The digital skills gap is a major threat to SME growth plans this year

A majority of SMEs in the UK believe digitalisation is important for the future of their business, but feel constrained from implementing it by the current shortage of digital talent.

Web hosting company IONOS, in partnership with YouGov, polled 1,004 UK SMEs to ask whether they view digitalisation – defined as the transformation of a business model towards using mainly computer processes – as a priority.

It found that 79% of small business owners in the UK consider the adoption of new technologies to be critical for future growth, citing opportunities for brand-building and customer retention.

However, their ambitions have stalled, due to a lack of job-ready digital talent. Some 29% of those polled said the ongoing shortage of skilled workers poses a high or very high risk for their business.

Experts are warning that small firm owners must double down on digitalisation to take full advantage of the potential benefits this year.

Skills shortage continues to impact businesses

We’ve written previously about the talent shortage as a result of the so-called ‘Great Resignation’. Swathes of employees handed in their notice following the COVID-19 lockdowns, leading to a stark rise in the number of job vacancies in the UK.

IT roles have been some of the hardest to fill. The shift to remote working during COVID-19 has led to a rapid advancement in technology – but some business owners’ eyes are bigger than their staffing.

Companies that jumped to get on board with trends like AI have found themselves unable to find the tech talent to support such ambitions – driving up demand for tech teams. Digitally-savvy workers are now rulers of a ‘sellers market’, where employers are clambering over each other to hire them.

It’s not surprising that many engineers and developers now only accept remote, short-term contracts with the highest bidder – exacerbating the recruitment issue for hiring managers.

Startups research, carried out in early 2021, found that lack of digital talent was one of the lowest concerns for SMEs looking to adopt new technologies in the organisation. At the time, just 7% of entrepreneur respondents listed it as a barrier.

Results of a Startups poll of UK business owners (2021): What are the barriers to adopting new technologies in your business?

Two years later, IONOS’ findings show that the digital talent gap – the discrepancy between the demand and supply of workers with sought-after digital skills – has become the biggest blocker to digitalisation by small firms.

Some 31% of respondents told IONOS that their workforce’s poor tech know-how represents a major barrier to digitalisation efforts. Other barriers given were:

• Cost (45%)
• Lack of time (45%)
• Lack of interest (21%)
• Uncertainty around security and data protection (24%)

One solution is to invest in upskilling workers. This involves introducing structured training programmes to help existing employees develop new skills. It is generally much cheaper than onboarding and recruitment costs.

Another option is to look towards Gen Z workers (those currently aged between 16-25). This age group tends to be more digitally-savvy than older colleagues, having grown up alongside the internet.

Andy Peddar is CEO of Deazy, a specialist software talent company that embeds its developers, or teams, within client workforces. Peddar says there are still affordable options for startups to plug digital skills gaps.

“Recruitment agencies are old-fashioned, although can still play a role, and there are freelance marketplaces available too. There are [also] more agile ways to address this challenge, such as working with an external partner to spin up a full tech delivery squad or to augment the in-house team.

“This means startups can benefit from up-to-date skills and experience whilst keeping their cost base flexible and without treading on the toes of current employees.”

Despite the precariousness of the hiring market, there is hope for tech SMEs. Figures from the Office of National Statistics (ONS) show that the vacancy rate fell by 9,000 for the scientific and technical industries between December 2022 and February 2023.

“Those who don’t firmly anchor their business strategy in digitalisation will have a hard time surviving in the market in the future,” comments Achim Weiß, CEO of IONOS.

“Of course, know-how must be built up first and resources invested, which isn’t always easy, especially for small companies. However, what they gain from digitalisation far outweighs that initial outlay: more security, new business models and greater resilience to crises.”

Economic uncertainty poses further concern for entrepreneurs

The IONOS report shows that small business owners are aware of the value of using business tools and software for growth.

The three top benefits of digitalisation, as chosen by small business respondents, were:

• Greater presence and ease of discovery on the internet (78%)
• Creating a modern image (76%)
• The ability to win new customers (72%)

Alongside the tech worker shortage, however, is another discouraging factor for firms: the cost of living crisis.

IONOS’ research suggests that heightened overheads, caused by inflation, are also stopping business owners from investing in automated tools that can enable digitalisation – without the added hiring fees.

• 42% of respondents stated that the declining economy presents a high, or very high, risk to their company. For many, stemmed cash flow is discouraging investment.
• 34% identified increasing prices of energy and raw materials as a threat to budgets
• 28% stated that inflation is a major barrier to further digitalisation.

Changes to the government’s R&D tax relief scheme, which allows firms to claim a tax break for spending made on innovation projects, have also lessened SME appetites for new tech investment.

Chancellor Jeremy Hunt announced the enhanced deduction small companies could claim for qualifying R&D expenditure has reduced from 130% to 86%. By contrast, the amount for large companies will increase from 13% to 20%.

A survey by Nucleus Commercial Finance, carried out in February 2023, shows that 23% of small business owners have delayed planned investment in new technology or infrastructure as a result.

Top 3 tips for bringing down technology costs in your business

In light of the economic challenges, putting in the hours to find better software and hardware deals is a crucial step for senior leaders.

But with every platform currently advertising itself as a must-have, company tech wishlists are likely bursting at the seams.

Here’s our top three tips for streamlining hardware purchases or upgrades when you’re working to a strict budget.

1. Look for a scalable platform. Outgrowing an existing system brings hefty replacement and training costs. You may be stagnant now, but it’s a good idea to find a platform with lots of pricing tiers to ensure you’re not hindering growth in the long run.
2. Audit your existing software. If you’re seeking to update a platform, first take the time to identify exactly what you don’t like about your current solution. If a specific pain point can be patched up with a quick fix add-on, you might find a complete overhaul isn’t necessary.
3. Look for a free solution. If a free plan isn’t available with your chosen provider, a free trial might tide you over while your finances are still stretched. It might not last forever, but you’ll be able to test out a product before you risk any money on it.