector is ripe for innovation and growth. Linking it to large corporations' supply chain can be a win-win for everyone involved. This includes SMEs and corporations -- and the governments looking to SMEs as a possible solution to their job-creation needs.
A version of this article originally appeared in The Gulf.