KfW SME Digitalisation Report: SMEs spent a record EUR 23 billion on digitalisation in 2021

• COVID-19 pandemic’s boost continues as businesses begin to tackle more complex projects
• Risk of a split into digital pioneers and small firms left behind is greater than ever
• Lack of digital literacy and IT experts is slowing progress

The new KfW SME Digitalisation Report has revealed that the pandemic-induced digitalisation surge in the SME sector continued in the year 2021. Expenditure by small and medium-sized enterprises in Germany on digital projects rose to EUR 23 billion (2020: EUR 20.3 billion), a new record since the first survey conducted by KfW Research in the year 2016. SMEs’ overall expenditure has increased by two thirds since then.

The SME base engaged in tackling digitalisation projects has not broadened significantly during the coronavirus pandemic. At 31%, the share of digital transformers among SMEs is just marginally above the pre-pandemic level of 2019 (30%) and has dropped slightly on the first pandemic year 2020 (33%). But this also means that those investing in digitalisation are spending more on the individual measures they are putting in place. Average expenditure by a small or medium-sized enterprise on digitalisation rose sharply from EUR 19,900 in 2020 to now EUR 26,200. This is consistent with the fact that the quality of digitalisation projects is shifting from relatively simple crisis management measures in the first pandemic year (such as more online sales or digital marketing) to complex, more permanent and strategic projects. Thus, a good one fourth more projects (+26.8%) involving the reorganisation of workflows were realised in 2021 than the year before, and projects aimed at digitally integrating functional areas increased again slightly in 2021 (+3.2%) after falling sharply by -12.5% in 2020.

The figures for the overall SME sector mask very mixed developments from one company size class to another. While small firms with fewer than five employees in particular are putting digitalisation on the backburner again after implementing pandemic management measures in 2020, larger SMEs are continuing or further expanding their activities. Whereas 27% of small businesses were still among the digital transformers in 2021 (2020: 30%; 2019: 28%), that figure was over 52% in medium-sized companies with more than 10 employees (2020: 48%; 2019: 44%) and even 65% among the large enterprises with more than 50 employees (2020: 67%; 2019: 60%). A look at the amounts invested shows that an even more pronounced gap between small and large SMEs. Large enterprises invested an average EUR 173,700 in digital projects, 21 times more than the average invested by a micro business (EUR 8,300).

The shortage of IT specialists and general lack of digital literacy among employees is turning into an increasingly serious obstacle for digitalisation among SMEs. One in four businesses (25%) mentioned lack of IT skills as a barrier to digitalisation, and 22% complained about a shortage of IT specialists. Among the SMEs embracing digitalisation, 63% anticipate problems filling vacancies in the next three years. Unlike businesses that have not even started to go digital, these companies mainly face a shortage of candidates with advanced digital skills (+66.2%) and applicants with basic knowledge in this area (+31.3%) and knowledge of mathematics and statistics (+23.9%). They are attempting to solve the problem by investing in continuing professional development to upskill their existing workforce (46%), and to a lesser extent by introducing processes that reduce workloads or a business reorganisation (12%).

“Germany is about to undergo major transformations, and its future competitiveness and prosperity depend on whether it can manage them successfully. The digitalisation of its economy plays a particular role in this. As the new KfW SME Digitalisation Report shows, there is reason to be optimistic. The pandemic-induced digitalisation surge in the SME sector is continuing, overall expenditure on digital projects is growing and flowing into more long-term projects, and businesses are tackling the issue from a more strategic angle”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “However, a few drops of bitterness remain, particularly the fact that the SME base tackling digitalisation is hardly expanding and the risk of a split into digital pioneers and small firms left behind is now greater than ever. And it is becoming increasingly clear that recruitment problems also mean the digital transformation is anything but guaranteed. The shortage of workers with digital skills is increasingly becoming a barrier to digitalisation. Businesses are addressing the issue with mixed levels of success.”

Further information can be retrieved from https://www.kfw.de/%C3%9Cber-die-KfW/KfW-Research/Digitalisierung.html

The database:

The KfW SME Digitalisation Report is based on the SME Panel (KfW-Mittelstandspanel), which has been conducted since 2003 as a recurring postal survey of small and medium-sized enterprises in Germany with annual turnover of up to EUR 500 million. The KfW SME Panel provides representative data for all SMEs of all sizes and across all industries in Germany. A total of 10,796 SMEs took part in the most recent survey wave, which was conducted in the spring of 2022.