How Data Informs Business

'Although the digital economy is increasingly dominated by a handful of tech majors, a multitude of innovative SMEs nevertheless are the drivers of the mobile and digital industries, particularly in newly emerging market segments such as data for self-driving vehicles or mobile applications. Opportunity exists therefore for tech-based SMEs to play a major role in the data-driven economy. The mobile ecosystem in Nigeria, for instance, was worth an estimated US$8.3 billion in 2017, and the digital industry may contribute 7 percent of Mali's GDP.

Although the digital economy is increasingly dominated by a handful of tech majors, a multitude of innovative SMEs nevertheless are the drivers of the mobile and digital industries, particularly in newly emerging market segments such as data for self-driving vehicles or mobile applications. Opportunity exists therefore for tech-based SMEs to play a major role in the data-driven economy. The mobile ecosystem in Nigeria, for instance, was worth an estimated US$8.3 billion in 2017, and the d igital industry may contribute 7 percent of Mali's GDP.

SME advantages, drivers, and constraints of data adoption

SMEs try to absorb new technologies and innovation, but are often constrained by limited availability of skilled workers, particularly in emerging markets, in turn limiting potential for growth and job creation. Starting in the 1990s, many SMEs in developing countries began to adopt modern ICTs, increasing profitability and productivity. In addition, ICT made training and education more accessible for workers. This could eventually raise the employability of low-skilled workers.

SMEs are characterized by potentially advantageous features that distinguish them from other businesses. Their relatively small market size allows them to adapt quicker to changing market conditions, and they are less likely to have stranded assets, both of which increase their chances of success. Increasing digitization dramatically reduces transaction costs for collecting information, communication, and data controlling. Through easier access to information and the use of complex data analytics, firms may analyze the interdependency and buying patterns of users to pursue targeted advertisement, and adjust their inventory accordingly. SMEs can exploit low entry barriers to benefit from the potential disruption of data on existing models. Moreover, SMEs' digital technology adoption barriers can be lowered by the transition from hard infrastructure investments to platform-based digital services. The increasing availability and range of cloud-based tools for enterprise management is particularly relevant to SMEs.

Data analytics allows firms to establish new forms of customer engagement, exploit digital distribution channels, and serve new customers. Data analytics, combined with voice and vision recognition, enables firms to complement or substitute for human labor with machines (such as automated call answering and recording to reduce call center employees). Leveraging data can also affect competition, with SMEs transforming processes, facilitating innovation, and addressing key challenges. Access to data can revolutionize decision-making with enhanced visibility of firm operations and improved performance measurement techniques.

Innovative data-driven business models for SMEs

The use of alternative data to build credit histories by scanning users' mobile phones for their history or credit charges, for instance, is spurring new business models for SMEs to provide credit to the underserved. Even in sectors unrelated to financial products and services, firms are developing new data-centric business lines and alternative revenue streams out of the data they collect from customers. Firms in Sub-Saharan Africa, such as M-KOPA Solar (Kenya), Off Grid Electric (Tanzania), PEG Africa (Ghana), and BBOXX (Côte d'Ivoire), have not only revolutionized energy access, but are also starting to support financial inclusion. Through “pay-as-you-glow” business models, these providers allow low-income, mostly rural consumers to have solar energy at home. On the basis of the data collected on the timeliness of repayments they accumulate for the home solar systems they offer, these energy companies can allow customers to build a credit history and thus access credit and loans.

However, challenges to the use of data and data analytics exist, particularly in emerging markets, which are more acute for SMEs than for larger firms, as discussed below.

First is financial and access constraints. SMEs tend to have limited access to financial resources, which makes it hard to invest in new technologies and maintain them. Limited financial resources also cause SMEs to lack a formal risk management practice, even for those that do have an information technology department. In addition, SMEs in emerging markets often face obstacles accessing data relevant to their business. Larger firms gain access to that same data, often owned by the government, or are able to pay for it from private sources, thanks to larger financial resources or networks of contacts not available to SMEs.

Second is limited awareness. SMEs also tend to lack awareness of the opportunities offered by digitized business and operations, which affects their ability to adapt and compete in a fast-evolving business environment. A 2014 survey among 1,000 SMEs in Germany revealed that for 70 percent of enterprises with annual revenue below €500 million, the digitization of processes was still seen as irrelevant. Making the situation worse is that many available ICT products and information do not necessarily take the specific needs of SMEs into account

Third, human capital limitations are a constraint. Investments in new technologies often require investments in complementary knowledge-based assets. SMEs frequently lack the skilled people to benefit from new digital technologies, the resources to train these workers, or the management that can help them make the most of the new technologies. The lack of availability of skilled labor inhibits the adoption of data analytics, complex data integration, and model building in SMEs, especially in developing countries. That SMEs in emerging markets have a harder time competing for scarce skilled labor against larger firms, both local and foreign, compounds this challenge.

Fourth, new data sources may require remodeling of existing systems, such as SME warehouse systems. This is particularly true considering the volume and variety of structured and unstructured data becoming available from different sources, including social media. Organizational challenges also exist, such as internal resistance to adopting data analytics as a new way of doing business. On the other hand, wider access to different tools can help SMEs “turn digital” and help mitigate the challenges SMEs face.

Fifth, infrastructure constrains many SMEs in emerging markets because of challenges in accessibility, affordability, and quality of connectivity, particularly outside major urban centers (map 5.1). SMEs scattered across territories, particularly microenterprises and entrepreneurs, face a digital divide that could hinder the benefits of data for SMEs.

Sixth, lack of trust. This is mainly due to the increased digital security risks perceived by potential SME adopters, which is partly also the result of the increasing sophistication of digital security threats. In addition, the lack of data governance frameworks in many countries, or a lack of awareness of them or an understanding of how to comply, affects the ability of SMEs to adopt digital-data-generating tools. These frameworks should include privacy policies, intellectual property, data security, and access rights. Emergent practices also risk reducing confidence in the digital economy and the incentives to adopt ICT. Discrimination enabled by data analytics, based on profiling customers by where they live, for example, may create greater efficiencies and innovation but also limit individual freedom. On the other hand, disruptive technologies that tackle data governance aspects, such as distributed ledger technologies like blockchain, are emerging rapidly, facilitating inclusion. These could ease SME access to digital payments, loans, supply chains, land titles, contracts, or even ID.

Policies for SMEs in the data-driven economy

In an interconnected world, access to and use of digital technologies and data tools has become key to SME competitiveness, affecting the very chances to survive and develop. Cloud computing, in particular, allows smaller firms to overcome the barriers associated with the high fixed costs of ICT investment, and can help smaller firms rapidly scale up, providing high-power computing resources flexibly via a pay-as-you-go model.

SMEs tend to struggle to navigate the web of regulations and policies pertaining to data and understanding the legal and administrative frameworks governing cross-border data flows, data protection, data privacy, and personal data, to name a few. Data regulatory frameworks are complex, and many SMEs struggle to find the time and resources to fully comprehend their implications. SMEs may thus limit their utilization of data.

Evidence shows that the lack of appropriate (open) standards and fear of vendor lock-in, often due to proprietary solutions, can be strong barriers to adoption. This is particularly true for SMEs, which often lack the negotiating power and know-how about advanced ICTs such as cloud computing, data analytics, and the IoT.

Recent analysis suggests that small firms are often much more affected by poorly designed regulatory frameworks than large and incumbent firms, limiting their growth and reducing overall business dynamism. Policy action to boost the growth prospects of start-ups and SMEs is thus essential. The available data also point to systematic differences in the adoption of other complex digital technologies across firms.

The following policies can help SMEs benefit from the opportunities of the data-driven economy:

• Implement a national digital transformation strategy for SMEs. Enhancing competition in broadband internet to increase speed and reduce costs, promoting nationwide cloud service markets, or reducing import duties and taxes on information technology equipment are national policies with widespread impact that are particularly likely to benefit SMEs. In addition, specific strategic choices need to address the needs of SMEs. For example, digital public procurement has caused an increase of participation of digital SMEs. Awareness and technical training may be necessary to enable compliance with data policies and fully grasp the benefits of big data. A national strategy should also implement awareness-raising initiatives for SMEs to better understand the value of upgrading their technology and fully exploit the potential of digital data. Such an initiative could include, as appropriate, capacity-building programs specifically directed to SMEs.

• Encourage technology adoption and complementary investments. It is crucial not only to facilitate the access of SMEs to the technology itself, but also to help them make the necessary complementary investments, for example, in process and product innovation and in ICT services or in skills. SME engagement with competency centers or technology diffusion extension services can also be helpful.

• Implement data security strategies, with SMEs as a specific segment. Data security strategies often look just at the critical information infrastructure, but they should also address the specific needs of SMEs by providing them with practical guidance and the appropriate incentives for adopting good practices. For example, interest is increasing in tailored standards and certification schemes developed by or in cooperation with business and in leveraging digital risk.Implement data security strategies, with SMEs as a specific segment. Data security strategies often look just at the critical information infrastructure, but they should also address the specific needs of SMEs by providing them with practical guidance and the appropriate incentives for adopting good practices. For example, interest is increasing in tailored standards and certification schemes developed by or in cooperation with business and in leveraging digital risk.

• Implement open data for business initiatives. Some open government data initiatives focus on transparency and accountability and often tend to neglect its economic value. Disproportionate benefits exist from open data to SMEs, sowing the seeds of further growth and innovation. Even when government data does not have a price tag, the availability of data can depend on “who you are and who you know”; often, the relevant official must be persuaded to supply data and sometimes a personal visit to the office is necessary. As such, open data democratizes access and levels the field with respect to incumbents with established relationships and resources. In 2017, the World Bank's Open Data for Business assessment in Kenya found that small businesses could benefit from the release of government procurement, budget, and geospatial data, and that this would help address structural disadvantages in information access relative to larger, more established, companies.

• Promote data cooperatives among SMEs and value chains. These collaborative pools of data can facilitate access and use, and pave the way for moving beyond simply sharing information to a livelier exchange across public-private boundaries.