Scotland's digital strategy: evidence discussion paper

3. Why Does Digital Matter?

Enhanced digitalisation presents unprecedented opportunities for economic growth. A digitally-enabled Scotland underpins our core commitment to creating opportunities for all to flourish, through increasing sustainable economic growth, opportunity and equality.

3.1 Connectivity

Connectivity is a vital part of our national infrastructure. It is an essential determinant of economic success and individual learning, and enables citizens to access online public services.

The economic impacts of increased digital connectivity are widely recognised. A study for the Organisation for Economic Co-operation and Development ( OECD) of 25 OECD countries between 1996 and 2007 found that a 10% increase in broadband penetration increased GDP per capita growth by between 0.9 to 1.5 percentage points. ^[36]

Similarly, a World Bank study focusing on 66 developed countries between 1980 and 2002 found that an equivalent increase in broadband penetration resulted in a rise in GDP growth of 1.2 percentage points. ^[37] In addition, a report commissioned by Scottish Futures Trust found that becoming a world leader in digitalisation could increase GDP in Scotland by £13 billion by 2030. ^[38]

Availability of reliable digital infrastructure enables businesses to utilise digital technologies which offer significant cost saving and revenue-enhancing benefits. Furthermore, digital connectivity allows consumers to access a wider market, thus improving competition and increasing the incentives for businesses to innovate and introduce new products and services. Enhanced connectivity fosters time saving and greater flexibility due to increased opportunities for remote working and online shopping.

However, Scotland faces unique challenges due to its low population density and geography, meaning that there is a lack of incentive for the market to provide digital infrastructure in certain areas. Government support is necessary to address market failure and ensure that broadband infrastructure reaches areas of Scotland where the market would otherwise not serve.

Digital connectivity has important implications for inclusion, presenting significant opportunities for rural businesses to grow and reducing isolation for those living within remote areas. Availability and affordability of digital infrastructure also encourages non-users to go online. The offline population tends to include those who are older, on low incomes or may have a form of disability, who stand to gain significantly from being digitally connected. ^[39]

The forthcoming 5G revolution is likely to significantly improve connectivity across Scotland. 5G will run on a high spectrum band, using higher frequency signals than current 4G mobile network technology. This means that 5G can support significantly higher speeds of delivery, allow many users to connect simultaneously without any compromise in speed and is vital to use of the internet of things.

Figure 3.1: The six key pillars

Source: Scottish Futures Trust

Although technical standards for 5G are still being developed, it is clear that 5G networks will represent a genuine step to change in mobile connectivity. The International Telecommunications Union has defined that 5G ready networks will be capable of supporting speeds of up to 20Gbps. If this is to be delivered in Scotland, our digital infrastructure will need to be enhanced. Figure 3.1 outlines the six key pillars, identified by Scottish Futures Trust, that are needed to create the environment for Scotland to adopt 5G connectivity.

As existing copper infrastructure is unable to support such high speeds, fibre is an essential component to delivering 5G. In addition, the ability to access and efficiently install underground ducting is vital to enable the deployment of fibre and a significantly higher concentration of masts and antennas is needed, particularly within urban areas. It is also necessary to have more efficient use of spectrum - the bands of radio waves over which data and voice communications travel. Greater spectrum capacity is needed to cope with higher data demand. Furthermore, increasing the capacity of the internet exchange point ( IX) located in Scotland is necessary, as relying on information being stored in the internet exchanges in London or Manchester may not provide anticipated 5G speeds to users.

This new equipment will require innovation to ensure that there is sufficient power supply in both urban and rural areas. Support for sustainable energy supplies and battery power technology will be a key success factor. Collaboration between government, regulators and businesses is necessary to ensure the integration of the six key pillars and hence the delivery of world-class 5G connectivity across Scotland.

3.2 Skills

Digital skills, ranging from basic digital literacy to more specialised knowledge, are required across all sectors, not just within technology companies. Digital skills are vital to the life chances of our people through significantly increasing employment opportunities and contributing to economic growth.

For Scottish businesses to be able to fully exploit the opportunities offered by digital technologies to drive growth, improve productivity and stimulate innovation, it is essential that the workforce has the skills and confidence to do so. However, there is a shortage of skills required to meet the demand for digital roles, restricting growth within the digital sector and the wider economy.

In 2014, there were 35 vacancies per 1,000 jobs in the digital and creative industry compared to 24 per 1,000 jobs across the economy as a whole, according to a UK study. ^[40] Approximately 28% of these vacancies were due to skills shortages. Furthermore, only 37% of businesses in Scotland stated that they were fully equipped in terms of having the skills to meet the business' digital technology needs. ^[41] 25% of firms within digital technologies and other sectors believed that recruiting people with the right technical skills or experience would be an issue for their business over the next 12 months. ^[42] A global study of business executives, in IT and non- IT companies, revealed that more than half felt that improving the talent capabilities of current IT staff would lead to better use of technology within their organisation. ^[43]

The provision of formal education and in-work training increases the supply of digital skills and helps to address shortages. A degree qualification is currently a requirement for many occupations within the digital sector, with almost three-quarters of employees in the sector having attained a higher education or equivalent qualification. ^[44] The demand for high level digital skills is predicted to increase in the future, as job growth is expected to be particularly concentrated in areas such as software development, software engineering and web development. Furthermore, the demand for graduates is anticipated to rise as firms continue to seek to employ skilled applicants directly from university. ^[45]

Moreover, the rapid rate of technological innovation requires the existing workforce to continually update their skills. Up-skilling the current workforce is an important way of responding to the immediate demand the sector faces. In-work digital training is low with only 26% of Scottish businesses reporting that they provided digital training to their staff in 2014. ^[46] A survey of Scottish businesses within the digital sector and firms with significant digital activity found that 53% would like to see more digital technology skills training for their staff. ^[47]

There is a significant gender imbalance in both digital-related education and employment. A study by Edinburgh Napier University found that the proportion of women in digital occupations is approximately 18%, compared to 48% for the aggregate workforce. ^[48] Findings from the study suggest that features of the working conditions within the digital sector deter females from entering or staying within the industry. For example, lack of part-time positions, little flexibility of working arrangements and long hours constrain participation, particularly for women with caring responsibilities.

Attracting more women into the industry has the potential to increase sector growth and productivity, as well as furthering inclusion. Research by the European Commission estimated that if women held digital jobs as frequently as men, the European GDP would be enhanced by €9 billion per year. ^[49]

More broadly, digital technologies are changing the nature of the labour market, meaning that digital skills are more important than ever before. Digitalisation has the potential to impact jobs through improving productivity, meaning that fewer employees are needed to provide a service or manufacture a product. However, job creation due to the increased business opportunities and innovation that digital technologies provide is likely to outweigh the loss in jobs due to increased productivity. A study of the French economy finds that for every job that is displaced due to technology, another 2.4 are created. ^[50] A report by Scottish Futures Trust suggests that if Scotland fully embraces digitalisation, the benefits to the labour market are likely to be higher than the losses. ^[51]

A recent report by Deloitte highlighted the potential scale of automation in the public sector based on the type of role performed. ^[52] The report suggested that in the public sector administrative and operative roles are likely to be automated over the next two decades, while frontline roles and those requiring strategic and complex thinking are to be highly resilient to automation. While on balance the evidence suggests that the impact of digital technologies will be positive across the economy and labour market, the effects may not be evenly distributed, highlighting the importance of continuing to invest in education and up-skilling of workers.

3.3 A Digital Society

A key challenge of the digital age is ensuring that everyone has the opportunity to benefit from the advantages that digital technology has to offer. As well as investment in digital infrastructure, affordable access and sufficient skills are needs to maximise the personal, societal and economic benefits. The power of the internet has the ability to tackle persistent inequalities and enable social mobility. It is vital that citizens not only have access to digital technologies, but the confidence, motivation and resources to use them.

Digital inequalities are more likely to be experienced by those who are already more likely to be disadvantaged according to other measures. Within Scotland, a digital divide remains along a number of dimensions, including age and socio-economic deprivation. For example, 26% of adults living in the 20% most deprived areas in Scotland reported not using the internet compared with 16% in the rest of the country. In addition, 70% of those aged 75 and over do not use the internet, which is more than triple the Scottish average. ^[53]

Furthermore, certain groups were found to have lower levels of digital literacy - the capabilities required for living, learning and working in a digital society. Among those that have access, a lower proportion of adults in social housing were confident using the internet to complete online activities such shopping and sending emails, compared to those in private rented housing. Those aged over 60 and those on incomes between £10,000 and £20,000 consistently reported being less confident than average across online activities. ^[54] In addition, Citizens Advice Scotland surveyed clients seeking advice or assistance with social security benefits. ^[55] Of those surveyed almost three-quarters (72%) said that they would struggle to apply for a job online and only 28% felt that they would be able to complete an online job application unaided.

Evidence suggests that key groups who do not take advantage of the internet in their lives are actually those who might benefit most. Internet use presents opportunities for cheaper online purchasing, a way to keep in touch via social media and awareness of employment vacancies. A report by the UK Government revealed that offline households miss out on savings of £560 per year from shopping, paying bills online and being able to keep in contact with family and friends. ^[56] In addition, further saving can be achieved through price comparison websites that allow people to access information about different goods and services to find the best deal. Those within lower income households would particularly benefit from reductions in the cost of living enabled by digital.

Moreover, digital technology creates educational opportunities for users to participate in online learning, supplementing formal means of education. Internet access has the potential to reduce social isolation by providing new channels to increase social interaction and meet others with similar interests. Another key benefit is increased access to online public services and greater civic engagement. This is suggested to positively impact health, due to increased connections with healthcare professionals. ^[57]

Closing the digital divide is critical to the future of a fairer Scotland and is likely to positively impact social cohesion. Enhanced use of digital can help marginalised groups access public services and feel more engaged in society. It is suggested that once the digital divide has been minimised in Scotland, the economically disadvantaged will also be more employable. Access to the internet provides information about job vacancies and the ability to apply for jobs online and, in turn, increased digital skills enhance employability. ^[58]

3.4 A Digital Economy

Digitalisation is a key driver of business success. Utilising digital technologies can help to transform any business regardless of its size and location, increasing international competitiveness and the ability to innovate.

The vast majority of Scottish businesses have internet access, although larger firms are more likely to use Next Generation Access ( NGA) broadband and mobile technologies. ^[59] 25% of Scottish companies use cloud computing and 34% of firms utilise data analytics, rising to 75% of larger businesses.

Research by the Centre for Economics and Business Research found that increasing the usage of cloud computing in the UK from 32% of businesses to 56% within a five-year period resulted in an increase in GDP of 1.26%. ^[60] Based on similar analysis, Scottish Futures Trust estimates that if Scotland adopts cloud technology and big data to a world-leading extent, the economic benefits could be over

£5 billion. ^[61] In addition, enhanced digitalisation could create an additional 175,000 jobs by 2030 and generate up to 6000 new home-office firms and small and medium enterprises within Scotland. Increased demand for workers also has the potential to raise earnings by up to £2000 per worker. As over 80% of the productivity advantages US multinationals have over domestic UK businesses is suggested to be due to better use of IT, increased digitalisation across Scottish businesses could result in significant productivity gains. ^[62]

In addition, digitalisation helps Scottish businesses to become more internationally competitive. Digital technologies allow businesses to more effectively communicate with customers through social media and online advertising. A third of exporting businesses in Scotland reported making 20% of their export sales via their website and two-thirds agreed that using digital technologies increased the number of international markets they export to. ^[63] Scottish businesses classed as having high levels of digitalisation were also much more likely to export compared to companies that had low adoption of digital technologies. ^[64]

Digital technologies facilitate innovation, which is key to increased productivity and long-term growth in GDP and earnings. Digitalisation makes collaboration easier and can help innovators to achieve a faster time to market. Among Scottish businesses using digital technologies, 71% reported using digital technologies aided in the development of new products and services. ^[65] A survey of global business executives in 2011 revealed that the majority of respondents expected digital technology to support future innovation and would be willing to spend more on such technologies in the future. ^[66]

3.5 Public Service Reform

Our approach to public services and to public service reform continues to be informed by the findings of the Christie Commission on the Future Delivery of Public Services, giving us consistent and clear strategic direction built around the four pillars of reform: partnership; prevention; people; and performance. ^[67] This includes a sharp focus on improving performance, through greater transparency, innovation and use of digital technology.

Digital technology offers a wide range of opportunities to improve and change the way that public services are delivered in Scotland. Driving resilient online public services will help to control costs, reduce paper handling and transportation costs for citizens and organisations. Online enquiries can result in significant cost savings compared to equivalent traditional in-person enquiries. ^[68] In addition, digital technology can capture patterns of service use and feedback, meaning that users can be directly involved in service design and improvements can be made on an ongoing basis. The provision of online services results in increased efficiency by freeing up resources for face-to-face delivery where it is required.

In particular, digital technology has the ability to improve public services such as education and healthcare. The internet can enable greater access to educational materials, improve the quality of resources and make education delivery more inclusive. Materials, such as lectures and texts, may be accessed outside of the classroom meaning that learning is not limited to schools, but is continuously happening within other environments. Studies show that online education provision is effective in supporting learning for disengaged students, where attending school is difficult due to personal circumstances. ^[69]

Furthermore, digital technology can improve the quality and reduce the cost of healthcare, transforming the way people look after their own health and wellbeing and interact with health and care services. Access to health-related information online allows people to gain increased knowledge about their own health and how best to manage any existing conditions they may have. In addition, citizens can use digital technologies to book appointments online, order repeat prescriptions and monitor their health and fitness via devices and apps.

Technology can allow patient records to be transferred to an electronic database, saving time and reducing manual errors. The majority of NHS patient records are now electronic, enabling better access and allowing aggregation and analysis to improve clinical practice, public health and business management. Digital healthcare is also addressing major health issues in Scotland, such as an ageing population. Telemedicine provides medical care from a distance through telephone and video appointments, reducing costs and waiting times. ^[70]

3.6 Cyber Resilience and Data

The digital age presents substantial opportunities for economic growth, however it also increases the risks associated with cyber security. As businesses increasingly invest in mobile and cloud technologies to access information remotely, the threat of security breaches intensifies, with the sophistication of cyber-attacks also growing.

Integrating cyber resilience into business operations across the private and public sector is vital. Failure to address security concerns could damage future growth, hinder business reputation and lose consumer trust. Cyber resilience is a business enabler - when businesses become more cyber resilient, they build consumer confidence and ultimately increase their profitability.

Increased awareness of the threats that cyber breaches present has led to demand for cyber security skills to increase by 70% since 2012. ^[71] This is likely to continue as businesses seek to manage cyber risk to ensure they continue to take full advantage of the digital revolution. Currently, 16% of Scottish businesses believe that they have the necessary information and skills to ensure their organisation's systems are secure, with a further 42% reporting having most of the required skills. ^[72] However, small businesses are more vulnerable when using digital technology. Research conducted by KPMG and Cyber Streetwise demonstrated that small businesses across Scotland were the least likely out of any in the UK to have taken steps to protect their data. One in five Scottish-based small businesses surveyed admitted that they failed to take any steps to protect their data. ^[73]

Digital technologies allow greater amounts of data to be collected which can generate enhanced knowledge when information is shared with others. Sharing data across public services has the potential to significantly improve outcomes for the people of Scotland, increase the quality and efficiency of public services and reduce costs.

The new European Union General Data Protection Regulation ( GDPR) comes into effect from May 2018 and will result in data security and protection being increasingly important. The GDPR changes how personal data should be collected, stored, accessed and utilised and how organisations are legally obliged to respond in the event of a personal data breach. One major consequence of the new legislation is that companies can be fined up to €20 million or 4% of their annual global turnover if they fail to inform authorities about a data breach within 72 hours and inform users of data breaches without delay. The regulation also requires organisations with more than 250 employees to have a Data Protection Officer in place to ensure compliance.