Keeping their mouths shut

Research from the Office of Fair Trading (OFT) shows while several small businesses have been adversely affected by anti-competitive practices, many are unprepared to complain to the authorities. Jeff Meyer examines why.

According to the OFT's study, a quarter of small businesses have been adversely affected by anti-competitive practice. A further third of small firms claim they know such activity goes on, but less than a fifth feel compelled to complain to authorities.

Professor David Storey, director of the Centre for SMEs at Warwick Business School, presented the findings this week at a round-table discussion between the OFT, the Department of Trade & Industry (DTI) and representatives from the small business community.

"I think this number is very high," Storey said, referring to the one in four small firms that have suffered from anti-competitive behaviour.

"Yet most [small businesses] respond by shrugging their shoulders or competing more aggressively."

He suggested many business owners are put off from filing a complaint with the OFT because doing so involves a long period of uncertainty with no guaranteed payoff. He stressed the need for a shorter process.

In the past, he said in his report, the government has responded to claims of anti-competitive practice by attempting to tailor policies to the needs of different types of small businesses.

There is no prototypical small business, however, and many of these policies have failed, he said. The various industries are too different, and their marketplaces are changing rapidly, said Barry Stephens, chief executive of the National Federation of Builders (NFB).

He claimed there are many practices employed by the construction firms that form his client base that, if legislated, would not apply to retailers, and vice versa.

Construction firms, for example, have no repeat clients while retailers vie for return customers, making for differences in the way the two industries compete. Construction contracts are typically one-off deals, and they are constantly competing.

Many smaller construction firms, however, are blocked from procuring contracts because they do not have the resources to put in a bid.

Government changes to building regulations also make it more difficult and called for a moratorium, Stephens said.

Apart from having any tailored policy, anti-competitiveness is simply hard to regulate, added John Fingleton, chief executive of the OFT, who chaired the discussion.

"Most people have a feeling they are being ripped off," he said, but it begins and ends with that. Many business owners either cannot substantiate their claims or choose to write it off as a loss. "People don’t want to be a hero for the sector but make money for themselves," Fingleton said.

Vincent Smith, director of competition enforcement at the OFT, said that pursuing claims of anti-competitiveness is very difficult for his agency because companies, when they do file a complaint, often either choose not to get involved, want to remain anonymous or cannot provide all of the information the authorities need to act.

The OFT, as a rule, he said, cannot pursue a claim under any of these circumstances. "Because of this, we disappoint a lot of people," Smith said.

He stressed that better communication is needed so that businesses know what is needed from them.

One of the problems his organisation often encounters is that firms complaining of anti-competitiveness simply are not competitive businesses.

Storey acceded to this point but said it’s difficult to pinpoint how many of the 25% in his survey that have experienced anti-competitiveness are poor competitors or justified victims.

"There's a nice circularity in this," he said. "A lot of companies are not competitive businesses, but we don't know which direction it goes. Has a company been pushed out or is another company more efficient and you blame yourself."

Storey admitted he does not know the reason, but he said business owners knew exactly what he meant when asked them about anti-competitive behaviour.

His survey questions clearly described and define the indicators of anti-competitive behaviour, such as price fixing and collusion, he said, before asking business owners if they have experienced such practices.

Nevertheless, the key issue is why less than a fifth of businesses feel compelled to formally complain if they feel their trade has been illegally threatened.

Storey's research found several stark differences between the firms he deems 'isolationists' - companies likely not to report anti-competitive offences - and those he calls 'retaliators' - businesses guaranteed to do so.

Isolationists tend to run micro firms, a business with fewer than 10 employees, in the construction, motor or manufacturing industries. The isolationist has low or no educational qualifications and recognises that his or her firm is less competitive.

In contrast, retaliators run younger, larger businesses and are typically women. Storey said that both isolationists and retaliators, however, are often unaware of their legal rights and are suspicious of anything government does, which also harms the process.

This is why many businesses, retaliator and isolationist alike, choose to either ignore anti-competitive behaviour or respond with more aggressive strategies of their own.

Storey said it is crucial for small firms to become more aware of the legal environment, even if it is to be sure that they are not unknowingly breaking the law, themselves.

"It's easy to take a social view of how businesses should respond, but for a small business it's a private view," said Tom Dibaja, external affairs manager for the Federation of Master Builders (FMB).

A small business is its owner's way of life, and his or her main interest is the survival of that business, he said.

"People who complain drive change, and it's about enabling them," said Fingleton.

While government and business traded views on just how to enable firms to complain, Storey said it just takes one big name to go down before others will step out of the shadows and complain.

"If I were in the OFT, I'd be thinking, 'Can I get some big hits?' that will lead to a deluge of change" he said.

"If you can say where the big hits will come about, that will change the environment more than getting them to come in on a one-by-one basis."

© Crimson Business Ltd 2005