Digital challenges continue to plague SMEs

• Most SMEs have a poor environment of technology adoption and a major lack of connectivity
• In order to be able to capitalise on digital, SMEs need to have a different mindset

ACCORDING to global research firm IDC, by 2021, at least 50% of global gross domestic product (GDP) will be digitised, with growth in every industry driven by digitally enhanced offerings, operations and relationships.

IDC also believes that by 2020, investors will use platform, data value and customer engagement metrics as valuation factors for all enterprises.

“For Malaysia, we expect this figure to be at 20% by 2021 and for APAC [Asia Pacific] it is expected to be at 60%, higher than the global number due to the strong growth of the digital economies here,” IDC predicts from its Top 10 Digital Transformation prediction research worldwide, concerning the digitisation of GDP.

IDC Malaysia research director Pranabesh Nath highlighted the above during a recent media briefing on digital transformation among small-and-medium enterprises (SMEs), along with Sage vice president for Asia, Robin Chao.

Pranabesh feels that Malaysia can meet the 2021 number, as it is already at 18% according to the Malaysia Digital Economy Corporation.

He told Digital News Asia that organisations slow to digitise their offerings and operations (i.e., to adopt a digital-native operating model) over the next three years will find themselves competing for only a minority — and a progressively shrinking minority — of their market segments' opportunities. This is especially important to SMEs, he said.

Investors will demand digitalisation from companies

According to IDC research, another important source of pressure to accelerate digital transformation journeys will come from investors. “Investor perceptions of the future value of companies (and hence the current stock price) are rapidly changing, with a new emphasis on key indicators of digital success — examples abound today in every industry.”

Pranabesh pointed out that several key metrics relevant to digital transformation will have a growing impact on company valuations, namely:

• Platform participation: Measured by how well a company is drawing customers, channel partners, and developers to its offerings
• Data value and monetisation: New mechanisms for putting a value on data under the company's control and, perhaps more importantly, its ability to enrich that data with advanced analysis
• Customer engagement: Digital measures of customer engagement are proliferating and rising in importance (e.g., net promoter score).

“Although it is difficult to gauge with any precision, IDC estimates that 10-20% of valuations are already tied directly to digital efforts. However, there is a great disparity between traditional investors looking for return from established companies and those looking for growth from emerging digital companies like Tesla.

“Over time, this investor gap will wane, and by 2020, these digital measures will make up a large part of valuations for all enterprises,” IDC said.

SMEs’ digital journey is hampered by challenges

According to Pranabesh, for SMEs, most of them have a poor environment of technology adoption and a major lack of connectivity. “Having said that, in the last two to three years, the adoption of advanced technologies around some business functions are coming in at a much faster pace,” he said.

Why are SMEs digitally stuck? He said it is due to a lack of digital mindset, namely not understanding what going digital is about; poor commercialisation of innovative ideas and ineffective metrics to measure the digital transformation performance.

Chao of Sage meanwhile, pointed out that whether startups or enterprises, the challenges faced by Malaysian businesses include hiring, training and retaining talent; navigating a complex business environment and increasing productivity.

Pranabesh meanwhile, noted that disruption is happening and they [SMEs] need to think about what they should do and they need to have clear and specific goals.

“That is a big challenge because these goals need to be mapped to what they are doing right now, that is not a very clear line in these companies. There are many ways to go about it such as seeking out solutions vendors and using the best practices of these vendors, but it’s constantly a challenge as they don’t know what kind of KPIs to set up.”

IDC found through its research that the majority of SMEs are not ready. “In order to be able to capitalise on digital, they need to have a different mindset. That is a key challenge and a lot of SMEs have this problem, the smaller you are, the likelier you have this problem,” he added.

Chao believes that it’s not so much about funding. “They must understand current challenges, the KPIs in terms of the journey, what success means to them and more importantly, identifying the risks and financial implications if they don’t do anything.”

He added that he has asked SMEs if they knew the cost of not doing anything and they couldn’t answer. He then advised them to go back to the drawing board and then do a sanity check on their strategies.

The solution

How can the technology gaps be addressed? Pranabesh cited an example. “The first level of technology adoption is one or two applications of cloud adoption in sales, for example. As you get more experience and confidence, and put more money in, you see more complex use cases. If you want to do asset tracking, that’s more advanced than using Office 365.”

“Lots of companies still have very largely old and outdated Internet connections, they need faster connectivity to run applications like cloud. Sometimes this is not available but those cases are very rare, it’s not too difficult in urban centres. The reason they don’t want to spend on connectivity is because they don’t see the value of doing that. That aspect is the very key. They don’t understand the whole benefit of technology adoption.”

He also noted that in the last Budget, the government has a plan to improve broadband connectivity for consumers and SMEs. “You really need that kind of push from the government that says that this is the basic speed and the pricing that’s fair. This is the problem with the smaller SMEs, for the mid to large size it’s not really an issue. However, when you start to look at advanced connections, they need to look at upgrading the connectivity to support applications,” he said of SMEs.

Chao advised that SMEs need to be clear about their objectives before embarking on their technology adoption journey. “Then look at some of these technologies you want to adopt and some use case studies. For supply chain for example, do what is enough and get a feel of it, once you have experience and have innovated in certain areas, you will know what applications can take you to the next level. It all depends on your environment and business, there’s no one size fits all.”

He concluded by saying it is important for the private sector and government to work together to keep enforcing the importance of digitalisation.

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