By EY
Digital Transformation
Achieving digital-first mindset for SMEs is now possible with transformative technology becoming increasingly commercially viable. As applications mature from Proof-of-Concepts (PoCs) feasibility studies to pilots and then larger-scale deployment, new technology should help organisations to:
- Adapt to changing business landscape and scale at speed
- Modernise business, amplify efficiency, agility and scalability and boost revenue from operations
- Reduce costs and risks with improved quality of information for informed decision-making
- Deliver high-touch convergent customer experiences that are personalised, insightful and data-driven
- Empower employees, mobilise business, boost workforce productivity and drive innovation
- Form closer partnerships with increased collaboration
- Engineer next-generation products and services that are focused on the digital age
- Leapfrog into a more competitive position against peers in the regional or even global arena
Organisations that are determined enough to forge ahead with their digital transformation strategy are front-running the competition. Multinationals with deeper pockets and capital for investments, robust human resources and easier access to digital talent are likelier to be ahead with their transformational program. Separately, micro enterprises and start-ups may be unencumbered by traditional business models and legacy infrastructures, and funded by new investment criteria. These are probably led by a younger generation of entrepreneurs who are more attuned to customer experiences, might already have digital innovation in their core DNA, and are more willing to experiment with emerging technology and challenge existing ways of conducting business.
With lesser resources than their larger peers and lesser agility than the smaller start-ups, how does ASEAN SMEs compare in terms of digital readiness?
In this section, the digital drivers and maturity level of these organisations are assessed, and interesting observations across the countries, industries and tier-sizing are highlighted. Digital investments, challenges and desired support to further advance their transformation agenda are also outlined.
Drivers of transformation
From the EY survey, it appears tha the digitalt tidal wave is sweeping through ASEAN SMEs. Qualitative feedback indicates four impetus for digital investments.
- Raise the bar on customer service: Today’s customers have higher service expectations — with many, particularly the younger digitally native individuals being increasingly accustomed to round-the-clock digital availability, and expecting organisations to manage relationships and deliver products and services at hyper speed. As respondents previously cited in figure 3 (Vol.54 No.2), heightened customer expectations, coupled with diminishing loyalty, are forcing them to elevate relationships. The application of digital technology would help organisations to achieve near real-time fulfillment, provide contextual interactions and personalisation, and enable more frictionless user experiences.
- Build connectivity and leverage off ecosystem partners: Regardless of their size or sectorial focus, organisations should not operate in isolation, particularly as borders separating industries converge and start to blur. As customers increasingly conduct their life on digital platforms for offerings such as FS and health care, SMEs comprehend the value of collaborating with participants within their broader ecosystem. Such collaboration provides organisations with connectivity into the digital network of other businesses, plus the opportunity to capitalise on external expertise and collective innovation, and to co-create new products, pursue new markets or customers.
- Manage operating cost: Meeting these high customer expectations call for SMEs to accelerate the digitalisation of business processes, particularly labor-intensive back-office processes to reduce paperwork, raise automation and quicken turnaround times. For the front-office, expense management is also critical to reducing the cost to serve or deliver more services and solutions via digital, self-serve channels.
For instance, with escalating salaries in most ASEAN markets, RPA is emerging as a new class of digital labor that serves to eliminate manual, repetitive processes. 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, some emerging from unexpected places: SMEs are facing competitive threats from nimbler entrants born in this digital age that are leveraging data instead of physical infrastructures as their currency of choice. Competitors could be micro enterprises that do not need to reach comparable scale to negatively impact profitability, or new entrants that are able to leverage disruptive technologies to achieve significant scale and pose challenge within a short span of time.
In the CPR sector, for example, small e-retailers with minimal operating overheads could cherry-pick segments of products and severely undercut the pricing of SME retail companies. To retain relevance and contest these competitors, incumbents need to quicken their technological pace to deliver on new business propositions.
Digitalisation is — if not already the case, will — impact almost every facet of organisations. It alters the competitive landscape and performance across industries and creates an urgent imperative for SMEs to transform for growth and competitiveness.
As a respondent from the ICT sector in Indonesia succinctly sums it up, “with innovation serving as a differentiator in today’s marketplace, we need to implement digital transformation. This is the only way we can retain relevance in the eyes of our customers and build a scalable, sustainable business.”
Digital innovation maturity
The benefits from digitalisation are apparent to the SME respondents. But how are these digital ambitions syncing up with their level of (perceived) digital maturity?
Replies are plotted along a digital continuum in figure 7, ranging from being digital novices (stage 1) to digital native enterprises with innovation embedded in their corporate DNA (stage 5). Most respondents (38.3%) fall within stage 2, having initiated multiple digital activities running parallel across different lines of businesses or functions. This is common across all countries except for Indonesia, with the majority (26%) still at stage 1 of their digital transformation (versus the ASEAN regional average of 16.6%).
While there is a desire for an agile digital strategy, this still eludes many. Most are currently rather tactical when it comes to digitalisation, placing ad-hoc smart bets and picking up the lower-hanging fruits, before embarking on deliberate steps toward a more defined DX strategy in stages 4 and 5.
When analysing the data across market sizes in figure 8, those in tier 1, with their relatively larger scale and budgets, are predictably the most determined with their digitalisation endeavors. These account for the highest proportion of digitally progressive organisations (i.e., 45% and 41% of those in stages 4 and 5 respectively).
Meanwhile, given their leaner resources and smaller investment budgets, the firms in tier 3 have not progressed as quickly along the digital maturity curve. Interestingly though, they were not too far behind compares to the mid-tiers, with an almost equal percentage being at stage 3 and having transformational programs residing centrally with a digital team. Perhaps these smaller SMEs have less rigid and formal hierarchies, which allow for greater collaborations and a quicker pace of change.*
Figure 9 looks at the extent to which these ASEAN SMEs are extending their digital reach and influence across the back-to-front office. Aligned with earlier comments on the need to digitalise to reduce expenses via automating back-office processes or trimming front-end client servicing cost, almost two-thirds of office functions are almost, or completely, digitally enabled.
Organisations understand that digital transformation is not consigned to customer-facing processes like sales and marketing to enhance customer experiences, but that operations need to be transformed end-to-end, from front-, mid-(e.g., for strategy planning, supply chain, risk management, R&D), through to back-office, so as to reinvent how they conduct businesses.
In this aspect, the back-office operations are slightly more transformed given that digitalisation presents very tangible benefits for functions such as finance, accounting and human resource. Intense manual work and stacks of paperwork are replaced with more efficient computer-based automation.
Yet, while office functions are already somewhat digitally enabled, almost 55% of respondents also concurrently classify their organisations within stages 1 or 2 along the maturity curve in figure 7. For these companies that are digitally enabled within their front-, middle- or back-office, there could be various strategies operating in parallel along these functions and thus the need for more unified enterprise digital strategies.
Investment in transformative technologies
Digitalisation is becoming synonymous with the use of transformative technologies as real-world applications become practical and start to redefine how businesses are conducted or goods and services are consumed. New technologies range from AI, machine learning and RPA, to blockchain and smart contracts, Internet of Things (IoT), to cutting-edge applications that engage customers though augmented and virtual reality.
ASEAN SMEs are using emerging technology to:
- Improve payment applications
On an aggregated basis, payment technologies top the chart with 68.2% currently investing to enhance online payments. This is driven by e-commerce, e-banking and e-wallets, particularly more so within emerging ASEAN markets like Indonesia, the Philippines and Vietnam with low credit card penetration.8
Industry statistics estimate that the region’s internet economy will exceed a gross market value of US$240b by 2025, more than twice that of US$72b in 2018, with the ASEAN population being the most engaged mobile Internet users in the world. Thus, having a good payment technology for online transactions is a basic hygiene requirement for SMEs to drive online revenues and become more entrenched in the digital economy. - Advance big data analytics
Following a close second, 66% mention having invested in deeper implementation of big data analytics, AI and cognitive computing or machine learning. Intelligent automation and machine learning techniques apply statistical models to constantly improve as the system learns, extracts and delivers sophisticated and timely information to support more accurate and informed business decisions. These are particularly valuable for organisations serving retail clientele, through collecting customer insights for contextualising and personalising interactions and offerings. - Raise efficiencies through automation and blockchain
Intelligent systems and automation are highly complementary technologies that can reduce repetitive activities, especially for labor-intensive industries such as manufacturing, transport and warehousing. Hence, 53.3% of respondents are simultaneously investing in analytics and RPA — the business-managed software tools or “bots” that are programmed to flow rules to complete process-oriented tasks much more efficiently than their human counterparts. At its core, RPA mimics and replaces manually intensive functions that traditionally are performed by employees, and not only eliminates the potential for human errors but frees up manpower to dedicate time to more valuable tasks.
Related to these is the application of blockchain (the use of a decentralised, consensus-driven ledger that tracks and records all transactions in a series of sequential blocks) to assist in process automation.
In the ASEAN region, industries that are exploring the use of blockchain include FS, supply chain and health care. For instance, within FS, blockchain is already demonstrating itself to be operationally viable, particularly within trade finance and cross-border business-to-business transactions. Automation and blockchain lend themselves well to the global trade finance industry, which remains paper-heavy and labor-intensive. Blockchain, together with smart contracts that automatically trigger commercial actions, allows multiple trade participants to establish a shared, immutable and transparent record of all terms of trade, verify transactions and accelerate settlement without requiring a financial intermediary.
Specific examples of these digital application and success stories are illustrated in the next chapter.
3. Redesigning for the Digital Economy: A Study of SMEs in Southeast Asia- Internet of Things (IoT) on Governments’ Digital Agenda
*point of caution that being higher or even highest up the maturity curve does not necessarily mean being better. The SMEs, in ASEAN region spans multiple industries, each varying in their states of disruption, conservatism, culture, customer bases and strategic objectives.
What works for one organisation or industry may not necessarily be effective for the other. Not every organisation in every industry can or should move forth at the same pace. Hence, disruptive potential and digital maturity will vary across industries and business sizes and influence the SME’s transformation strategies.
