The digital transformation story is often portrayed as a battle between tiny start-ups and the giant corporations they threaten to disrupt. However, there are millions of companies in between for which the opportunities presented by digital technology—and the threat of digital disruption—are just as compelling.
An SAP-sponsored survey of senior executives by The Economist Intelligence Unit (EIU), which included 201 respondents from organisations with US$250m-500m in annual revenue, shows that digital transformation is a high priority for these small and mediumsized businesses (SMBs).
According to the survey, in the past three years SMBs have been more focused on customer-facing digital initiatives, with social media their most common area of investment. In recent times, improving their products and the way they use data and information have been their top priorities.
Digital initiatives at SMBs are less likely to be led by the IT department than by individual departments with support from IT. However, both IT and non-IT executives are less satisfed with their IT department’s contribution to digital transformation than those in larger companies. In particular, they would like to see their IT department take on a greater role and increase the speed of digital adoption by supporting organisational agility and selecting and implementing digital technologies.
In order for the IT department’s experience and expertise to be put to the best possible use, the organisation as a whole must evolve, not just the IT function. Our survey results suggest that IT executives should initiate a conversation with other senior executives around their transformation strategy and use this as an opportunity to establish a model of cross-functional collaboration that the rest of the organisation can follow.
Digital Transformation at SMBs
Just under one-quarter of respondents from organisations in the US$250m-500m revenue bracket (22%) describe digital transformation as their highest strategic priority. A further 42% say it is a relatively high strategic priority (see chart 1).
The objectives these smaller companies are trying to achieve through digital transformation are similar to those of larger organisations. When asked to identify the primary aims of their digital transformation initiatives, the most common responses from SMB respondents are “improving the way our organisation uses data and information” (42%) and “improving our products and services using digital technology” (41%).
However, respondents from smaller organisations are more likely to identify “transforming our operating model” (35%) as a primary objective than those in larger companies (29%). This is a positive sign: the International Data Corporation (IDC), an American market research company, contends that only by transforming their underlying operating model—including processes, decision-making and organisational structure—will organisations be able to compete in the digital economy. “To compete in … intelligent markets, it is essential that an organisation’s operating models are transformed.”
Certainly, many small and medium-sized organisations see digital technology as an opportunity to transform their business. Vectus is an Indian manufacturer of pipes and water tanks, which currently relies primarily on retailers and distributors for its sales. The company plans to transform its operating model with new direct links to customers by building an online network of local plumbers. It plans to work with the government to certify plumbers around the country, familiarising them with its products and creating a mobile service that allows businesses or homeowners to find a local, certified plumber when needed. “We can use this to open a new channel to the end customer,” explains Vectus’s head of IT, Manish Sinha.
Progress to Date
To date, SMBs have focused their digital initiatives on the customer: 64% say their organisation has launched new customer-facing digital channels in the last three years, which is 9% more than respondents from companies in the higher revenue brackets, and 63% say they have launched new products or services made possible by digital technology—again, 5% more than other respondents.
This customer focus is refl ected in the digital technology investments that SMBs have made in recent years. The most common technology investment among small and medium-sized companies in the past year has been in social media, as identif ed by 73% of respondents in the SMB category, compared with 66% of other companies.
One company for which social media are a crucial component of digital transformation is Skullcandy, the US-based headphone manufacturer. The company uses social media channels to promote specif c products, including customised headphones designed by celebrities, and to position itself as a lifestyle brand with content from its online magazine Stayloud. Social media are a rich source of customer feedback for Skullcandy, and the IT department is helping the customer service function to make better use of it. “If you look at any of our social media outlets that we have today, you see the occasional rant, the occasional question, the occasional problem such as a new owner asking how to set up a gaming headset,” explains Skullcandy’s head of IT, Mark Hopkins. “
A lot of those things go unnoticed as we’re not actively searching for those kinds of things right now.” They are currently working on tools to automatically search for such messages using keywords and channel them to the customer support department. “That’s one area where we’re really expecting to change this year,” Mr Hopkins explains.
Another area of focus for SMBs is mobile commerce, with 70% reporting that their organisation has invested in mobile technology. Although this is good progress, the response from companies with US$500m+ in revenue is actually 82%. M-commerce is the fastest-growing segment of the online retail sector, and in many emerging markets mobile is already the principal platform for digital business. SMBs which are not yet taking advantage of mobile technology should consider doing so.
The Role of IT
A challenging issue for companies of all sizes is the level of satisfaction with the effectiveness of their organisation’s digital initiatives. According to the survey, satisfaction is lowest among SMBs, with only 17% of respondents saying that their company’s initiatives are “highly effective”, compared with 27% of respondents in the higher revenue brackets (see chart 2).
One explanation for this relative lack of effectiveness is an absence of strategic oversight guiding digital projects. Just 7% of SMB executives report that their employer has an organisation-wide digital transformation strategy, compared with 28% of those from larger companies. As demonstrated in the EIU’s Digitising IT report, executives at companies with a digital strategy are much more likely to describe their digital initiatives as effective.
This is counterbalanced by the fact that the CEOs of smaller business are more likely to take direct ownership of digital initiatives: 27% of respondents from SMBs say they are owned by the CEO, compared with 18% of respondents from larger firms. According to George Westerman, principal research scientist with the MIT Sloan Initiative on the Digital Economy, senior ownership is vital for digital transformation to be successful. “Driving transformation requires someone to lead it. For all the talk of ‘bottom-up innovation’, the companies I call ‘digital masters’ take a top-down approach, without exception.”
As in larger organisations, there is a considerable degree of variance in the way SMBs implement their digital initiatives. The most common approach is for digital initiatives to be led by individual departments with support from the IT department (32%); the second most common tactic is for them to be led by the IT department (23%). The fact that IT is not necessarily the leader of digital transformation is not a bad thing, as long as it is participating effectively. As Mr Westerman puts it: “While IT doesn’t always lead digital, it’s always part of the conversation in any company driving digital transformation successfully.”
However, IT departments at SMBs could do more to engage in that conversation. For one thing, only 40% of SMB executives are happy with the contribution of their IT department, compared with 45% of executives at companies with an annual revenue between US$500m and US$1bn and 52% of executives at companies with an annual revenue of US$1bn or more (see chart 3).
This level of satisfaction is consistent among both IT and non-IT executives from SMBs. Evidently, IT leaders at smaller f rms recognise that their departments could be doing more to support digital transformation. But what should they be doing, and how?
IT’s ideal contribution
When asked to identify which capabilities are of the greatest importance to the success of their digital initiatives, the most frequent response among respondents from smaller firms is “improving our organisational agility”. This is a common theme among companies of all sizes: the pace of digital innovation requires companies to operate with greater speed and flexibility.
Nearly four out of ten SMB executives surveyed (39%) believe that the IT department should play a leadership role in improving organisational agility. This view is slightly more common among IT than non-IT executives (42% versus 37%). However, just 9% of SMB respondents report that their IT function takes the lead in this regard.
Similarly, 40% believe their IT department should take the leadership role in selecting, implementing and integrating digital technology—but only 14% report that it does. And 29% think their IT departments should be leading the hunt for opportunities to innovate, but just 3% say that it does.
Despite these discrepancies, IT departments at SMBs are beginning to adapt to the digital era: 85% of respondents say their IT function has changed how it works in the last three years in order to support digital initiatives (see chart 4). Fewer SMB respondents say that IT has changed “completely” or “significantly” in that time (37%) than respondents from larger organisations (49%). And their limited adoption of new methodologies, such as Agile development (16%) and DevOps (17%), suggests that this adaptation is not happening as quickly as it should.
When asked to identify what measures they think would help the IT department fulf l its ideal role, 44% of respondents identify “devising and implementing a digital transformation strategy”—the
most common answer. This is something in which IT must participate, but which should arguably be driven from the top.
The next most important measure is “improving collaboration between IT and other departments”, chosen by 39% of respondents. Digital development requires close collaboration between the functions, often in small, agile and interdisciplinary teams. When UK-based appliance maker Vax embarked on a project to build an omnichannel customer experience, its IT workers had to “sit down with the customer-facing departments and ask them where they wanted to get to”, recalls IT director Nigel Aitchison. Achieving this close collaboration requires as much effort from the business as it does from IT.
It is not up to the IT department alone to adapt to digital transformation: the organisation as a whole must evolve so that IT can apply its experience and expertise most effectively. The most valuable contribution IT executives at SMBs could make to their company’s digital fortunes is to initiate a conversation with their peers about devising a digital transformation strategy that offers a model of cross-functional collaboration that the rest of the organisation can follow.
SMBs may not have the scale and budget of larger f rms, but in the digital economy they have certain advantages: they can be more agile than larger corporations, and they have more established customer relationships than the typical start-up. IT departments at SMBs have made progress, but they should focus on the opportunities that digital technology provides to help them punch above their weight.
