Digital transformation is increasingly understood as a matter of survival for small and midsize companies. Most are planning to make the sweeping, technology-driven organizational changes that define digital transformation, and a growing majority say these adjustments will be essential to their competitiveness in the near future.
Oxford Economics surveyed over 3,000 executives in 17 countries about their readiness for digital transformation, including more than 1,300 companies with revenues below $500 million. We also analyzed responses from companies with $500 million to $1 billion in revenue to better understand how digital transformation efforts change as companies grow.
We found that more than half of small and midsize companies see digital transformation as a core business goal, and this goal is viewed with growing urgency: more than 80% see such initiatives as important or critically important to their company’s survival. And while companies are increasingly focusing investments on digital technologies, overall progress towards comprehensive digital transformation remains limited.
Digital Transformation is an Existential Issue
Our research covered several aspects of the transformation story. How are small and midsize companies going about digital transformation? What challenges do they face? How will their
efforts pay off? Among the key findings:
- Technology is essential. Executives from small and midsize companies expect technology change and the increasing pace of change to have a major impact on their organization over the next two years. And nearly three-quarters say technology is essential to growth, competitive advantage, and improving the customer experience.
- Human capital matters. Effective management is seen as the most important factor in the success of digital transformation for small and midsize companies. Making sure the workforce is equipped with up-to-date skills is a core component in the success of these initiatives.
- Transformation drives performance. Small and midsize companies expect digitization to improve business performance for a wide range of functions, and to help their organizations meet critical goals, including more efficient business operations and stronger financial performance.
Well-run small and midsize companies share some defining characteristics with truly digital enterprises—companies that are using technology to radically improve enterprise performance— including engaged workers, a lack of bureaucracy, opportunities for collaboration, strong relationships among leaders and employees, and an ability to adapt quickly to change. But small and midsize companies also face unique challenges. With fewer resources than large companies, they need to be strategic and precise with their decisions and investments to make transformation a reality.
The Transformation Imperative
Technology is redefining the way small and midsize companies do business, and it is happening fast. New tools, new ways of using technology, and the speed at which change is occurring are the top issues facing these companies in the next two years. Increasing speed to market was cited as the top revenue driver for the next two years by the survey respondents (44%), and the response was even higher among smaller companies between $100 million and $500 million in revenue.
Most small and midsize companies are just getting started on transformation. Nearly one-quarter are still in the planning stages, and while 58% are piloting initiatives today, just under 20% have completed digital transformation projects in at least some areas of the business. But most already see the latest technology as essential to gaining a competitive edge. Over 80% say it is somewhat or significantly advantageous to their businesses; 69% say it is important or highly important to retaining competitive advantage; and 74% say technology is essential to growth.
Keeping up with technology change is a business imperative
Investing for the Future
Small and midsize companies are ramping up investments in a range of digital tools, with a focus on the building blocks (e.g., cloud and mobile) that will support the next wave of emerging technologies. They also are investing in Big Data and analytics (57%) and the Internet of Things (52%). In the next two years, they plan to increase their focus on Big Data (79%) while still investing heavily in cloud and mobile.
For now, these companies are focusing less on emerging technologies like machine learning/AI and robotics. But investment levels are expected to pick up over the next two years as technology and organizational capabilities mature. The number of respondents who say they will invest in these toolsets jumps to 18% for machine learning/AI and 9% for robotics in two years’ time, up from 5% today. (In general, small and midsize companies with stronger financial performance are more likely to be investing in a range of technologies than other small and midsize companies.)
This growing emphasis on advanced technology can be seen in the percentage of total budget dedicated to digital transformation. Currently, the great majority (84%) of small and midsize respondents are spending less than 9% of their total budget on transformation; this number will grow in the next two years, with nearly onequarter planning to allocate between 10% and 20% of their total budget to digital transformation in that time.
Still, funding for digital transformation remains an inherent challenge for small and midsize companies. Over one-third say that lack of budget is a top-three challenge for their digital transformation initiatives—a number that rises to 46% for the smallest companies surveyed, while just 13% of companies with over $1 billion in revenue cite this as a concern. Our previous research shows that smaller companies are more adept at using technology than is commonly assumed. But as an increasing share of customers and revenue are driven by digital products and services, small and midsize companies must continually reevaluate technology budgets and the types of tools they are investing in.
Technology investments are focused on the building blocks
Conclusion
Small and midsize companies face many of the same challenges that larger enterprises do, including rethinking operations, products and services, and business models to compete in the digital economy.
And while many lack the monetary and talent resources of larger enterprises, they also have inherent advantages—such as the ability to make decisions quickly, take risks, and pivot the organization—that allow them to compete effectively in this environment. How can small and midsize companies leverage technology and digitization to capitalize on their strengths?
- Build a strong technology foundation that allows for continual improvement to operations, processes, and product and service development.
- Develop a strategic plan for workforce development, including recruitment, reskilling, and retention. Businesses may need to rethink their location or allow for more flexible work to ensure access to top talent.
- Think beyond IT. Successful transformation around digital technologies requires business units to work closely with IT on implementation and innovation. Specialized task forces within the company dedicated to transformation may help facilitate change.
