The UK small and medium size enterprise (SME) market is extremely diverse, comprising 1.2 million businesses, according to the Department of Trade and Industry.

SMEs employ 56 per cent of the UK workforce and account for half of the £2.4tn sales of all companies in the country. As such, they are an increasingly important user of technology.

In this special five-part report, Computing examines the IT issues facing SMEs, looking at the latest research and talking to IT managers in the sector about the challenges they face. We start this week with an overview of the market by each of the main industry sectors.

Manufacturing

Manufacturers have a complicated supply chain and use IT to simplify this. They are increasingly looking at emerging technology such as radio frequency identification (RFID), and are tackling huge data management and storage requirements.

The Confederation of British Industry (CBI) conducted a survey in February 2005 of 673 manufacturing companies with fewer than 500 employees. It found that manufacturing SMEs were spending more on innovation and cost-saving initiatives, despite rising unit costs and stagnant orders.

The general opinion is that the market is tough, but there are still opportunities for IT managers to make a difference.

Growth areas: RFID, storage, just-in-time stock control, high-end workstations, health and safety management

Banking and finance

IT budgets and staff numbers in the financial services sector are rising - the industry is well above investment averages.

Financial services companies are projected to spend 13 per cent of their IT budgets on operational expenses, compared with an average of five per cent, according to analyst Meta Group.

Much of this expansion is being driven by the increasing burden of regulatory compliance, as well as the continuing need to manage costs. For many SMEs, compliance is seen as an administrative overhead with minimal benefits, and the need to comply with an increased number of regulations is restricting IT spend on new projects.

Topping the list of compliance concerns are anti-money laundering and ‘know your customer’ regulations, rated as either ‘important’ or ‘very important’ by 83 per cent of firms polled by Finextra Research for its 2005 Financial Technology Strategies survey, followed by Sarbanes-Oxley and Basel II.

Finextra also noted a significant rise in the number of companies investigating Linux. Less than a third of those polled in 2004 said they were looking at Linux, while 58 per cent indicated an interest in 2005.

Financial SMEs are also the biggest users of IBM’s OS/400 operating system, suggesting there are legacy systems ready for an upgrade.

Data security is of paramount importance. As the industry implements changes in the way customers use their cards with chip-and- PIN, fraudsters adapt their techniques. The ability of people to hack into systems and extract data, using anything from Trojans to key-logging devices, is growing. Data security solutions are, as they always have been, an area of IT that financial SMEs need to keep up to date.

Growth areas: compliance, security, money laundering prevention, know-your-customer systems, storage, disaster recovery, Linux

Education

Many education establishments are SMEs and it is one of the sectors with the most money to spend. To ensure a reasonable level of standardisation across schools, the government mandates that IT purchases are controlled in part by The British Educational Communications and Technology Agency (Becta) which negotiates a national framework of contracts and standards.

One growth area is management information system (MIS) software. The education MIS market is worth an estimated £180m a year across the country’s 23,000 schools, providing the systems used for internal administration.

Recently Becta reported that schools using open source software could halve the cost of IT. The report found the cost per PC for primary schools in the UK using open source software was half that of those running proprietary software, and 20 per cent less for secondary schools.

Higher-education establishments are also keen to use elearning to educate more students. More than 90 per cent of lecturers who responded to a poll by elearning company WebCT said classroom-based teaching is more effective in conjunction with elearning.

Growth areas: broadband, Linux, MIS software, elearning, smartboards, laptops, streaming media

Distribution and transport

Globalisation and just-in-time retailing has caused the distribution and transport markets to grow over the past 10 years. Researcher IDC reported in October 2005 that these organisation are likely to increase IT budgets.

There are a number of interesting new tracking technologies being implemented, but the sector has been burdened by soaring oil prices, and cost containment all round is the goal. This is likely to have a negative effect on IT spend in the near future. Despite this, the IDC survey shows that the transport industry is still optimistic about short term revenues and profits.

Growth areas: in-vehicle satellite tracking technology; home delivery management software; integrating information with existing sales, supply chain and customer back-office systems; mobile technologies for dispatch/courier companies; service oriented architecture (SOA); RFID.

Retail

This industry spends less per employee, and also has relatively fewer IT staff than most other industries, according to Meta. With the high street in the doldrums, IT budgets are feeling the strain.

IT teams are focusing on helping retailers to cut costs and squeeze more out of their customers. But the sector is also under pressure to update its technology in the back office and the shop front. There is a need for systems that deliver return on investment by offering real business benefits, such as less queuing time, quicker payment or intelligent inventory management using technologies such as RFID.

Ecommerce sales are rising by nearly 30 per cent per year, compared with total retail sales growth of just 0.9 per cent.

Growth areas: low-cost handheld devices; secure ecommerce systems; inventory software; on-demand CRM; SOA; RFID.

Health

Largely centrally funded, the UK health sector combines wide central purchasing with thousands of medium and small contractors.

The NHS may be the UK’s biggest employer, but is in reality a collection of smaller organisations, which may need to customise the IT systems that have been purchased centrally. The 10-year £6bn NHS IT plan, which at this stage applies only to England, is mammoth in its complexity. The Connecting for Health (CfH) programme is developing national systems for ebookings, prescriptions and patient records, and upgrading local technology to link to the central applications.

Growth areas: IT training, smartcards, ebooking systems, e-prescription systems

This article is an excerpt from the Computing mi SME guide 2006, a comprehensive analysis of the technology market among UK SMEs. See www.computingmi.co.uk