The landscape of skills in Wales is complicated. When looking at skills from the top down, in the context of the small to medium enterprise (SME) economy, the whole picture becomes ever more disparate, fragmented, and complex. The provision landscape is made up of different schools, colleges, and higher education (HE) institutions, as well as private sector skills providers for businesses. From their perspective it is difficult to dissect the widely varying needs of SMEs across different sectors, sizes and locations of businesses of Wales. It is clear, that providing a reactive and flexible system that also answers the needs of different stakeholders in this context is challenging.

Moreover, for both the business and skills sides of the equation, it is difficult to assess small business needs effectively. One of the enduring issues for SMEs is the relative lack of time and capacity, especially for micro businesses. Often, a single individual employer must oversee everything from market changes, stock and supply, to regulation, to understanding staff needs and everything in between. In this context, the HR capacity of SMEs is often limited. Even when there is expertise available to develop a skills strategy, identify their skills needs, and conduct a skills audit, the time to do so is limited. This also makes it difficult for central institutions to map out the territory of SME skills needs too. Our research suggests that building links across to develop understandings over time can help address this.

As a result, SMEs often encounter difficulties attaining relevant skills. FSB’s own research found that almost 80% of small firms struggled to recruit in the past 12 months.1 These challenges can arise from competition with larger companies and a system that often feels geared towards larger companies and public institutions. This report looks to contribute an analysis of the view from the firms themselves from the bottom-up. Serving to complement views from central institutions and skills experts, this can help provide a different view to bring into focus where policy interventions can be made to make a difference.

For SMEs experiencing growth, there are pinch points where growth changes their needs, as well as their management and HR challenges. Scaling up is not just a matter of financial resource, although that is a crucial component. It also entails addressing their specific skills needs, including those of the business owners themselves.

When factoring in the necessity to anticipate future skill requirements for harnessing new economic opportunities during the transition to a net-zero economy and ensuring that Welsh businesses and their workforce can adapt and flourish in the future, the complexity of the situation deepens further.

There is a mutual dependency as businesses need new skills and a resource to tap into for their development and the pursuit of future opportunities. Similarly, without the development and growth of those businesses, the jobs and opportunities for any newly skilled labour force will be lacking.

There is a real frustration here, felt by all. In this context, while some may suggest a “lack of work ethic” among young people, what is often observed instead is the presenting response to a highly complex situation. Small firms need to be aware that expecting all individuals to come from an education and skills system ‘fully baked’ to the workplace is unrealistic. However, the skills and business support system must also recognise its responsibility to the broader business community. It should aim to provide a well-rounded and practical education while actively working to develop the local skills pipeline in collaboration with small firms in the area. Particularly in more rural or deprived areas, where the skill pool is often smaller, and the economy is more dependent on smaller businesses than large companies.

In this context, the key anchors for SMEs locally are often not large companies, but public institutions, including further education (FE) colleges and higher education (HE) universities. These anchors were vital to many of the businesses we interviewed.

On the other hand, all this points to opportunities waiting to be explored, and a will to bring growth from firms themselves, if they are provided with the tools and support to do so. There are untapped resources and better ways can be found to signpost SMEs to the skills they need, along with support, to help them identify their own skills opportunities. At the same time in a Welsh economy where 99.3% of businesses are small businesses, and provide 63% of private sector employment2, the part of the economy that has the most potential to grow is the small business economy.

Almost all our interviewees were looking to grow their business. These varied from a minority with vague aspirations in this regard, to others with clear plans to pursue. Of these some had concrete examples of where the access to skills, capacity, and capability had already forced them to hold off on growth, innovation, and/or capital acquisition.

As such we can point to clear experiences of opportunity costs – of roads that firms have not been able to travel toward growth – due to them being unable to access the skills necessary to facilitate that growth. Similarly, CIPD research has highlighted that many small firms also have challenges making the most of their workforce skills and/or retaining the skills of their existing staff because of a lack of knowledge on HR and people management issues.

When we think of all these opportunity costs across the wider SME economy, it is clear that significant growth is being lost at a time when there is a need not only for an approach to economic growth but enabling the structures which allow for this. Interviewees’ experiences are of being unable to access skilled staff needed for jobs necessary for their firm to grow. There are latent opportunities for growth that can be encouraged, developed, and harnessed to grow the Welsh economy from its foundation of embedded small business. As OECD analysis suggests, bringing Wales closer to best practice on establishing these links could lead to a significant boost in growth and productivity.3

A strong emphasis on cultivating the SME skills-based economy, often described by economists as a ‘capacity and capabilities approach,’ holds promise for alleviating Wales’s longstanding economic development challenges. By nurturing human capital, we can establish a systemic strategy that seeks to create a mutually reinforcing agenda for both skills development and skills-driven growth among SMEs in Wales.

Firms cannot do this by themselves. This calls for effective institutional guidance and steering.

Small businesses would welcome a role in such a project, indeed, FSB’s own research from 2019 found that one third (33%) of small businesses engaged with schools and/or colleges. But this figure had nearly halved to 17 per cent in 2022. Our research suggests this downward trend is the opposite of SME desires, which actually trends towards wanting an increase in encounters with educational institutions.4 Therefore, it requires a nimble architecture that is easier to access, alongside a long-term commitment from all governments to take on the challenge and mission to economic development in Wales over the long term. Such an approach would require governmental and institutional support that is mutually beneficial for individuals, firms, and public institutions, as well as the places, communities, and economies that are embedded across Wales. A firmer foundation for economic growth takes time, and there is no silver bullet, but a process of hard work dedicated to the long-term economic development across small businesses is a vital part of the answer.

The newly formed Commission for Tertiary Education and Research (CTER) provides opportunities for reassessing ways of working and bringing in best practice, as well as providing a central point for engagement and trusted and independent evidence.

This report begins with a brief overview of the skills environment in Wales, before looking at the empirical evidence and interview findings on economic context and then skills challenges. We then look at how firms themselves respond to their skills challenges and adapt to gaps in provision in innovative and effective ways, but necessarily fragmented and limited in some respects, before looking at how firms have engaged with business and skills support. This all leads to FSB and CIPD’s recommendations and approach to an SME skills-led economy model for sustainable growth. This approach advocates for a whole government approach with concrete recommendations to fulfil this aspiration, based on real, known gaps, to develop an SME Skills-Led Economy for Wales.

This project is a partnership between two of Wales’s leading industry bodies representing smaller businesses across Wales and the professional advisory community among HR and development professionals, so vital for guiding and informing the decisions of those businesses. It is borne out of an understanding that growing skills supply, capability, and development across our smaller businesses is key to returning sustainable growth for the Welsh economy and wellbeing for those within it.


Small businesses in Wales are currently grappling with accessing sufficiently skilled staff while they also confront the challenge of a growing perceived mismatch between the skills in the education system and those that business needs.

This structural dilemma arises from a combination of factors, including a lack of foresight in anticipating skill requirements and a failure to adequately adapt vocational education and training to address the evolving needs of the labour market.

This requires a more robust alliance between the spheres of education and training, and the stakeholders within the labour market, with a particular emphasis on SMEs. This collaborative effort is essential for enhancing the alignment of skills with the rapidly changing demands of the labour market.

At Welsh Government level, there is a need to ensure a collaborative cross-departmental approach that aligns skills and economic needs and ensures an agenda that addresses the needs of all stakeholders. A Skills led mission that gives Welsh Government a priority through a taskforce for skills-led SME approach, taking in senior officials and policy development across Economy and Skills and Education to ensure a joined-up approach geared toward long term economic development.

There is also a need for a more interconnected policy response at a local level, the importance of which particularly relevant in the case of SMEs, which are much more likely to serve local markets and are required to draw from a local supply of skills. For instance, the OECD has long advocated for a local ecosystem approach5 to address issues related to growth, jobs and skills. This is because addressing these issues requires action across a range of inter-connected policy areas – including business support, innovation, skills, economic development, and industrial strategy.

Building core people-management capability and improving firms ‘absorptive capacity’ is a necessary first step to business improvement given that many SMEs either lack a dedicated HR function or are time and resource poor and therefore lack in depth knowledge of the skills gaps and people management challenges and how to address them effectively.

From this general strategic framework, the economic mission on skills follows. Focusing on growing the SME economy in Wales and refreshing the ‘missing middle’ agenda we can build the key policy interventions for a better Skills-Led Economy in Wales geared for SME growth, building the capacity and capabilities of our firms while also building our citizens to have new skills opportunities, equipping them for future transition in the economy.



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