SMEs still waiting for the e-commerce revolution

As the internet access rate among small UK firms climbs higher and higher, Business Europe explores why most SMEs are still waiting for the much-heralded e-commerce jackpot.

E-commerce enthusiasts such as UK Prime Minister Tony Blair spend a lot of time trumpeting the advantages of doing business on the internet. Much of this preaching is directed specifically at small-to-medium sized firms, whose fragmented markets and limited resources supposedly make them ideal candidates for buying and selling online.

It's hard to fault the logic of this argument. The internet's capacity to overcome distance while simultaneously doing away with the middleman in any transaction does indeed make it ideally suited to SMEs. In theory, the web's gigantic reach hands a truly global market to small firms, provided they are competitive and can successfully draw attention to themselves. At the same time, dramatic cost reductions should be achievable as small firms gravitate towards the cheapest online suppliers.

The message is reinforced by some beguiling calculations from normally conservative analysts. Investment bank Goldman Sachs in May this year predicted that the internet will boost world GDP by 5% over the next ten years. Manufacturing is expected to reap the greatest benefits, with the cost of car production forecast to fall by 14% over the same period. UK electronics retail giant Dixons, meanwhile, says it expects e-commerce to account for 15% of its total sales by 2002.

For SMEs, buying raw materials online, or e-procurement, may prove to be the most attractive feature of the net. A study earlier this year by the London School of Economics estimated that collective buying of inputs and equipment, made possible for the first time by the internet, could save UK businesses between 18 and 24 billion pounds a year.

And there's no doubt that small firms are keenly aware of the internet's potential. The SME sector in the UK is stampeding to get online, as government figures released last month show. The number of small firms with internet access now stands at 1.7 million, up from just 600,000 this time las year, according to the Department of Trade and Industry.

The take-up rate amongst micro-businesses, defined as those with 10 employees or under, has shot up from 15% to 55% during the past year. An estimated 450,000 SMEs engage in some form of online trading, and the government aims to boost this to 1 million by 2002.

And yet, there's an inescapable feeling in late 2000 that the benefits of online trading have been slow to arrive, if indeed they are on their way at all. Small firms in the UK remain very much at the mercy of such old-economy variables as interest rates, the price of fuel, and currency fluctuations. There has been no marked increase in revenues or productivity, nor have costs fallen. Manufacturers, who supposedly stand to benefit from sharply reduced raw material costs, are in fact facing their most serious competitive squeeze for ten years.

The simple fact, of course, is that online buying and selling both of finished goods and of inputs is still in its infancy, at least in Europe. One reason why it hasn't developed faster is that most consumers, with good reason, still don't believe that online transactions are secure. Another factor is European telecommunications companies' reluctance to provide unmetered interne access. This makes it more expensive for a company to switch to online trading than it need be.

But the most fundamental reason why e-commerce has yet to set the world of small business on fire is that the practicalities of doing business online are far more complex than they look. SMEs by and large realise this, and are very sensibly hanging back.

The Federation of Small Business, the UK's main SME association, says that it often advises its members not to bother establishing an interne presence. Setting up a website for the purpose of selling goods is an expensive and troublesome operation, requiring dedicated staff and a high degree of commitment. Many SMEs also underestimate the extent to which their business depends on personal relations and face to face contact with clients, an FSB spokesman said.

Established e-tailers stress that it is all too easy for consumers buying online to become disappointed with the level of service on offer. To be able to fulfil internet orders throughout the country with the same service that you might get from your local branch requires a major capital investment, Sir Stanley Kalms, chairman of Dixons, told the BBC in an interview last month.

Even if a new e-commerce website takes off, there can be unforeseen pitfalls. Many budding e-commerce companies have got off to a good start, bu have ultimately died a death because they failed to master scaleability - the art of expanding operations in line with increasing demand.

All the same, no one should doubt that there's money to be made by doing business online, despite all the high-profile dotcom failures and the new mood of caution in the industry. In the first quarter of 2000, online sales in the US actually grew by 1.2%, to 5.3 billion dollars, even though overall retail sales plummeted by 8.9%. Internet sales were up again by 5.3% in the second quarter, this time reaching 5.52 billion dollars. Total quarterly retail sales in the US are in the region of 800 billion dollars, according to the US Commerce Department.

But, two years on from the first rush of optimism over the potential of e-commerce, it has become clear that the internet offers few short cuts to business success. Selling online may put the seller in touch with a huge number of potential buyers, but it doesn't relieve him of any of his traditional obligations regarding quality, reliability and service. In short, sellers still need to win the trust of their buyers.

For the moment, e-commerce companies are still working out by trial and error how to achieve this balance. Once they do, there will no longer be any reason for consumers not to buy online, and the e-commerce revolution will begin.