New research from the National Center for the Middle Market at Ohio State, the nation's leading resource for mid-sized companies, has identified half a dozen capabilities associated with much-reduced impact from the business effects of Covid and much more robust forecasts for future growth. The capabilities were derived from NCMM's landmark 20,000 company study, "The DNA of Middle Market Growth," and tested against the pandemic performance of 1,000 middle-market companies. These capabilities are like elements of a strong immune system. By investing in them, you can accelerate recovery and protect your company against future shocks.
- There are key capabilities that protect against shock--and enable faster recovery
- CFOs' role in ensuring access to capital and a strong planning function is critical for resiliency
- CFOs need stronger partnerships with marketing and talent to restart growth
Hi, I’m Tom Stewart, I’m the Executive Director of the National Center for the Middle Market at the Fisher College of Business at The Ohio State University. And I’m pleased to be with you today, this morning this afternoon, whatever it is, to talk about some recent findings that we have, from our research about how companies responded to the covid 19 pandemic, and particularly about the characteristics of companies that have what we call a strong immune system, what the data show about companies that were able to have a reduced impact from a pandemic, and also that have a stronger forecast for recovery capabilities that you can look at, for your company to see whether they will help you now and in the future. A couple of things about the National Center for the middle market, we are, as I said, part of the Ohio State University, with the nation’s leading research outfit, focused on mid sized companies, we do research, outreach and education, to try to understand this important segment of the economy, the challenges and issues that these companies face, and also, of course, their contribution to the economy as a whole. Who are these guys? How do we define the middle market, when we set up set up, set up the center back 10 years ago, we began by taking census data to try to define what the middle market is. And we did that by saying, well, what’s the middle third of the US economy, the US private sector, and if you set those sliders, the middle third of the private sector from private GDP is companies with revenues between 10 million and a billion dollars a year, there are about 200,000 of those companies, it’s a big spread two orders of magnitude. But that’s the middle third of the private sector. And these companies are rather bigger than small and they’re smaller than big. we subdivide them and our research to look at companies between 10 and 5050, and 100, and 100 and 100 million and a billion dollars a year in revenue, because those tend to have different characteristics. But overall, they tend not to be startups, they’re most the median age is 31. They’re 85%. Private, they’re off the radar screen, partly because they’re private. And yet, they have more than $10 trillion in annual revenue, that contribute 60% of all new private sector jobs. It really is where the growth is we call it the market that moves America. And that’s because it is where the growth is in the US economy. The Forgotten middle child of us capitalism and extremely important. We’ve been doing a lot of research about the impact of the covid 19 pandemic on this group of companies. In March, we did a pulse we asked 260 companies when we had surveyed three months before, so we were able to get a before and during a right in the middle of the of the beginning of the pandemic to see the impact. Then we went back into the field in June, surveyed 1000 companies, middle market companies across the country, reprise the march COVID-19 questions and included additional questions about company response use of government and other sources of response of support, and so on and so forth. So those that’s the basis of what I’ll be talking to you about today. But also in the background is some serious research that we did a few years ago. It’s all serious research. But some major research we did a few years ago, developing a growth model for middle market companies. And we which we looked at data points from more than 20,000 middle market companies over a period of five years to understand the factors that drive growth. For this important segment of the economy, we’re able to take those factors and capabilities and apply them to the COVID data with the data that you’re going to see in a minute. Before I get to that immune system, I want to give you a quick portrait of some of the impact of the pandemic on the middle market. In March 25% of these companies said that they thought the impact was going to be catastrophic. By June three months later, that number had fallen in half. Now, it may be that some have already had the catastrophe. But what I really think that happened is that by June 13% of companies were saying catastrophic because they realized that the if their worst fears from March were not coming true. The metaphor I have in my hand is in my head, is it sort of like a car driving off the road into the ditch? And in March, people can Oh my god, am I alive? Am I bleeding? Is everybody heard? Is the carbon a person fire? What’s the state of things and by June people were realizing it’s not quite so bad. We’re all alive. No bones broken. Not how do we get out of here? Having said that 13% is still one out of eight. Still an extraordinary number that says that that they have started what Yeah, well, not a bit. That says that they’re facing a potentially catastrophic response from the pandemic. You can see this by looking at the revenue figures. Now these are year on year revenue figures. So it’s June 2019, to June 2020, you have seven months of strong revenue growth, and then boom, the pandemic hits. And what you can basically see as you can see about 10 point swing in revenue growth from positive 7% by positive six and a half percent to negative 3.7%. That said, that big catastrophe, the middle market is not as bad as what the companies in the s&p 500 faced, which was an 11%. top line growth drop. Here are the numbers for employment. middle market, again, you’re on here June 2019, June 2019, to June 2020, revenue growth, revenue growth, revenue, or employment dropped 4.4%, where it had been rising at about a 4% rate annually. You can also see that again, the middle market had a less severe impact than big business or small business. It’s part of a pattern we traditionally say that middle market is occupies this sweet spot between resilience and runway, the ability, the resilience, the ability to take a licking and keep on ticking, and runway, which has room for organic growth. And those capabilities stand the middle market in good stead in good times, but also seem to have caused a somewhat reduced impact for mid sized companies compared to the rest in this terrible difficult time. Now, looking forward, what we see again, these are June figures forecasting for June of 2021. middle market companies are seeing a return to positive revenue growth, but at a much lower level than they were seeing before we’re seeing a drop from these five 6% revenue forecast to a revenue growth of just about 2%. As far as employment is concerned, we’re seeing a forecast of continued reductions in employment. This, by the way, somewhat typical of these companies, we saw this coming out of the Great Recession, they’re worried about getting out over their skis, they don’t want to they were not going to add to payroll until they booked a few quarters of solid income and know that they can afford it. The same might be true of capital spending and other kinds of investments. They’re conservative financially, as many of you many of you guys know from your own personal experience. And as I said, don’t want to outdrive their headlights or get out of their skis, they want to make sure they’re okay. before they go into further expansionary activities. Part of the factors that they consider, of course, is economic confidence. And here you can see what happened to economic confidence we see a record low for confidence in the local economy, we see serious drops for confidence in the national and global economies. Before panicking about that, first of all, it’s not the worst we’ve ever seen. If you go back to 2012 2013, except for the local economy, the national and global economy levels were worse. But also you noticed that there had been a sort of a trailing off in economic confidence for about the six quarters before that. So what we had seen was that that very long expansion had grown a little long in the tooth and people were beginning to get a little anxious, a little more cautious. We saw it and some other data from the middle market as well, which I won’t bother to talk about here. But but we’ve sort of seen this. So confidence is low. Revenues down employments down investment projects, to nobody’s surprise were tabled on December of 2019. More than half said they planted that plan to enter a new domestic or international market in the next 12 months. That number dropped to just over 40%. In June of 2020, the number of companies that said that they expected to open a new plant or facility dropped from 25 one and four to to just 14% a 10 percentage point drop really significant. You all know, investment plans were tabled. One of the things we did see interestingly was that plans for innovation for r&d and for introducing new products are not so much delayed. As these big capital spending plans. Companies are holding also holding on to cash. Every quarter we ask if you had an extra buck, what would you do with it? Would you put it aside or would you put it right to work. And you can see basically that between December and June the number of companies that said they would hold it as cash went up from 30% to 48%. So companies are keeping their powder dry, for safety for a cushion or for opportunities that might come up but they’re not committing that cash right now. Now, one of the interesting things that you see look at what people are doing with the money that they have. You see impact negative impacts on revenue supply chain growth. initiatives a 31% difference in between the positive and negative impact of COVID on growth initiatives. But you see the digital transformation and digital spending is pretty much holding its own. One of the reasons for that, of course, is that digital can help you save costs. And another reason is that digital can automate people automate functions and, and help you manage on thinking ways to bring customers and employees back to work. But digital seems to be holding its own in that expenditure package and investment package for middle market companies. So that’s the portrait of how the covid 19 pandemic and the recession that’s following has been hitting middle market companies. What’s interesting is if you look deeper into the data, you find that you find a differences between some companies were much worse hit than others, sometimes irrespective of industry, irrespective of specific specific activities that they perform. There seem to be some companies that just were in a stronger condition. Now, overall, people are saying that there’s a long road back in March, basically 20 40% said they could get back to work right away. 20% said it would take six months or more. By June, that number have flipped. 23% said they could get back right away. 40%, saying it would take six months or seven months or more to get back to work, there is a long road to recovery. But along that road, you see companies that are advanced and companies that are laggard here, take a look at this growth distribution, a past year revenue growth in that second quarter of 2020 numbers that you see, you’ll see 42% had decreased revenue, 19% had no change. But 32% had revenue growth of 10% or more, that’s nearly a third. And it’s not too different from the numbers that we saw in previous quarters. So some companies were doing really well. Some companies even added more than 10% to their workforce 12% of middle market companies were able to do that, while 75% cut their workforce. So there were some companies that were thriving. Now in some cases, they are companies like zoom, which was a middle market company at the beginning of the pandemic and is graduated beyond a billion dollars, since so some of these companies were just the right company in the right place at the right time. But others simply were doing better. I’m going to give you some charts, some data that are a little bit hard to read, but I hope we can explain them pretty well. When we built our middle market growth model a few years ago, when we started identifying a series of capabilities that had to do with finance, operational efficiency, talent, sales and marketing investment plans and growth. We’ve been asking for years, what what companies how companies rate themselves on those capabilities? How good are you at accessing capital at an affordable cost? How do you give yourself an A, B, C, D or an F? do you rate yourself excellent or very good, or Okay, or not very good at all at a number of capabilities. So we went through these capabilities, we took a look to see how those capabilities line up with the impact from the pandemic. And we discovered half a dozen capabilities, which I’m going to go through now, which companies or companies that had a strong self rating a strong grade and those capabilities had a much reduced impact from COVID-19. And the way this chart looks at if you take a look at that line that says the total middle market 46% of companies give themselves an A or a B at accessing funding at an affordable cost of capital. But among companies that said that COVID had a low impact, that number was 63%. And the difference between the low impact and the high impact was 20 points. So getting capital on fordable cost of capital is a huge contributor to you to the likelihood that you have a low impact from COVID-19. Being able to withstand a downturn in your industry, thinking that you have the assets, the capabilities, the resources, maybe the access to capital, other things that you would need the money in the bank to withstand a downturn, the loyal customers out that set of group another 20% difference. Marketing and Communications was the third most powerful and 18% difference. Those companies that said that gave themselves an A or a B in marketing and communications were 18% more likely to say that they had a low impact from co COVID-19 than companies that had a less liquid capability and that having a growth strategy in place. Now, obviously, all your plans, gone out the window, but the fact that you had plans and had a strategy in place was a really important basis for companies to be able to do better keeping talented employees, I’m going to go into this in a little more detail in a minute, because there’s an interesting wrinkle on this, but being able to have strong people, keeping them having a strong, engaged and loyal, talented employee base, really important, and investing sufficiently for the future. And that’s one of those things where it’s not just investing this quarter, and then waiting five years, but this regular pulse of investment for the future. So we’re always looking ahead, you’ll see how these things feed into one another, right? The affordable cost of camp of capital, helps you invest for the future, you have a long term growth strategy, so that you know how to invest for the future. These things relate to one another in interesting ways. Now, if you want to go a little deeper, and take a look at you guys as CFOs as my people in the finance function, what are the top immunity capabilities in the finance function, but that cost of capital was a really important one with a 20% difference, investing sufficiently for the future you guys need to be thinking about that eating your seed corn, but investing your seed corn, keeping it, making sure you’ve got something to plant and having that regular cadence, so that you’re not robbing Peter to pay Paul. And you’re being ants not grasshoppers, as as you manage and as stewards of your company’s investment, operational efficiency, important but not at all as important as those first to having a strong relationship with your primary bank. Important as as important as operational efficiency. And obviously, maintaining margins are really important thing, particularly now as sales are under pressure and margins are under pressure, the ability to maintain margins becomes a critical thing that gives you a likelihood of being less badly hit from a downturn like we’re going through now. Now, I mentioned planning, planning as a really important capability.
And that overall, having a long term growth strategy and being able to withstand a downturn, you’re in your industry, both of which are key planning functions that show up in that Gang of Six most important capabilities. You guys as CFOs are the custodians of that plan. It’s really important for you, you guys are the people who bring together but ops talent. And you know, you’re chro, and you’re marketing people, everybody else said to have to bring together so you guys are critical to that planning. So having a plan, setting annual formal annual growth targets for each fiscal year, and investing in systems and business processes, so that investment and continuous improvement are three or four very important things in the planning area that helped create immunity. Now in marketing and sales and talent, we see similar things I mentioned the marketing and communications capability. I think that’s striking that it’s so much more important than sales force effectiveness, managing against foreign competition, or geographic expansion. What it tells me is that knowing your customers, and keeping your customers close and engaged at a time when they’re struggling, is really important, more important than the Salesforce effectiveness is keeping that relationship going with customers across the broad spectrum of marketing, communications, talent, I mentioned keeping talented employees as being really important. And notice that it’s more important than having a high performing management team. But that high performing team you and the people around you is the second most important thing. Managing healthcare costs, critically important ability to get a workforce that you can afford, and providing career pathing minimarket companies tend to under invest in training and development, they do a good job of providing career pathing. So I can see what my future is in the company that I can sort of roll my own when it comes to training and development. And it’s one of those things that we have seen is really important. One of the ways in which the CFO and the chro need to get together to think about how collectively together, you guys can manage these five capabilities that help protect your companies against the stress that something like the pandemic in this recession are going to impose. Now, what’s interesting, talked about immunity and I’ve talked about the key capabilities that seem to have been created. conditions under which companies have, if you will, a mild case of an impact from from the pandemic. The interesting thing is that these same capabilities are also strongly associated with companies having a more robust forecast for future growth. You’ll recall, maybe you want from an earlier slide that the US middle market projected 2% revenue growth for the 12 months from June 2020, to June 2021. And they projected a 12 month employment growth rate of negative point 2%. Now take a look on the right hand side of this slide at the projected revenue growth and employment growth, for companies with those strong immune capabilities, companies that say they can get get capital at an affordable cost, they’re forecasting 6% growth three times higher than the growth rate of the middle market as a whole. They’re projecting positive employment growth companies that say we can take it we can withstand a downturn, 5% growth and a 2%, employee growth rate, marketing and communications nearly 6% 5.7. And again, 1.9%. So every one of these capabilities is not only associated with protection against the worst, but it’s associated with building opportunities, the capabilities, the resources, the assets, financial assets, and the human assets that will allow companies to seize the future over the next 12 months. So that’s the story. As companies begin to get a handle on the impact of COVID and the recession on their businesses, what’s emerging in data that we see are that re engaging employees and customers are critical things for companies to pay attention to. Most investments have been tabled. But investments in innovation and digitalization have held their own or even inched up. And they’ve done this in a context where a handful of capabilities seem to confer a relative immunity, companies that rate themselves excellent or very good,
these areas were less likely to be severely hit by COVID. And they forecast a more rapid and robust recovery. Those are access to capital, the ability to withstand a downturn in the industry, marketing and communications, having a long term growth strategy in place, keeping talented employees and investing sufficiently for the future. It’s pretty clear from looking at these, that you as the CFOs of these companies play a central role, not just in managing through the crisis, but in laying the groundwork for growth. I hope these insights will help you as you get into the planning season for 2021. Think about the things that need to be top priorities for your business. And I hope that as you come forward, you stay safe, get strong, and keep strong as we go forward. Again, thanks very much more information on this and about the National Center for the middle market can be found at our website, that URL is here, middle market. center.org appreciate your time and attention. And I hope you have a great 2020 great remainder of 2020 more prosperous 2021 thanks very much.
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