KfW Research: SMEs have not fully realised their digitalisation potential

• Total annual investment is just EUR 14 billion
• Only one in four businesses have completed digitalisation projects
• Small businesses are particularly reluctant
• Knowledge-based service providers and R&D-intensive manufacturers are leading the field

Only a modest proportion of the 3.71 million SMEs in Germany has concluded digitalisation projects successfully in the past three years (2014-2016). According to a current analysis conducted by KfW Research, just one in four small and medium-sized enterprises (26%) have invested in the deployment of new or improved digital technologies for processes, products or services. SMEs spent a total of EUR 14 billion on digitalisation projects in 2016. Compared with the EUR 169 billion they invested in new machinery, buildings, equipment and similar items, their expenditure on digitalisation is therefore relatively low. On average, an enterprise spends EUR 18,000 on digitalisation projects.

The main item of SMEs’ digitalisation projects is the renewal of IT structures (54% of respondents), closely followed by the digitalisation of contacts with customers and suppliers (52%). Less common are investments in the development of specific expertise (38%), the reorganisation of workflows (29%) and the introduction of new marketing and distribution strategies (29%). The digitalisation of products or services is the least common item, accounting for 19% of all projects.

The current analysis by KfW Research maps the digitalisation activities of the entire German SME sector across its entire breadth in a representative way for the first time. On the basis of the KfW SME Panel, enterprises of all size classes and sectors were surveyed on whether and how they have expanded their digitalisation between 2014 and 2016. Unlike previous studies, the analysis also captured small businesses with fewer than five employees. These small businesses represent the bulk of the German Mittelstand – 81% of all SMEs fall into this category.

Although this high number of small businesses accounts for a substantial portion (EUR 4.3 billion) of SMEs’ total expenditure on digitalisation, the bulk of them has not yet identified potential benefits of digitalisation for their own business model. In the past three years, only 24% have even completed a relevant project. Digitalisation efforts increase with the size of the business. Forty-five per cent of large SMEs with more than 50 employees have completed projects.

But large SMEs are not only more likely to digitalise their business. A look at the different types of digitalisation projects shows that they are also technologically more sophisticated. Large enterprises are more likely to renew their IT structures, regard the development of in-house digitalisation skills as important and set out to reorganise their workflows. Small businesses, in turn, are primarily involved with digitalising links to customers and suppliers or invest in digital marketing and distribution strategies. Large SMEs have probably passed these digitalisation stages long ago.

In addition to its size, the industry to which a small or medium-sized company belongs also has a strong influence on digitalisation activities. What is little surprising is that knowledge-based service providers such as the media, IT service providers, law firms, tax accountants and management consultancies (32%) are particularly active. The same is true of R&D-intensive manufacturers (31%) in industries such as engineering, electronics and chemicals. Digitalisation projects hardly play a role in the construction sector (13%).

“In German SMEs, digitalisation is still in its infancy”, said Dr Jörg Zeuner, Chief Economist of KfW Group. “Particularly the many small businesses in this country still appear to have a limited concept of the benefits digital technologies may bring to their business model. Projects are therefore rare and approached with hesitation. It is not just the slow pace at which SMEs introduce digitalisation that is problematic, but also their narrow view of the topic. Digitalisation projects are often reduced merely to possible efficiency gains. But precisely because new business models and new service and product offerings are very important for growth, productivity and competitiveness, a reorientation is imperative.”

“In order for the digital revolution in the German SME sector to succeed and new business models to have a chance of developing, removing existing barriers is of crucial importance,” Zeuner added. “These include employees’ lack of IT skills, unresolved issues relating to data security and data protection, problems in adapting the corporate structure and workflow management, and the unsatisfactory quality of internet connections. In addition to informing about the benefits and opportunities of digitalisation and speeding up the expansion of the broadband network, policymakers can improve digital education in particular. This will require greater efforts in all areas of the educational system – in schools and universities as well as in the dual training system and professional development”.

The current study by KfW Research on digitalisation in SMEs can be accessed at: Digitalisierung(only in German)