Make Way For The Middle Market: An Economic Growth Engine
What drives global growth? Billion-dollar companies such as Apple, Philips and Saudi Aramco may grab the headlines, but it’s middle-market businesses that underpin the economy.
As of 2011, there are approximately 200,000 middle-market companies – those with $10 million to $1 billion in annual revenue – accounting for 30 million jobs in the U.S. According to the National Center for the Middle Market’s indicator, these midmarket companies have grown at an annual rate of 6.5 percent. By comparison, the S&P 500 grew by 3.6 percent over the same period.
In Germany, “mittelstand” companies are responsible for more than 60 percent of jobs. Meanwhile, in the U.K., middle-market businesses are responsible for one-third of all private-sector revenue and jobs.
While middle-market companies face their own set of challenges, a unique set of advantages also enables them to thrive as they serve as engines of economic growth.
Companies of all sizes have choices to make about how they’ll grow. Will they expand their territories? Find entirely new markets to apply existing products and services? Launch completely new products and services?
“Middle-market companies have the advantage of agility when it comes to visualizing and pursuing the future of business,” says Robert Stein, middle market client segment leader, U.S. Commercial Risk at Aon. “The key is being well-informed and strategic about not only mitigating risks but also taking them.”
In today’s global digital economy, midsize companies are looking for an edge along three key paths to expansion: international growth, technological advancement and talent development.
As they grow, middle-market companies increasingly look to exports and international markets, which are easy to reach, thanks to today’s connected world.
Businesses that do so, however, navigate trade disputes or uncertainties, regulatory complexities and the nuances of local markets.
Like larger companies, middle-market businesses must be prepared to react to geopolitical events that might affect their business. For example, the U.S.–China trade dispute prompted many midsize U.S. companies doing business in China to look for opportunities in other markets.
Middle-market companies looking to expand internationally have access to numerous resources. Government agencies and programs that support economic development can provide a boost to midsize businesses trying to understand foreign markets and develop their export business.
Meanwhile, networking and membership in trade and business associations can also help those in the middle market move into international markets.
Technology’s Key Function
Technology can be an essential factor in leveling the playing field for middle-market companies as they compete against larger businesses with more resources.
More and more, midsize companies rely on predictive analytics, artificial intelligence (AI), automation and other tools in areas such as talent acquisition, demand forecasting and increasing efficiency. For instance, predictive analytics and AI are helping midsize firms better analyze their business operations and better understand customers’ needs and preferences, as well as anticipate labor needs and identify the right candidates.
Overall, middle-market companies are increasingly recognizing the importance of digital transformation as they look to innovate with products and business models and to improve customer experience.
A 2019 survey by BDO USA assessed various midsize firms’ digital transformation plans by industry. Beyond simply developing a digital transformation strategy, top priorities across industries included:
• Retail – Investing in innovative capabilities for anticipated business needs (23 percent), addressing customer experience (20 percent)
• Health care – Optimizing business efficiencies and operations across the supply chain (16 percent), investing in innovative capabilities (15 percent)
• Financial services – Optimizing business efficiencies (37 percent), addressing customer experience (20 percent)
• Natural resources – Investing in innovative capabilities (28 percent), addressing customer experience (12 percent)
When faced with limited resources, financing digital-transformation projects can pose yet another challenge for middle-market companies. According to Fifth Third Bank, however, midsize businesses can learn from the digital transformation experiences of other businesses and industries to help determine where they’ll receive the biggest return for their investment.
In assessing how middle-market firms plan to pay for digital transformation, the BDO USA survey found most expect to tap working capital, ranging from 89 percent of financial services firms to 56 percent of retail and natural resources businesses. Other major sources of financing included private funding, public equity, research and development tax credits or incentives, sale or divestment and government grants.
In Singapore, the midmarket sector’s success has become a governmental priority.
“The government recognizes the challenges faced by this particular part of its business community,” says Andrew Hare, managing director of Aon Inpoint Asia. “As a result, it has focused its national budget to help small and medium-size enterprises (SMEs) in their quest for innovation and growth.”
The SMEs Go Digital program, funded by the Singapore government, offers subsidies of up to 70 percent on the cost of tools supporting cyber security, AI and other digital technologies. In partnership with local financial institutions, the program also offers access to loans for digital-transformation projects like automation.
“The Singapore government has played a critical role in creating a healthy ecosystem where SMEs can thrive, turning the country into an international center of business,” says Hare. “However, SMEs still need to think of creative ways to innovate and stay competitive.”
Getting The Talent Right
Attracting, developing and retaining core talent is essential for businesses of all sizes, particularly in a tight labor market. In this space, middle-market companies face some particular challenges.
“Understanding talent is imperative and every talent decision carries more weight, given limited resources and reduced margin for error,” says Marinus van Driel, associate partner of Assessment Solutions at Aon. “One financial-services organization prices out the net hiring cost for a nonexecutive role at $220,000. But getting a hiring or a succession decision wrong in the small and middle-market space creates a much larger impact than the hiring cost alone.”
A talent misstep can extend its impact into the client base, the brand or the partner ecosystem, van Driel says.
“The good news is that the inverse is true: the correct talent decision can benefit the organization exponentially and radically accelerate growth,” van Driel continues.
Unlike many larger businesses, middle-market companies often tend to hire in response to growth rather than in anticipation of it, according to research from the National Center for the Middle Market. Furthermore, the same organization found that middle-market companies often lack depth in senior management and are not prepared to fill these positions should they suddenly become vacant.
When it comes to talent selection and development, middle-market companies typically lack the breadth of resources, systems and tools enjoyed by larger firms. Nonetheless, there are ways to overcome this challenge, including being proactive in anticipating talent needs and seeking to fulfill not only current but also future skill requirements, says John McLaughlin, commercial director of Assessment Solutions at Aon.
“If we look beyond the ‘current’ understanding of desirable skills, we can begin to hypothesize about what might drive future readiness and, thus, apply a forward-looking lens in the making of talent decisions,” says McLaughlin. “Midmarket companies can use established models and tools available in the market at a fraction of the cost typically set aside for a hiring process.”
Understanding employee longevity and the potential return on investment from hiring, succession or development decisions are other valuable considerations. In a scenario where resources are tight, this offers an attractive proposition to midmarket companies wishing to both mitigate the risk of erroneous talent decisions and ensure continued, or accelerated, growth, McLaughlin says.
Interestingly, an organization may find that the talent gaps which come with growth or expansion can be filled from the existing workforce.
“With the right tools and methodologies – and considering the condition of the labor market globally – filling new or emerging roles in house is a no-brainer for midmarket companies,” says McLaughlin. “Virtual assessment and online training processes provide midsize companies with a valuable method of identifying both internal and external talent. The benefits can be doubled when such tools are used in empowering talent to develop new skills.”
Middle-market businesses should also appraise their wage and benefit programs and, where appropriate, consider such approaches as flexible work schedules or mobile-work arrangements in supporting recruitment and retention goals, McLaughlin says.
Midsize Firms As Major Global Players
Middle-market companies have long been important players in local and national economies. Yet today, advances in technology and logistics have given many middle-market businesses the opportunity to compete alongside larger businesses on a global landscape.
By strategically addressing their unique risks and using the tools and resources available to them, middle-market companies can transform themselves for greater success.
“With the right risk-management process in place to create a more thriving and innovative environment, midsize businesses can continue to play an increasingly important role as they propel economies forward,” says Hare.