Quickening pace of SMB and Midmarket digital transformation driving technology spend

Techaisle's latest SMB and Midmarket Digital transformation adoption trends research shows that 37% of small businesses (1-99 employees) and 46% of midmarket firms (100-4999 employees) expedited their digital transformation efforts due to pandemic. On the flip side, 27% of SMBs (1-999 employees) slowed down their digital transformation to prioritize their business's essential aspects, such as revenue generation. 27% of upper midmarket firms (1000-4999 employees) either changed their approach to transformation or kept the same pace as before the pandemic.

Investment in digital transformation has been underway for several years and was poised to be an essential factor in the IT and business market in the early 2020s. The pandemic lent urgency to digital transformation – but having arrived in a hurry, the changes wrought in response to the pandemic do not appear to be leaving as abruptly.

The accelerated pace of transformation will result in US$1,163B worldwide spend on IT (excluding telecom services) by SMB and upper-midmarket firms in 2021.

Unlike many IT market terms, which tie to specific technologies or technology capabilities, digital transformation is most often used to indicate an amorphous state in which an organization can seamlessly deploy new digital capabilities that streamline current or next-step processes, eliminating the business friction.

Organizational restructuring to hasten pace of transformation

Generally, firms consider digital transformation as a proxy for process efficiency. For many years, it has been a management goal, embedded without a consistent set of steps and defined outcomes in the IT plans of a substantial majority of SMBs. The pandemic brought urgency to these plans: there are numerous anecdotal reports of IT leaders being told, "you know that three-year digital transformation plan? Can you deliver it in three months instead?" For the most part, these requests tended to have a minimal additional budget attached to them, generally came without requisitions for new IT staff. These requests reflected management's understanding that highly-automated processes are essential in a business environment where physical interactions are awkward or forbidden, adding necessity to efficiency as compelling reasons to invest in digital transformation.

To change the transformation pace, 17% of SMBs are restructuring their entire organizations, and 24% are creating new functions dedicated to digital transformation. The changes will be more pronounced in the midmarket and upper-midmarket firms, which are quickly putting together dedicated groups and departments to digitize, digitalize and transform their organizations. Nearly one-fifth of SMBs are relying on their employees to guide transformation initiatives.

Changing digital transformation drivers

As we enter 2021, SMBs can define digital transformation objectives better and establish practical goals and budgets within their annual plans. To round out an understanding of the context for digital transformation activity, Techaisle explored adoption drivers, barriers, and anticipated benefits, exploring the issues that shape digital transformation pace and strategy in the SMB segment.

Techaisle's technology portfolio analysis begins with a view of digital transformation 'pillars' – the core motivations driving SMBs to adopt digital transformation. These pillars, representing the top answers to the question about objectives driving digital transformation initiatives, provide a lens for understanding the reasons that SMBs are investing in digital transformation initiatives. 

Data shows that the digital transformation drivers have completely changed from previous years. Ensuring better compliance with regulations, improving operational efficiency, improving engagement with partners/contractors/suppliers, and managing risks are the top transformation drivers for SMBs. Upper-midmarket firms have slightly different drivers - managing risk and uncertainty, improving operational efficiency, enhancing engagement with partners/contractors/suppliers/customers, and driving innovation. This feedback from the research helps position the critical issues associated with the five pillars within the context of SMB and midmarket digital transformation.

Incremental, pragmatic transformation goals

However, the quickening pace of transformation does not mean that all SMBs heavily invest in long-term strategies. Recent data corroborates our 2021 predictions on bursts of incremental transformation goals. Between 14% to 34% of SMBs are planning to invest in short-term planning to assess outcomes and pivot when necessary. The digital transformation vision is ambitious and will span all of the functions in an SMB organization and all of the technology used to support its activities. These SMBs will focus on separating digital transformation components into two: one focused on technology and the other focused on business transformation and management culture. While individual targets will vary by the context within an SMB, the notion that technologies and culture/capabilities need to combine in bursts of interim, incremental investments to deliver optimal benefits is provide a starting point for SMBs to apply digital transformation frameworks.

Many business and IT leaders in the SMB market consider digital transformation to be a catch-all phrase applied to a wide variety of activities, which tie to an even-wider range of objectives. However, a debate along these lines misses the essential point of digital transformation in 2021 and beyond. There is an alignment between the business and IT world in the belief that companies need to transform via ubiquitous automation to ensure future viability.
2021 will be the year of IT services and midmarket battleground. 39% of upper-midmarket firms suffer from a shortage of talented/skilled employees, resulting in seeking external guidance in designing, architecting, deploying, and managing the digitally transformed infrastructure.

The detailed research report is still under development and will be available in April 2021.