Long Tail Versus Fat Middle

 Photo by  Victor Freitas  on  Unsplash

Now I'm no economist... (I should start everything I write with that disclaimer) ...

But this FT piece today got me thinking about the responsibilities of small business owners to the wider economy. Do they have any responsibilities? Or, is their one and only responsibility to their own business and their own success? It's this success that will drive the success of the wider economy, right? 

The article says: 

small companies do not always think in terms of productivity — they may be more focused on profitability, revenue growth or sheer survival. And while productivity may be the end goal for policymakers, maximising output per hour worked is not always the priority for business.

Productivity is a confusing term. It's often muddled with efficiency. Most small business owners I know and have worked with are extremely productive but not completely efficient. They're not perfect, but this is just the nature of running a small business today, where you have to think about so much more than your product or service.

Outsourcing can only go so far, and even though you might give, say, your accounts, payroll, legal, marketing and PR to outside agencies, a founder or business owner is still going to be distracted by tasks that don't conform with the core purpose of their business. That is SME and startup life. And if it's less than perfectly productive, then so be it. Blaming poor UK productivity on hard-working problem solvers and innovators misses two points.

Firstly, if you want to root out inefficiencies, start by looking at the fat middle, not at the long tail of British business. Take UK financial services. You'll find huge inefficiencies and lower-than-hoped-for productivity at the heart of our biggest banks and financial service institutions. Legacy IT systems are a great example of where behemoth organisations have swelled too quickly and are now too big for their own good. Consequently, the time and effort it would take to change means that most of these companies still rely on systems and protocols that are creating a huge drag on sales and revenue. And, because of the gargantuan size of these companies, it's creating a pronounced drag on national revenues. It's these companies that are inefficient and damaging the wider economy, if any. 

Secondly, the long tail in UK business may be inefficient. The article makes a good case. But what the long tail loses in inefficiency it more than makes up for in robustness and, crucially, antifragility. With rates rising and financial markets near the end of a decade-long bull run, it seems more than prudent for forecasters and regulators to begin to think about the possibility of the next downturn lurching into view. A highly uncorrelated, diversified business landscape will be far more resilient when the inevitable downturn comes than one that is highly correlated, crowding under the fat middle. Long tails mean higher company risk but a lower risk of correlation, and a lower the risk of correlation during a catastrophe, like in 2008, should protect both individual businesses and the wider economy. I'm sure we're all willing to pass up a fraction of productivity for that. 

In answer to my earlier question about SME and startup responsibility, in my inexpert opinion, I think they have only one, and that is to do all that they can to grow their business and plough their own individual furrow, whether that's feeding directly into national productivity or not. That's how we all win - and survive - over the long term, with great businesses doing great work on their own terms. In short, I think we'd all rather be part of an anti-fragile, less-productive economy than a fragile, highly efficient one. 

Edward Playfair