By Colin Bell, Head of Business Growth and Support at the North East Combined Authority

The relationship between innovation as a driver for business growth and productivity is long established.

PwC found that the most innovative firms predict 41.5% higher growth than the least innovative firms (over a five-year period) and the Enterprise Research Centre identified that 51% of labour productivity growth is driven by innovation – some compelling stats!

Business growth, productivity improvement and innovation are not mutually exclusive – you can’t sustain one without sustaining the other. Creating innovation driven businesses therefore need to be at the beating heart of the pursuit of business growth, productivity improvement and more and better jobs.

Analysis of the productivity performance of 1,723 businesses who have recently been supported through the North East Growth Hub demonstrates that high range performers achieved a turnover per employee of between £75.1k and £228k, whereas the low range achieved between £8.5k and 25.5K (the Lower quartile between £25.51k and £45k and upper quartile £45.1k to £75k).

Although a turnover per employee can be seen as a relatively crude metric, it does however provide quick insight into how a business competes and the type of business model they operate.

Let’s take the example of two marketing agencies. On the surface they look pretty similar, they both have the foosball table in reception, trendy background music, funky layout…….you get what I mean. What they deliver to their customers could also look - on the surface - very similar, as could their turnover and number of employees. These similarities can however be deceiving as their results in terms of profitability and scalability can be very different.

Agency A has a turnover per employee of £40k (lower quartile) – they are therefore likely to operate a traditional model based on selling day rates with the aim of selling as much employee time to clients as possible. Ultimately this is a difficult model to operate, everyone is working hard, because revenue is based on selling people’s time, processes are labour intensive, resulting in tight profit margins, the overservicing of clients and attracting (and paying the price tag for) talent is an increasing problem.

Agency B have a turnover per employee of £150k, they have similar clients who demand similar services, they have however developed their own data driven software platform that their clients subscribe to and which automates marketing activities. This combination of automation, repeat and predictable income and intellectual property creation combines to drive demand, efficiency, results, and the cash that can be used to fuel growth and development.  

Agency A is labour intensive, whereas Agency B is knowledge intensive.  Agency A operates a traditional business model whereas Agency B operates an innovative business model. The overarching difference is that Agency B is more innovative than Agency A and it’s their level of innovation that’s driving performance. 

Perhaps an extreme example but hopefully it helps to illustrate the point!

What’s striking is that on the surface these two businesses look similar. What’s important therefore isn’t what can be seen on the surface, but what lays beneath the surface. Those things that are less obvious such as the operational systems, how the business is structured, the developmental projects and new products and services that people are working on in the background, the markets and types of clients the business works with, and the collaborations and partnerships that are formed – it’s not what they do but it’s the way that they do it that matters! 

The North East Growth Hub exists to support businesses to innovate, grow and improve. There is a wealth of support and funding on offer so why not get in touch with one of our experienced team to discover how we can help. Book an appointment with one of our Business Support Advisers today.