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RTICs & SIC

The SIC note. Why the UK needs to overhaul its industrial classification system

It is a well known, but little talked about, problem that the way that businesses in the UK are classified is fundamentally broken. Economists know it, the government knows it, data providers know it but they’ve had no choice but to use a defunct tool to design policy, plan investment and make decisions that impact on the lives of 67 million people.

At The Data City we know that this represents an obstacle to coherent economic policy at both local and national scales; limits investment; reduces analytical capability; damages business credit ratings and creates a significant opportunity cost to the UK economy.

Our innovative approach to acquiring, analysing, and visualising company data gives our customers a huge advantage when they need to understand the economy.

It is especially important to fix this in a post-Brexit, Covid-19 recovery scenario.

What are SIC codes? A brief history

SIC Codes were first introduced into the UK in 1948 to classify businesses and other entities according to the type of economic activity they conducted. Changes in UK industry through the twentieth century lead to updates in 1958, 1968, 1980 (when more detail in manufacturing was added), 1992, 1997, 2003 and finally in 2007 (providing greater depth in IT and other professional services). They haven’t been updated since, meaning that there are no relevant codes for strategically important emerging sectors in the UK economy such as AI, cyber-security or advanced manufacturing.

Put short, they’re unreliable and potentially dangerous; issues that we are fixing through real-time industrial classification at The Data City.

The weakness in the UK’s industrial statistics was also recognised by Chancellor George Osbourne who commissioned an independent review of economic statistics in 2015. The Independent Review of UK Economic Statistics was published the following year. The lead author of that report was Sir Charles Bean, Professor of Economics at LSE and former Deputy Governor for Monetary Policy at the Bank of England. He expressed the fundamental flaw in SIC Codes, writing in The Independent Review of UK Statistics, 2016;

The changing structure of the economy means that SIC will constantly lag reality, under-representing newer industries and over-representing ones that are declining in importance.

There have been attempts to improve the codes (adding new categories and nuance) over the years, but none have resulted in a system that allows analysts and policy makers to define a sector and understand it in detail. This has created a chaotic classification system that offers little to no value in shaping the UK’s industrial strategy, guiding investment or helping businesses trade with one another.

There’s been no choice for analysts, policy makers and economists but to work with a broken set of tools. It is time for that to change.

The anatomy of a SIC system

There were 4,524,908 active companies in the UK as of December 2020. Companies can select up to four SIC codes with companies house, although the majority select just one as you can see in the chart shown here. Believing that they serve no purpose, companies generally select the ones that sound like the closest fit. The choice of SIC code is rarely a strategic decision and is often made by a company accountant without discussion with the wider business.

The 4,524,908 active companies have selected a total of 992 SIC codes between them. That’s 992 codes that are meant to capture the entire breadth, depth and diversity of the whole UK economy. The issues highlighted above can be seen in three emerging sectors that we’ve recently classified; energy management, residue management and A.I.

A nation of other-ers

Napoleon (or more accurately, Bertrand Barere de Vieuzac) described the UK as a nation of shopkeepers in 1794. Skip forward 226 years and SIC codes, equally derisively, describe us as a nation of other-ers in 2020.

Nearly a third of UK companies are classified under one of 74 SIC Codes that start with ‘other’. The most commonly used code in the UK is ‘82990 – Other business support service activities n.e.c’ (n.e.c stands for ‘not elsewhere classified’). This means that nearly one third of all UK companies have not found an SIC code that accurately reflects their business activities. It also means that nearly a third of UK companies can be hidden from analysis.

Perhaps more worryingly for analysts, list builders and policy makers, there are 158,191 companies active in the UK that do not have SIC Codes, many of them due to being founded prior to the introduction of SIC codes in 1948. Moreover, a company can be both ‘Active’ and be classified under SIC code 99999 (dormant company). There are 139686 active companies with an SIC code 99999.

Why does it matter?

From guiding industrial strategy to informing credit ratings, academic research, government support and b2b marketing, the flaws in SIC expose thousands of businesses to risks and opportunity costs.

National and regional policy makers use SIC codes to develop industrial strategy. In the absence of quality data, local authorities are either ‘making do’ or turning to consultants to develop a picture of local industry composition. The results of local industrial analysis are often confusing and inaccurate because there are no commonly agreed taxonomies of industry. Councillor James Lewis, Deputy Mayor for West Yorkshire said;

The provision of accurate data is fundamental to successful industrial strategy at both national and regional level, and yet the codes used are often imprecise and out of date. We support the use of the innovative technology at the Data City as a force for good, as we help emerging sectors and existing companies in the recovery from Covid-19

Jacobs and O’Neill published a paper about the dangers of using SIC as a data source in the European Business Review in 2003, “On the reliability (or otherwise) of SIC codes”. They wrote;

Researchers often make use of SIC (Standard Industrial Classification) codes when gathering and analysing data about the activities of companies. The use of these codes is, however, fraught with potential difficulties, errors easily creeping in and
consequently distorting results … despite efforts to standardise them (and thus to make them worthy of their name), they still present levels of inconsistency and unreliability both internally and comparatively.

Beyond the obvious problem this causes for serious economic analysis and industrial policy, SIC codes are also used in business credit score calculations. This means that the SIC systems is hampering hundreds of thousands of UK businesses’ credit ratings .

In addition, leaders in the events industry have called for a fundamental change in the system after being heavily affected by the Coronavirus pandemic in 2020. With only three codes for companies in that industry to use, and with many companies using different SIC codes as this article explains, the industry was unable to demonstrate its significant contribution to the UK economy. Martin Fullard, writing in Conference News 2020, explains;

Unless the SIC codes are revised (and I can tell you that the Business Visits and Events Partnership (BVEP) is already working on this), then we will never be recognised as the industry we know we truly are. The Government will not pay attention to us when we tell them the events industry as a whole is (or was) worth £70bn to the UK economy each year. They are only interested in what the audited accounts on Companies House tells them, and right now, we are telling them we don’t exist.

Despite the perils of doing so, business-to-business marketers often use SIC codes to create company lists. This is not only an inefficient use of marketing budget, but can also damage brand reputation when customer experience is ascending as a b2b marketing priority. As Jason Dilworth wrote for the Marketing Eye in 2020;

The biggest mistake that UK companies make when trying to target other UK companies is to rely heavily on SIC codes.

What do we do about it?

This situation is straight forward to fix if we can agree a new way of classifying industry in real-time.

We’ve spent six years building technology that creates accurate list of businesses by sector or region. Our real-time industrial classifications (RTICs) can replace the broken SIC code system and we are already working with a range of government bodies, growth catalysts, private companies and local authorities to build a better data infrastructure for UK industry.

Our data platform makes sector analysis better, faster, and cheaper. The platform, named the Data City Explorer, uses machine learning and artificial intelligence to find companies working within specific fields. Insights within the platform instantly highlight top-performing companies and sectors and create constantly updated print-quality graphics for presentations and reports. Detailed data downloads let advanced users work with Excel, PowerBI and more to join in their own data, extracts further insights, and create custom visualisations.

As previously stated, our innovative approach to acquiring, analysing, and visualising company data gives our customers a huge advantage when they need to understand the economy, we want to enable better decision making at all levels of UK government and industry.