Three of the big challenges for small to medium-sized enterprises (SMEs) are finding and retaining good staff, punching above their weight in the marketplace, and ensuring that cash flow is robust enough to stay in business.

Tackling such issues means putting in place the right processes and systems, while also structuring for future growth. It also means offering an increasingly flexible working environment, not least to compensate for wages that are often by necessity lower than those provided by larger organisations.

IT can help SMEs to tackle many of the challenges they face. But many do not consider technology a business enabler, rather a necessary evil on which they have to spend money. In fact, many small firms frequently do not budget for IT, and only spend on systems when strictly necessary.

As a result, says Celia Hyde, commercial director at IT services and consultancy firm Small Business Computing, while companies that consider IT fundamental to their business, and can afford to do so will invest an average of £1,000 per employee per annum, the rest are more likely to spend as little as £400 per staff member each year.

The highest-spending sector tends to be professional services, primarily within the financial sector, as many of these organisations have been set up by managers who have previously worked in the City and are aware of the benefits IT can bring. The lowest-spending sector is retail, which tends to invest in little beyond basic electronic point of sale equipment.

Clive Longbottom, service director at analyst Quocirca, says SMEs have one common theme when it comes to expenditure – money is perceived as being a one-person decision on whether it is spent or not. ‘Therefore, budgets are pretty static and depend strongly on how well the previous IT project went,’ he says.

It also does not help that many SMEs do not have enough in-house knowledge or bandwidth to look at new technologies, let alone to implement, manage and support them. While larger companies may have IT managers and a small technology department, SMEs are generally stretched and do not necessarily have time to develop long-term strategies or keep abreast of new trends.

SMEs tend to be several years behind large corporates in terms of IT adoption, principally because of concerns about the upfront capital outlay, high management costs and the impact on the business if the technology does not work.

Such issues are leading to a growing trend towards the adoption of outsourcing. This could involve hiring a third party to manage the entire IT infrastructure, introducing managed services for routine tasks such as network or email management, or subscribing on a monthly basis to hosted applications such as customer relationship management.

Peter Critchley, strategy director at IT services firm Morse Consulting, says the growing interest in outsourcing and hosting will continue in the next few years.

‘A lot of SMEs don’t know how to do IT themselves, but they realise that they have to buy right and not restrict themselves in growth terms,’ he says. ‘Key issues include support and maintenance, but because cash flow is everything, they also like the idea of buying on a subscription or pay-as-you-use basis because they want low upfront predictable costs.’

Another benefit of the on-demand model is that it can be flexed up and down depending on requirements. If an organisation reduces headcount, it simply pays less that month, or has the option to increase subscriber numbers as it grows.

But among many SMEs, there is still a lack of awareness of the options available, a general fear of passing control to an external provider and concerns about becoming tied in to a given vendor’s model – factors that have inhibited the market. Longbottom also warns that there are challenges involved in successfully creating and managing a dynamic service level agreement, and ensuring that the provider advises at the right level.

‘It’s important to check out that they provide a full support service, which includes business continuity and disaster recovery,’ he says. ‘It’s also important to figure out what should be done if the provider gets into commercial difficulties.’

Beyond the challenge of learning to deal with external service providers, another key issue for SMEs is how to attract and retain staff. Many small firms are turning to the idea of introducing remote and flexible working practices as an incentive for individuals to join them, rather than their larger rivals.