Connecting the dots an expanding network of risk and opportunity

This report, ‘An expanding network of risk and opportunity: how UK SMEs are under-estimating the growing complexity of technology’, developed in association with the Economist Intellige

An expanding network of risk and opportunity: How UK SMEs are under-estimating the growing complexity

of technology

Written by

About this report

In November 2012, the Economist Intelligence Unit, on behalf of Zurich, surveyed 549 small business owners and directors in the UK to explore what SMEs think about the current economic landscape and how they are adapting in order to survive and succeed

In addition, in-depth interviews were conducted with two SME experts Our thanks are due to the following for their time and insight:

Jay Epton, Director of SMB for Symantec Cliff Mills, Director of Research for the National Computing Centre

Contents

Foreword 3

UK SMEs have always been innovators and ‘technology adopters’, in both good times and, perhaps even more so, during more challenging times This certainly rings true today Indeed, the SME sector may be at a ‘technological infl ection point’, a signifi cant point of change for how small businesses manage and conduct business

Rates of mobile web usage and tablet adoption are defying historical precedent

‘E-tailing’ is bringing structural change to high-streets and ‘Cloud’ (Internet-based) computing is changing the operational footprint of many small fi rms A new hybrid

‘sharing economy’ of sole-traders, or ‘renters’, is also now emerging

The business benefi ts for SMEs are signifi cant Mobile working and Cloud computing can unleash new effi ciencies and levels of productivity for the small business E-tailing, online distribution and social media offer enhanced scalability, allowing SMEs to reach, sell and service new markets and customers

But these vast new opportunities also present a growing area of complexity in regards

to risk – especially, for the small business This report, ‘An expanding network of risk and opportunity: how UK SMEs are under-estimating the growing complexity of technology’,

developed in association with the Economist Intelligence Unit (EIU), focuses on this very dynamic

Over the past decade the realm of cyber risk has expanded and become increasingly complex More long-standing challenges, such as data confi dentiality and protection, are now subject to increasing oversight from the Information Commissioner’s Offi ce (ICO), as well as new EU Data Protection legislation

New emerging threats – such as cyber attack and social media reputational damage – are not only new challenges in their own right, but bring additional complexity to the

long-standing risks, due to interconnectivity The World Economic Forum (WEF) refers interconnectivity The World Economic Forum (WEF) refers interconnectivity

to this as the ‘dark side of connectivity’1, a digital landscape where the likelihood and impact of cyber threats are amplifi ed by hyper-connectivity

The current ‘transformation of the high-street’ – and its genesis in the rapid growth

of e-tailing – exemplifi es this challenging dynamic between opportunity and risk SMEs must approach technology and the future with an appetite for both – but also an equally balanced awareness, appreciation and understanding for risk in this unchartered territory

Moore’s law tells us that the power of computing power doubles every two years The pace of technology development is only increasing Over the next decade, the insurance industry can play a critical role within the greater business community in helping SMEs understand, monitor and protect against the new risks emerging in the cyber landscape

Richard Coleman

Director, SME

UK General Insurance Zurich Insurance plc

1 Global Risks 2012, World Economic Forum

Executive summary

There is no doubt that technology is dramatically shifting and rapidly expanding the landscape of opportunity for small and medium-sized enterprises (SMEs) in the UK For example, 53% of SMEs in Europe have now adopted some kind of cloud computing service, an increase of 8 percentage points on the year before2, and experts believe getting fi rmly on the technology bandwagon is becoming increasingly important for SME success and competitiveness with every passing year

However, one-quarter of UK SMEs remain in the dark, not actively monitoring technologies and the impact they could have for their businesses They also happen to be less confi dent

in their business outlook and less opportunistic overall For these non-adopters, technology ineffi ciency may add to other business challenges to create a strong headwind to long-term competitiveness and sustainability

In order to investigate in detail how SMEs have adapted to the new technology risk landscape, the Economist Intelligence Unit, on behalf of Zurich, surveyed over

500 UK SMEs

The majority are keen to capture the benefi ts to both serve their business needs and obtain a competitive advantage, but SMEs also need to manage an increasingly complex and swiftly evolving set of associated risks

SMEs are undervaluing the level of threat and the growing complexity of many technology risks – particularly those associated with emergent trends such as web-based services (cloud), mobile and social media They are underestimating their vulnerability

to cyber criminals, even as attacks targeting SMEs are on the rise And they are not suffi ciently connecting the dots regarding the interconnectivity of technology risks in general, which threatens to exponentially increase potential levels of exposure

For some industries in particular, awareness of technology risks is worryingly low Retail and distribution – a sector in potential transformation – stands out as surprisingly behind the curve on technology

While key steps are being taken by many, the biggest oversight among SMEs is the human factor Few are focussing on training and updating their security policies, which need to be driven all the way through the organisation to manage the expanding range

of vulnerable points

How are UK SMEs adapting to the growing complexity of technology?

Increased use of

mobile technology

5%negative impact,55%positive impact

IT exposure associated with

teleworking/mobile workforces

40% not a threat

Social media reputational disaster 40%not a threat

Growth of

social media

6%negative impact

34%positive impact

The technology landscape is changing quickly

As businesses change the way they communicate and share data, they are increasing their exposure to

external threats such as

data loss and cyber attack

Human error is probably the

largest risk, however only

46% of SMEs have

trained their staff

46% trained their staff

46%

have reviewed security policies SMEs are underestimating the interconnectivity

of the risks and the pace of change

Delete

consumer reviews

Source: Economist Intelligence Unit

Technology: a requirement for

SME business performance

Over two-thirds of UK SMEs say that they assess the impact of technological trends on their businesses According to experts this group is much more likely to survive and thrive

in the future Being able to link technology directly to overall business performance is the “holy grail for technology experts; but it is very diffi cult to measure”, says Cliff Mills, Director of Research for the National Computing Centre (NCC)

But the consensus is clear among experts, who believe technology is increasingly a basic requirement for SME performance, more so than fi ve years ago even Mr Mills says:

“If you are not actively on the web, and not getting the technology expertise to help run your business, you will certainly be left behind.”

Technology, confi dence and risk appetite

Interestingly, in line with expert opinion, the ‘tech aware’ SMEs – the two-thirds who actively assess the impact or possible impact of technology on their business – are more confi dent about the outlook for their businesses in the coming one to two years They also have a more opportunistic overall attitude towards risk than their ‘not tech aware’ counterparts

Table 1:

How do you feel about the outlook for your business over the following time periods?

* Those SMEs that assess the impact of technological trends on their business (67% of respondents)

Source: The Economist Intelligence Unit.

Table 2:

How would you describe your company’s ‘risk appetite’ compared with other SMEs in your industry?

Source: The Economist Intelligence Unit.

Simon Porter, Vice-President of Mid-Market Europe for IBM, a technology fi rm, warns that “by not leveraging new technologies, which many of the innovative competitors are doing, UK SMEs will lose competitiveness Many foreign fi rms are now competing more aggressively with SMEs, leveraging the Internet and cloud, so unless the SMEs in the UK respond, they will not succeed” And it is not just foreign fi rms that UK SMEs need to be conscious of Increasingly, the new generation of directors running SMEs grew up with technology, and they will have a big advantage over others

Cliff Mills is the Director of Research

for the National Computing Centre

(NCC), an independent membership

organisation for IT professionals The

NCC is the single largest corporate

membership body in the UK IT sector.

Simon Porter is Vice-President of

Simon Porter

Mid-Market Europe for IBM, the

world’s largest IT and consulting

services company IBM is a global

business and technology leader,

innovating in research and

development to shape the future of

society at large

Technology:

a requirement

for SME business

performance

Unleashing competitiveness for micro fi rms and small businesses

Larger companies are now only slightly ahead of their smaller SME counterparts in staying abreast of technology trends and their business impacts Some 80% of medium-sized enterprises are assessing technology, compared with 73% and 70% of small and micro-enterprises, respectively

With the advent of cloud services, and the evolution of mobile devices and technological sophistication, smaller SMEs are less hindered by the cost barriers that used to defi ne the divide between medium and small/micro-enterprises Indeed, our survey demonstrates that they are getting much closer to the norms among medium-sized businesses

Sole traders, on the other hand, are at a disadvantage owing to their lack of resources

Only one-half (52%) are thinking about the impact of technology on their business

Jay Epton, Director of SMB for Symantec, a computer security fi rm, reminds us that

as sole traders and in micro-enterprises, “you are often MD (managing director), IT manager, marketing director and operations director at once, so it’s diffi cult to prioritise”

In some sectors, new technologies may have a low level of practical benefi t and application for the sole trader However, for some, emerging areas such as social media can offer increased marketing and customer service opportunities, as well as reduced administrative overheads

Table 3:

Do you assess the impact that technological change is or might be having on your business? (Size)

*Those SMEs that assess the impact of technological trends on their business (67% of respondents)

Source: The Economist Intelligence Unit.

Jay Epton is Director of SMB

at Symantec, a global leader in

providing security, storage and

systems management solutions to

help small businesses secure and

manage their information.

Technology:

a requirement

for SME business

performance

Retail industry stands out as behind the technology curve

Industry sector infl uences the relative importance of technology Most striking

is how few SMEs in the retail and distribution industry are assessing technology impact, particularly in light of the cannibalisation of high street shops by online retailers in recent years Not only is the growth in retail overall expected to be fl at

in 2013-14, according to the Centre for Retail Research (CRR), but 2012 proved to

be the worst year for bankruptcies since the start of the recession in 2008 Yet for many retailers ‘online seems to be an afterthought’

Table 4:

Do you assess the impact that technological change is or might be having on your business? (Industry)

Source: The Economist Intelligence Unit.

Retailers also appear to underappreciate the potential scale of threat that the emerging technology landscape poses for their day-to-day and business performance For instance, only 17% view data loss as a ‘major threat’ and, even lower, 10% see social media reputational disaster as such Given the increasing reliance of retailers on ‘online reputation’ – for instance, online customer reviews – to help generate future demand and business earnings, the latter refl ects a signifi cant new area of vulnerability

SMEs seem to fully embrace the upside of technology for their businesses, but are they taking the right precautions when they adopt new technologies? Many are underappreciating the potential business impact that many technologies may pose

Technology only has an upside in the eyes of SMEs

Emerging technologies are evolving rapidly, creating huge opportunities for SMEs that are both accessible and, as we saw in part one, necessary to remain competitive according to experts The broad perception among SMEs is that technology brings almost exclusively positive opportunities to their businesses At most, just 6% of respondents see technology trends having a negative impact

Online shopping is the one exception, and the retail industry is struggling with the technological challenge it faces (see box)

Table 5:

What impact do you think the following technological trends are having on your business?

negative impact

Some negative impact

No impact

Not applicable

Some positive impact

Signifi cant positive impact

Increased use of mobile

technology

Increased use of

personal devices

0.5 % 3.8 % 31.7 % 11.7 % 39.3 % 12.9 %

Growth of web-based

software or IT services

Increased analysis/use of

customer data

1.5 % 3.6 % 39.7 % 17.7 % 30.1 % 7.5 %

Growth of online

shopping/consumption

3.5 % 10.4 % 39.0 % 22.0 % 17.9 % 7.3 %

Advances in

manufacturing technology

Source: The Economist Intelligence Unit.

Still surprising is the proportion of SMEs who view these technology-related trends – such as mobile technology, personal devices and web-based software services – as irrelevant to their businesses But the numbers are also slightly skewed by the signifi cantly different perspectives among the ‘tech aware’ and ‘not tech aware’

Opportunity in technology (positive impact) lies in the eyes of the ‘tech aware’

Opportunity versus threat: the perception gap

Opportunity

versus threat:

the perception gap

Table 6:

What impact do you think the following technological trends are having on your business?

No Impact/

Not Applicable

(Some/Signifi cant) Positive Impact

Tech Aware Not Tech Aware Tech Aware Not Tech Aware

Increased use of mobile technology 29% 62% 66% 34%

Growth of web-based software or IT services 40% 72% 55% 24%

Growth of social media 53% 75% 41% 19%

Advances in manufacturing technology 69% 85% 29% 10%

Source: The Economist Intelligence Unit.

Threat – a mix of healthy fear and underestimation?

Technology-related risks are seen on an entirely different scale Over three-quarters

of UK SMEs, a huge number in comparison to those that see opportunities, see long-standing risks associated with data loss, cyber attack and electronic theft or fraud as threats This implies that SMEs hold a healthy – if not overly fearful – view of the potential threats that these long-standing technology-related risks pose The risks associated with emergent trends, however – such as cloud computing, Internet-based services, social media and mobile workforces – are not seen to be as signifi cant While over one-half of UK SMEs see these trends as some level of threat, worryingly less than 20% perceive them as a ‘major threat’ In the case of reputational disaster from social media, only 13% of SMEs view this as a major risk These statistics may indicate a lack

of understanding of the complexity and the potential scale of impact associated with these emergent trends