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How IT can work for you: Costs and benefits of technology across Last-Mile Distributors
Technology costs in emerging markets
10 years of change in 1 year of crisis. That’s one remarkable figure quoted in the latest McKinsey report, which looks to identify how the COVID-19 pandemic has impacted companies' digitisation plans. Across the board, respondents “recognize technology’s strategic importance as a critical component of the business, not just a source of cost efficiencies”.
The transformative power of technology, be it through modern fintech options or turnkey solutions, has completely revolutionised emerging markets, and unlocked many previously unserviceable business opportunities. The challenge for founders, C-level employees, and investors, is to know what % of their budget should go towards IT (Information Technology) and how they can get the best value for money from their service providers.
Solaris Offgrid and Enable Digital have partnered to run market research into the current state of the market, and to understand the value that organisations in emerging markets place in their IT. This research is sorely needed - current data and models are often based on developed markets, and trends that are clear in Western Europe, North America, or Asia-Pacific, may not hold true in Africa, South America, and other emerging markets.
Given the considerably different operational and financial realities, and the infrastructural capabilities of the countries themselves, digitisation takes its own unique flavour in emerging markets. In addressing the extremely price-sensitive markets at the Bottom of the Pyramid, it is necessary to adjust their entire company organisation and capital expenditure accordingly. Thus, whilst spending $50 per user per month would be common and acceptable in Western Europe, it can be seen as inappropriate in markets where the unit economics are already challenging.
Commonly quoted is that SMEs (<$5m yearly revenue) on average spend 6.9% of the budget on IT and technology (IT Spending and Staffing Benchmarks 2020/2021). However, other places suggest that the global average for all companies is 3.3% (Technology budgets: From value preservation to value creation - CIO Insider). Under what metrics can investors and the operating companies themselves judge what is appropriate?
With the below findings, and the attached data, we aim to empower organisations to make more informed decisions around their IT and technology, and to provide valuable insights as to the impact their IT should be making. We also aim to challenge common narratives and hesitations around spending on IT.
Top 5 learnings
This survey was run in June 2021, and takes data from over 40 respondents from across the Energy Access, Healthcare, Sanitation, and other related sectors.
1) IT leadership both provides and requires a sense of direction
4.6x more likely to be strategically led:
Teams who have invested in IT Leadership (either through a CIO or Head of IT) are 4.6x more likely to have at least a general sense of direction, if not a formalised strategy, on how IT will help their strategic outcomes. Only 15% of those without this leadership share that confidence.
Our survey explored how the highest level of IT representation impacts other aspects of organisational maturity and spending. Unsurprisingly, those organisations who have a Chief Technology/Information Officer (CTO/CIO) role were much more likely to have a formalised strategy, which includes a budget provided and milestones set for its tracking. Those organisations who did not have this level of representation, for example where the highest level was a Customer Experience/Support Lead type role, were much more likely to have only a very simple or indeed no IT strategy at all.
In our experience, a formalised IT strategy makes sure that resources are used efficiently, and it aligns with the operational strategy to make sure it can be executed.
In contrast, we've seen companies without a formalised IT strategy wobble between building and buying software. Software developers built solutions that the operations soon replaced by a purchased solution. Other custom-built solutions were built haphazardly and did not integrate well with existing systems. The IT department wasted time and money setting up unused solutions whilst operations were frustrated and hindered using sub-par solutions. Ultimately, the business was delayed and even impaired from introducing new products, and could not expand to new geographies because the software did not support the functionalities reporting capabilities needed. All of this could have been mitigated with a clear vision on the company's IT strategy.
A good IT strategy defends and supports the operational strategy: Software can make sure that operational processes are executed the way they are outlined by the COO, instead of each individual doing this their own way. This has many benefits including when upscaling, but also when it comes to fraud detection.
Moreover, we have seen several times that companies with a well formalised IT strategy were eligible for additional investments, grants, or "Technical Assistance" from investors. Indeed, investors are often happy to invest additional capital in a company for IT when they know the capital is used well. To many, a good IT infrastructure is an asset.
Formulating an IT strategy is important for a company's development as it translates how its workflows and processes can be designed to be strong, agile, and scalable, and how adaptable they can be as the company grows. By effectively leveraging opportunities that technology can bring, such as unlocking new market segments, or decreasing costs through more effective supply chain management, organisations can cause noticeable and significant changes in their bottom line business effectiveness.
Used effectively, this IT strategy can have a huge impact not only on the day-to-day operations of an organisation but also on its likelihood to raise funds. Explicitly put, the potential of a company to deliver a social and economic impact at scale is only as strong as its organisational vision. This vision is what IT should be defending and delivering. Indeed, this IT strategy must be driven by and stem from the overarching business strategy, and it should provide the key understandings of how technology is perceived and used within the company. Our survey suggests that companies who have this CTO/CIO role are better able to combine these high level business goals into a formal IT strategy.
2) IT seniority and leadership affects budgets - both in size and types of spending
A consequence of having a CTO/CIO role in your organisation is the increased likelihood that a greater budget is allocated towards IT and technology. This makes sense - an IT representative at board level will probably lobby for greater spending on IT, not to mention the additional salary costs associated with a C-level employee.
Additionally, it may also be that companies who have a CTO/CIO are more likely to be driven by technology at a more fundamental level. Interestingly, when we look at what the IT budget is spent on, we can see that SaaS solutions are the number 1 expensive only when a CTO/CIO is present. Otherwise the primary expenses for a team led by an IT lead or Customer Support department are consultants or IT staff payroll; indeed in these cases SaaS is never mentioned as a key expenditure element.
We believe that this is because CTO/CIOs tend to be more experienced and understanding of the power of technology, and hence they are willing to pay more for effective software solutions as they recognise the ability of them to facilitate the work being done.
There are a wide array of different services and subscriptions that come under this category - for example hosting costs on AWS, subscription fees to Angaza/PaygOps, or Xero, etc. That this category only stands out for companies with CTO/CIOs is revealing, because it shows that they recognise the importance these types of SaaS solutions hold. In contrast, organisations who do not have this seniority may be missing out on the value these solutions can bring.
3) As companies grow, so does their IT spending
If we take the 7% expenditure on IT mentioned before as a baseline, we observe that 75% of all respondents are under-spending on their IT. This trend is particularly evident in smaller companies (those with fewer than 20 employees, excluding sales agents), amongst whom 83% allocated less than 7% of their overall budget towards IT.
As companies grow and mature, their budget lines adapt and change their shape. Whilst early-stage companies often face cash-flow constraints and so have to prioritise purchasing inventory, as they get larger this dynamic changes and a greater proportion of the budget can be allocated towards activities that are more strategically minded. This includes increasing their investment in IT and technology, because they understand that investing now will allow for greater returns from the increased effectiveness of operations, greater market opportunities now available etc.
An example of this improvement in effectiveness could be the manual stock transfers and inventory updates - whilst sales are small, these updates can be done manually, but as sales grows, this can quickly become overwhelming. An automated process for updating stock would release resources to work on other, more important tasks.
Such notion of budget increasing as the company expands is also a finding of our industry peer Global Distributors Collective (GDC), who conducted a recent study establishing across their members answering their survey, to find on average respondents were spending 25,000 USD in SaaS per year, with 15% of their respondent to spend more than 100,000 USD annual in SaaS.
It stands to reason that the need for effective technology solutions grows as your company grows, and the return on investment in sophisticated IT solutions appear increasingly attractive as companies scale. In addition to this, those companies that have more mature IT early-on in their own growth are often better able to prove their scalability and appear more attractive to investors, which in itself may act as a key component towards leveraging greater investment.
4) COVID accelerated existing trends with increased IT spending
Shifting in-person work to remote work due to COVID-19 fundamentally challenged the ability for many companies in emerging markets, and particularly last mile distribution, to operate. With organisations taking precautions to limit face-to-face contact, many of their traditional sales channels were effectively removed, and organisations had to quickly react to this new reality.
These challenges show how integral modern technology is in enabling companies to do business: from the ever greater reliance on mobile money-based transactions, to increases in digital messages to clients (through the internet, or SMSs). Combine that with empowering these newly remote employees to continue to do their vital work via digital tools, and the importance of having effective IT in place has rarely been so clear.
Has your spending on IT changed in % terms since the start of 2020 to 2021?
Once again, it is important to stress that IT is only a means to an end, the one of securing workflows and processes of a given organisation to support its growth, such as maintaining a continuum of service quality when optimising cost of delivery while the company scales. With the Covid-19 crisis hitting Last Mile Distributors and adding limitations of movements to their agents, many company leaders gained in appreciation of a stronger process structure through their digitalisation to ensure that some elements of the value proposition, which had become inefficient as relying too much on manual repetitive tasks, could be achieved effectively again even from isolated staff members.
5) The build or buy conundrum
a) At the CRM level
What type of IT solutions does your organisation want to use?
One of the most striking results from this survey was the very low % of respondents who intended on their IT solutions being primarily developed in-house (only 13%). Contrast this to 42% who will primarily use off-the-shelf solutions, and then a further 46% who will use a blended mix of both approaches.
We believe there are 2 main reasons behind this:
The growing maturity of SaaS solutions appropriate for different markets and functions
The challenge in hiring suitably experienced development staff who could create appropriate software
In addition, it is quite challenging to create good, effective software, particularly in emerging markets where the target licence/subscription prices are much lower than would be expected in more digital-friendly markets. This puts pressure on the seniority of available IT resources, further exacerbated with the flight of these resources out-of-country and to larger, more established companies. To combat this, some companies are turning to innovative employment structures and incentives (see this article on how companies are using Stock ownership to entice long term employment).
Off-Grid solar provides a clear example to this. When this sector was nascent, there were very few software solutions available to operators in this space., leading to market domination by a small number of providers along with the necessity of individual custom development made by each company. As the sector has matured, and particularly over the past 5 years, there have been more digital service providers entering this market - for example, PaygOps, Paygee and Upya.
This increase in the availability of software solutions has driven innovation, and provided the consumer of these products and the off-grid distributors with greater choice in the marketplace. With all of the digital service providers keenly listening to the needs of their customers, they continue to develop their products to provide more functionality across the value chain - from inventory controls to agent management.
The continuous improvement of these software has removed some of the necessity for companies to develop solutions entirely by themselves. Instead, it has opened up opportunities for specific, targeted integrations and applications to fill the gaps found - for example with business intelligence layered on top of the software platform. The survey results of this question underline that reality, and it is a trend that we would expect to continue over the coming years.
b) At the data analytics level
Our survey suggests that data is continuing its run as one of the most prominent topics in the business world. Nearly all respondents intend on expanding their data capabilities, be it through internal upskilling, new hires, or with outside consultants. Indeed, 58% expressed plans to build upon their current resources and skills: given the benefit of combining data analytical skills with sector-specific knowledge, this seems a sensible approach.
Fully one quarter of respondents were also planning to use external consultants to bolster their own data capabilities. This approach allows companies to jump skill gaps that may exist within internal data capabilities. Additionally, when your internal data team collaborates with external senior consultants, they tend to learn a lot, creating a positive feedback-loop of upskilling.
From our experience in working with clients and understanding their data needs, the most common project that these data resources (be them internal or external) work on is the building of a modern data infrastructure upon which business intelligence and reporting can be built into. With companies using a variety of off-the-shelf solutions for different areas of the business, the default dashboards that these separate tools offer are often incomplete for the needs of end-users. Centralising data access and combining the spread out data points to draw more comprehensive conclusions is increasingly becoming a key ambition for SMEs.
Conclusion
Successful organisations are always supported by a strong network of processes and workflows. These ensure consistency in the value proposition delivery, and maximise the efficiency of the resources employed for that purpose. Digitisation is only a means to such an end: to translate an organisational vision into something that businesses and operations can be built upon. To fulfill these lofty goals, a clear focus and strategy for technology must be provided and driven by the overarching business strategy.
The key characteristics of companies who invest resources into IT do so on several fronts - firstly by entrusting a senior employee, normally CIO/Head of IT, to enact technology plans as prompted and conceived through the business strategy. This is complemented by an average of 3-10% spending of overall companies expenses on IT, which includes at least some elements of the design and technological infrastructure being externalised to service providers. Furthermore, companies are willing to invest in their own internal Business Intelligence and analytics capabilities, to ensure they are well placed for the evolving data landscape. With this combination of traits, companies are better placed to scale sustainably, and indeed prove to investors their capacity for further growth.
As the market further matures, we expect to see these trends continue and indeed grow in significance. We also believe that these characteristics will form a key part of future technology strategies for all types of different organisations, and act as indicators for further investment.
About Solaris Offgrid:
Solaris Offgrid supports distributors of essential services to build strong customer traction and greater relations with investors through flexible and inclusive Paygo solutions, designed for last-mile operations. Adopting a bottom up approach in the design of its solutions and creating synergies with a strong network of partners to solve last-mile challenges, the company has already deployed Paygo solutions in more than 30 countries through PaygOps, Solaris Offgrid in-house software solution built “In the Field, for the Field” and its product development services. Leading reference in the off-grid solar market, PaygOps is engineered to deliver modular and interoperable solutions to address off-grid energy access challenges and distribution complexity. For more information on PaygOps, please contact [email protected].
About Enable Digital:
Enable provides digital technology solutions for emerging market and climate tech ventures and their investors. Their clients are providing essential goods and services for customers in sectors such as Energy Access, Agriculture, Mobility, Waste, and more. They support entrepreneurs, social innovators, and investors to grow their companies through effective digitisation - be it in choosing the best software for their needs, developing Business Intelligence and Reporting capabilities, or providing Technical Assistance. To find out more, visit https://enable.digital and email them at [email protected].
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