A new report from The Entrepreneurs Network, commissioned by cloud accounting platform Xero, argues that small firms should make better use of digital technologies to tackle the sluggish productivity which characterised the pre-Covid economy and bounce back faster post lockdown.

Upgrade: Closing the digital gap and lifting productivity for SMEs reveals:

If the 1.1m micro-businesses (0-9 employees) doubled their uptake of key digital technologies, the UK economy would get a £16.6bn boost.
This would restore four-fifths of lost productivity growth since the financial crisis, and enable businesses to bounce back faster post-lockdown.
The small business response to lockdown with shops switching to selling online and offices going remote shows that major digital transformation is achievable.
As the economy reopens, it is vital that the switch to digital becomes permanent and more small businesses make the most use of the right digital tools.
The report calls on the government to widen the scope of the R&D tax credit to make it easier for SMEs to invest in innovation.
It also backs support for peer-to-peer learning initiatives so business-owners can overcome knowledge barriers by learning from entrepreneurs in similar situations.
To tackle digital skill shortages, it proposes allowing tax relief for self-funded training and improving awareness of existing digital training programmes.

Upgrade shows many small firms are failing to make use of the right digital tools. It finds that although the UK is one of the world’s most innovative economies hosting over 70 tech unicorns, over a third (38%) of small businesses are not adopting tried-and-tested tech.This is important because if the UK’s 1.1 million micro businesses doubled their uptake of key digital technologies it would lead to a total £16.6bn boost to the economy. This amounts to a £4,050 average productivity boost for the 4.09m workers employed by micro businesses, restoring four-fifths of lost productivity growth between the financial crisis and the lockdown.

While the UK's productivity has on average underperformed relative to other major economies, top-performing UK companies are on par with the most productive businesses in the world. The problem is the large gap between the UKs ‘leaders and laggards’. Technology adoption is a similar story. Although the UK is home to world-leading tech businesses, many SMEs do not do the basics.

Over a third (38%) of UK SMEs have very low levels of digital adoption. According to the EU’s Digital Intensity Index, which measures the use of digital tech by businesses, many lack a website, social media presence, or fast broadband. By contrast, in Sweden and the Netherlands just over a fifth (23%) of firms have very low levels of digital adoption. In Finland, just one in ten (11%) have low levels of adoption.

Sam Dumitriu, Research Director at The Entrepreneurs Network and author of the report, says:

“Recent events have highlighted the importance of digital technology in enabling businesses to continue trading in the most difficult of circumstances. It is now time to take advantage of a massive opportunity to boost productivity by increasing the rate of digital adoption. “Britain is a world-leader in innovation, but too often best practices are not spreading to all SMEs.”

Gary Turner, UK Managing Director, Xero says:

“One of the achievements of so many small firms in recent months has been how they have been able to pivot their business models to operate differently. They are discovering new digital ways to achieve greater value, scale and resilience.
“As the economy reopens and small firms look to rebuild, we must close the digital divide to help small firms bounce back more quickly. Hence, the lessons in this study on how we can encourage firms to make more use of the right technology are more important than ever.”

Policy recommendations

We identify three key barriers to digital adoption: knowledge, skills, and finance. The report recommends nine policies to ensure that businesses have the information to identify digital solutions, the finance to invest in them, and the skills to implement them:

Knowledge

Prioritise support for peer-to-peer learning initiatives. Peer-to-peer learning is a tried and tested approach for increasing SME adoption of business best practices.
Outsource the provision of advice to trusted groups. This should be delivered through trusted business organisations.
Do more to leverage relationships between SMEs and accountants. Accountants are often a trusted source of information to SMEs.

Skills

Allow tax relief for self-funded training. This would make self-funded training cheaper and bring the UK’s tax-code in line with other OECD countries. It could be limited to pre-approved digital training schemes to ensure that the goal of increasing business productivity is prioritised.
Improve awareness of and access to digital training. The government should trial different approaches to see what best increases the uptake of different schemes

Finance

Ensure better awareness of tech grant schemes. SMEs often struggle to keep up with schemes on offer as they change so the government should make sure that the messaging on future grant schemes is effective.
Improve the impact of tech grant schemes. The government should increase the impact of these schemes by tying funding to participation in knowledge-sharing networks.
Allow R&D tax relief for user interface and user experience development work. Businesses should be allowed to claim R&D tax relief on digitisation projects.
Improve the promotion and access to R&D tax credit schemes. HMRC should provide clearer feedback on rejected applications.