Mid-market key to solving Australia's productivity puzzle

With Australia’s productivity growth at its lowest in 60 years, it’s the mid-market services sector that will drive improvements.

It is Australia’s 60,000 mid-market businesses who can – and must - drive the nation’s services sector growth and productivity.

The Productivity Inquiry’s public hearings were two weeks ago, ahead of a February 2023 final report to Government.

The Inquiry’s interim report highlighted that Australia’s services sector (employing almost 90 percent of workers and accounting for 80 percent of economic activity) is comparatively less productive than our goods sector, and lags on the global stage. The 2021 Intergenerational Report clearly placed the impetus for future income and living standard improvements on productivity growth.

With the world emerging from COVID-19, ABS data shows in 2021-22 it was the mid-sized businesses (with 20-199 employees) enjoying the highest rate of growth: at 5.9 percent, outpacing large businesses (3.8 percent) and almost double the growth rate of businesses employing fewer than 20 staff.??

Australia now has approximately 13 times the number of mid-sized businesses than large businesses. It is this dynamic mid-market services sector that will bear most of the responsibility for lifting Australia’s services productivity.

This is the flourishing market our fast-growing professional services firm serves, with our own growth reflecting this mid-market trend. RSM Australia revenue has grown 54 percent in the past five years and in this our centenary year our staff numbers have reached 1620, up from 1000 five years ago.

Solving service sector productivity problems is a very people-intensive business. We are growing along with other businesses who are helping the mid-market sector with their own growth issues. So, we see on a daily basis what sort of innovative action it takes for the mid-market service sector to increase productivity.

The recent Federal Budget referenced Australia’s flatlining productivity, with the Government operating on the assumption of a lower annual productivity growth (1.2 percent, from 1.5 percent).

In his Budget speech the Treasurer pronounced that his $7.5 billion package would boost productivity, but in reality there was little spend specifically around productivity.?This will have to be market-driven.

And this will require behavioral change in the mid-market when it comes to innovation – the latest ABS Innovation in Business statistics show that while 65 percent of mid-sized businesses reported introducing innovation, the mid-market cohort was most likely to abandon its innovation activity in the two years ending June 2021.

Businesses who confront head-on their major risk and/or regulatory challenges - from sustainability and climate change, to skyrocketing energy costs and frustrating labour shortages - will lead the way in driving growth.?This mid-market growth push is going to require increasingly specialised skillsets to support business operations.

Initiatives in #cybersecurity along with moves to boost mid-market capabilities around the tech big three of AI, robotics and big data are set to play a key role in productivity growth. Here lies the capability to create structural changes that shift Australia’s productivity.

RSM globally is very focused on AI: one bot, RAMI, creates efficiencies around client information and lead generation, with a further two AI robots assisting with graduate recruitment and efficiency improvement.

Cybersecurity is an issue already being prioritised by our mid-market clients – nationally, we’ve seen a 30 percent increase in enquiries for these services over the past year, with a further rapid rise anticipated given business sector consternation over recent cybersecurity threats.?

The Productivity Commission is focusing on the four key enablers of services sector growth outlined above– innovation, digital technology and cyber-security, business environment and skilled workforce.?Their interim report cites the practical side to innovation, the process of changing the way a business operates. Already Australia has made up ground on its tech lag during the pandemic, with lockdowns driving organisations to implement major technology and workforce flexibility changes.

Services improvement could be anything from faster and more accurate health diagnostics to investing in totally new services, taking a lead from how transformational novel products have been. Software as a Service (SaaS), as an example, offers multiple paths to productivity improvement.

Professional services firms are leading the way here. Businesses are increasingly eager for #ESG audits, they are wanting to green their supply chains, ensure sustainability in everything from their procurement to their waste management and understand the new and emerging technologies that will drive the momentum for sustainability. The imperative to decarbonise the economy cited by the Inquiry’s interim report will require innovation and investment.

The report pointed out the importance of leveraging technology for productivity gains. Business services have become so technical and specialised and a large proportion of services sector growth will come from those who can support the mid-market with initiatives in cyber security and sustainability.

Mid-market firms must make a significant investment in talent, and we have been walking the talk on this, with our national graduate intake increasing from 90 in 2019 to 310 this year. ?

The services sector will continue to dominate in providing jobs and economic output for Australia, but we cannot understate the need to innovate in order to achieve the productivity growth of traditional sectors such as agriculture, mining and manufacturing.