Lessons from Around the World for Accelerating SME Digital Transformation
Back in 2016, the World Bank’s seminal research report on the state-of-play of global digital transformation uncovered a worrying trend. Large firms in the developing world were far more productive per employee than small and medium-sized firms (SMEs). And the gap looked to be widening over time. It looked like much lower levels of digital adoption among SMEs could be a major cause of this. Frontier, digitally savvy large firms were capturing almost all of the dividends from digital transformation.
More recently, the International Monetary Fund established similar evidence for the Europe region. The authors of the research find that smaller firms experienced a larger decline in post Great Financial Crisis total factor productivity growth compared to their larger counterparts, regardless of economic sector. Moreover, the impact was progressively larger for medium, small, and micro firms relative to large firms.
Why is this important? If you have a job in most of the world, it is most likely that you work for a small or medium-sized enterprise (SME). Although definitions vary across countries, an SME is often characterised as those businesses with less than 250 employees for a medium-sized enterprise (small less than 50; micro less than 10). According to the United Nations (UN), formal and informal SMEs make up over 90% of companies worldwide, accounting for 70% of total employment and up to 50% of global GDP. Additionally, United Nations analysts suggest that with their innate flexibility and knowledge of local markets, SMEs can be uniquely well placed to solve market-specific challenges or meet emerging needs on the ground. Much of the value-add to the economy and society is also captured and retained domestically by SMEs.
Closing this productivity divide between large and other firms therefore holds a key to permanently boosting wider economic growth, prosperity, and reducing income inequalities globally. One of the best and most often cited ways to boost the overall labour productivity potential in SMEs could be through digital transformation. The Organisation for Economic Cooperation and Development (OECD) has been especially active in this area, in terms of identifying problems and measuring digital adoption by firm size. Recent research from the OECD shows SMEs to be trailing large firms consistently in many areas of digital adoption and application.
Digitalisation can be a game changer for SMEs, introducing smart contracts and automating many back-office functions. It can for example, reduce late payments and improve business cash flow. Going online and trading across borders can also allow SMEs to reach a similar number of customers as larger rivals.
Additionally, the COVID-19 pandemic has only accentuated the need to go digital for many small businesses – to foster resilience or even to continue trading and survive. SMEs that have digitalised are more likely to have found new business opportunities during the pandemic, double the rate of the least digitalised according to Vodafone. Other reports have shown how digitalisation has built long term business resilience, increasing EBIT by 12-20% in the first year, and increasing speed to market by 40-50% on average.
For small and micro enterprises, it is often the opportunity cost which is most important in operations when employee time is limited. The less time a small business owner spends on back office administration and processes, the more time owners and employees have for value creation and product development, sales, and marketing activities. Automating administrative processes can often be the first win-win for micro and small enterprises from adopting basic digital solutions such as business accounting and process software. In manufacturing, data obtained from going digital can be used to redesign processes, improve safety, worker productivity and reduce waste and energy consumption.
But SMEs that time-constrained and bereft of investment capital need extra help with digital transformation. Making the first step can be the most difficult. The need for government support to SMEs is clear here. Several pioneering nations have been doing just that through acceleration programmes and targeted initiatives. We at Huawei, in collaboration with Arthur D. Little, have scrutinised these to find the most impactful and cost-effective activities.
A summary of global best practices
E-government should leverage its unique role as user, regulator, and investor to accelerate digitalization in industry and society, often to the benefit of SMEs. Denmark has been driving digital transformation of its public services to making cashless payments the default process and mandating all citizens to access public services online. A nationwide government digital ID (NemID) is in place and Denmark was the first European country to implement COVID-19 vaccination passports.
A webstore front is not enough – SMEs need bundled support (e-payments, security, e-marketing, etc.) to successfully transform. Start Digital is an initiative launched by IMDA and Enterprise Singapore that provides foundational digital packs to help businesses at reduced costs through natural touchpoints (banks and telcos). SMEs select two solutions from six categories on a minimum 18-month contract. The packs get businesses online to start their digital journey.
Grants are preferable to improve SME digital affordability. The Hong Kong government operates a technology voucher scheme for SMEs to upgrade or purchase new ICT equipment and online digital solutions that are proven to boost productivity. The grant supplied is on a 3:1 matched basis.
One-stop centres provide a single touchpoint for SMEs with a multitude of services. The Acelera PYME programme in Spain is dedicated to providing a one-stop shop for digital support to SMEs and includes digital solutions, digital tools, financial information plus tailored advice.
Digital Centres of Excellence (CoE). Germany has established 26 integrated digital centers of excellence (Mittelstand 4.0 Competence Centers) as points of contact for all digital matters, ranging from digital solutions, cybersecurity, and business models to the testing of new technologies. They provide key tools and resources in driving micro and small enterprises towards Industry 4.0 capabilities.
Digital skills and vocational training is required for effective SME digital implementation. Singapore’s skills agency (under the Ministry of Education integrated within the SMEs Go Digital Programme) provides training, workshops, and skills development for SMEs to make the most of digital technologies.
Provide roadmaps/detailed guidance for SMEs to follow. In Germany, Mittelstand 4.0 Competence Centres provide close supervision and support to ensure enterprises can pragmatically achieve their vision, building on the industry expertise of consultants and centre staff. Blueprints are established, specifically for SMEs in manufacturing industries.
Provide tools to find and access support more easily. In Hong Kong, fund matching kiosks are provided for SMEs to enter simple information about their business to then search eligibility criteria among all government funding schemes with follow-up information on how to apply.
The digital decade is upon us. Implementing similar support programmes and initiatives should re-pay themselves many times over for governments around the world in helping SMEs – the bedrock of employment – close the productivity gap, foster financial resilience and accelerate economic growth.
- Huawei Enterprise Digital Services [Huawei services for helping organizations with digital transformation]
- How Horizon Europe Will Benefit SMEs [Article]
Disclaimer: Any views and/or opinions expressed in this post by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Huawei Technologies.
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