For business owners and leaders tasked with driving digital strategy, it is their perception of risk that is more impactful on success than anything else. Deciding to incorporate digital tools or infrastructure can be daunting because of the unknown it represents, but shying away from the process can be a far riskier path. By understanding the psychological barriers behind digital decision-making, industry stakeholders can and should encourage technology adoption in small and medium-sized businesses — in doing so, they will strengthen the backbone of the global economy.

It’s no surprise that factors such as cost, and the availability of skilled workers, can stall the pursuit of digital strategies. More surprising, however, was the observed inertia around technology (especially at times that necessitate digitalization to remain agile), which can be explained by psychological factors holding business leaders back.

Human decision making is a complicated phenomenon. Many studies on the topic highlight the parameters defining our mental processes, even if they can’t fully explain them. These studies often find that we can be guided towards an outcome that we know is against our best interests. And this is the case in business, too.

It’s easy to view corporate decision making as something steeped in careful consideration — a binary process led by data and best practice. However, businesses are ultimately run by humans. Commercial progress is determined by the choices that we make, either alone or as a group.

As a result, the unpredictability of the human brain can influence a range of business decisions. This is even more pronounced when processing the outcomes of technology-related decisions, which teases out every dimension of our psyche. This is because for lots of companies, especially small and mid-sized firms, new tech is still very much a leap into the unknown.

Sometimes, when faced with a difficult decision, we need a catalyst to force us to make it. The Covid-19 pandemic, for example, accelerated technology adoption in many businesses, who took the leap and embraced new digital tools to survive. While many small-to-medium-sized enterprises (SMEs) set up websites or e-commerce platforms to process online orders, a significant portion were less willing to take the plunge.

I recently collaborated with Xero on a behavioral science study that explored the psychological barriers to digital adoption. It found that there remains a resistance to change and a skepticism towards technology that prevents widespread uptake. This is despite the clear benefits it offers.

While six out of 10 companies claimed to be confident when embracing new technology, there was also a clear sense of apathy, with only three out of 10 considering themselves worse off if digital investment is postponed.

It’s no surprise that factors such as cost, and the availability of skilled workers, can stall the pursuit of digital strategies. More surprising, however, was the observed inertia around technology (especially at times that necessitate digitalization to remain agile), which can be explained by psychological factors holding business leaders back.

After a turbulent couple of years, from the pandemic to political upheaval, you might think that mid-sized businesses would be accustomed to constant change. Given the near-constant state of flux, it would be fair to assume that they might be more willing to embrace new processes or tools to get themselves back on track, adapt and thrive in an expanding digital economy.

Instead, many still opt to maintain the status quo. According to the Xero study, a great number of businesses still grapple with the “hassle factor” — a key behavioral barrier which sees them struggle to convince themselves that investment is worth the effort or potential risk, particularly if they don’t boast unlimited budgets.

Along with death and taxes, change is one of life’s constants. And just like those other two examples, it is something many humans fear. Theoretical models suggest this is due to the absence of control and a lack of understanding of what lies ahead. It’s simple, really. We are afraid of the unknown, which can cause us to make bad choices.

This uncertainty is common in the business world. Whether it’s a new tool, a new colleague, or shifts in the wider market, it’s natural to feel trepidation about the upcoming impact. It therefore stands to reason that no matter how much change someone has experienced, an unknown outcome is often the biggest barrier to action.

In a pandemic-dominated context, inertia can understandably be attributed to short-term thinking. After all, it’s hard for small and medium-sized companies to look ahead when they need to carefully manage the day-to-day.

The study with Xero supported this, finding that seven out of 10 SMEs remain focused on short-term survival rather than how to better run their business. However necessary during times of crisis, this mindset prevents them from investing in initiatives, like digital transformation, which will more than likely pay dividends in the long term.

There are several psychological factors — or mind traps — that business leaders fall into when making decisions about digital strategy. These can vary depending on the size of the organization.

“Group think” is one such trap and has the potential to be damaging. It can take hold when a leadership team remains introspective, without seeking insight from elsewhere in the company. Often it is the most cohesive teams that fall victim to this because there is no friction or difference of opinion to force new ideas.

If a select group of employees — perhaps senior leaders — are comfortable with the status quo, any decisions are likely to remain safe and avoid disruption. Even in situations that demand change, it’s easier for them to find comfort in the safety of predictability.

In larger companies, it’s also easier for staff to experience feelings of disposability, especially when change is afoot. This absence of psychological safety makes them less confident to speak up, something only amplified during crises when people tend to follow orders and ideas in the pursuit of stability. This has negative connotations for businesses that need to pursue digital transformation, because its greatest advocates can find themselves muted.

Given the above, one might assume that decision making is easier, better, and faster on the smaller end of the SME spectrum due to the flexibility of their organizational structure and communication flow. However, in these organizations, the decision-making burden may rest on one employee or a very small group of them, making it easy to fall victim to cognitive errors. “All or nothing thinking,” for example, means small business owners may view things in more binary terms – thinking something is either completely good or bad. This means that change from the original choice can be perceived as a negative.

Founders and SME leaders may also generalize, catastrophize, or suffer from confirmation bias, meaning they may look for proof to support pre-existing expectations. This is related to our response to change and stressful situations, when mental filtering focuses our attention on certain types of evidence. It obscures our ability to see things clearly and be proactive rather than reactive or what is worse — inactive.

In small businesses, this is primarily the result of having very little or no social support in the workplace. Without alternative perspectives, it’s very difficult for them to know if they are falling into these traps. For start-ups that are bootstrapping or ploughing in significant personal capital, there is also the risk of experiencing the sunk-cost fallacy. When individuals invest a great deal into a business, it’s natural to feel committed to it. Many small and mid-sized businesses trying to grow or survive in the last 18 months have undoubtedly put in a huge amount of time, money, and energy, but sometimes this can lead them down an unhealthy path and an irrational escalation of commitment.

Because they feel responsible for the unrecoverable time and cost already spent, they continue to make even riskier decisions. Sometimes that manifests itself as ill-advised spending, but often it is doing nothing instead. No one likes regretting decisions, so once committed to something it’s common for decision makers to freeze up and ignore other options that could be much more effective.

With so many hurdles to effective decision-making, it’s no wonder digital transformation is hard to get right. In addition, convincing budget holders to increase technology adoption is no easy task. But it can be done. Sometimes, rational explanations aren’t enough to get through to business leaders. Humans take time to change and so it takes a much longer-term approach to shift their mindset.

By applying the principles of nudge theory, it’s possible to persuade them. Many of these techniques play on core facets of human programming, such as the human fear of missing out. For example, comparing commercial progress or digital strategy with competitors can be an effective method to highlight the cost of inertia. It’s also important to make it clear that tech-driven strategy is the new standard. Instead of asking, “Do you want to adopt technology?” the question should be, “Which technology do you want to adopt?”

Otherwise, we can prime business owners and leaders by sending them reminders (advertisements fall into this category) or asking them to imagine a scenario in which technology is or isn’t adopted. Appealing to the imagination in this way can be very effective — and can include prompting them to consider how decisions may impact loved ones or colleagues.

Of course, affecting change in business should be carried out entirely without manipulation. Whether you’re a government, tech vendor, or an industry body, there is a moral imperative that should govern efforts to influence tech adoption.

The study with Xero may have shown a hesitancy to pursue digital change in small and medium-sized companies, with only four out of 10 companies agreeing that new technology would benefit them once integrated. But this is one part of a deeper psychological story.

For business owners and leaders tasked with driving digital strategy, it is their perception of risk that is more impactful on success than anything else. Deciding to incorporate digital tools or infrastructure can be daunting because of the unknown it represents, but shying away from the process can be a far riskier path. By understanding the psychological barriers behind digital decision-making, industry stakeholders can and should encourage technology adoption in small and medium-sized businesses — in doing so, they will strengthen the backbone of the global economy.

Source: Harvard Business Review

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