Digital transformation for SMEs

Established in 2015, the ASEAN Economic Community promotes the significant growth and potential of the region’s emerging economies. Key drivers of emerging economies are small and medium enterprises (SMEs). However, with rapid digitalization occurring across almost all business sectors, ASEAN SMEs are increasingly looking to transform their enterprises. SMEs are considering tapping into digital trends to further grow and strengthen their competitive edge as well as making use of emerging technologies to maintain their profitability.

This article focuses on selected insights from EY’s latest survey, Redesigning for the digital economy, which covers SMEs from the six largest ASEAN markets of Indonesia, Malaysia, Singapore, Thailand and the Philippines. Respondents are from 370 ASEAN mid-market organizations with annual global revenues of between $20 million to $500 million. These collective insights help us understand their strategic priorities, approaches to digital transformation, and application of transformative technologies.

In general, the survey reports that transformative technology is increasingly viable, facilitating SMEs to adopt a digital-first mindset. Investments in technologies such as artificial intelligence, machine learning, and robotic process automation present attractive benefits that can help manage costs, reduce risks, deliver personalized customer service, and create next-generation products and services that are more focused on the digital age. However, digitalization also presents a challenge. It is as much a game changer as it is a massive undertaking, since SMEs will need to take a long-term view of their resource investments, and may find the need to depart from traditional models to reboot themselves.

DRIVERS OF TRANSFORMATION
Many SMEs are determined to forge ahead with digital transformation strategies to gain an edge over their competition, and the EY survey identifies four of the forces that spur on digital investments to ensure they stay ahead.

Service quality. Customers today have higher service expectations, especially with younger, digitally adept accustomed to 24/7 availability. These customers expect service to be rendered faster than ever, pushing companies to elevate their ability to deliver. Applying digital technology would help organizations achieve near real-time fulfillment, provide contextual personalization, and enable increasingly problem-free user experiences. One current method to provide real-time fulfillment is through AI in the form of chatbots. This developing tool automates repetitive individual queries, increasing the chances of conversion.

Build connectivity and leverage off ecosystem partners. Regardless of size or industry, SMEs will gain an advantage from collaborating with participants within their broader ecosystem. This provides them with connectivity into the digital network of other businesses, with the added opportunities of co-creating new products, capitalizing on external expertise and collective innovation, and pursuing new markets or customers.

Managing operating costs. Meeting high customer expectations requires SMEs to accelerate the digitalization of their business processes. These include labor-intensive back-office processes to reduce paperwork, raise automation, quicken turnaround times and manage front-office expenses critical to reducing the cost to serve or deliver more services and solutions via digital, self-serve channels. For example, as a response to escalating salaries, robotic process automation (RPA) is emerging as a new class of digital labor that can eliminate manual, repetitive processes. Its benefits include cost-saving opportunities from continued enhancements to processes and advancements in robotic tools, higher dependability, and transactions that are more accurate, documentable, and auditable with process automation.

Keep pace with competitors. SMEs are facing competitive threats from new companies created in this digital age that can utilize nimbler data instead of slower physical infrastructure. A possible competitor may come in the form of micro enterprises that can negatively impact profitability without needing to be of comparable scale, or new companies that achieve significant scale by leveraging disruptive technologies and posing a challenge within a short amount of time. Another example is small e-retailers with minimal operating overheads that can choose what product segments to sell, severely undercutting the pricing of SME retail companies. To maintain relevance, SMEs need to deliver on new business propositions by stepping up their technological pace. A possible solution is through improved payment applications, with payment technologies enabled by e-commerce and e-wallets that are especially driven in an emerging country like the Philippines with low credit card penetration.

Digitalization will impact almost every facet of SMEs. It alters the competitive landscape and performance across industries, creating an urgent imperative for SMEs to transform for growth and competitiveness. High-level steps must be undertaken for SMEs to transform their digital vision into reality, some of which are presented in the survey.

STEPS TO DIGITAL SUCCESS
The EY Survey further discusses that while digital disruptions in businesses are well-documented, many organizations have achieved limited, genuine successes with digital transformations.

Transformation begins with a committed executive-level sponsorship, laying a firm foundation for digital success. Oversight of digital technologies, and the foresight to prioritize these to champion change, paves the way for SMEs to move quickly. The survey notes that 74.2% of respondents felt that, in developing a culture of agile innovation, having supportive senior stakeholders is a prerogative. To begin, a current-state assessment of the organization’s innovation maturity should be made to serve as a benchmark for execution, while a realistic outlook about what the future-state model must be adopted.

Nearly 61% of respondents highlight that technical limitations from legacy architectures hinder their digital strategies, requiring a balance between both. Some SMEs might opt for major overhauls, but many could simply decommission applications they find redundant, then recondition remaining systems to reduce complexity and enable them to process quickly when necessary. Cost savings from IT legacy modernizations such as cloud technologies, open APIs, and microservices applications can then be invested to fund a continuous digital strategy.

SMEs should not just concentrate efforts within specific areas, and instead focus on end-to-end initiatives. This means extending beyond customer-facing processes and including digital solutions for mid and back-office functions. Further cohesiveness could be improved by horizontally integrating between front, mid and back-offices. It should be noted that while surveyed SMEs intend to focus more on adopting emerging solutions than business-as-usual technologies by FY22, they should also be cautious against pursuing disruptive technology simply for the sake of doing so. Not every component needs to be digitalized, and not every initiative may deliver a satisfactory RoI. To reduce risk, SMEs can incubate digital solutions through prototyping, testing and validating initiatives through experimentation on a smaller scale and keenly monitoring feedback.

SMEs are also treading a fine line between balancing digital initiatives and managing data protection and customer privacy safeguards, ensuring that the intent to mitigate new digital risks do not impede innovation. Security risks from cyber threats and vulnerabilities are also challenges that merit attention as breaches can not only result in significant reputational and financial impact, they could also damage consumer confidence in the company. This calls for SMEs to develop integrated risk management, compliance and security protocols as part of an initial digital design phase.

ASEAN SMEs are vital contributors to the region’s economy, but their continued economic support depends on their ability to leverage digital solutions to expand efficiently. While transforming into digital powerhouses cannot be expected overnight, the digital environment is rapidly evolving, and SMEs cannot risk being left behind. Digital initiatives that are well-crafted and executed can help SMES today progress in a competitive landscape, further finding potential to become tomorrow’s multinationals. Clearly, while the challenges in transforming digitally are great, the rewards to be reaped are far greater.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Wilson P. Tan is the Vice Chairman and Deputy Managing Partner of SGV & Co.