Business

Part of a ZDNET Special Feature: Small Business Tech Essentials

Small business tech outlook: Here are the challenges and opportunities ahead

The economic outlook is creating headwinds for small business. But many now see tech as the key to thriving in uncertain times.

Written by Charles McLellan, Senior Editor Oct. 7, 2022 at 5:29 a.m. PT

Small business challenges and priorities in 2022 — Image: Getty Images

With two-thirds of 2022 behind us, the challenges facing small and medium-sized businesses (SMBs) are mounting.

With continuing pressure on revenue and cash reserves, upheaval in the labour market and disruption to supply chains, it's clear that there are tough times ahead, and SMBs – the bedrock of most countries' economies – are in the firing line. But many business managers have a new-found understanding of technology which may help them find a way to succeed even in difficult times. In this special feature we look at both the broader economic picture and how small business is using tech to respond.

Macroeconomic trends

In December 2021, the OECD noted that "Output in most OECD countries has now surpassed its late-2019 level and is converging on its pre-pandemic path but lower-income economies, particularly those where vaccination rates are low, are at risk of being left behind".

Inflation, which was predicted to peak in late 2021, was expected to be 2.47% higher worldwide over the year beginning 24 February 2022 due to commodity and financial market shocks caused by Russia's invasion of Ukraine. The worldwide hit to GDP over the same period was predicted to be 1.08%.

OECD: effect of Ukraine war on GDP and inflation — Chart: OECD

In June 2022, the OECD assessed 'The price of war' by noting that, prior to the outbreak of the war, the outlook appeared broadly favourable over 2022-23, with growth and inflation returning to normality as the COVID-19 pandemic and supply-side constraints waned. "The invasion of Ukraine, along with shutdowns in major cities and ports in China due to the zero-COVID policy, has generated a new set of adverse shocks. Global GDP growth is now projected to slow sharply this year to 3%, around 1½ percentage points weaker than projected in the December 2021 OECD Economic Outlook, and to remain at a similar subdued pace in 2023," it warned.

The latest figures for the UK economy are in line with these predictions, with GDP growing by just 0.2% in July after falling by 0.6% in June and the Consumer Prices Index including owner occupiers' housing costs (CPIH) rising by 8.8% in the 12 months to July 2022, up from 8.2% in June. The Consumer Prices Index (CPI) rose by 10.1% in the 12 months to July 2022, up from 9.4% in June.

When it comes to the prices that producers of goods and services pay for their inputs and charge for their outputs, the trend is also rising sharply. The latest ONS figures show input prices up 22% on the year to July 2022 (down from a record high of 24.1% in the year to June 2022) and output (factory gate) prices up 17.1% over the same period (up from 16.4% in the year to June 2022, and the highest level since August 1977). A particular issue for small businesses is the increases they are facing in their energy costs – for electricity and gas. While the government has taken some steps to tackle this the Federation of Small Business has noted that "a tough year remains ahead of many small firms".

Small business health and confidence

How are these macroeconomic trends playing out among small businesses?

In the US, the health of SMBs (defined as companies with fewer than 500 employees that are not sole proprietorships) is tracked on a quarterly basis by the US Chamber of Commerce/Met Life Small Business Index (SBI). The latest Q2 2022 SBI score, based on a survey conducted between April 29 and May 17, was 66.8 -- the highest level since the start of the pandemic, although still below the Q1 2020 level (71.7):

US Chamber of Commerce/Met Life: Small Business Index — Chart: US Chamber of Commerce/Met Life

Although there's no sign of collapsing confidence in the SBI just yet, there are warning signs in the trends for the five biggest challenges facing US small businesses. 'Inflation costs' is rising sharply, 'supply chain issues' is rising steadily, while a downward trend for revenue as a concern has reversed in Q2. Rising interest rates have also entered the picture as a major concern for small businesses in the US:

US SMB challenges Q2 2022 — Charts: US Chamber of Commerce / Met Life

Meanwhile, half of SBI respondents say they believe it will be another six months to a year until the US small business climate returns to normal, while fewer than one in ten (6%) think that normality has already resumed.

Another regular UK survey is carried out by the Federation of Small Businesses (FSB), which is used to generate the UK's Small Business Index (SBI). In Q2 2022, the SBI fell to –24.7, indicating that more SMBs expect performance to decline in the coming quarter than improve -- after rising to 15.3 in Q1 2022. This 40-point fall is the second largest in the SBI's history, beaten only by the 121.8-point fall at the start of the Covid pandemic (Q1 2020).

Chart: Federation of Small Businesses (UK)

The outlook for SMBs in the UK is noticeably more pessimistic than it currently is in the US.

SMB challenges and priorities in 2022/23

To get an idea of the specific issues likely to be facing small businesses in 2022/23, we looked at multiple (>30) surveys and forward-looking articles published within the past 18 months and logged the mentions of different subject areas. Here's the picture that emerged.

Challenges and priorities for SMBs in 2022 — Chart: ZDNET

The top five issues -- Digital marketing & customer acquisition/retention; Employee relations, training & wellbeing; Digital transformation & new technology; Labour market & outsourcing; and Remote/hybrid work -- are all driven to some extent by the pandemic experience. Let's take a closer look.

Digital marketing & customer relations

During lockdowns, the focus for attracting new customers and keeping existing ones happy inevitably tilted more towards online channels. But it's not enough just to build a website with a functioning e-commerce solution and hope that customers will come: businesses need to boost their SEO efforts, as well as attract and convert new leads via email and social media campaigns, increasingly using video and 'influencers' of various descriptions. And once customers are acquired, it's clearly essential to have efficient CRM systems in place so that SMBs can deliver a satisfying experience that builds loyalty.

Read more:

Employee relations, training & wellbeing

Before the pandemic, it's unlikely that concerns about employees would have ranked so highly as they do here. But widespread changes to working conditions and practices over the past two years have brought issues like employee burnout, mental health, work-life balance and morale to the fore. These days, employers not only need to review how they manage employees' workflows and monitor their performance, but must also communicate efficiently with (often remote) workers and find new ways to deliver training, coaching and mentoring. Failure in these areas is a recipe for poor employee retention, and a particular concern for SMBs that lack dedicated HR staff.

Read more:

Digital transformation and new technology

Digital transformation and the adoption of new technology is an important focus for SMBs as it can put them in a better position to ride out challenging economic conditions and gain an edge on their competitors. Cloud technology such as SaaS applications -- particularly ones aimed at specific vertical markets -- deliver obvious benefits in terms of shifting from capital to operational expenditure by outsourcing the deployment and maintenance of the underlying technology. This should allow businesses to concentrate on adding value via the agile development of bespoke products and services, and by transforming online experiences using new technologies such as AR and VR, machine learning and AI.

Read more:

Labour market & outsourcing

Job vacancies created by the 'great resignation' of 2021/22 have resulted in increased use of the gig economy and outsourcing. For small businesses, assuming they can access the skills they require, this could be a positive trend: fewer permanent employees mean lower overheads and an opportunity for greater flexibility, with SMBs accessing expertise for business processes like accounting, IT services, marketing, human resources and customer support as required.

Read more:

Remote/hybrid working

One of the most profound changes brought about by the COVID-19 pandemic is likely to be a lasting shift towards remote or hybrid working, and the resulting demise of the traditional office as the primary workplace for many employees. Despite predictable resistance from more conservative quarters, it seems that businesses are adapting to the shifting employee expectations generated by the lockdowns of 2020/21: many workers proved that they could work productively from home, or with infrequent visits to the office, and have no desire to turn the clock back.

Going forward, work will likely fall along a continuum from fully remote through hybrid to fully in-office, with the balance depending on an employee's role, the sector their company operates in and personal choice. SMBs will need to ensure that productivity, communication and security technology is in place to service remote and hybrid workers, because the demand for flexible working is not going away, and laggards are likely to have trouble keeping and recruiting staff.

Read more:

It's likely that SMBs who are ahead of the game on key issues like digital marketing, employee relations, remote working, outsourcing and digital transformation will be better placed to weather the upcoming economic downturn.

The 2023 State of IT

A key annual survey that examines business' IT budget plans and technology trends is the State of IT report from SpiceWorks Ziff Davis. The 2023 survey, released on 27 September, was conducted in June 2022, canvassing 968 IT buyers from organisations across North America (62%) and Europe (38%). This survey has a distinct SMB slant, with 32% of companies having 1-99 employees and 34% having 100-499 employees.

The 2023 State of IT report confirms that businesses are concerned about recession in 2023, with 65% of enterprises (>500 employees) and 45% of SMBs (1-499 employees) preparing for this eventuality. Recession preparations are more prevalent in Europe (65% of organisations) than North America (45% of organisations).

Reducing non-essential spending is the top precautionary measure (43% overall, 38% of enterprises, 45% of mid-size businesses, 46% of small businesses), but this does not include IT budget reduction: 51% of companies plan to increase year-on-year IT spending, compared to just 6% that plan to decrease their tech budget. That said, IT budget increases are less likely, and decreases more likely, the smaller the company size (the same pattern also applies to expected revenue changes):

State of IT 2023: IT budget changes — Image: Spiceworks Ziff Davis

"Despite widespread economic worries going into 2023, there's reason for B2B technology providers to be optimistic. Even as many businesses reduce discretionary spending to weather a likely recession, we anticipate future growth in corporate IT budgets," said Peter Tsai, Head of Technology Insights at Spiceworks Ziff Davis.

"This prioritization of IT spending represents a continuation of modernization efforts kick started during the pandemic. Over the last few uncertain years, corporate decision makers have seen first-hand the benefits of IT investments, which often pay for themselves by improving processes, enhancing resilience, or enhancing workplace productivity," Tsai added.

Inflation is a driver of IT budget increases in 2023, especially for small businesses, but other important factors include the need to update outdated IT infrastructure, employee growth and increased security concerns.

State of IT 2023: IT budget drivers — Image: Spiceworks Ziff Davis

There are indications in the survey that post-pandemic changes to working environments are driving changes in IT budget allocation. As of June 2022, 85% of companies that allowed remote working had asked employees to return to the office (44.4% all workers, 40.1% some workers). Cloud spending plans for 2023 fell slightly (23% of total IT budget vs 26% in 2022), while planned spending on managed services rose (18% in 2023 vs 15% in 2020, before the pandemic). The report suggests that "organizations are likely right-sizing their environments to support their employees wherever it makes most sense. Additionally, after businesses spent the last couple of years modernizing, many are likely now turning to services to help them maintain their new technology stacks".

It's noticeable, though, that small businesses (1-99 employees) plan to spend less on cloud in 2023 (21% of IT budget) than mid-size businesses and enterprises (24% each), while enterprises plan to spend more on managed services (20%) than SMBs (17% each).

Outlook

Just as economies were beginning to recover from pandemic-driven recession, war in Ukraine, rising inflation and the threat of recession have created further headwinds for SMBs to navigate.

Indices of SMB health and confidence in the US and UK generally increased through 2021 to Q1 2022, but recent political and economic shocks have put the brakes on this optimism, especially in the UK.

Key concerns for SMBs in the 2022/23 timeframe include digital marketing and CRM, employee relations, digital transformation, the labour market and outsourcing, and remote/hybrid working.

Despite the general economic gloom, IT spending appears to be holding up. So what has changed? The events of the last couple of years forced small business leaders to invest in and engage with technology in order to keep their organisation operating through unprecedented times. Whether that's digital customer acquisition, finding new ways to support and engage staff, or wholescale digital transformation projects, the wisest small business managers now see technology as less of a cost centre and more of a driver of productivity and growth.