Small and medium enterprises (SMEs) have been identified as major drivers of inclusive economic growth and development in this country and around the world, according to the Banking Association of South Africa.
It notes that researchers estimate that in South Africa, SMEs make up 91% of formalised businesses, provide employment to about 60% of the labour force and total economic output accounts for roughly 34% of GDP. These are impressive statistics.
SMEs are also said to foster diversification through their development of new and unsaturated sectors of the economy. In addition, innovative and technology-based SMEs can provide a platform for local, regional and international growth, especially in Brazil, Russia, India, China and South Africa (BRICS) economies.
As such, SMEs are considered to be significant contributors to economies through unemployment reduction in the face of a formal sector that continues to shed jobs. If that’s the case, why is it that so few manage to sell those businesses for their true worth?
The Banking Association of SA lists the many challenges faced by SMEs, but highlights the lack of appropriate technology as a major contributor.
How much is the business worth?
Reportedly, a whopping 98% of small businesses polled by M&T Bank over the past two years didn’t know the value of their companies. I would take that a step further and add that most SMEs never realise the true value of their businesses because they are not invested in the right technology that will place them ahead of their competition.
Capital outlay is not a necessary outcome of an upgrade in technology.
After all, that is the name of the game in all sectors. Again, this can be due to a number of factors, including a ‘penny wise, pound foolish’ mindset – the SME feels it will involve a capital outlay which it cannot afford; the wrong technology advice that focuses more on the supplier selling ‘IT’ and less on business problems and how to solve them.
SMEs should listen up at this point and note – capital outlay is not a necessary outcome of an upgrade in technology. SaaS-based models are a good option for SMEs that, with the help of the right advice, can purchase on a ‘pay only for what you use’ basis, making it affordable.
Also, managed services have long since been hailed as immensely cost-effective. This model can be customised to include other components of IT, such as security, hardware, data backup, recovery and management, network monitoring, HR, and payroll. There is no one-size-fits-all solution − it all depends on the organisation’s digital maturity and strategy.
Technology is changing rapidly and constantly needs to be refreshed, adding the headache of cost unpredictability. The managed services option moves to a fixed monthly cost, eliminating capex costs as well as the other costs associated with buying, maintaining and supporting IT, including staffing.
Is the business sustainable?
Operating an SME in the South African economy is no mean feat. The business knows its market, understands its product offerings, knows how to sell them and has grown over the years. Having said that, it still can’t crack that last hurdle that would put it one step ahead of the competition – why is that?
This can be for a variety of reasons but in my experience over the years of consulting to SMEs and large enterprises, it often rests specifically with the issue of technology for technology’s sake – in other words, the tech is not increasing the value of the business.
This is because it is not enhancing customer service, operational efficiencies nor is it providing the level of security needed in today’s cyber crime-ridden world. Above all, its tech solutions have not been devised from the perspective of growing the value of the enterprise.
Where does the SME’s special magic juice – its intellectual property (IP) – reside? In carefully designed technology repositories, or in somebody’s head? Over-reliance on owner/founder knowledge is a common problem in my experience and can apply to small and medium enterprises.
Is the cache of IP in the SME easily accessible, or is it locked inside the head of one or several individuals in the company?
Too many businesses make the mistake of not systematising valuable company/market IP and knowledge. The reason they don’t do this is because they don’t know how to extract this value and how to get it onto their systems.
Again, this is usually coupled with SMEs partnering with suppliers of IT instead of finding a partner that will dig deep into their business structures, look at the challenges, understand how the company operates and set about solving the business problems, as opposed to selling boxes or software that goes nowhere near improving the business value.
In my next article, I will expand on what SMEs need to do to ensure a business that continues to grow, is ahead of the competition and is a highly-saleable entity.
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