From “What Happened?” to “Now What?”
Six months ago, as 2020 began, cautious optimism reigned in the middle
market. Growth forecasts, expected hiring, and economic confidence were
high, although trending slightly lower compared to the robust performance
and glowing optimism of the last half of the decade that was ending. The
long expansion seemed long in the tooth, but it was still expanding.
Then—boom.
When we talked to middle market executives in March, two weeks
after the World Health Organization declared COVID-19 a pandemic
and as much of business locked down, 25% feared a “catastrophic”
impact on their business. Three out of four—76%—said “ongoing
uncertainty” was one of their top three challenges, followed closely by
“continuity of operations.” The great economist John Maynard Keynes
described uncertainty this way: “About [uncertain] matters there is no
scientific basis on which to form any calculable probability whatever.
We simply do not know. Nevertheless, the necessity for action and for
decision compels us as practical men to do our best to overlook this
awkward fact.”
We simply do not know: That is where the middle market found itself
in March. Like someone who had fallen into a gully, the middle market
first asked, “What happened?” and moved its limbs to see if anything
was broken.
Three months later, one out of eight expect catastrophe—a better
number, but still a bad one. Executives still find themselves facing
uncertainty (according to 66% in our June COVID-19 report) but they are
turning to the necessity for action and decision. Executives have gone
from reaction to reality. What first? What next? What then? The answer
seems to be people and customers first. Get them back and feeling safe.
We’ll work it out from there.
A Hazy Outlook
It is too early to forecast the timing and pace of recovery, or how
business will look and feel next quarter, next year, or five years from
now. No sooner was this survey completed than COVID-19 cases began
to surge in the West and South, where the disease had been relatively
quiescent. But in the fog of the future we can discern some ways in
which middle market companies—historically the most dynamic and
fastest-growing part of the economy—will shape their future.
One is the overall resilience of middle market companies. Though
economic confidence is at or near record-low levels, just 17% of
executives expect the next quarter’s sales to be down; their estimation
of underlying demand for their offerings is essentially unchanged for the
last year and a half. Overall, companies expect that the road out of the
gully may be a long one, but it leads upward. They also, generally, have
the ability to absorb a punch (more than small business) and the agility to
respond quickly to an opportunity (more than big business). Tempering
this optimism: Just 38% say getting access to the capital they need is
somewhat or very easy, while 20% say it is somewhat or very hard, a
two-to-one ratio; the corresponding numbers six months ago were 53%
and 14%, nearly four-to-one.
Second, the next few months will favor those who prepared
beforehand. Forty-seven percent of middle market companies saying
they have easy access to capital also say that the impact of the
pandemic has been low. Companies with an “excellent” or “very good”
long-term growth strategy in place are almost half again as likely to
have had a low impact as those less planful. Similarly, companies that
give themselves high marks for retaining talented employees are much
less likely to say the pandemic hit them hard than companies less
attentive to their human capital. The same holds true for companies
that invest sufficiently for the future. As companies grow, processes
such as planning become increasingly important, a phenomenon we
documented during the long expansion.
These capabilities will make for an easier road through the challenging
times ahead. The middle market as a whole sees growth of 2.0% in the
next 12 months. Those confident in their ability to get capital foresee
growth of 6%, while companies that invest sufficiently expect 5.7%
growth. The strong strategic planners see 5% growth, and talent-keepers
see 4.7% growth.
Third, many executives intend to use forthcoming months not just
to recover, but to change. The impact of the pandemic on digital
transformation efforts has been slightly more positive than negative:
27% cite a positive impact, 25% a negative. (For companies in business
services, 36% see a positive impact; in healthcare, 34%.) This contrasts to
largely negative impacts in areas such as capital spending (16% positive,
42% negative) and growth initiatives (21% positive, 52% negative.) It is
often said that a crisis can accelerate trends that already exist. COVID-19’s
effect on digital transformation appears to be an example.