Malaysia’s SMEs look to invest in digital technologies

• Transformative technologies will become an investment priority by FY22
• Majority of SMEs (Malaysia 62.7%, SEA 54.9%) in early stages of digital maturity

SMALL and medium enterprises (SMEs) across Southeast Asia are looking to invest in digital technologies within the next three years as the key enabler to drive new business propositions and user experiences, and deliver on significantly enhanced offerings. However, they face challenges around digital talent shortage and transformation, cyber-security risks, as well as in determining how to incorporate a holistic strategy for continuous digital innovation, according to a new EY report, Redesigning for the digital economy. 

The study of about 370 SMEs across six core Southeast Asian markets (Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam) revealed that transformative technologies will overtake current technologies to become the investment priority in three years’ time.

Transformative technologies cover digital applications such as artificial intelligence (AI), machine learning, blockchain and robotic process automation (RPA); while current technologies are defined as upgrades and expansions to existing infocomm technology (ICT) software, hardware and services.

The study found that Southeast Asia’s SMEs presently (FY19) focus their investments in current technologies (77.2%), transformative technologies (76.4%) and fixed assets (74%). However, in three years’ time (FY22), respondents expect their investment priority to shift to transformative technologies (80.7%). Those that expect current technologies and fixed assets to be investment priorities in FY22 slipped to 76.9% and 72% respectively.

In Malaysia, current technologies (81%) are a top investment priority among SMEs (FY19), followed by fixed assets (75%) and transformative technologies (73%).

Looking ahead, SMEs in Malaysia expect transformative technologies (83%) to take investment precedence, followed by current technologies (78%), intangible assets (including patents, trademarks, copyrights, franchises and goodwill) (73%), and then fixed assets (71%).

Liew Nam Soon, EY Asean Markets Leader explains: “Companies are investing in conventional technologies as to drive business-as-usual performance. However, going forward, the sea change is that they see the value and potential that emerging technologies such as artificial intelligence and machine learning bring.

“Further, digitalisation is not a one-off investment or project. Digital adoption is a journey that will require long-term organisational change, executive sponsorship and a different lens on investment horizons.” 

Majority of Malaysia’s SMEs in early stages of digital maturity

While the benefits of digitalisation are apparent, the digital ambitions of the SME respondents may not sync up with their perceived level of digital maturity.

Only 6.8% of Malaysia’s SMEs (Southeast Asia 8.7%) are at stage five of digital maturity, where organisations have a single digital platform to scale technological innovations and consider themselves digital native enterprises.

The majority of SMEs in Malaysia (62.7%) are in the early stages of digital maturity (Southeast Asia 54.9%), with digitalisation programmes remaining largely unaligned with the broader enterprise strategy and multiple initiatives running in parallel across business functions.

Over half of the SMEs in Malaysia are at stage two (Malaysia 52.5%, Southeast Asia 38.3%) of digital maturity, where digital transformation initiatives have some alignment to the organisation’s enterprise strategy and are initiated at the functional or lines of business level, with multiple strategies running in parallel; while less than a fifth (Malaysia 10.2%, Southeast Asia 16.6%) of the respondents are still at stage one, or the initial phases of digital transformation, where initiatives are largely informal, tactical and separate from the organisation’s broader enterprise strategy.

Chow Sang Hoe (pic, right), partner and Malaysia Advisory leader, Ernst & Young Advisory Services Sdn Bhd and EY Asean Advisory Leader, says: “While there is a desire among SMEs for an agile digital strategy, this still eludes many. Most SMEs are currently rather tactical in their digitalisation efforts – placing ad-hoc smart bets and picking the low-hanging fruit, before embarking on deliberate steps toward a more defined digital transformation strategy as they mature along the continuum. This is reflected in the case of Malaysia’s SMEs who perceive themselves to be at the earlier stages on the adoption continuum.

“Digital transformation shouldn’t be an end destination in itself. Instead, digitalisation is a critical business enabler that incorporates robust new technologies, operating models, cultures and mindsets to empower organizations to craft new business propositions and user experiences, or deliver significantly enhanced offerings,” Chow adds.

Challenges impeding digital transformation

Among the top three challenges that Southeast Asian SMEs face with digital transformation are: a lack of access to digital talent (64.7%); pressure to focus on the short-term benefits of digitalisation (64.7%); and digital risks (64.4%).

One of the toughest challenges is securing qualified digital talent such as data scientists and social marketers. Individuals with the relevant skillsets are scarce, particularly in the emerging markets of Southeast Asia where digitalisation outpaces the supply of talent that can deliver on it.

As critical is the tendency to focus on immediate gains against investment in the longer term for digital future-proofing. Given the competing agendas vying for budget and limited resources, initiatives with more tangible and near-term returns may take precedence over digitalization programs.

As well, new technologies can be a double-edged sword, giving rise to opportunities as well as security and data risks such as cyber threats and data breaches.

In Malaysia, the top three challenges are difficulty for existing staff to reskill and transition towards a digital-first culture (67.8%); lack of talent (66.1%); and pressure to focus on the short term (64.4%).

Chow comments: “Digital transformation is as much a cultural as a technological endeavor. Understandably, Malaysia’s SMEs appear to focus more on current technologies to deliver immediate gains in the near term against budget and resource limitations.

“However, as they seek to achieve digital transformation, the need to reskill and transition existing staff towards a digital-first mindset is crucial.

“The digital talent challenge that SMEs face is not unique. The Malaysian government recognizes this and has introduced new schemes, programs and incentives to encourage reskilling or upskilling. Initiatives such as ‘Industry4WRD’, Malaysia’s National Policy on Industry 4.0 as well as MDEC’s Premier Digital Tech Ecosystem provide structured support to boost existing employees’ digital skills and build a strong pipeline of talent in digital and technological capabilities.”

Steps to undertake in the digital transformation journey

The EY report highlights seven high-level steps that SMEs should undertake in their digital transformation journey:

• Lay a firm foundation for digital success: Transformation begins with having strong and committed executive level sponsorship with oversight of digital technologies and foresight to prioritise these to champion change.
• Balance legacies with new technology: 61.0% of Malaysia respondents (Southeast Asia 60.9%) highlight that IT limitations from legacy architectures are hindering their digital strategies. This is a pervasive issue, with organisations working on old fragmented infrastructures that constrain business agility.
• Focus on end-to-end, not discrete initiatives: Organisations should create and embed the digital strategy into business operations, then design the right products, services or experiences to enhance performance based on these aspirations.
• Share responsibilities collectively; digitalisation isn’t an IT-only initiative: Adopting emerging technologies should be cross-organisation such that no one individual or department owns it. The responsibility is shared across multiple divisions, with multiple users benefiting from the transformation.
• Manage the people dimension: Talent is an extremely crucial actor as transformation creates new roles while impacting existing positions. Besides sourcing for new staff, SMEs need to engage incumbent employees to minimise resistance and drive the behavioral changes needed to integrate digitalisation.
• Mitigate new dimensions of digital risks: SMEs should develop integrated risk management, compliance and security protocols as part of their initial design phase.
• Integrate into an ecosystem-based world; don’t create digital islands: Transformation is a massive undertaking with limited success, if undertaken in silos. With the customer typically driving the need for digital transformation, partnerships would be essential to raise competencies that support more holistic customer experiences.

Liew concludes: “Adopting a digital mindset goes beyond executing discrete projects within a specified timeframe. SMEs that successfully fuse digital into their DNA to deliver continuous innovation into everyday operations are those that are effectively redesigning themselves for the digital future.”