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THE IMPACT OF ICT ON SMES - A MOTOR FOR FUTURE ECONOMIC GROWTH IN HARD-PRESSED TIMES

Africa’s economies are often dominated by Government and large corporations but the real engine of economic growth may be small and medium-sized enterprises, SMEs in the jargon. By adding technology to their operations (the ICT acronym) two economic “drivers” are brought together and sparks may fly. You may even get a significant productivity “jump”. Not all SMEs can achieve this but those that can should be a significant market for African computer hardware and software resellers. Russell Southwood makes comparisons between Africa and Jamaica where this effect is already beginning to be felt.

Sometimes it;s useful to step back from the plentiful obstacles to business on the continent and see how it’s done elsewhere. Last October Balancing Act carried out a workshop for IICD in Jamaica to encourage SMEs and sole trader businesses to make use of ICT to help grow their business. It may seem a strange comparison as Jamaica has some distinct advantages: It’s close to USA. It has large tourism and entertainment industries for its size: there can be few who have not heard of Bob Marley. But it shares a number of disadvantages with African countries. There is a large incumbent telco (Cable and Wireless) that dominates international bandwidth pricing. Internet users are around in some numbers but outside the main towns connectivity is limited or non-existent. Computers and software are expensive. Sound familiar? Perhaps familiar enough to provide some pointers.

The issue for Africa is how fast it can create jobs that will grow the overall level of wealth in the economy and attract hard currency to pay for expensive imports (like computers). Many African countries are still dominated by the large concession/franchise-style companies of colonial times. One company gets the right to import say a particular make of car. Provided that car is a popular global brand, this is a licence to print money, usually only available to the few.

Sadly, larger scale opportunities of this kind offer more opportunities offer more potential for corruption to some of Africa’s less scrupulous political elite. There has to be a mindshift in Government and the private sector to encourage innovative, energetic and competitive SMEs. African governments need to think carefully about what the global competitive advantage of their country is: for example, selling the same coffee as everyone else will not be a recipe for survival in competitive international markets.

So Government and the larger private sector need to not only encourage the growth of SMEs (through outsourcing contracts) but insist that they raise their level of management expertise through implementing ICT systems. Not all SMEs will benefit from having ICT as part of their operations. Africa is full of “me-to” companies that fight over small markets, all roughly offering the same thing. So SMEs that will make the productivity jump will need to be able to say “yes” to one or more of the following:

* Be doing or be capable of doing international business: You don’t need to be offering e-transactions. A simple web site can connect a company with international markets. Yes, there are all the attendant obstacles of how you market and deal with international business but that makes it difficult, not impossible to achieve. Tourism is ripe to take advantage of this channel to its hard-currency markets. Some SMEs in Africa have made these steps but there are still many more who might follow.

* Going from high to low entry-cost: For some businesses, the capital cost of setting up has traditionally been high. For example, the cost of designing media using ICT has tumbled in the last ten years. With new software and hardware, prices have been tumbling in many professional areas. What was once the USD10,000 accounts package is now the USD200 small-user accounts package. There’s been a blurring between professional uses and an am/pro area has grown up: digital filming and recording provide good examples. Electronic media is cheaper to deliver than print media (if there’s a critical mass of computers). All these things mean that what were once high-cost, high-risk industries are now much easier places to survive in if you’re an early adopter of ICT.

* Competitive advantage: It’s a business truism that you must have some kind of competitive advantage. But Africa is full of companies whose competitive offer is all too often marked by low quality and low service. ICT offers a number of different ways of building relationships with customers. On service alone, there are endless opportunities for differentiation from the many mediocre operators.

* Distinctiveness: In a world dominated by the same global brands, there is inevitably a thirst among consumers wherever they are for something different. At a micro level, there are a range of South African companies and designers who have shown it is possible to produce goods that people in the developed world will buy. For example, there is an Ethiopian company selling high-quality leather goods from that country. Many African countries have rich textile colours and designs. Where is the company or trader offering a catalogue of them on the web.

* Have access to finance: The average SME, however well it’s doing, will probably need access to finance to make this transition. Although secondhand PCs can now be bought for as little as USD200-300 each, this still represents a significant investment for many businesses. Business finance of this scale remains frustratingly hard to obtain. The lack of a “repayment culture” still represents a significant obstacle. But as the Jamaican examples below show, there are ways of creating these opportunities whilst keeping a necessary level of security on the loans. Countries like Ghana and Kenya are more advanced than say many of the smaller Francophone countries. Agencies like EMPRETEC can offer financing and advice.

Although it’s obvious to most of the readers of News Update, it’s worth repeating where the business gains might come from. There are two ways in which ICT can provide productivity “jumps” for SMEs:

- Within any SME computers and communications technology can make the same group of people capable of doing more work and doing it better than was previously possible. Whether this is controlling cash flow (and chasing those who owe you money) or staying on top of inventory, technology provides better ways of keeping up. And this includes anyone from the small shop-keeper to the 30 person service and supply company. The Jamaican builder who could supply electronic versions of drawing and could complete electronic templates for quotes was both faster than his competitors and offered the customer more.

- Looking outwards any company can improve the way it gets orders and offer better ways to its customers of interacting with the company. For all the massive obstacles that stand between an SME in Africa and a market in a developed country, business can be got provided the company has something of quality to offer and delivers it reliably. The Jamaican cake-maker was surprised at a request to fly over to Cyprus and create a wedding cake. Bit was a logical consequence of her having kept in e-mail contact with her customers and had an international web presence.

Two slightly more detailed examples from Jamaica have a direct relevance for African SMEs:

* JoJo’s Fashions is a dress-making business run by Maxine Mitchell: “I resisted introducing new technology until my 8 year old told me that IT had passed me by.” She used to be able to cut 6 dresses a day. Now she can cut dozens and produce them to a higher quality: “I now have a computerised machine to do the embroidery.” With wordprocessing, she can amend a past quotation fax it to a potential buyer: “With a laptop and a mobile, the business continues, wherever I am.” It has allowed her to expand her horizons: “I used to supply a small market in Jamaica, now I’m able to supply a much larger market across the Caribbean. I’m currently looking at building a website and offering a catalogue clothes. Whenever I travel on business, customers ask me ‘are you on the web’? They want to be able to look up your contact details and browse a range of information about your company and its products.” Her biggest mistake in implementing ICT systems?: “Knowing the point where you can’t do everything yourself.”

* Starfish Oils makes Jamaica-inspired candles and aromatherapy products company run by Kynan Cooke. He started getting ICT implemented in his company by putting his accounts, documents and filing on to a computer. This was followed by getting online. Soon he was in specialist chat rooms comparing notes about getting cheaper and better wicks for the candles: “You can ask a lot of questions without anyone saying ‘what are you asking that for, dummy?’”. ICT was the answer to the growth the company quicly began to experience:” It’s hard to manage 100 people but it’s relatively easy to manage 20 people with a computer network. “Stock-taking in each of the three shops now takes one hour rather than 6-7 people spending four hours on it: “If we wanted to open four more stores, we’d have the capacity to handle it.”

His biggest mistake? “Trying to do too much too fast. I said to myself I’m going to spend real money and get the most expensive accountancy system. I needed 10 people to operate it and it cost USD10-30,000 a year to run it. It was too big for what we needed. I was advised against it but I over-computerised. But let’s not be afraid of mistakes. That’s how we learn.”

On the finance side, the Jamaican companies providing finance insisted that their clients got used to the idea of saving. So when the moment came to borrow to finance a computer purchase or some other ICT item, they were accustomed to putting aside a monthly sum rather than taking it out of the business. In addition, they accepted items of household furniture as collateral like beds and wardrobes.

So how do these arguments play out in reality in Africa? There is precious little detailed evidence but two surveys give some sense of what might be happening. According to a World Wide Worx survey of SMEs in South Africa (one of the largest of its kind) investment in information technology is having a major impact on the competitiveness of small and medium businesses.

5742 companies were interviewed on their investment in ICT, impact of this investment, factors influencing purchases, and their use of financial and business services. Among the key findings of the survey was that SMEs are spending a higher proportion of their turnover on ICT each year. In 2001, 47% of SMEs spent more than 1% of turnover on IT, in 2002 48%, and in 2003 49% expect to spend more than 1% of their turnover on IT.

“This bears out the prevailing sentiment that SMEs represent a growth market for the IT sector even as large corporations are cutting back,” says Arthur Goldstuck, MD of World Wide Worx and principal researcher on the project.

The core of the research project, measuring the impact of IT on the competitiveness of SMEs, examined four key components of competitiveness, namely:

- Cost reduction, which is in turn a measure of organisational efficiency and financial controls;

- Turnover;

- Ability to retain existing clients and win new clients, which is in turn a reflection of SMEs’ ability to grow market share;

- Profitability.

The survey examined these four areas both in terms of perceived impact of past investment, and expected impact of future investment in IT. The overall findings were that SMEs were relatively neutral on the impact of past investment, but exceptionally positive on the expected impact of future investment. It is significant that negative sentiment is low for both past and future investment.

For example, while 59% of respondents are positive and 33% neutral on the impact of past investment on cost reduction, 69% are positive and 25% neutral on the impact of future investment. The number of negative respondents falls from 8% for impact of past investment to 6% for impact of future investment.

These findings are generally similar to the findings for the other measures of competitiveness, except for the impact of IT on turnover, where a greater proportion of respondents are negative and neutral on the impact of both past and future investment. This reflects a realistic appreciation that IT cannot generate sales, although it can make a big difference to the impact of those sales on the bottom line. It also represents a challenge to the IT industry to improve its offerings to SMEs with regard to sales tools such as sales force automation.

Last week a survey was published on companies’ take-up of ICT in Morocco. The agri-business sector had the highest take-up but only 24% of companies had implemented ICT systems (see last issue) followed by 19% in industrial metallurgy. Neither of these sectors are the home of plentiful SMEs and this gives some idea of the long road the continent still has to travel. Both South Africa and Morocco might be said to represent those running at the front of the race. So where’s your country and your company?

A major plank of the NEPAD programme is putting a million computers (probably mostly refurbished) into schools. This is a wholly worthy initiative and ought to be implemented as quickly as possible. But imagine the impact of a similar scheme for SMEs in a single country or across the continent. A strong and vibrant African SME sector that uses ICT will add yet another pressure on African governments to raise their global game.

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