Southeast Asian SMEs challenged by digital transformation

Southeast Asian SMEs challenged by digital transformation

EY study surveyed 370 SMEs across six Southeast Asian markets

Credit: Dreamstime

Despite the eagerness of regional small and medium-sized enterprises (SMEs) to invest in digital technologies, significant challenges still remain across Southeast Asia.

An Ernst & Young (EY) report - surveying 370 SMEs across Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam - found that regional SMEs, in general, looked to invest in digital technologies within the next three years, with a majority (54.9 per cent) in the early stages of digital maturity.

Challenges persist, however, not just around talent shortages, as is common globally, but also around the process of digital transformation as well as cyber security risks and in determining how to incorporate a ‘holistic’ strategy for continuous digital innovation, according to the EY report.

According to findings, SMEs currently invest their resources in current technologies (77.2 per cent), transformative technologies (76.4 per cent) and fixed assets (74.0 per cent).

In three years’ time (FY 2022), this segment of the market is expected to increase investment in transformative technologies (80.7 per cent), while SMEs who expect their investments in current technologies and fixed assets to be their priority in FY 2022 slipped to 76.9 per cent and 72.0 per cent, respectively.

Transformative technologies cover digital applications such as artificial intelligence (AI), machine learning, blockchain and robotic process automation (RPA), while current technologies are defined as upgrades and expansions to existing infocomm technology (ICT) software, hardware and services.

“Digitalisation is not a one-off investment or project,” said Liew Nam Soon, leader of ASEAN Markets at EY. “Digital adoption is a journey that will require long-term organisational change, executive sponsorship and a different lens on investment horizons.”

Digital maturity

The report also highlighted the perceived gap between the digital ambitions of SMEs and their own understanding of how far along they are in regards to digital maturity.

Meanwhile, over half of Southeast Asian SMEs (54.9 per cent) are in the early stages of digital maturity, with digitalisation programs remaining largely unaligned with the broader enterprise strategy and multiple initiatives running in parallel across business functions.

The majority of SMEs reported being at stage two of digital maturity, where digital transformation initiatives have some alignment to the organisation’s enterprise strategy and are initiated at the functional or lines of business level with multiple strategies running in parallel.

However, 16.6 per cent are still at stage one of digital maturity, where initiatives are largely informal, tactical and separate from the organisation’s broader enterprise strategy.

In regards to the highest stage - ranked five - just 8.7 per cent of SMEs are at this level of digital maturity, where the organisation has a single digital platform to scale technological innovations and consider themselves a digital native enterprise.

Interestingly, Singapore SMEs reported that only 3.1 per cent are at stage five, significantly lower than the broader story across Southeast Asia, despite the city-states perceived advancement relative to its neighbours.

However, as Choo Eng Chuan - leader of Asean Growth Markets at EY - points out that Singapore SMEs may have higher expectations on what is defined as digital being aligned with the enterprise strategy.

“Hence, more Singapore SMEs perceive themselves to be at the earlier stages on the adoption continuum,” said Choo. “While there is a desire among SMEs for an agile digital strategy, this still eludes many.

"Most SMEs are currently rather tactical in their digitalisation efforts - placing ad-hoc smart bets and picking the low-hanging fruit, before embarking on deliberate steps toward a more defined digital transformation strategy as they mature along the continuum.

“Digital transformation should not be an end destination in itself. Instead, digitalisation is a critical business enabler that incorporates robust new technologies, operating models, cultures and mindsets to empower organisations to craft new business propositions and user experiences, or deliver significantly enhanced offerings."

SMEs face a number of challenges when it comes to digital transformation, and according to the report, the top three are a lack of access to digital talent (64.7 per cent); pressure to focus on the short-term benefits of digitalisation (64.7 per cent) and digital risks (64.4 per cent).

Finding qualified digital talent such as data scientists and social marketers is considered one of the toughest challenges for an SME. Individuals with the relevant skill sets are scarce, particularly in the emerging markets of Southeast Asia where digitalisation outpaces the supply of talent that can deliver on it.

The second most highly cited challenge is the tendency to focus on short term returns over longer-term digital future-proofing, and the implementation of digitalisation programs.

Furthermore, new technologies can be a double-edged sword, giving rise to opportunities as well as security and data risks such as cyber threats and data breaches.

Path to digital transformation

The report highlighted seven high-level steps that SMEs should undertake in their digital transformation journey.

The first of these steps is to lay a firm foundation for digital success, which starts by having a strong and committed executive level sponsorship with oversight of digital technologies and foresight to prioritise these to champion change.

The next step involved balancing legacy infrastructure with new technologies, with 60.9 per cent of Southeast Asian SMEs highlighting that IT limitations from legacy architectures are hindering their digital strategies. This is a pervasive issue, with organisations working on old fragmented infrastructures that constrain business agility.

The third step involves SMEs needing to focus on end-to-end and not discrete initiatives. SMEs should create and embed the digital strategy into business operations, then design the right products, services or experiences to enhance performance based on these aspirations.

The fourth step is for SMEs to realise that digitalisation is not an IT-only initiative, and that responsibility needs to be shared collectively. Adopting emerging technologies should be cross-organisation such that no one individual or department owns it. The responsibility is shared across multiple divisions, with multiple users benefiting from the transformation.

Delving deeper, the fifth step is people management, and besides sourcing new staff, SMEs need to engage incumbent employees to minimise resistance and drive the behavioural changes needed to integrate digitalisation.

The sixth step involves the mitigation of digital risks, with the recommendation being that SMEs should develop an integrated risk management, compliance and security protocols as part of their initial design phase.

The final step is the recommendation that SMEs should not create digital islands, but instead transition to an ecosystem-based environment. Transformation is a massive undertaking with limited success, if undertaken in silos.

With the customer typically driving the need for digital transformation, partnerships would be essential to raise competencies that support more holistic customer experiences.

“Adopting a digital mindset goes beyond executing discrete projects within a specified timeframe,” said Liew. “SMEs that successfully fuse digital into their DNA to deliver continuous innovation into everyday operations are those effectively redesigning themselves for the digital future.”

Tags Ernst & YoungSMEs

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