This is for everyone: The case for universal digitisation
Written with the well-known cross-sector charity Go ON UK, this report presents the socioeconomic case for universal digitization, particularly in the United Kingdom. Based on quantitative research, it highlights the socioeconomic case for improving the digital infrastructure and promoting usage. We realize the benefits of the internet – including the economic, social, and community benefits – only when everyone is online.
“This is for everyone” The case for universal digitisation
Amsterdam Steven Pattheeuws Senior Executive Advisor +31-6-22791964 steven.pattheeuws @strategyand.pwc.com Beirut Bahjat El-Darwiche Partner +961-1-985-655 bahjat.eldarwiche @strategyand.pwc.com Delhi Ashish Sharma International Director +91-124-499-8705 ashish.sharma @strategyand.pwc.com Dubai David Tusa Partner +971-4-390-0583 david.tusa @strategyand.pwc.com Milind Singh Principal +44-20-7393-3746 milind.singh @strategyand.pwc.com
Düsseldorf Roman Friedrich Partner +49-211-3890-165 roman.friedrich @strategyand.pwc.com Frankfurt Olaf Acker Partner +49-69-97167-453 olaf.acker @strategyand.pwc.com Helsinki Santeri Kirvelä Principal +358-9-6154-6666 santeri.kirvela @strategyand.pwc.com London Sid Azad Partner +44-20-7393-3563 sid.azad @strategyand.pwc.com Victor Koss Partner +44-20-7393-3738 victor.koss @strategyand.pwc.com Madrid José Arias Partner +34-91-411-5121 jose.arias @strategyand.pwc.com
Mexico City Carlos Navarro Partner +52-55-9178-4209 carlos.navarro @strategyand.pwc.com Milan Luigi Pugliese Partner +39-02-72-50-93-03 luigi.pugliese @strategyand.pwc.com New York Christopher Vollmer Partner +1-212-551-6794 christopher.vollmer @strategyand.pwc.com Paris Pierre Péladeau Partner +33-1-44-34-3074 pierre.peladeau @strategyand.pwc.com Riyadh Hilal Halaoui Partner +961-1-985-655 hilal.halaoui @strategyand.pwc.com São Paulo Ivan de Souza Senior Partner +55-11-5501-6368 ivan.de.souza @strategyand.pwc.com
Shanghai Andrew Cainey Senior Executive Advisor +86-21-2327-9800 andrew.cainey @strategyand.pwc.com Tokyo Toshiya Imai Partner +81-3-6757-8659 toshiya.imai @strategyand.pwc.com Vienna Klaus Hoelbling Partner +43-1-518-22-907 klaus.hoelbling @strategyand.pwc.com Zurich Alex Koster Partner +41-43-268-2133 alex.koster @strategyand.pwc.com
About the authors
Victor Koss is a partner with Strategy& based in London. He advises retail and corporate banking clients, mobile operators, and retailers on a broad range of topics, including strategy, customer management, operating models, and proposition design. He has spent almost 10 years addressing the opportunities and issues arising from digitisation globally across industries. Sid Azad is a partner with Strategy& based in London. He specialises in conducting board-level strategic reviews for financial-services and fast-moving consumer goods clients, and has been closely studying the ways digitisation is changing consumer behaviour. For past several years, he has been focusing his research on helping clients respond to the cross-industry challenges and opportunities created by digitisation. Anu Gurm was formerly an associate with Booz & Company. Elliott Rosenthal was formerly a consultant with Booz & Company.
This report was originally published by Booz & Company in 2012.
Foreword, by Martha Lane Fox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1. Introduction: A virtuous circle
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2. The digital nation: The value of digital leadership . . . . . . . . . . . . . . . . . . . . 14 3. Individuals: Enhancing health, wealth, and well-being
. . . . . . . . . . . . . . 23
4. Enterprises: Supercharging the economy . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5. Charities: Bigger impact for less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 6. Government: Achieving universal digitisation . . . . . . . . . . . . . . . . . . . . . 46 7. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Every day, the media is full of debate and challenge about what kind of society the United Kingdom can and should build in this new “age of austerity.” How much should we spend on public services? How can we foster entrepreneurialism? How do we support a growing and an aging population? The questions are important, and yet I feel the debate often fails to reflect properly on one of the biggest changes to the world of the last 20 years, changes that can help us combat each one of these challenges more effectively. Digital is too often seen as relating only to hardware or software issues. The enormous power digitisation has to transform our economic, social, and civic worlds is still ignored. I hope this report by Strategy& will finally put the digital agenda at the heart of the agenda of economists, politicians, and social reformers. It is the first report I have seen that links these worlds together and gives us a complete picture of the scale of the opportunity now on offer to the U.K. Yes, the £63 billion potential GDP uplift is eye-catching. Digital clearly offers growth, particularly to the small and medium-sized enterprise sector. But far greater digital capability offers so much more: improvements in education, connecting the elderly and isolated to their communities more effectively, helping people back into work, and better health and social services. All these benefits make their greatest impact on the lives of the marginalized sections of society. There are 10.8 million people in the U.K. who do not use the Internet, and they are consequently more vulnerable. As Strategy& shows, this is no longer something we can dismiss as somebody else’s problem. We gain the full benefits ourselves only if everyone is online. The lack of basic digital skills for millions means “digitisation” is unbalanced — we will increasingly fall short of the U.K.’s potential if we do not start to address the problem.
That’s why this is such an urgent national priority and why Go ON UK, a cross-sector charity, which I chair, is taking a lead in broadening the skills of individuals and organisations. But it is too big a job for even this impressive group of partners. The U.K. should grasp this moment to shape its own digital future. It should be a future in which no one is left behind and in which the benefits of digital are shared by all. That’s why I ask everyone — individuals, families, charities, businesses, and the government — to help unlock the powerful social and economic prize that waits us. As Tim Berners-Lee said: “The Web as I envisage it, we have not seen it yet. The future is still so much bigger than the past.” My thanks to Strategy& for their valuable work. Martha Lane Fox
This report was written by Strategy& with Go ON UK and its founder partners. Its purpose is to present the socioeconomic case for universal digitisation. The foundations of the analysis and observations made in this report are a combination of proprietary Strategy& findings and data provided by Go ON UK and its founder partners and third-party sources. Strategy& conducted the analysis and prepared this report. Our purpose, and that of Go ON UK, are the same: to highlight the socioeconomic case for digitising the United Kingdom, to describe the benefits to individuals and organisations that the Internet can bring, and to stimulate debate on a potential future course of action. In bringing a body of quantitative research to bear on the study of the social impact of digitisation, we recognize that much more needs to be done. We hope that this report acts as a catalyst to encourage further research, including longitudinal studies, about the social impact of digitisation, its effect on the lives of individuals, and its influence on the effectiveness of organisations, in the U.K. and throughout the world.
At the heart of the opening ceremony of the London 2012 Olympic Games — a typically British celebration of the history and culture of the United Kingdom — was a vision of a digital nation. As Sir Tim BernersLee, inventor of the World Wide Web, tweeted from the centre of the Olympic Stadium, around him unfolded a rich narrative of the people of the United Kingdom, from all walks of life, connecting via the Web. The message to the world was clear: The U.K. is a modern, technologically advanced nation leading the global charge into the digital era. But is this true? Is the U.K. fully exploiting the potential offered by digitisation to support and promote its economic and societal well-being? By all measures, the U.K. is a leading digital nation. It is ranked 12 out of 150 on the Strategy& Digitization Index,1 which compares the state of progress for nations around the world. In its digital foundations — the confluence of an affordable, fast, and robust broadband network of infrastructure, public- and private-sector digital services, and residents with a high level of education — analysis shows that the U.K. has a very strong platform for future development. But it is not where it could be. The U.K. is not maximising the potential offered by digital technologies, because too many individuals and organisations are either not using them to their fullest or not using them at all. We estimate that the U.K. could have increased its annual 2011 GDP by up to £63 billion if it had achieved global leadership in digitisation. In the 19th and early 20th centuries, near-universal electrification transformed the lives of everyone, profoundly improving the lot of the most vulnerable. Digitisation could have a similar impact. However, its benefits are not unlocked just by flicking a switch. Realising the full digital potential of the United Kingdom will require a holistic approach
from government, businesses, and members of the community, working together to connect with the individuals and organisations now missing out on the benefits of being online. We propose a three-pronged strategy to fully unlock this potential. First, we need to continue investing in the digital foundations to improve the digital infrastructure, develop more and better online services, and bolster human capital. Second, we need to promote Internet usage. This means reaching out to individuals and organisations that are not online to ensure they have easy access to digital technologies, are aware of the benefits of being online, and have the basic digital literacy skills needed to engage with the digital world. Third, we need to encourage the innovations and entrepreneurship of the private and not-for-profit sectors. As digital platforms expand through the U.K., companies and organisations will create new forms of value-adding enterprise. This needs to be encouraged and abetted. In this report we argue that universal digitisation has the potential to unlock substantial economic and social benefits for four sectors in particular: individuals, small and medium-sized enterprises (SMEs), charities, and government. • Individuals can expect better quality of life through improved education, health, wealth, and well-being: Improving education outcomes; Web-based learning can increase levels of engagement and attainment Improving employability; digitisation promotes more effective jobhunting and flexible working arrangements Improving health and well-being; studies show digitisation can raise the quality of diagnosis and care, through remote monitoring and other innovations Reducing isolation; access to the Internet can help elderly users stay connected to friends and family
• Small and medium-sized enterprises drive economic growth: Supercharging revenue growth; digital technology can enable SMEs to unlock as much as £18.8 billion in incremental revenue Streamlining the cost base; digitisation can help channel scarce resources and help businesses expand more effectively Boosting the service sectors; as they invest in digitising their offerings SMEs could improve customer satisfaction and retention • Charities can make a bigger impact for less cost: Significantly enhancing fund-raising potential; digital technologies can more effectively link donors with worthy causes Transforming operations; the right technologies can lower operating costs and enhance the reach of not-for-profit organisations • Government can better meet the goals of constituents through universal digitisation: Cost savings; central and local governments can potentially recoup £5.1 billion annually with the digital delivery of services Meeting environmental challenges; governments can make use of digitisation to reduce CO2 emissions Research suggests that countries that lead the world in promoting affordable access to the Web, and that successfully adopt new digital models of public- and private-service delivery on a large scale, can unlock new economic growth opportunities. In the words of Sir Tim, #this is for everyone.
1. Introduction: A virtuous circle
Sir Tim Berners-Lee’s now famous Olympic Games opening ceremony tweet, “This is for everyone,” intentionally referred to the inclusive nature of the Internet.2 Regardless of age, social status, or any other factor, all individuals and organisations can be part of the digital revolution and can benefit from the range of opportunities offered by the digital era. The United Kingdom has demonstrated itself to be a leading digital nation. This is reflected in its consistently high rankings in indices of digital maturity: • The Strategy& Digitization Index (DI) ranks the U.K. 12th among nations, based on the speed, reliability, and ubiquity of infrastructure; affordability of access; usability of services; and skills of the population.
• Digital foundations matter: Powerful infrastructure, highquality services, and depth of (technical) human capital combine to create an online environment of considerable value. • Usage matters even more: The extent to which individuals and organisations exploit the potential offered by a country’s digital foundations determines how much benefit the country realises. • Universal digitisation is possible: Society changes for the better when individuals and organisations in every sphere can fully exploit the potential benefits of being online.
• The World Economic Forum’s Networked Readiness Index (NRI) ranks the U.K. 10th, on the basis of the impact of technology on international competitiveness. • The Web Index (TWI), produced by the World Wide Web Foundation (a group that Sir Tim founded), ranks the U.K. third, on the basis of a broad suite of measures representing the social and economic value of the Web. But the United Kingdom’s current digital status may not be enough to remain competitive in a highly turbulent global economy. The challenge for the U.K. is to further enhance its position at the leading edge of digital advancement, leveraging the full range of transformative technologies to deliver economic and social benefits to all of society. This can be accomplished, in part, by building up the country’s digital foundations. Strong digital foundations have three core elements. There needs to be an affordable, accessible, fast, and robust digital broadband infrastructure. This needs to be populated with innovative, highquality public- and private-sector digital services. Sufficient levels of human capital (including technical expertise) must exist to drive technological advancement and spur innovation. These three elements — infrastructure, services, and human capital — combine to help determine the U.K.’s maximum potential value from digitisation. Enhancing the digital foundations, for example, by upgrading to 4G mobile broadband and promoting greater service innovation within the technology community will increase the U.K.’s digital potential. But the digital foundations represent only half the story. The other half of the story is usage, the extent to which people are active with digital technologies and applications, incorporate them into their lives and work, and gain benefit from them. It is possible to create a virtuous circle of benefits from digitisation — in which improvements in quality of life and lowering of costs continually reinforce each other — only if universal digital usage becomes a priority. That means putting in place the services, access points, and training necessary to allow people to take advantage of the technology.
Some may object that digitisation has already spread far enough. Observers talk about children playing online instead of engaging in outdoor sports, electronic contact replacing richer face-to-face experience, the loss of work–life balance as people are overwhelmed with digital contact, concerns about loss of privacy as people’s purchases and activities are recorded, and other potential dangers. These concerns are clearly worth raising; they need to be addressed, in some cases by behaviour changes among individuals, and in some cases by society at large. However, all of these problems are related to those parts of digitisation that are already in place. Even if progress stops today, the problems will remain with us; arguably, they will grow worse unless individuals and organisations learn how to manage the integration of digital technologies into everyday life. The ability to manage these problems, and to find appropriate and equitable solutions for them, is only possible when government, the not-for-profit sector, the private sector (particularly SMEs), and individuals advance their levels of digital maturity. More open, transparent, and effective use of technologies makes it far more feasible, in our view, to find solutions. For example, the problems of work–life balance are partly resolved by the reduction of time spent commuting; the problems of isolation are partly resolved when individuals make online contacts that lead to face-to-face connection; and privacy-related problems, which will probably be an ongoing source of concern for the foreseeable future, can be resolved only by improving both standards of online services and general individual awareness of online safety. The U.K. government has already made a commitment to future investment in digital foundations, to keep the infrastructure competitive. More now needs to be done to promote usage, that is, to get the 10.8 million adults who do not use the Internet and the two-thirds of SMEs and one-fifth of charities that have little or no presence online to unlock the value of the digital foundations. The government can play an important role by migrating more of its services, in both local and central government, online, and by promoting (through its tax and fair practice laws) a robust and trustworthy online retail environment for consumers. As usage increases, this should open doors for renewed investment on the part of both the public and private sectors in a manner that is economically viable and sustainable.
2. The digital nation: The value of digital leadership
Our assessment of the United Kingdom’s potential is based on a comparative analysis of the digital maturity of nations, using econometric modeling techniques to estimate the impact that this digitisation can have on a nation’s GDP. The Strategy& Digitization Index, introduced in 2012, ranks 150 countries on their level of digital advancement (see Exhibit 1, next page). The index is calculated by quantifying 23 key metrics, which provide either direct or proxy indicators for the maturity of the country’s digital foundations and digital usage. Based on 10 years of historical data, the Strategy& Digitization Index has been stress tested for statistical significance and correlation with changes in GDP. A more detailed description of the methodology, which has been peer-reviewed by the academic community and was included in the 2012 World Economic Forum report on digitisation, can be found in Strategy&’s “Maximizing the Impact of Digitization.” Correlation is not causality, of course, but a close look at the index suggests that over the past five years, digitisation may have contributed as much as £860 billion to world GDP. These gains are not distributed evenly among nations. Countries that invest heavily in digital technology have enjoyed higher levels of economic growth — up to 24 percent more than their more analogue-constrained neighbours. The index also seems to confirm the idea that both dimensions of digitisation — access to full digital foundations plus usage — have more impact than the foundations alone. Previous studies that focused mainly on broadband coverage estimated that a 10 percent increase in penetration contributes a per capita GDP gain of just 0.16 percent to 0.25 percent. The Strategy& Digitization Index, which measured both the direct and indirect economic impacts of digitisation, found that an increase in the Digitization Index score of 10 percent correlates with a 0.50 percent to 0.62 percent gain in per capita GDP.
• Digitisation represented by investment in digital foundations and usage has contributed £860 billion to world GDP over the last five years. • The U.K. could have increased its 2011 GDP by up to £63 billion if it had achieved global digital leadership, as defined by the Strategy& Digitization Index.
Exhibit 1 The digitization top 12
Countries ranked by scores on the Strategy& Digitization Index, 2011 (maximum score: 100)
Source: “Maximizing the Impact of Digitization,” Strategy&, 2012; analysis updated to September 2012
The anatomy of digital maturity The Strategy& Digitization Index consists of 23 metrics that measure the state of a nation’s digital maturity. For our in-depth analysis of the U.K.’s progress in digitisation, those metrics were analysed in more detail. These metrics have been distributed across digital foundations — infrastructure, services, and human capital — and usage (see Exhibit 2, next page). What follows is an assessment of where the U.K. currently stands in terms of its digital maturity and the value of achieving digital leadership. Infrastructure: The U.K.’s backbone For those individuals and organisations that are online, an affordable, fast, and robust infrastructure underpins the digital experience. As of 2011, 89 percent of all Internet connections in the U.K. were faster than 2 megabits per second (Mbps). The country’s average connection speed in mid-2012 was about 5.7 Mbps. Overall Internet speeds in the U.K. have advanced every year and, thanks to a highly competitive market,3 prices have fallen at the same time. Since 2005, average headline broadband speeds have improved at a rate of 46 percent per year, and U.K. prices have dropped 8 percent per year. Although its average speed is adequate for most users today, the U.K. is lagging behind several other countries in the overall rollout of superfast broadband (see Exhibit 3, page 18). The government has committed to a target of 24 Mbps for more than 90 percent of the country by 2015, which will undoubtedly have a major impact on overall average speeds. But speed in itself is not enough to encourage usage. Ofcom (an independent regulatory authority for U.K. communications industries) has noted that in 2011 superfast coverage of the U.K. was at 60 percent, but only 6.6 percent of all connections were taking advantage of the top speeds. This suggests that focusing on availability is no guarantee of deriving full benefit from the investment. Services: Truly world-class The U.K. already has world-class, if not world-leading, digital services, across the private and public sectors. For example, U.K. citizens are twice as likely as their average Organisation for Economic Co-operation and Development (OECD) counterparts to order or purchase goods online. They spent £68.2 billion on online shopping in 2011.4 The U.K.’s proportion of retail sales conducted via the Internet was 9 percent,5 second-highest in the world, behind South Korea. However, the lion’s share of this revenue is being earned by large multinationals. Amazon alone accounts for 21.4 percent of the online entertainment market.6
Exhibit 2 Components of the Strategy& Digitization Index
Costs, fees, and tariffs: Fixed-line installation Fixed line per minute Mobile connection Mobile prepaid Broadband access Penetration: Fixed broadband Mobile phone Mobile broadband 3G connectivity Other elements: Network investment per subscriber International Internet bandwidth Speed (percentage of connections over 2 Mbps)
Data usage: Data as a percentage of wireless ARPU Internet addresses: Domains per capita IP addresses per capita SMS usage (average per customer)
Engineers as a percentage of population Percentage of workforce with secondary school education
Percentage of individuals using Internet Social networking usage PC usage (personal computer penetration)
Internet retail as a percentage of total retail
E-government Web measure index
Digital beneﬁts realized Social and economic beneﬁt
Digital beneﬁts lost Because of lack of usage
Note: This is a simplified representation of the Strategy& Digitization Index. For the full construct and indicators classification, refer to “Maximizing the Impact of Digitization,” Karim Sabbagh, Roman Friedrich, Bahjat ElDarwiche, and Milind Singh, Strategy&, 2012, http://www.strategyand. pwc.com/media/ uploads/Strategyand_ Maximizing-the-Impactof-Digitization.pdf Source: Strategy&
U.K. firms, particularly smaller companies, are failing to capture the opportunity afforded by high domestic demand for online retail. Onethird of SMEs have a digital presence, but only 14 percent of SMEs in the U.K. sell online, compared with 30 percent in Norway. Social media is also active in the United Kingdom. U.K. citizens are inveterate social networkers, 65 percent of the online population using a social network every month.7 Small businesses, however, are not taking advantage of this. Although 18 million Britons have used social media to interact with brands,8 only about 1 percent of small businesses are selling via the same channel.9 E-government is less advanced. As of mid-2012, 300 of 650 central government services had yet to be placed online, although a number of services had moved swiftly to digital channels. These include Companies House, Land Registry filings, HMRC Self-Assessment income tax, and the DVLA road tax service.
Exhibit 3 Average connection speeds, second quarter 2012
10.7 Mbps 8.9 Mbps 8.7 Mbps 8.4 Mbps
1. South Korea 2. Japan 3. Hong Kong 4. Latvia 5. Switzerland 18. U.K.
That said, the United Nations ranks the U.K. third in terms of its current online public service development.10 The top spot goes to South Korea, which has focused on driving demand for its services. South Korea’s one consolidated central government portal targets its users by their age, sex, and topic of interest.11 For example, students can access customised services to allow them to study from their mobile phones, and the unemployed are automatically sent job opportunities. Human capital: Education and engineering The development of human capital — defined as education attainment and the level of technical vocational standards — is a measure of a country’s ability to innovate in digital service provision and infrastructure development. The U.K. can boast some of the finest tertiary education establishments in the world, and it is still one of the destinations of choice for foreign students. But recent surveys show it does poorly in terms of general education standards. The U.K. currently ranks slightly below the OECD average for university graduation rates; approximately 36 percent of the population completes tertiary education. British students are also shying away from technical subjects like engineering. The OECD Programme for International Student Assessment, commonly known as PISA, which tests 15-year-olds from 65 countries, ranked the U.K. 25th for reading, 28th for mathematics, and 16th for science.12 The number of overseas students attending U.K. universities to study engineering increased by 12,308 from 1997 to 2007, but the number of U.K. engineering students declined by 5,76913: Overseas students now account for larger portions of the United Kingdom’s engineering and computer science graduates today than they did 25 years ago, and given current visa restrictions, most new graduates are likely to take their skills back to their home country. The U.K. has 0.1 engineers per 100 inhabitants, ranking 32nd globally behind countries such as Slovenia and Romania.14 Engineering as a profession is up to three times as common in South Korea as it is in the United Kingdom. The World Economic Forum’s NRI ranked the U.K. 20th in terms of overall quality of education systems but only 43rd in terms of math and science education.15 The long-term impact of these trends should be a worry for policymakers because human capital is a key lever for spurring worldclass innovation in the digital age.
Usage: Digital haves and have-nots The U.K. is considered a nation of adopters with high levels of Internet penetration. Data from the Office for National Statistics suggests that 84 percent of adults have used the Internet. However, this does not take into account how regularly an individual uses the Web or if he or she has stopped using it. Recent data from the BBC suggests that the levels of individual usage in the U.K. could be as low as 79 percent.16 This would place the U.K. well behind nations such as Norway and the Netherlands, which, according to the International Telecommunication Union, have usage figures of 94 percent and 92 percent, respectively.17 A 79 percent usage figure means that about one-fifth of the population — including 10.8 million people 15 and older — do not use the Internet at all.18 In addition, the e-Learning Foundation estimates that 800,000 of the most disadvantaged schoolchildren in the U.K. lack home access to the Internet.19 The BBC study found that of non-users, 71 percent are categorised among the three lowest socioeconomic groups, 51 percent are older than 65, and 50 percent have no formal qualifications. Three main factors reduce usage of the Internet20: • Access: Cost of service and lack of hardware can be barriers to getting online. Among working-age people in the U.K. (a government statistic that includes men aged 16–64 and women aged 16–59), 52 percent of non-users state that they do not use the Internet because it is too expensive and 62 percent state that they have stopped using it because they no longer have access to a computer. Among retired people, these figures are 44 percent and 69 percent, respectively. • Awareness: Many people are not online because they are not aware of the range of benefits available. Seventy-nine percent of working-age non-users and 88 percent of retired non-users state a simple lack of interest as a reason for not going online. • Skills: Using the Internet requires only the most basic digital literacy, yet lack of skills is cited as a key reason many people are not online. Indeed, 63 percent of working-age non-users and 78 percent of retired non-users state they do not know how to use the Internet. There is a similar digital divide in the business sector in the United Kingdom. The Strategy& SME digitisation survey suggests that only one in three SMEs communicates with its customers online. A Lloyds Banking Group PLC survey of U.K. SMEs and charities indicates that almost 20 percent of charities do not have a website, and many do not
perform even the most basic of business tasks online. It also notes that 23 percent of SMEs and 35 percent of charities stated that they would require training and support to develop basic online skills.21 This lack of skills and usage, on the part of both individuals and organisations, is a key reason the U.K. is not maximizing digitisation’s value. The value of digital leadership We ran three simulations using our econometric model to demonstrate the potential value to the U.K. of moving up to the top in each of the 23 Digitization Index metrics — the equivalent of having world-leading digital foundations and near-universal usage among individuals and organisations. Under each scenario, we measured the incremental GDP the U.K. might have had today under changed circumstances. • Scenario 1 shows results if the U.K. scored the same as Norway in each metric. (Norway tops the ranking of 150 countries.) • Scenario 2 depicts the U.K. if it ranked fifth for each metric (a worldclass ranking). • Scenario 3 shows the U.K. moving to the first position for each of the metrics. In this scenario, the U.K. would be positioned as the world’s most advanced digital nation, in terms of both its digital foundations and its usage, what we call world leadership. The implications of the model’s correlations are compelling. By matching Norway (Scenario 1), the U.K. could have increased GDP by £14 billion. By moving into fifth place for each metric (Scenario 2), it could have added 1.7 percent to GDP, or £26 billion. Finally, by achieving the top spot in digitisation (Scenario 3), it could have increased its GDP by up to £63 billion, a 4.2 percent boost (see Exhibit 4, next page). Looking forward In recent years, much debate has centred on the need to develop the U.K.’s digital foundations: rolling out the superfast broadband network, creating “digital by default” services through the government, and improving technical higher education. All of these efforts are important, but driving usage is the underexplored lever in terms of unlocking the U.K.’s full digital
Exhibit 4 The value of digital leadership
U.K. (#12) Additional 2011 GDP Norway (#1) World-Class World Leadership
£63 Billion (+4.2%)
£26 Billion (+1.7%) £14 Billion (+0.95%)
potential. Consider the example of the superfast broadband network, where 60 percent of homes have availability but usage levels stand at 6.6 percent22: The digital foundations are there, but lack of usage is limiting the potential benefit of this significant investment. Given that almost one-fifth of the adult population does not use the Internet and that significant numbers of SMEs and charities are lagging behind in digital maturity, we believe that getting all individuals and organisations online and ensuring they are doing a lot more when they are connected should be a priority. Chapters 3, 4, and 5 of this report illustrate the potential economic and social benefits of driving usage for individuals, SMEs, and charities. Chapter 6 discusses the government’s role in strengthening digital foundations and boosting usage. We know from analysis and experience that within companies, the efficiencies and benefits of digitisation tend to go straight to the bottom line. Implementing similar strategies across society presents tremendous challenges, but the indications are that it will also bring significant benefits.
3. Individuals: Enhancing health, wealth, and well-being
The Internet has an immediate effect on the lives of those who use it. It connects them to news, media, friends, and family; saves them money on services; and opens a world of choice in consumer goods (see “The Benefits of the Internet for Consumers,” next page). In the longer term, the Internet has significant tangible benefits for education, employment, and retirement. Research suggests that digitisation helps people at every stage of their lives, from youth into working age and well into later life. Some of the benefits: • Education: Digital learning tools can play an important role in improving education outcomes, raising standards, and preparing students for the world of work. • Employment: Online job listings encourage job searching by the unemployed, and Internet-enabled flexible work situations allow people to retain jobs they would otherwise have to leave. • Later life: Digitisation allows older people to stay connected to friends and family, and helps counter depression; remote online monitoring has been demonstrated to help improve health outcomes.
• Universal Internet usage among the young can significantly contribute toward improving education outcomes. • Enhancing the digital skills of the U.K.’s working population will protect and improve employability. • Digital technologies can play a major role in countering social isolation and depression, especially among the elderly.
The benefits of the Internet for consumers
Consumer surplus: In economics, the difference between a real-world price and any higher price that consumers would typically be willing to pay is known as a consumer surplus. The Internet is a considerable source of consumer surplus — in part because it provides content and services free that users would expect to pay for in the offline world. Free e-mail replaces the postal service. Free online video replaces cable. Free Skype connections replace international calls. And so on.23 Researchers at Stanford University and the University of Chicago calculate the consumer surplus derived from being online at between 5.2 and 7.1 percent of a person’s income. That equates to around £1,400 for a person earning the U.K.’s median income.24, 25 Reduced prices: Those who shop on the Internet can save an average of £550 per year on consumer goods through online discounts. The figure exceeds £1,700 for the wealthiest individuals and £270 for the poorest 10 percent.26 More choice: Internet retailers are able to stock almost limitless supplies of products to suit the tastes of every user. Choice has a measurable financial benefit. A study by the MIT Sloan School of Management estimates this benefit to be worth seven to 10 times as much as the gains from just online competition and consumer discounts.27
Education: Equipping and engaging students The school environment is one of the last domains to resist wholesale change by digital technology. Although digital whiteboards and Internet connectivity are now commonplace in schools, relatively little emphasis has been placed on harnessing the Web to improve education standards, even though research has demonstrated measurable impact. The Technology-Enhanced Learning Research Programme has worked with academics, industry representatives, and practitioners across the U.K. to understand the role of digitisation in the classroom. The group has stated that to “prosper in the 21st century, people need to be confident digital collaborators and communicators, discerning users of the Internet, and equipped with computational thinking skills such as understanding how to use and write the computer programs that underpin e-mails, searches, and maps.” Online learning, coupled with classroom tuition, can lead to better education outcomes. It is often preferred by students for its engaging,
interactive content. Teachers benefit from being able to tailor their instruction for each child, using the data collected about children’s performance. A number of pioneering schools are beginning to use technology to dramatically change classroom dynamics. Children work at their own pace through online classes via cloud computing services, and lessons at school are spent receiving focused tuition from the teacher, working on projects, or collaborating with peers. An analysis of 50 studies by the Center for Technology in Learning found that online learning blended with face-to-face classroom instruction showed statistically significant improvements in education outcomes over traditional classroom learning alone (see Exhibit 5 ).28 In a separate trial, 58 percent of students indicated that they actively preferred studying from online videos to classroom learning alone. More importantly, in nine out of 10 subjects, students improved grades, and the course lowered expenditures for the school district.29
Exhibit 5 The effect of online collaborative learning
Size of the improvement effect 0.39
Online video only Online video and classroom learning “Active” online classes and classroom learning
Note: Figures represent standard deviation from the previous norm
Source: Center for Technology in Learning
Technology helps deliver engaging learning materials that prepare children for the world of work. The OECD found that “Individuals who develop the skills needed to use [digital] texts efficiently and effectively will be at an increasing advantage in accessing higher education, finding and succeeding in a well-paid job, and participating fully in society.”30 The evidence has been so compelling that South Korea, already the world leader in teaching digital literacy, is looking to digitise its elementary-level education texts by 2014. In 2015 it plans to place the entire school curriculum on computers, smartphones, and tablets. The Ministry of Education will distribute free tablet PCs to low-income students and develop a textbook “cloud” where all books can be accessed. The required investment should not be underestimated; this will cost more than £1.3 billion (US$2 billion) over the next few years.31 In the U.K., the Essa Academy, a 900-pupil state school whose students come mainly from disadvantaged communities, recently introduced a new strategy to transform the teaching environment that put technology at the heart of the learning process. Each student was provided with a tablet and smartphone — loaded with general certificate of secondary education (GCSE) revision podcasts and 100,000 textbooks — and encouraged to study at his or her own pace. Within two years of the programme’s introduction, the proportion of A* to C grades rose from 55 percent to 99.5 percent. It will not be long before these ideas are widespread. The International Society for Technology in Education believes that the use of tablets and mobile applications will reach mass adoption by mid-2013.32 Employment: Finding and retaining employment The Internet has revolutionised the way people search for employment. Because of the flexibility it offers, it can also help people keep their jobs, but only those already online can benefit from these opportunities. This disadvantages those who remain offline, primarily those with less education and lower income backgrounds, and perpetuates the “digital divide” — the gap in opportunity between the digital haves and have-nots. Job hunting online Today, both prospective employees and employers have better access to information — allowing the market to match job with job seeker more quickly, efficiently, and cheaply. The Department for Work and Pensions
(DWP) found that there “was a significant and consistent increasing trend among job seekers in the use of the Internet over time from 2006 to 2009.”33 Those with an Internet connection at home were six times as likely to conduct a job search online as others. More than 1 million young people are currently not in education, employment, or training (NEET). They are projected to cost taxpayers £4.2 billion a year.34 This is a challenge not just today; it could become a significant burden on society for years to come.35 The Internet cannot cure unemployment, but it can facilitate individual efforts to find work. The think tank Policy Exchange found that young people are particularly receptive to using online and mobile channels to get back on track. Three out of four young people already use online job-hunting sites; 92 percent said they would use an app to help them find work.36 A study by the National Bureau of Economic Research found that if Internet penetration rises 10 percent in a community, an individual within that community becomes 10 percent more likely to use an employment agency, 7 percent more likely to search for a job, and 2 percent more likely to send out a CV.37 In short, the Internet brings significant advantages to job seekers. Unfortunately, about 23 percent of young people are not using job search websites. Flexible work arrangements The flexible workplace — in which people can work anywhere at any time they choose — is an affordable reality with today’s digital technology. Until now, however, it has been challenging to convince people, their employers, and government that flexibility can benefit all of them. Given the wealth of studies that confirm the economic and social benefits, a shift to greater work flexibility would seem easy (see Exhibit 6, next page). But nine-to-five schedules are enshrined in psyches, contracts, and international labour conventions. As a result, billions of people commute to work during daily rush hours. In 2009, the DWP set up a task force with the “aspiration for the U.K. to become the leading economy for 21st century flexible working practices, supporting sustainable economic growth through improved work-home balance.”38 The task force found that businesses with flexible working arrangements saw the following positive results:
Exhibit 6 The effect of workplace flexibility on performance
Percentage of respondents surveyed about ﬂexible working arrangements
78 61 63
Positive Neutral Negative
Effect of ﬂexible working on quantity of work
33 13 3
Effect of ﬂexible working on quality of work
Effect of ﬂexible working on work–life balance
Source: Cranfield University School of Management survey of flexible workers, managers, and colleagues
• Recruitment: 42 percent of businesses found it easier to attract people. • Staff retention: 65 percent stated that it helped retain employees. • Productivity: 58 percent reported productivity gains, more than half saying staff became more creative and innovative working outside the office. • Absenteeism: 38 percent saw a decrease in the number of days employees took off. • Loyalty: 70 percent noticed improvement in employee relations.
Free to choose when and where they work, those with significant family responsibilities — including parents of young children and those caring for aging relatives — would also be able to contribute more. New parents could maintain a low level of engagement with their workplace during their leave, making reintegration easier. Companies that have piloted this arrangement experienced reintegration rates between 96 and 99 percent,39 against a national average of 40 percent.40 Given that the average turnover cost per employee is in the range of £8,200 to £12,000,41 this could bring substantial savings to companies. Later life: Promoting health and well-being Getting old is not easy, particularly for the less well off. One-third of people over the age of 65 admit to feeling lonely some, most, or all of the time. Depression affects 20 percent of older people living in the community and 40 percent living in elder care homes, compared with 10 percent of the population at large. Heart disease, one of the biggest health threats to older people, is more dangerous for people with lower incomes; a man in the highestdeprivation group is up to three times as likely to die from chronic heart disease as a man in the lowest group.42 Technology offers tangible ways to help older people enjoy happier and healthier lives. It is not a “silver bullet” for the wider social and economic forces at play, but it is a tool that is currently underutilised. Fortunately, bringing people over age 65 online requires only basic levels of digital literacy. The challenge is making it happen. Loneliness and depression Social exclusion is a significant problem for the elderly, with damaging consequences to health and well-being. Today one in three people over age 60 can go a whole week without speaking to anyone, and one in 10 people spend up to a month without any human contact.43 Depression is closely linked to the degree to which people are socially isolated. A growing body of research shows that using the Internet — for e-mail, video chat, or other human contact — leads to higher levels of wellbeing and mental health for the elderly. A U.K. study found that the
prevalence of persistent social exclusion for older people without access to digital communication devices is almost three times as high as for those who have digital connections.44 Another study found regular Internet usage by people over age 50 reduced depression by 20 to 28 percent. The researchers stated, “The ability to stay in touch with others and find support when needed are likely responsible for the beneficial impacts of Internet use on mental health among older adults.”45 A study conducted at the Phoenix Center that looked at the relationship between depression and Internet access for more than 7,000 retired people, noted that “Internet use leads to about a 20 percent reduction in depression classification.” Older people are also among the fastest-growing user groups of social networking sites. One study in the U.S.46 showed that in 2010, among adults age 65 and older, “13 percent logged on to social networking sites on a typical day, compared with just 4 percent who did so in 2009.” Half of the social network users age 50 and over stated that they had used it to reconnect with a friend or family members with whom they had lost contact. Extrapolating for the studies above, if Internet access helps to reduce depression in the elderly by 20 percent, in the U.K. that would reduce the incidence of depression by up to 220,000 cases.47 The healthcare gap The gap between healthcare outcomes for the rich and poor is increasing. According to the British Medical Journal, “The last time in the long economic record that inequalities were almost as high was in the lead up to the economic crash of 1929 and the economic depression of the 1930s.” 48 By making universal digitisation a priority and promoting usage, we can reach more of those who are falling behind. Many long-term illnesses can be monitored via the Internet. Telehealth, the use of the Internet to provide healthcare, represents a significant opportunity to scale up the healthcare system efficiently, achieving better outcomes for more patients at lower costs. Telehealth includes the remote monitoring of a patient’s health and environment to proactively assess the patient’s risk, often via automated question-andanswer sessions, sensors, and in some cases a videoconferencing system for consultations with a healthcare professional. The data feeds into a secure computer system that assesses an individual’s needs and risk profile, and proactively suggests care requirements.
A large-scale trial of telehealth in the U.K. produced dramatic results. Called the Whole System Demonstrator, the trial ran for four years, from May 2008 through September 2012, and involved more than 6,000 patients and 238 doctors. The study focused on individuals suffering from conditions linked to heart failure, lung disease, and diabetes. The sample group experienced a 45 percent drop in mortality, a 20 percent drop in emergency admissions, a 14 percent drop in elective admissions, and a 15 percent drop in accident and emergency (A&E) admissions. Replicated throughout the National Health Service (NHS), a system like this would result in 44,000 fewer admissions, 210,000 fewer hospital bed days, and 620,000 fewer GP appointments. Patients in their own home would have their medical condition monitored and managed regardless of where they lived or how far they were from a hospital. Real-time monitoring and analysis of the data collected would promote healthy lifestyle choices and help medical professionals and patients introduce preventive measures before conditions deteriorated. As for costs, the U.K. Department of Health says that telehealth “could save the NHS up to £1.2 billion over five years.” 49 The British Medical Journal has suggested waiting for deployment until results from a further four studies confirm its impressive efficacy and costeffectiveness. Unlocking the benefits for individuals The Internet can be a leveler in a socially divided world; it can mean the difference between work and unemployment, inclusion and exclusion, and happiness and depression. We therefore argue that more needs to be done to increase Internet usage than just offering higher speeds and lower costs. Unless the people who are not connected today are aware of the benefits of being online, unlocking the full digital potential of the Internet will remain a dream.
4. Enterprises: Supercharging the economy
Small and medium-sized enterprises (SMEs)50 make up the most dynamic, innovative sector of the U.K. economy. They generate 48.8 percent51 of private-sector turnover in the U.K. and employ 59 percent of private-sector personnel. They grew 3 percent in the first half of 2012,52 while the rest of the economy flatlined; still, they are not growing nearly as much as they could. In general, although it is impossible to prove causality from correlation, there is a clear link between online engagement and revenue growth (see Exhibit 7, next page). Larger firms within the SME segment are relatively digitally mature, and are already reaping significant benefits from digitisation (see Exhibit 8, page 34). By comparison, most U.K. SMEs lag far behind their international peers — in both the front and back office. If these enterprises adopted digital technologies, thereby growing as fast as more digitised SMEs, Strategy& estimates that they could unlock up to £18.8 billion of annual incremental revenues.53 Will the growth potential from digitisation translate into actual revenue growth for SMEs? That depends in part on the level of innovation and new enterprise that results. Some observers have suggested that revenue growth is a zero-sum game: that customers will simply migrate from less-digitized to more-digitized businesses, without growing the economic pie. But there is reason to think that genuine revenue growth will occur: that new forms of digital manufacturing, online retail, marketing, and other innovative businesses will create new sources of revenue — and, not coincidentally, new jobs for programmers, designers, and technologically skilled people, especially among SMEs. The economic impact of other factors associated with digitisation — such as globalisation and the need for new skills — is also not clear. Studies specifically measuring the effect of teaching digital skills and promoting internationalisation to SMEs have not yet been conducted, and consequently the degree of cannibalisation from untrained firms is uncertain. However, the U.K. Department for Business, Innovation and Skills estimates these effects suppress the gains from digitisation by around 20 percent.
• Research conducted by Lloyds Banking Group indicates that highly digitised SMEs tend to grow at a faster rate than less-digitised SMEs. • Strategy& estimates that annual total turnover of U.K. SMEs could be boosted by £18.8 billion if all of these firms sold and marketed online. • It is estimated that SMEs could reduce their cost base by up to 20 percent by digitizing their backoffice operations. • Only 1 percent of U.K. SMEs make use of social media to generate revenue, whereas larger firms are rapidly investing in these technologies. • A full 25 percent of SMEs say that a lack of basic digital awareness and skills holds them back.
Exhibit 7 Well-connected firms show more growth
Percentage of ﬁrms surveyed in each category
45% 35% 27% 19% 13%
Mature (32%) Do a lot online, including complex business processes. Maintain a website with high-level functionality and promote themselves via social media
Immature (52%) Low to moderate business tasks done online. Maintain a website with low-level functionality
Ofﬂine (16%) No online presence at all. Employees use the Internet only for very basic online tasks
Source: Lloyds Banking Group survey
Exhibit 8 Smaller firms are less connected
Percentage of ﬁrms surveyed in each category
65% 57% 51% 34% 26% 23% 35%
Mature Immature Ofﬂine
Sole trader (1 employee) Small (2–10 employees) Medium (15–20 employees)
Source: Lloyds Banking Group survey
In the end, even if the economic benefit of digitisation is mitigated to some extent, it also yields the kinds of innovation that should, over time, produce higher levels of turnover.Enhancing the digital foundations and driving usage can help the economy move away from being a zero-sum game, where every gained job must replace one that was lost. Companies do not have to start from scratch to introduce information technology. Off-the-shelf programs allow firms of all sizes to benefit from global digital marketing campaigns, advanced customer analytics, and seamless payments processing. A Strategy& study found that integration with existing systems is the biggest hurdle for digitisation — ahead of cost. However, several off-the-shelf products available today integrate numerous functionalities, such as sales, inventory, banking, payments, and payroll, into a single end-to-end packaged solution. These packaged solutions can reduce or eliminate the need to integrate with existing systems. Such programs can also help enable a more flexible working environment. Today, entrepreneurs can sell their products and services to the world from anywhere. The two-thirds of U.K. SMEs currently not making maximum use of digital technologies are simply losing out.
To understand how digitisation is affecting small businesses, Lloyds Banking Group interviewed a representative sample of 677 business owners from different sectors of the economy. Those who are using the Internet across their business report significant benefits: • Faster growth: 51 percent increased sales due to effective marketing and wider geographic reach. • Reduced costs: 54 percent cut costs through back-office automation and electronic communications. • Improved customer service: 54 percent improved levels of customer satisfaction, service, and retention. For many of these companies, the move online was driven by customers or suppliers; business owners said they are three times as likely to implement technology because they feel they have to than because they think it will make them more competitive. Rather than waiting for their customers to prod them into action, however, SMEs should fundamentally rethink their approach to deploying technology and take proactive steps to exploit the Internet. SMEs are starting to get the message that online channels are not exclusively for retail giants. GS1, the U.K. supply chain standards organisation, noted a trend of smaller retailers adopting e-commerce channels to supplement sales growth.54 The demand is there. In blind testing, shoppers said they prefer the e-commerce outlets of SMEs over those of large enterprises two-thirds of the time,55 giving the sites better ratings for authenticity and ease of use. Despite this growth opportunity, SMEs consider only 35 percent of their employees to be digitally savvy, and 24 percent of SME owners say their companies do not have the very basic skill level needed to use the Internet for business purposes, except for simple online searches.56 There is a great opportunity to bring these companies on board.
Shoppers said they prefer the e-commerce outlets of SMEs over those of large enterprises, giving the sites better ratings for authenticity and ease of use.
Reducing costs Strategy& undertook an analysis of the levels of digitisation in the back office of more than 500 SMEs in four western European countries (the U.K., France, Germany, Netherlands) and one developing nation (Brazil). U.K. SMEs noticeably lag behind their international peers in the digitisation of three key business functions: • Commercial processes, such as sales management and customer relationship management (CRM) • Financial processes, including budgeting, planning, accounting, and reporting • People processes, including payroll, benefits management, and flexible working arrangements Paper-based processes are still used for most transactions, and only microbusinesses (typically sole proprietorships) and larger SMEs have managed to automate more than half of their commercial processes. Automating these processes using cloud-based online software would save money, increase productivity, and reduce environmental impact. (The “cloud” is the collective group of software and data facilities available online, operated remotely in technology centres, not owned by individuals or companies but accessed on a need-to-use basis.) Market research firm Gartner Inc. has projected that cloud technologies will provide a 10 to 13 percent lower total cost of ownership than on-premise software tools.57 A more recent study by the European Commission found even more dramatic savings; 80 percent of all organisations could reduce costs by 10 to 20 percent from the move to the cloud.58 Cloud technologies can also lead to increased productivity. A survey of more than 1,000 firms found such technologies helped standardise data processes in 35 percent of businesses, and productivity rose in almost half the cases.59 Switching to the cloud also reduces environmental impact and energy consumption. As resources are pooled, less power is used per business. A company can achieve up to a 90 percent reduction in its energy footprint by moving tasks online. However, 86 percent of small and medium-sized businesses are unaware of the potential savings.60 In a survey of 3,000 SMEs around the world, Microsoft found that SMEs are held back from adopting digital technologies because of a perceived lack of time and resources: 52 percent said they don’t have the resources
A company can achieve up to a 90 percent reduction in its energy footprint by moving tasks online.
to train people, whereas 60 percent said they don’t have the resources to implement new technologies and applications.61 A concerted effort toward digitisation could help change that. Enhancing customer engagement Many individual consumers have embraced social media. They evangelise their “likes” and broadcast their disdain when things go wrong. An analysis by Forrester Research found that 82 percent of marketers believe their social media presence is affecting their brand value.62 By 2015, Gartner Inc. predicts that half of corporate Web sales will come directly as a result of companies’ social media presence and mobile applications. Yet a survey by telecom provider TalkTalk found that only 1 percent63 of small businesses are currently using social media as a means of generating new business prospects. According to Strategy&, companies today spend less than 5 percent of their digital marketing budgets on social media channels, though this will rise to more than 10 percent by 2015.64 This lack of engagement is driven largely by a skills deficit: 43 percent of SME leaders say they are “not comfortable” using the technology. The Lloyds Banking Group survey found that 31 percent of the SME leaders needed specific “training and support” in this emergent form of marketing. Strategy& conducted in-depth interviews with 117 leading marketing executives to profile their growing dependence on social media for their strategy, skills, and internal processes. We found that as companies refine their use of social media, it transforms how they connect their brands with consumers, improving sales and other measures of engagement. SMEs need to come to grips with this new technology or they will cede yet more ground to larger rivals. The way forward The leaders of SMEs already know that digitisation will lead to greater growth. One recent survey found that 79 percent of U.K. business owners feel the Internet will make returning to growth easier after the global recession.65 But U.K. SMEs must first invest in the skills needed to exploit digitisation and create growth. Otherwise, they will be forced to outsource more jobs, widening the skills gap at home and jeopardising the turnover potential of digitisation. To help avoid this situation, SMEs should be made aware that the benefits of digitisation can apply to them, even more than to big multinationals — with a resulting impact on the economy that could be immense.
5. Charities: Bigger impact for less
In economically challenging times, more people turn to the not-for-profit sector for help.