The majority of SMEs in the UK (94%) struggled to find workers with the right skills over the past 12 months, according to a new report commissioned by The Open University.

The Open University Business Barometer [1], which monitors the skills landscape of the UK, reveals that three in five senior business leaders surveyed (61%) report the skills shortage has worsened over the past year. SMEs are being forced to pay a high price to ensure their organisations have the skills required to meet their business goals.The skills shortfall is now costing SMEs an extra £5.5 billion a year in recruitment fees, inflated salaries, temporary staff and training for workers hired at a lower level than intended. That’s 87% of the £6.3 billion total for the UK.

With skills in short supply, many of the SME leaders surveyed (69%) find that the recruitment process is taking longer - by an average of one month and 22 days. As a result, nearly two in three (64%) report spending more on recruitment, with costs increasing by 50 per cent: £1.1 billion in total. 

While the process is taking longer, when identified, talented workers with in-demand skillsets are able to take advantage of their strong position, driving employers to spend an additional £1.9 billion on salaries. Two thirds (56%) were obliged to increase the salary on offer last year, typically on four occasions, by an average £3,150 each time.

Half of SME leaders (52%) think their organisation is at a disadvantage because they cannot afford to increase the salary available for roles by as much as larger organisations, who can out-bid smaller employers, spending an average of £9,990 each time. In addition, three in five (62%) believe that losing highly skilled candidates significantly affects their organisation's growth potential.

Seven in 10 SME leaders (69%) believe large employers are using their higher resources to monopolise the best talent, leaving many priced out of the labour market. Many small and medium organisations have been forced to give up on finding appropriate talent altogether, choosing to hire at a lower level than intended (63%), then spending £1.3 billion to bring workers up to the level required. 

While SMEs spent £1.3 billion on temporary staff to fill vacant roles, half (49%) admit they have to cover these gaps themselves as they can’t afford the expense. Many are over-extending their workforces as a result, which can lead to exhaustion, low morale and poor motivation. Even though the vast majority (67%) know that spreading the workforce too thinly makes organisations less productive, many simply cannot afford the alternative.

More than half of senior business leaders within SMEs (53%) expect the situation to deteriorate over the next 12 months. And more than two in five (44%) expect their organisation to struggle financially in the next year, indicating that the issue needs to be urgently addressed. 

Heightening the focus on work-based training - through the apprenticeship levy and other initiatives - could help to increase the skills available across the labour market, reducing competition for highly skilled workers. While some SMEs do pay the apprenticeship levy and have access to their National Apprenticeship Service accounts, funding is also available for non-levy payers. While there have been some teething issues with the introduction of the levy, the majority of SMEs still recognise the benefits it brings. More than three in five (61%) agree that the levy will help to reduce the skills shortage in the next five years.

David Willett, Corporate Director at The Open University, says: "With SMEs spending more than £5.5 billion a year on the skills shortage, it is clear that we need a more sustainable approach. Highly skilled workers are essential for growth and productivity but they are being snapped up by larger competitors, leaving SMEs at a disadvantage. It is important that these smaller organisations are not left on the back foot

"Building skills through work-based training rather than buying them can reduce spending on short-term fixes, and level the playing field with larger organisations in the long-term, but it requires commitment. Investing in training will allow you to strengthen your organisation from within, resulting in a more motivated and productive workforce that will be fully equipped to drive future growth."

The full report  is available at www.openuniversity.co.uk/enterprise [2]