Two actions that can increase European SMEs’ profitability and job creation

This guest blog post was written by Eoin Costello, Digital Champion for Small Businesses at DigitalHQ clg


The pandemic has accelerated two trends: digital adoption and transfer of value

In the past year, the rate of SME digitalisation has leapt up as a result of the COVID-19 pandemic. At the same time, so has the increasing reach by cloud-based providers of business services of all types. From cloud computing to ride-hailing, from food delivery to online ordering from Amazon, these all take a bite of varying sizes out of the income of local SMEs in sectors as diverse as restaurants, retailers, or IT solutions providers. In the final quarter of 2020, Microsoft’s quarterly revenue surpassed $40bn for the first time as demand for cloud services continues to grow as a result of its direct to market sales.

This pattern is only going to accelerate with big businesses like Microsoft investing in clouds for industry, thus potentially removing the need over time for local enterprise software companies as well. Put at its simplest: the net effect of these accelerating trends will be to transfer value from our local communities to big business, Silicon Valley and the NASDAQ.

At DigitalHQ we believe that there is an opportunity for the EU to leverage digital growth plus the ‘loyalty to local’ movement inspired by the pandemic to create sustainable, SME-led jobs in our local communities. To maximise the potential for success we must act both at the level of individual SMEs and secondly at the collective level of the localities where those SMEs are based.

What’s the collective noun for a cluster of small businesses? A town!

Eoin Costello

Action #1 – Digital Growth Mindset for SMEs

Many European SMEs have poor productivity growth. Our goal must be to help SMEs level the playing pitch with big businesses by empowering them to get the maximum impact from their investment in digital assets. This requires a change in mindsets as owning a digital asset is not the same as powering up your business through digital. In other words, sustainable digitalisation does not stop at acquiring a Zoom subscription or collaborating through Google Docs. It means to profoundly remodel your business in a way that maximises the digital empowerment of your activities.

Each stage of growth of my own business, Novara Technology, from starting in the spare bedroom of my home to becoming Ireland’s second largest hosting company, was underpinned by a change in mindset on my part. My focus was constantly on how we could use digital to do things better. This led to a considerable investment in in-house developed automation software. This meant that by the time of Novara’s successful sale we had one of the best staff to sales ratios in the industry and were highly profitable with zero debt.

I use the analogy of the power loader ‘exoskeleton’ we saw in the movie Aliens to help explain the difference between buying a digital asset and using it to its full potential within your business. When business owners create real synergy between their team, their operations and their digital assets they can power up and use the ‘digital exoskeleton’ to make their businesses, as Daft Punk would put it, Harder, Better, Faster, Stronger!

Many SMEs don’t set about achieving synergy with their digital assets but, to use the analogy of an exoskeleton, leave them in the box or have them perform trivial tasks!

At its most basic, the Digital Growth Mindset is about understanding what value customers get from your business and then delivering that as effectively as possible by embedding digital capability and agility in your business using a four-step process. Each of these steps can be seen in more detail here.

  1. DIFFERENTIATION: Understanding from your customer’s point of view your basis for adding value. This helps inform the work of keeping your business the first choice of your customers and ahead of the competition.
  2. PRODUCTIVITY: What is the best way to sustainably deliver this value proposition? The goal here is to figure out how to operate your business in a way that your most valuable resource, you and your core team, are in a position to put as much time and effort as possible into working on your business rather than in your business.
  3. MEASURE: Energy flows where attention goes. Once you have a good sense of the ideal composition of how you will operate the activities of your business, the next step is to identify how you will know if all the parts are working together effectively. Real-time graphical displays of your KPIs can help you know if you are successfully creating synergy within your business.
  4. AGILITY: Change is the only constant in business. Once you have worked through steps 1, 2, and 3, that’s not the end of it. Your business is a living system that needs constant alertness and fine-tuning. Under step 4, you, as the owner or manager will be constantly monitoring and managing the dynamic tension between where you are now and where you need your business to get to.

Action #2 – Digital-First Communities

At DigitalHQ we believe that the future of our economies in Europe needs to be local and distributed. To optimise the best use of the fabric of our countries we need to use digital growth to create symbiotic relationships between localities, traditional small businesses and innovation-driven SMEs.

To achieve the benefits of  ’Digital First Communities’, localities need to digitally project their area as vibrant and attractive locations in which innovation-driven SMEs can thrive. Traditional SMEs need to maximise the use of digital to increase their reach and capture rate while local groups need to be created to help network and retain digital talent and their businesses.

If the EU implements effective policies to mobilise these strands of activity, small businesses will no longer want to go to work in business parks, industrial estates or city centres because their staff don’t want to be there. They will instead locate in the ecosystem of supports and resources that rural towns can provide. This will benefit traditional SMEs who need the footfall of innovation-driven SME staff in their locality for the sustainability of their businesses.

Another more subtle benefit is about culture change. The pace of technological change is so rapid that some small business owners are experiencing learned helplessness and are opting out of digital growth due to an experience of “too much change in too short a period of time”.

The spillover benefit of having digital natives drop into their local traditional business for a casual chat and sharing insights on getting business from digital is at the heart of our “Digital First Communities” model. We also know that for every job that software ‘eats’ research has shown that 2.6 new jobs are created. Imagine if during that chat over coffee the traditional business owner mentions that they are reducing headcount in the shop as more sales are done online. To this the digital SME owner mentions that they are looking to take on digital apprentices to meet the growing demand of their business, she asks how soon people might be available to start?

Creating fusion between traditional and digital SMEs in ’Digital First Communities’ can create long term sustainable jobs in rural communities.

Creating synergies between traditional businesses and innovation-driven SMEs

This imagined conversation illustrates the fact that we must seek to create synergies between traditional SMEs (the dry cleaner, the bakery, the tour guide) and Innovation Driven SMEs at the most local level possible to help future-proof traditional small businesses within their localities. At the macro level, this strategy can help reduce an economy’s dependence on a small number of mobile multinational corporations (MNCs) for economic growth.

Empowering local and distributed centres of employment will enable regional communities to retain tech talent in localities and enable SMEs to better compete for that talent. These innovation-driven SMEs can also revitalise vacant buildings; our digital growth living lab in Dun Laoghaire is located in vacant space in a 19th-century listed building.

With support and leadership from the EU, many localities, from neighbourhoods and villages to towns and regions, can start to take a grassroots-up, holistic approach to creating indigenous engines of growth at the heart of their communities as they plan their post-pandemic futures.