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Inside the UK’s SME tech crisis

While the government wants the UK to become the next Silicon Valley, digital technology is failing to reach swathes of small businesses.

By Greg Noone

When Lee Sutch drove into Culcheth six months ago, there seemed little to distinguish this large Cheshire village from similarly sized communities across the UK – that is until the local business community began regaling the broadband expert about their connectivity issues. At first, these issues were rather trivial: a smart speaker, perhaps, pinging on and off for lack of Wi-Fi. Then, more concerningly, the card merchants began disconnecting.

With few of their customers bothering to carry physical money on their persons, the shops decided to impose a temporary honour system, telling patrons they could take their items away so long as they returned from a nearby cash machine with the money to pay for them. Not everyone did. “When I spoke to the clothing shop, they said that 80% of the customers that had picked an item didn’t come back,” recalls Sutch. “The card machine is around the corner, the cafe’s over there, whatever they’ve just looked at is off their mind and then [they’re] off on their travels.”

As head of B2B for Freedom Fibre, a local alternative network builder, Sutch encounters these kinds of cases all the time. Many of these businesses, he says, are hooking up their tills, card merchants and CCTV systems to the same consumer broadband package as their televisions, laptops and smart speakers, signing up for an affordable service where bandwidth quickly gets maxed out but their business is treated with the same perfunctory repair notifications when the network goes down as your average consumer. Those problems might be solved if the company signed up for a business-centric provider, says Sutch, but most don’t. Instead, “they go about and they kind of work with what resources they’ve got”.

The same mentality extends to digital technology. While the growth in popularity of QR codes, e-commerce and contactless payment services since the pandemic has led to a perception that UK SMEs are keeping up with the technological times, in reality too few have actually harnessed the power of analytics software, cloud and AI to boost their productivity and profit margins. According to tech trade organisation techUK’s Local Digital Capital Index 2023, the overall number of businesses defined as operating in the ‘digital sector’ has declined nationwide, with a 12% drop in London alone. Meanwhile, another survey of 5,000 small and medium-sized businesses by accountancy software vendor Sage found that 92% of respondents said that they depended on technology for “business survival” – but many were either finding adopting new platforms too costly or were unable to find out which solutions were best for them. 

If the UK managed to boost tech adoption among its SME community, Sage continued, the contribution it makes to the national economy could be doubled to £448bn. That’s an enormous figure, says Neil Ross, techUK’s associate director for policy, but reflective of the fact that SMEs already employ three-fifths of the British working population and account for half of its private sector’s turnover. Letting that community wither on the vine of low levels of tech adoption and poor connectivity could lead to equally stunning constraints on the UK economy – much worse than those witnessed during the current productivity crisis. 

“If you’re behind on digital adoption, you’re definitely going to be behind on AI adoption when it really starts to spread out across the economy,” argues Ross – with dire implications for economic growth, international competitiveness and, eventually, wages and living standards. 

Hit hard by Brexit, the pandemic and now inflation, UK SMEs are struggling to keep their heads above water and failing to invest in the digital technology needed to secure their futures. (Photo by William Barton/Shutterstock)

SME tech adoption realities

SMEs have not had a great time in recent years. In addition to Brexit imposing new customs requirements on a swathe of businesses, the pandemic not only warped their supply chains but triggered an inflation crisis that depressed their bottom line, too. As such, explains Lesley Holt, most SMEs are barely keeping their heads above water. 

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“I know we’re hearing that things are improving, but they’re not for businesses,” says the adoption and acceleration director for West Midlands 5G, which works with SMEs across the country to improve their connectivity and tech take-up. Holt’s experience of working with businesses on these two goals is reflective of Sage and others’ findings: that these companies want to invest in new digital platforms to boost their productivity, but that either they cannot afford or don’t know where to start. “A lot of them actually understand the technology, but they’re all going, ‘Why is it for me, what’s my productivity level going to be, and what am I going to get for that investment?’” she says. 

Insights like that are usually provided by consultancies like Deloitte or PwC, but their costly services are often beyond the reach of your average wholesaler or dental practice. In their place stands an alphabet soup of growth hubs, university outreach schemes and government-funded agencies, West Midlands 5G among them, that aim to provide the same advice for free. Holt remembers being briefed by a combined authority on just how many different schemes were online in their region. “The diagram they showed me was just huge,” she says. The trouble is, these initiatives are often obscure, making them “just really hard to navigate.”

Those that do succeed in finding the right solution for them often benefit enormously, explains Chris Russell, the senior policy manager at the Federation of Small Business (FSB). A survey the trade association conducted this summer found that those SMEs which had adopted new digital technology saw their revenues rise by as much as 14.8%, while 64% of those who had applied for R&D tax relief in the past three years improved their cashflow. But these aren’t success stories, Russell laments, that the government or even the media are very much interested in hearing about. “It’s not a very exciting story, in many ways,” he says.

The evidence shows that SMEs of all stripes, from butchers and bakers to window manufacturers and warehouses, are interested in taking on new digital platforms to improve their productivity and boost their bottom line. Many, however, do not know how to start this journey without detracting from the daily tasks necessary to keep their businesses running. (Photo by Don Pablo/Shutterstock)

Government (in)action

These businesses, however, remain in the minority – something Russell attributes to an incoherent approach by the UK government toward accelerating tech diffusion and high-speed connectivity among SMEs. The Conservative-led government has spent so long concentrating on promoting early-stage R&D and remaking the country into the world’s next “Silicon Valley,” he argues, that encouraging small businesses to innovate with new tech seems, at best, a low priority. Sometimes ministers even forget which department is supposed to be handling the issue, he says. 

“We had a recent meeting with DSIT, and we asked them which department was responsible for digital tech adoption,” recalls Russell. “They said, ‘Oh, well, we think it’s us, but it might be a little bit DBT [Department for Business and Trade]. We’re not too sure.’” 

Publicly, the government has repeatedly committed to the cause of accelerating SME tech adoption. Despite this, its last attempt to do so on a national scale – the ‘Help to Grow: Digital’ voucher scheme, which provided advice and tax incentives for businesses looking to invest in new platforms – was cancelled in December 2022, after fewer than 1,000 out of 100,000 vouchers issued for discounted digital tech were actually disbursed (575, meanwhile, never bothered redeeming them.) 

“The program was a good idea but became overengineered,” recalls Ross, who sat on an advisory panel that helped the government build the scheme. One major issue was that Help to Grow was talking to the wrong set of people entirely. “It didn’t dock into those existing networks that SMEs use,” says Ross, who says that the government spent an inordinate time trying to speak to senior leaders at such companies instead of communicating effectively with accountants or IT managers – the kind of experts who could better realise the implications, technical and financial, in adopting new digital technologies. 

Help to Grow: Digital was not replaced, and there seems to be little chance of a new push from the government on SME tech adoption this side of the general election. That’s as much a decision based on philosophy, Russell suggests, than an unwillingness to repeat a policy that didn’t work the first time. The FSB policy hand suspects that there are more than a few fans of Mariana Mazzucato’s The Mission-Based Economy working in DSIT and DBT, civil servants and politicians who subscribe to the UCL academic’s theory that the government should prioritise funding ambitious and high-end R&D projects over and above diffusing existing digital technology in the wider economy. Doing so is absolutely fine, argues Russell,  “but you can’t just focus on that. You do need to focus on commercialisation and diffusion as well.”

As such, the FSB recommends that the government should reallocate at least 10% of its existing R&D budget into diffusion activities and set a target that half of all direct funding be poured into SMEs. That, says Russell, “would be a lot more money than has ever been given,” and should be paired with the creation of a new ‘Business England’ body to unite the current alphabet soup of accelerators and appropriate R&D tax relief. techUK recommends similar measures, including a new ‘digital growth grant,’ which Ross says could be “something very simple – like a tax-deductible loan on software-as-a-service technologies – that would be quite easy for accountants to pick up.”

These kinds of measures, say Ross and Russell, could help trigger a renaissance in tech adoption among the UK’s SME community. Dreams of a rejuvenated British Mittelstand equal to its European counterparts, however, can only come true if these businesses are provided with the kind of fibre solutions that prioritise them over and above ordinary consumers, argues Sutch. While alt-nets like Freedom Fibre are helping to cater to that demand and progress has been made in rolling out super-fast broadband, he continues, more could be done to standardise service level agreements in this budding market. 

Digital skills also remain a block on long-term tech adoption among SMEs. While this may not impact the business itself in using new platforms – “I don’t think all small business owners should have an intimate knowledge of coding…or even directly employ someone who does,” says Russell – it will impose limitations on the extent to which they can be adapted or repaired in the long-term. “Just look at telecoms,” says Holt. “60% of the workforce are over 50.” 

These are not problems that can be solved with quick fixes. Rather, tackling the connectivity and tech adoption woes of the UK’s huge community of SMEs will require patience, funding and steadfast commitment – factors that have proven elusive in the febrile socio-economic maelstrom of recent years. But if the next government, Labour or Conservative, wishes to dig itself out of its current economic mire, it doesn’t really have a choice, says Russell. “I think if we really wanted to see the productivity benefits, and therefore hopefully get economic growth in the UK going again,” he says, “we really need to pay a lot more attention to this.” 

Read more: So what are Labour’s tech policies, exactly?

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