Australia’s productivity growth has slowed, despite Australians reporting they are working longer hours. Counterintuitively, one solution to this problem is for business leaders to focus not on day-to-day operational activities, but instead to create more space – or ‘slack’ – to allow for business transformation.

What is “slack”? A report by the Committee for Economic Development of Australia (CEDA) found that slack and agility were key leadership attributes that could yield big economic dividends, especially in challenging times. The more these skills – part of a broader set known as dynamic capabilities – were present in leadership, the better the performance of a business, resulting in greater profits, higher productivity, improved customer satisfaction, superior employee outcomes and a greater capacity for innovation.

Out of the 149 businesses that CEDA analysed, it was particularly evident that in the first few months of the pandemic, businesses with strong dynamic capabilities were better equipped to adapt and succeed, with 54 per cent of top firms innovating by overhauling their management processes compared to 26 per cent of the weakest firms.

The findings of this research suggest that creating space for leadership to work outside of business as usual is key to honing the capabilities needed for a business to be resilient to economic headwinds. By helping SMEs to develop dynamic capabilities, we can contribute to the nation’s productivity, and create a stronger economy.

This can also be seen in data that compares medium-sized companies who have actively created slack for transformation and those who have not. Over the past five years, longitudinal data on 217 SMEs who graduated from the Growth Modules program of the Australian Centre for Business Growth (AUCBG) showed these companies added an average of $5.4 million in revenue and increased headcount by an average of 6.3 full-time employees. This contrasts strongly with data from the 38,755 medium-sized firms analysed by the ABS, which increased revenue by only $0.6 million and reduced headcount by an average of one full-time person.

This suggests SMEs must first find the “space” to transform if they are to unlock their productivity potential and weather economic turbulence. To ‘make space’ means to allocate time, resources and funds to build new capabilities and foster innovation before a crisis is in sight. It also means prioritising new initiatives based on the return on effort, their rate of return and the weight of their strategic importance.

While it’s true that companies that created room for learning and change demonstrated better productivity outcomes, for SMEs, who make up 98 per cent of the economy, this is especially tricky. They face a high cost-of-living environment, sticky inflation and continuing global shocks. At the same time, they may have limited resources and a lack of expertise.

To make a start, SMEs should consider investing in slack or space as an investment in innovation. Change can start simply by allocating as little as one hour per week for the team to discuss non-operational matters and future strategies, leading to significant improvements in capabilities and long-term success.

To transform, organisations also need a leadership team that’s primed to be curious, to look over the horizon, be able to listen and be open to feedback.

CEDA’s study into business dynamism also points to the critical importance of diversity, finding that diversity at the board level – such as gender, international experience and STEM experience – correlate with better capabilities and outcomes. Research shows 81 per cent of top-performing companies with a board had at least one female director, at least one with STEM experience and at least one with international experience, compared with just 26 per cent of the weakest firms.

Diversity of opinions can come in the form of mentorship. Many SMEs in particular are afraid of deploying external expertise, whether its outsourcing or getting a set of advisors. However, when they go hand-in-hand, it increases the dynamic capabilities of businesses by both freeing up ‘time for slack’ and allowing for eclectic schools of thought.

If SMEs, which are the largest sector of the economy, can lift their eyes, devote resources to growth and harness diversity to unlock new opportunities, Australia may just find the productivity growth it needs to navigate a changing economic landscape.

By Melissa Wilson, Senior Economist (SA) at the Committee for Economic Development of Australia (CEDA)

This article was first published by Inside Small Business