SMEs require innovation to be able to innovate

South African small cap technology companies face an uphill battle to develop innovative products and services which are competitive in the global arena - particularly as they have to compete against technology giants that are awash with funds - and funding.

"However," says Graham McKay, CTO of JSE-listed Prism Holdings, "it can be done. Indeed, South African companies have a proud record of innovation."

McKay defines innovation as a new or significantly improved product or service that is successfully introduced to the market.

"Innovation does not mean the ability to invent something totally new. Rather innovation is based on the results of new technological developments, new combinations of existing technology or the utilisation of other knowledge," he explains.

In addition, innovation always involves risk - technology risk or financial risk or reputation risk or various combinations thereof.

"The problem is that when a small company has limited financial resources, innovation failure can rapidly translate into the crippling failure of the company itself.

"The challenge for small cap companies - particularly one like Prism which is listed on the JSE and has a fiduciary duty to protect the interests of its shareholders, employees, suppliers and other stakeholders - is to strike the correct balance between innovation and risk," he says.

Prism operates within a niche sector of the IT market that addresses the entire range of technologies across what is referred to as the trusted transactions chain.

Examples of trusted transactions include:

* An electronic payment request from a point-of-sale, eg credit or debit card.

* A request for electronic cellular airtime top-up (possibly initiated from the handset).

* The download of a prepaid electricity number from a secure back-end to the point of service where a consumer is waiting for it.

* Or the management and distribution of secure keys that form a core part of the cryptographic requirements around trusted transacting.

Using its core technical skills and capabilities, Prism develops home-grown technology that addresses all points across the trusted transaction chain.

Prism allocated more than R31 million to R&D during its 2004 financial year. More than 82% of its 2004 revenue was generated through the sale of technologies, solutions and services incorporating its own IP.

According to McKay, innovation at Prism is usually stimulated by customers or management asking for "the impossible", for old things to be done in new ways or new things to be done using old technology or infrastructure. Prism has cultivated a mindset that accepts these challenges as positive opportunities rather than negative problems.

However, asking for "the impossible" means Prism doesn`t always succeed.

"We recognise that to innovate requires taking some form of chance or risk that is out of the usual framework or approach. For innovation to flourish, failure must be tolerated but still disdained.

"Prism is therefore acutely aware that its management of risk and how this is balanced with the constant need to innovate is crucial to long term and sustainable growth. Its ability to manage the probability or possibility of failure and minimise its impact if it ultimately occurs is essential to being innovative on a sustainable basis," he adds.

Another challenge to Prism`s ability to successfully compete internationally is the fact that its technology development base is physically located in SA - far from its potential global markets, placing it at a disadvantage to its internationally located competitors.

"The fact that Prism has succeeded in participating in new electronic payment initiatives in emerging payment channels and technologies involving chip card and wireless is a measure of the company`s ability to select international opportunities that require some degree of innovation and have delivered a profitable financial return," McKay concludes.