The Digital Economy Contents

4Business take-up of technology and digital skills

Businesses and the digital economy

20.Although the UK is leading the world in e-commerce, with the online retail market accounting for 8.3% of GDP in 2010, there is a digital “skills gap”: up to 12.6 million of the adult UK population do not have basic digital skills, with an estimated 5.8 million people never having used the internet. This gap in digital skills is costing the UK economy an estimated £63 billion a year in lost additional GDP,17 and 93% of companies say that it is already affecting operations and recruitment.18 If the entire UK population were trained in basic digital skills at a cost of £1.31 billion, over a 10-year period, the new value would be £14.3 billion, a better than 1:10 benefit ratio.19

21.We do not want to repeat the detailed analysis of digital skills made by other Committees, including the Science and Technology Committee20 and the House of Lords Digital Skills Committee21. They have reported that the UK faces a digital skills crisis, from schools to the workplace.22 We agree with them and call upon the Government to recognise the urgency and act accordingly. We want to emphasise the adverse effect that a workforce not skilled in digital technology has on businesses. There is, according to a Government-commissioned study by Ecorys UK, a direct correlation between market competitiveness and the uptake and use of digital technology in the workplace.23

22.It is widely accepted that businesses, both non-digital and digital, can make better use of digital technology to improve their performance. Baroness Neville-Rolfe, Minister for Intellectual Property, highlighted the great opportunity of the internet to provide “new sources of customers, new locations where you can sell and new opportunities to do things in the digital world”.24 However, the CBI Report, “Embracing Digital in Every Sector” highlighted the disparity between the availability of technology and the adoption of technology by businesses, with UK ranking 5th out of 140 on the availability of technology, but only 14th out of 140 for the adoption of technology at company level.25 The Minister for the Digital Economy acknowledged the fact that there are still too many small businesses that are not online or that are not taking full advantage of the benefits of trading online.26

23.One requirement for businesses in the digital economy is access to a skilled workforce that can embrace digital advances, which bring “a new and reliable way to connect with customers, suppliers and employees”, according to Mike Cherry, the then Policy Director of the Federation of Small Businesses.27 However, there is a shortfall of digitally-skilled workers, including animators in visual effects and 2D/3D computer animation for the film, television and video games sector, and physical scientists working in radiology, for example work on magnetic resonance imaging.28

24.We did hear from witnesses outside London who have taken a different approach to the digital skills deficit. John Connolly, MD of the Centre for Digital Innovation, Humber LEP, told us of the collaborative work occurring in Humberside, and the opening of an innovation centre two and half years ago, which has grown to about 200 members.29 The innovation centre helps start-up digital businesses to grow, and connects technical experts with creators of digital disruptor businesses, thereby closing the digital skills gap.30 Also, Gareth Mann, CEO of Digital Contact—a data company focusing on the financial services industry—told us that there would always be a digital skills shortage where there was constant evolution and innovation. He explained that his solution to attract the brightest and best was to move the business outside London, to give a better work-life balance to staff.31 

25.There is an urgent need for clarity about the issue of skills, post referendum. Many firms are currently putting recruitment on hold until there is more certainty in the country, and the Government needs to provide clarity in this vital area, otherwise skills and talent will be lost elsewhere, such as to Berlin or Frankfurt.

26.While we recognise that the provision of digital skills may never keep pace with the speed of innovation, there must be a bedrock of core skills that people need to acquire, so that they can build on, extend and then adapt to meet the needs of changing technology. We have not replicated the work of other Committees on the dearth of digitally-skilled workers, such as the Science and Technology Select Committee and the House of Lords Select Committee on Digital Skills, both of whom highlighted the shortage of workers with IT skills. However, both Reports were published before the result of the referendum, and the Government needs to state in its reply how tech firms that employ EU nationals will be affected in the short, medium and long term. The Government needs to provide clarity surrounding skills, post referendum, otherwise skills and talent will be lost to other countries.

Showcasing the success of digital businesses

27.The United Kingdom is successful in tech start-up businesses. There is much for the UK to be proud of in the prevalence of tech start-ups. The Minister told us that the UK is one of the prime destinations, if not the prime destination in Europe, to set up a tech business.32 We heard from specific sectors, including the financial, retail and gaming industry, about digital innovations. For example, Chris Taylor, from Shropshire Council, told us about digital advances in the farming industry, using automated milking parlours, and manufacturing sectors across Telford, making use of the internet of things and machine-to-machine operations, and companies developing 3D technology across Shropshire.33 There are also a high number of unicorns based in the UK. GP Bullhound research for London Technology Week reported that 17 of the 40 European tech companies classified as unicorns—tech companies valued at $1billion or more—started in the UK34. In other words, 43% of all European Unicorns were based in the UK.

28.The strength of the financial services industry in the UK is in part due to the role of digital Fintech. We heard from Russell Gould, COO of ezbob Ltd, that his financial business can provide business loans within 15 minutes, “the evolution of technology that has allowed us to harness those bits of technology together to create the ability to make such rapid decisions, saving small businesses days and hours in valuable time”.35

29.The United Kingdom is a world leader in Fintech, with the sector estimated to be worth £20 billion in annual revenues. According to TechCity UK’s “Tech Nation 2016” paper, published in February 2016, over half of European Fintech unicorns are UK based, including TransferWise, Funding Circle and GoCardless.36 This position is now at risk as firms will want to be part of the single market of financial regulation. The Government needs to set out with urgency how it will address this, and avoid our strengths in fintech being eroded.

30.We also heard from Chris van der Kuyl, Chairman of 4J Studios, about the gaming industry, and the fact that Grand Theft Auto, “now effectively bigger than all the retail sales in the music industry put together. Grand Theft Auto—created and still to this day developed in the United Kingdom—is possibly one of the biggest franchises. Our own company, 4J, is fortunate enough to work with Microsoft and a Swedish company called Mojang on Minecraft for all games consoles. Genuinely some of the biggest entertainment products in the world are created in this industry”.37 There is therefore much to be proud of in relation to digital sectors in the United Kingdom, and the Government is supporting such sectors well, but its success is not being recognised due to the faulty ways of measuring the gaming industry, as mentioned in Chapter 2.

31.The UK is one of the prime destinations in Europe to set up a tech business. The gaming industry does not have the recognition it deserves as an innovator and, in some cases, a world leader. It is making a larger contribution to the economy that is not picked up because of the way in which the gaming industry is measured.

32.The United Kingdom is a world leader in fintech, with the sector estimated to be worth £20 billion in annual revenues. This position could now be at risk as firms will want to be part of the single market of financial regulation. The Government needs to set out with urgency how it will address this, to avoid our strengths in fintech being eroded.


33.Our joint work with the Education Committee currently includes an inquiry into apprenticeships, which our digital economy inquiry has complemented. We heard examples of how the digital sector uses apprenticeships. For example, the Tech Partnership is a network of employers (including large and small tech businesses, and IT professionals) that work in collaboration with other stakeholders to address skills issues, such as skills shortages existing in the digital economy.38 We learnt of Tech Partnership’s work in creating a degree apprenticeship, which has been designed by employers, working with higher education, and with the financial backing of the Government. A cohort of 300 apprentices will start the degree apprenticeship in September.39 Dean Cassar, Director of Operations at Tech Partnership, told us of the flexibility of apprenticeships, providing digital skills that are relevant at different stages of people’s careers.40

Apprenticeship levy

34.There are concerns in the digital sector about the use of apprenticeships in certain digital businesses, and the implication of the new levy for those businesses. The levy will be payable on annual pay bills of more than £3million, at a rate of 0.5% of an employer’s pay bill.41 The Government will give each business an allowance of £15,000, and each will have a Digital Apprenticeship Service account, which will fund the costs of apprentices’ training, assessment and certification. The training must meet an approved standard or framework and the individual must meet the apprentice eligibility framework.

35.Some digital businesses need a small group of highly-skilled people from the start, and we were told that they would be hindered financially by the apprenticeship levy. Jo Twist told the Committee that the creative industry, including the gaming industry, need “people who can hit the ground running”.42 While being supportive of the Skills Investment Fund,43 and the ability to bring new entrants into the industry, Jo Twist told us that her industry does not yet have the capacity or the funding to develop apprenticeships within the industry, but “as an industry, we have estimated we are going to be paying £2 million into that levy pot”.44

36.The apprenticeship levy requires all employers operating in the UK, with a pay bill over £3 million a year, to make an investment in apprenticeships. While we appreciate the fact that many digital businesses are composed of a few highly-skilled people, we urge those small digital businesses to study the guidance on how the apprenticeship levy will work, and find ways of accessing money paid under the apprenticeship levy to support the furthering of digital skills for apprentices.

37.We are currently running a joint inquiry on apprenticeships with the Education Committee, and therefore will not comment on substantive aspects of the apprenticeship levy in this Report. However, small businesses (including digital businesses) employing highly-skilled workers may not have the capacity to employ apprentices, and therefore the current apprenticeship levy requirements could hinder those businesses financially. The Government needs to address how differing business workforce models, such as tech firms, with a small number of highly-skilled workers, are not compromised through the operation of the apprenticeship levy.

17 Science and Technology Committee, Digital skills crisis, June 2016, summary.

18 Q 151, quoting written evidence from techUK, Science and Technology Select Committee’s inquiry into the Digital Skills Gap, 8 March 2016.

19 Q 140, Rachel Neaman, CE of Go ON UK, Science and Technology Committee’s inquiry into the Digital Skills Gap, 8 March 2016.

20 Science and Technology Committee, Digital skills crisis, June 2016.

21 House of Lords Select Committee on Digital Skills, February 2015; Science and Technology Committee inquiry on Digital Skills.

22 Science and Technology Committee, Digital skills crisis, June 2016, summary.

23 Digital skills for the UK economy, Ecorys UK, January 2016 (for BIS and CMS).

24 Q 227

26 Q 483

27 Q 3

28 Tier 2 Shortage Occupation List - Government approved version - valid from 6 April 2013.

29 Q 10

30 Q 10

31 Q 329

32 Q 480

33 Q 343

34 Written evidence, Innovate UK, TDE 14

35 Q 321

36 Tech Nation 2016: transforming UK industries, Tech City UK, February 2016

37 Q 406

38 Q 44 [Dean Cassar]

39 Q 62 [Dean Cassar]

40 Q 62

41 Apprenticeship levy: how it will work, Department for Business Innovation and Skills, April 2016

42 Q 419

43 Working in partnership with industry and informed by research, Creative Skillset directs collective investment through the Skills Investment Fund to create new and innovative training in skills to ensure growth in the UK’s Creative Industries.

44 Q 419

© Parliamentary copyright 2015

15 July 2016