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‘Digital drag’ reveals £77.3bn income gap for UK small businesses

October 3, 2023

The smallest firms are falling behind larger SMEs in digitalisation, with potential for 885,000 new jobs

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The UK’s smallest companies could generate £77.3bn of extra revenue and create 885,000 new jobs if they all digitalised at the rate of the top 20% of tech adopters*. This is according to new research from Xero, the global small business platform, and economics consultant, Cebr.

The research, from Xero's Beating the 'digital drag' report also found that SMEs that had digitalised the most over the last four years grew their revenue by 8.1% over the same period, compared to the slowest adopters, who’d seen their revenues decline by 4.7%. Improving customer experience, smoother operations, and expanding their client base were cited as the top three benefits for adopting more tech.

Small businesses: the heart of the UK economy

As part of the research, 684 of the UK’s smallest businesses** – those with up to nine employees – were surveyed. Overall, these businesses contribute £934.8bn to private sector turnover (15.3% of total UK turnover) and represent 94.8% of all UK companies. They provide more than a quarter (8.9m) of the country’s jobs, and for every £1 they make, create an additional 59p for the wider economy.

Despite this key economic role, many lag behind larger small businesses when it comes to digitalisation. In fact, the survey found that on almost every measure, those with 10-249 employees have innovated faster than the UK’s smallest businesses. They use almost twice as many digital tools – an average of eight technologies each, compared to 4.7 by the UK’s smallest businesses. And despite the pandemic driving many of them online from early 2020, less than a third (30%) have increased their use of digital tools since 2019, compared to 69% of larger SMEs. 41% of the UK’s smallest businesses report using emerging technologies, such as AI and digital assistants, compared to 77% of larger SMEs.

Without a clear understanding of the benefits of digitalisation, 40% of small businesses say they fail to see the relevance of new technologies to their company, with a similar number (39%) believing that adopting more tech wouldn’t deliver value for money.

Commenting on the findings, Alex von Schirmeister, UK Managing Director at Xero, said: “This nation’s army of tiny firms already pack a punch, contributing billions to the UK economy and creating millions of jobs. But they have a different relationship with technology to larger SMEs, often without dedicated experts on hand to support adoption. They have unique needs and priorities as businesses, so shouldn’t be treated as one ‘catch-all’ group.
“The smallest firms suffer from a 'digital drag' where concerns over technology can suppress the transformational benefits to them. With the right guidance and support, these businesses could fuel even more economic growth and reach new levels of success with technology.”
Huib Maat, founder of Pairfum London added, “Before the pandemic, we sold our perfumes almost exclusively in physical stores, but we soon launched our e-commerce store to sell our products online. It was a scary time and we didn’t always know where to turn for help. We already have to wear many different hats, so it is difficult to add too many tools, as each tool has a learning curve before we become an expert. I would definitely appreciate more expert advice and guidance that’s tailored to my size and type of business.
“For every new piece of tech we consider bringing into the business, we assess whether we can afford it, how easy it would be for our team to use it, and crucially, how much of an impact it will have on our productivity and performance. But when the right tools are used, they can transform a business. We are currently experimenting with AI in the development of our next range of fragrances and products, which is really exciting.”

Beating the ‘digital drag’

To help small businesses thrive and choose the right technologies for their organisations, Xero has the following recommendations:

  • Set clear expectations: help staff embrace new technologies by tackling psychological and behavioural barriers. Part of this comes down to talking plans through so everyone knows what’s expected of them, and how the tech will help them do their jobs
  • Prioritise the right tech: start with the options that will have the most impact. Think not just about what the tech can do, but how it will fit into company culture.
  • Predict trouble spots: think about all the things that could go wrong. Advance planning can reveal any hidden threats and help avoid any teething problems.
  • Balance costs and benefits: create lists of the costs and benefits. Being objective helps overcome any resistance to change by identifying exactly what’s at stake.
  • Put into practice: a fifth (20%) of small businesses admit they lack the knowledge or skills to adopt more tech. To address this,check out relevant training and support from industry bodies, groups or trade associations. Working with a mentor or advisor (like an accountant or coach) is another great way to develop a strategy and boost skills in key areas.
  • Learn and adapt: reach out to people, like an accountant, who might be able to offer insight into how similar businesses have digitalised, and what benefits they have enjoyed. Find out what did and didn’t work for others.

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