Report shows how small businesses can improve productivity through digitalisation

New data from a Xero Small Business Insights (XSBI) report shows New Zealand small business labour productivity remains below pre-pandemic levels, putting additional pressure on small businesses.

The report, Small business productivity: Trends, implications and strategies, is based on anonymised and aggregated data from more than 240,000 Xero small business customers and looks at small business labour productivity across New Zealand, Australia and the United Kingdom (UK).

Productivity in New Zealand small businesses (adjusted for inflation) was generally between $100/hour and $110/hour in the three year period prior to the pandemic. The first lockdown business closures and disruptions saw it plunge as low as $59.20/hour in April 2020.

As pandemic disruptions eased, small business productivity in New Zealand began to rebuild, reaching its most recent peak in November 2022 at $122.60/hour. However, New Zealand small business labour productivity fell again in 2023, falling to $99.30/hour in December 2023, the lower end of the pre-pandemic productivity range.

Xero Country Manager, Bridget Snelling, says the decline in productivity over the past 12 months has likely added pressure to the bottom lines of small businesses, making it harder to lift wages for staff and keep prices low for customers.

“Small businesses have been doing it tough post-COVID, working long hours with less to show for it in an inflationary environment. As a nation, we need to be working smarter, because working longer days is no-one’s ideal solution. Improved productivity will not only help small businesses lift profits, empowering them to pay higher wages and lower their prices, but it will also strengthen the broader economy.

“One action small businesses can take to improve productivity is to digitalise. Insights developed by the New Zealand Institute of Economic Research show us that a 20 percent increase in the number of businesses adopting cloud-based business tools in the future could add up to $7.8 billion to Aotearoa’s annual GDP through improved productivity.

“This signals that digitalisation is part of the solution to our productivity woes, and holds the potential to unlock benefits for small businesses. Our government needs to be doing everything it can to support the digitalisation of our small business economy and turn this country into a world-leading digital nation.”

A previous Xero study from 2021 revealed small businesses that readily adopt new technology saw on average 120 percent higher revenue. They also reported 106 percent higher productivity than those small businesses that repeatedly fail to do so.

Small vs larger business productivity comparisons

These 2021 findings are further supported by this latest report and insights, which highlights the benefits of small businesses adopting digital tools. Small business productivity growth, as measured by the XSBI data, tends to be equal to or higher than national level productivity growth for all three regions.

This is unexpected as, generally, small business productivity performance is lower than national productivity growth. A likely reason for this difference is that the small businesses in the XSBI data set are all Xero customers and therefore using digital technology, which is known to improve productivity.

“This report shows that there is an incredible opportunity here to improve productivity through digitalisation. If we want to ensure New Zealand is highly competitive on the world stage, our small businesses need to digitalise.”

International comparisons

For the majority of the time covered by the data (January 2017 to December 2023), New Zealand small businesses have had the highest productivity of the three countries, followed by Australia then the UK.

This finding contrasts the latest OECD’s national level productivity report, which ranks Australia ahead, followed by the UK and then New Zealand. The different rankings are likely due to differences in methodology, with the XSBI series measuring productivity for small business wage-earners only and the OECD measuring productivity for all employed.

“The report findings show the benefits of small businesses using digital tools – quite simply, digitalisation of our economy could be a ‘silver bullet’ to help grow New Zealand’s productivity,” says Snelling.