Small and medium enterprises (SMEs) across Southeast Asia look to invest in digital technologies within the next three years as the key enabler to drive new business propositions and user experiences, and deliver on significantly enhanced offerings. However, they face challenges around digital talent shortages and transformation, and cybersecurity risks, as well as in determining how to incorporate a holistic strategy for continuous digital innovation, according to a new EY report, Redesigning for the digital economy.
The study of about 370 SMEs across six Southeast Asian markets (Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam) revealed that transformative technologies will overtake current technologies to become the investment priority in three years’ time.
The study found that Southeast Asia’s SMEs presently (FY 2019) focus their investments in current technologies (77.2%), transformative technologies (76.4%) and fixed assets (74.0%). However, in three years’ time (FY 2022), Southeast Asia’s SMEs expect their investment priority to shift to transformative technologies (80.7%). Those that expect current technologies and fixed assets to be their investment priorities in FY 2022 slipped to 76.9% and 72.0% respectively.
In Singapore, transformative technologies (81.5%) are already a top investment priority among SMEs (FY 2019), followed by current technologies (67.7%) and fixed assets (58.5%). Looking ahead, SMEs in Singapore expect transformative technologies (81.5%) to continue to take investment precedence, followed by current technologies (69.2%) and fixed assets (53.8%).
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.
Liew Nam Soon, EY Asean Markets Leader explains, “Being more exposed to transformative technologies than those in most other markets in the region, Singapore’s companies can better appreciate the value and potential of emerging technologies, such as artificial intelligence and machine learning. Hence, Singapore’s SMEs are already placing their bets in transformative technologies to help them achieve growth and enhance customer experience. Further, digitalization is not a one-off investment or project. Digital adoption is a journey that will require long-term organizational change, executive sponsorship and a different lens on investment horizons.”
Majority of Singapore SMEs in early stages of digital maturity
While the benefits of digitalization are apparent, the digital ambitions of the SME respondents may not sync up with their perceived level of digital maturity.
Over half of SMEs (Singapore 55.4%, Southeast Asia 54.9%) are in the early stages of digital maturity, with digitalization programs remaining largely unaligned with the broader enterprise strategy and multiple initiatives running in parallel across business functions.
The majority of SMEs are at stage 2 (Singapore 44.6%, Southeast Asia 38.3%) of digital maturity, where digital transformation initiatives have some alignment to the organization’s enterprise strategy and are initiated at the functional or lines of business level with multiple strategies running in parallel. Less than a fifth (Singapore 10.8%, Southeast Asia 16.6%) of respondents are still at stage 1, or the initial phases of digital transformation, where initiatives are largely informal, tactical and separate from the organization’s broader enterprise strategy. Just 3.1% of Singapore SMEs (Southeast Asia 8.7%) are at stage 5 of digital maturity, where the organization has a single digital platform to scale technological innovations and consider themselves a digital native enterprise.
Choo Eng Chuan, EY Asean Growth Markets Leader says, “While there is a desire among SMEs for an agile digital strategy, this still eludes many. Most SMEs are currently rather tactical in their digitalization 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. Additionally, 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.”
Choo adds, “Digital transformation shouldn’t be an end destination in itself. Instead, digitalization is a critical business enabler that incorporates robust new technologies, operating models, cultures and mindsets to empower organizations to craft new business propositions and user experiences, or deliver significantly enhanced offerings.”
Challenges impeding digital transformation
Among the top three challenges that Southeast Asian SMEs face with digital transformation are: a lack of access to digital talent (64.7%); pressure to focus on the short-term benefits of digitalization (64.7%) and digital risks (64.4%).
One of the toughest challenges is securing qualified digital talent such as data scientists and social marketers. Individuals with the relevant skillsets are scarce, particularly in the emerging markets of Southeast Asia where digitalization outpaces the supply of talent that can deliver on it. As critical is the tendency to focus on immediate gains against investment in the longer term for digital future-proofing. Given the competing agendas vying for budget and limited resources, initiatives with more tangible and near-term returns may take precedence over digitalization programs. As well, 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.
In Singapore, the top three challenges are limitations from legacy infrastructure (63.1%), lack of digital talent (60.0%) and uncertainty around how to optimize digital technologies and alignment with the broader enterprise strategy (53.8%).
Liew comments, “Given that Singapore SMEs have had more exposure to ICT opportunities than some, particularly those in the emerging markets in Southeast Asia, they would have invested more in software and hardware over the years and done so earlier.
Understandably, as they seek to achieve digital transformation, some may face challenges in integrating the legacy systems and infrastructure, which may have more limitations since they were installed earlier. Further, these SMEs may have implemented ICT systems in an ad-hoc and siloed manner in the past. Hence, now they face uncertainty and difficulty in trying to optimize the various digital technologies, and making sure that their digital strategy is aligned with the enterprise strategy.
“The digital talent challenge that SMEs face is not unique. The Singapore government recognizes this and has introduced new schemes, programs and incentives to encourage reskilling or upskilling. For example, the ‘SMEs Go Digital program’ in Singapore provides structured support to boost employees’ digital skills and harness digital technology to enhance capabilities in cybersecurity, data protection and analytics.”
The report highlighted seven high-level steps that SMEs should undertake in their digital transformation journey:
Lay a firm foundation for digital success: Transformation begins with having a strong and committed executive level sponsorship with oversight of digital technologies and foresight to prioritize these to champion change. Balance legacies with new technology: 63.1% of Singapore respondents (Southeast Asia 60.9%) highlight that IT limitations from legacy architectures are hindering their digital strategies. This is a pervasive issue, with organizations working on old fragmented infrastructures that constrain business agility.
Focus on end-to-end, not discrete initiatives: Organizations 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.
Digitalization isn’t an IT-only initiative, so share responsibilities collectively: Adopting emerging technologies should be cross-organization such that no one individual or department owns it. The responsibility is shared across multiple divisions, with multiple users benefiting from the transformation.
Manage the people dimension: Talent is an extremely crucial actor as transformation creates new roles while impacting existing positions. Besides sourcing new staff, SMEs need to engage incumbent employees to minimize resistance and drive the behavioral changes needed to integrate digitalization.
Mitigate new dimensions of digital risks: SMEs should develop an integrated risk management, compliance and security protocols as part of their initial design phase.
Don’t create digital islands; instead integrate into an ecosystem-based world: 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.
Liew concludes, “Adopting a digital mindset goes beyond executing discrete projects within a specified timeframe. SMEs that successfully fuse digital into their DNA to deliver continuous innovation into everyday operations are those effectively redesigning themselves for the digital future.”