Most companies that live and breathe the online revolution are not tech startups, but smart smaller firms that use online tools to run their core business better: to cut costs, reach customers and suppliers, innovate and get more control. Many others, however, are falling behind, according to a new Grattan Institute discussion paper.
picture from Shutterstock
Small and medium enterprises (SMEs) (those with less than 200 employees) employ two-thirds of private sector workers and contribute more than half of Australia's private sector GDP. If advanced online technology becomes the norm among SMEs, the productivity gains will spread through the whole economy.
There are four big opportunities: mobile, social, data analytics, and the cloud
The online toolset is far broader than just having a website customers can find through a search engine. Firms need to explore and exploit four online toolsets to stay relevant: the cloud; social; mobile; and data analytics.
First: mobile. Customers are shopping from the tram. Potential hires are looking for jobs from the train. A small business owner can run their firm from a mobile device. Yet only 18% of Australian SMEs with an internet connection have developed mobile-optimised websites.
Second: social. Customers, suppliers and employees are talking online. They expect companies to be part of the conversation: many already are. Yet only a quarter of Australian SMEs with an internet connection say they use social networking for marketing purposes.
Third: data analytics. Tools for capturing and exploiting data are much easier to use than in the past. They let business owners learn about their firm's performance and their environment: which customer segments are buying and which channels do they buy through? What parts of your business are paying their way?
Fourth, the cloud: you can now access essentially any IT service, on demand, over a network. Applications like file management, web search, email, and spreadsheets can all be managed over the web. Few Australian SME managers use the term "cloud computing": only 8% say they use the cloud. But 47% of SMEs with an internet connection use basic cloud computing services such as webmail or cloud data storage.
The cloud offers more than these basics. It makes enterprise IT capabilities available to small firms. It offers new capabilities: you can collaborate in new ways and create new services. And it offers "cheap and ubiquitous building blocks" for new services.
All four opportunities can help small firms win where before they would have lost to larger firms that could absorb the fixed costs of corporate IT.
Firms that adopt new online tools fast are also faster growing, more profitable, generate more jobs, and they innovate and export more. The causation goes both ways – firms with growth opportunities find advanced tools more valuable – but the tools clearly help firms to capture opportunities.
Why are some are firms slow to get on board?
Yet SMEs in Australia are far from universally adopting new online tools. About 60% of SMEs have low or very low digital engagement (that is, at most only have a website and do some social media). Opportunities do vary by sector: SMEs in business services, retail and hospitality are strong adopters, while farmers and builders use online tools less.
But the biggest constraints are awareness and skills. About 60% of SMEs say they they do not have the skills to make the most of online services.
Some firms are also concerned about data security, privacy, and being locked in to an online provider. Some concerns may be allayed as firms become better informed. Indeed, some firms cite the improved security that large, specialist online providers make available as one reason for choosing to use cloud services.
The path forward
Government and industry can help smaller firms wring more productivity from online tools.
First, if government promotes broader productivity growth and innovation, it can support the adoption of online tools indirectly. Free trade can increase domestic productivity through competitive pressure and broader market access. Foreign direct investment and skilled migration can also make local firms and workers more productive.
Second, online should be the default for interacting with government. Government portals like business.gov.au and myGov.gov.au can drive adoption more broadly if they are done well. Government, as a user of cloud services, can demonstrate their value. And government can support the development of trust in online services, as through its recent "Cloud computing regulatory stocktake".
Third, government should get policy settings right for cost-effective broadband networks. Reliable, high bandwidth, symmetric networks and international capacity are needed. Some small businesses say they use mobile networks as a backup during business peak times. Some move just to get access to better networks.
Awareness and skills are important, but government can largely let the private sector lead in helping SMEs improve skills and digital literacy. Online service providers educate SMEs as they develop their markets. Industry associations can help reach the SME community.
When a firm becomes more efficient, the owners of that firm benefit most. When many firms become more efficient, customers benefit, because firms compete.
The use of information and communication technologies (ICT) contributed more than a fifth of Australian labour productivity growth in the 1990s. Recent surveys of the literature find that ICT use still contributes to productivity growth. Its contribution may have increased in recent years. The information technology revolution may just be getting started. It is time for our small and medium enterprises to get on board. Jim Minifie is Productivity Growth Program Director at Grattan Institute. This work is part of Grattan Institute's Spreading Smart Ideas series to identify policy reform opportunities to accelerate the spread of innovation. The series is made possible with the support of Google.