The National Center for the Middle Market looks back on 2017 and shares their forecasts for the middle market in 2018.
Transcription
The US middle market is the driving force for the competitiveness of our economy. Middle market companies delivered a great performance in 2017. Can they repeat in 2018?
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Welcome to the Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid-sized companies and help you take advantage of new opportunities.
2017 is wrapping up and soon we'll be unwrapping 2018. It's time to look back at the year's big stories and trends in the middle market and fire up our crystal ball and look ahead into 2018.
I'm Tom Stewart, I'm the Executive Director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We're the nation's leading research center studying mid-sized companies which account for a third of private sector employment and GDP, and the lion's share of economic growth and employment growth. It is the market that moves America.
The National Center for the Middle Market is a partnership between Ohio State and SunTrust banks, Cisco Systems, and Grant Thornton LLP. With me today to look back and look forward is the Managing Director of the Center, Doug Farren.
Hi, Tom.
Almost a year ago, we sat down together and kicked off this podcast series, which is now a year old. And almost six years ago, a little more than six years ago, you were actually here when we cut the ribbon on the National Center for the Middle Market as you look back on the year that we've just put under our belts, what do you see?
Well, it's been another very strong year in the middle markets. You know, in the third quarter, when we released our middle market indicator top line numbers, we saw revenue growth at 7% and we saw employment growth at a very robust 6.4%. Now comparing those with some of the numbers we've seen over the last four quarters, keep in mind, we'll be getting our fourth quarter data here very shortly in our middle market indicator, but those numbers are very much aligned with what we've seen over the last year.
The whole year's been good.
It's been very good. So if we think about top line revenue growth, again, past four quarters we've seen an average growth rate of 6.8%. Six in 10 companies say that their performance has improved for the year.
And the interesting thing is, it's actually seven in 10 I think. 70-- yeah, 70%. And that's fascinating. We ask a question like, overall performance, which includes profitability, growth, and basically how you're feeling about the business, is it better, the same, or worse? And the number of companies that said it's worse is like 5% or 6%, and it's been that way for a couple of years-- although three years ago, four years ago, those numbers were 12% and 15%, there was a lot of deterioration.
But we saw in the third quarter 70% of companies said that their performance had improved over the last year, and that's up from 63% a year before. So almost everybody is doing better, and, you know, and almost nobody is doing worse, there are a few doing-- you know, but the rising tide has lifted just about every boat in the harbor.
And if we dig just a little bit deeper into those numbers, let's look at some of the key industries as well as key regions. So key industries driving these top line revenue growth rates, we've seen services at 10% average growth, manufacturing at 7.8%, financial services almost 7.5% growth in top line revenue.
And the manufacturing numbers are really interesting. I mean, we hear a lot of stuff in the press and from politicians about the hollowing out of American industry, but in the middle market, the numbers are strong.
They are very strong. And another thing I would add about these three particular sectors, it's consistent. We'll see a sector like a construction where we will see a bump into the 10%, 11%, 12%, followed by a sharp decline. These three industries were solid across, again, every quarter.
And employment was strong in manufacturing too, right?
It was. Actually, if we look at the employment numbers again across the entire middle market, 5.4% average employment growth. Some of the key industries here, actually the two strongest were services and construction, consistent construction growth. If we look at key regions, so parts of the country that are leading the way, the West and the South interestingly lead the way with revenue growth, and the Northeast is adding the most jobs at a rate of just under 6%.
So it's across the board. I mean, basically there's nobody who's doing badly-- with sort of funny numbers in retail.
Yeah, retail continues to be a really interesting industry to look at. You know, obviously in the mainstream news, we hear a lot about bankruptcies and closings and the changing face of retail. However, we've seen some interesting growth in middle market retail, and I think some of it has to do with these niche players who are picking up on maybe some of the opportunities and gaps from your large big box traditional department store-type retailers and other larger companies that are either going out of business or not effectively making the switch to more omnichannel.
You know, one of the things, of course, we've seen is a shift in the retail mix. So if you think about retail, it's one thing to be buying clothing and it may be another thing to be buying a restaurant meal. And retail that sells experiences has been growing faster or more robustly than retail that sells products. And so the overall retail numbers sort of may disguise a sort of a big sloshing around of water from one end of the bathtub to the other from the products-- you know, from the selling of things to the selling of services-- selling of experiences, rather.
So it'll be interesting for us to see what 2018 brings. As we've learned over these past six years, that middle market managers traditionally underpromise and overdeliver, so we'll see if that holds true for next year as well.
Now, I mean, that's a number that I think is fascinating to me, that we see-- basically every quarter we say, how is business in the last 12 months? How do you think business will be in the 12 months to come? And as you said, we saw a 7% top line growth in the last 12 months and companies project 6% top line growth, but usually they underforecast by a percentage point or a percentage point and a half.
That's true.
If they are as conservative as they usually are, they are looking forward to a better 2018 than 2017, and 2017 was a dang good year, as you might say.
But these strong numbers don't come without their own challenges and concerns, right?
Well, you know, one of the things we saw-- I mean, and we studied this, we released a study that we worked on this year with the Brookings Institution about talent. And the title of this study was, "Help Wanted," and that's-- you can almost say "Help Wanted" with an exclamation point. The middle market is the fastest growing part of the economy and I think it's really startling that the numbers that we show, that we collect consistently show that mid-sized companies grow at 50%, 100% more than the S&P 500, and their employment grows faster than that. I mean, in the last 12 months, middle market employment grew 6.4% and large corporation employment grew 2.8%, so it was a really huge difference-- small business, 1.2%.
So we are at nearly full employment in the economy, And if the talent shoe is going to pinch-- and it's pinching, it's going to pinch right there where the demand is the greatest. And one of the things we learned as in the research we did with Brookings is that the demand is great from middle market companies, but they themselves and the sources of supply don't quite mesh in terms of filling that demand.
Yeah, that's very true. And I've actually been able to work with a number of middle market companies through the immersion course that I teach here at the college. And whether it's a professional sports franchise looking for a marketing manager or a company like Grody, Inc who's looking for a great welder, they're all struggling to find these people to help continue to support the growth that they're forecasting.
And that's-- and again, one of the things we saw is that that goes across all sets of skills, because senior managerial talent, truck drivers, and in some cases, people are saying there are issues of, I can't find somebody who can pass a drug test, but in other cases, they can't find people with the increasingly digital skills required for work, or they don't have the soft skills for management, it's across the board.
I think our friends at Brookings, now that you mention that, shared some data about how jobs have become more digital over the last decade or 15 years. And the one that always stands out to me as being the most interesting is how the machine shop operator has gone from a score of like five to over 50. And, you know, we learned this a few years ago when we did our advanced manufacturing study that those were actually very, very high-skilled jobs, and actually, we shouldn't be surprised that the amount of digital skills needed to run advanced machinery would be on the rise. So just some very, very interesting things that we learned in the talent domain.
And you know, while we're talking digital, that's one of the other things I learned this year. There is, again, you know, you can go across the business press and everything you read and you read a whole lot of stuff about the importance of customer experience. And we did our study of digitization of the customer experience with the subtitle, "Are We There Yet?" And the answer is, not yet.
But one are the things we learned from that-- first of all, we asked executives-- what your customers find most important in your product or service offerings? And the number one thing they said was the quality, number two was customer experience, and number three was price, and it was well behind quality and customer experience. So one of the things we learned is that customer experience really matters.
And the other thing we learned is that mid-sized companies are struggling to create a sort of an omnichannel, 360 customer experience that can be in the store, on the website, on the phone, where you can really hopscotch from channel to channel or platform to platform in a consistent and coherent way. And it's hard to do. And important to do.
I mean, customers are demanding it. I guess in this Christmas shopping season, this holiday shopping season, we all really sensed that in our own behavior, that we want to be able to move around-- and by the way, post-holidays, if we're calling up about returns or problems, we're going to want the same sort of omnichannel experience, and we know how hard it is or how few companies actually deliver that.
Which then brings in the question of cybersecurity and how secure your data is. You know, late last year, late 2016, if you recall, we collected data from the middle market about cybersecurity. Subsequently we launched our own cybersecurity resource center for the middle market. But Tom, what do you-- I mean, what have you seen in terms of the concerns? We know it's a big boardroom issue, but practically, what are middle market companies worried about in terms of their data?
Well there are a couple of things, and first of all, they are worried about it. A year ago when we got those first data back, we asked companies how important cybersecurity is and that number was off the charts-- basically everybody said it's 95%, said it's very important or extremely important. And then we asked, do you have an up-to-date cybersecurity policy and strategy? And only about half of companies did. So there's a general sense of unpreparedness.
In the months since then, I think we've seen a couple of things. First of all, more attention. Certainly more immediate attention. Second of all, a changing cybercrime industry. So you're looking at more prevalent ransomware attacks, and bitcoin has made it just even easier to do ransomware attacks. But you're still seeing those sort of large amount of penetration of companies.
And earlier this week, we were talking with Joey Muniz, who's a cybersecurity expert at Cisco who was talking about that. And he says, basically, cybercrime is up like 15% I think on a compound basis and it continues to rise. And the cost of cybercrime are going up and the middle market is by no means immune from it.
I don't think, however, from some other data I've seen that's still rough, I don't see a whole lot of change in the number of companies that are really up-to-date with the cybersecurity strategy. I think people are having a hard time figuring out what I'm supposed to do when I've got an IT department of five people.
Yeah, I was going to say, given the limited resources and expertise, I think it's a struggle just knowing where to start. And how do you start exploring these issues? Maybe auditing your own readiness and concerns and, you know, as a center, we try to help that with some questions that these leaders should be asking themselves in their firms and their IT folks, but yes, certainly something that I think we're continuing to see as a struggle.
You know, when we look forward, I mean, there are a couple of other sort of serious-- if I think of-- if I were to put on my hat and pretend to be a CEO, some of the things that I would be thinking about would be, am I playing a good game of cyber defense? What am I doing about talent? And I think a lot of our research shows that mid-market companies are a lot better at managing today's workforce than planning for tomorrow's.
So for example, they tell us they're really good at identifying their key players and their key positions, but not very good at succession planning, and I think similarly with the sort of digitization of the customer experience and working with customers.
There are a couple of other issues that I think are of growing importance. One is M&A. You know, the amount of M&A in the middle market has been pretty constant and at a pretty high rate. More than one out of five companies every year does a deal. And if you compound that, that comes to a pretty impressive number. And those companies that are in the deal space say that they expect mergers to contribute more than a quarter of their growth.
So there's a lot of interest, a lot of activity, and there's a lot of money. I mean, there's a whole lot of investment money parked out there looking for middle market companies. So one of the things that I think-- if I were wearing my CEO hat, is I would want to be deal-ready, whether or not I'm interested. I would want to create a company that could buy or sell without having to start from the end zone, and also be prepared with the kinds of financial measurements and operational process documentation so that I could do a better job either as predator or prey in organic growth. And that would be one thing that would also be on my radar screen for next year.
So even though those rates have been pretty consistent, these aren't necessarily experienced participants in the M&A process, right? So not to give away our upcoming research paper on M&A, but I know one of the things we're going to help address is how you use advisors in the process, and maybe some questions that, again, wearing that CEO hat, you need to ask yourself-- to your point on whether you're ready or looking actively, you know, this could be a long process, so it's always good to be kind of ready to go should you get that phone call.
Yeah, yeah. Or want to make that phone call, or suddenly get that ambition. I mean, the thing that I think is interesting is over the 3 and 1/2 years I've been at the center, and I'm sure you've seen this in your six years, there's that-- the degree to which middle market companies balance agility, the ability to turn on a dime, flexibility, and so on and so forth, that smaller company agility with process and planning, and, you know, how much should you be planning, how much superstructure do you need, and how much is too little and how much is too much?
I think it's one of those managerial balancing acts that mid-sized companies need to master-- and do pretty well judging by their-- judging by their performance, most of them have found that sweet spot between resilience and for agility and process, but its a never-ending battle.
Yeah. I mean, this year. I think some of the work that we've done has reinforced that notion, whether it be how to manage working capital, for instance, or in our supply chain study, being a perfect link. I mean, we saw lots of examples of flexibility, deep engagement with both their suppliers and customers. I mean, to your point, these are the types of behaviors that I think make middle market companies very successful and very agile, but they also create a lot of opportunities to be a little bit more planful, and again, looking ahead, I think that's one of the things we might be looking at in 2018 is the strategic planning process within the middle market.
Yep, yep. And my own instinct is that companies, they always need to do it, but the next year or two may be especially important. We are now-- I can't remember, I think it's 103, maybe 104 months into an economic expansion, which makes it the third longest economic expansion in US business history. And our numbers from the middle market indicator show tremendous confidence from executives in their local economies, in the national economy, in the global economy, it's rising in all of them.
But 103 months is a long time, and you never know-- if a bubble bursts, you never know-- you never realize it was a bubble until it bursts, or if something goes down, you know-- surprises by definition are unexpected. And so that ability to think about what can go right and make sure you're resourcing that, but also think about what can go wrong and make sure you're preparing for that. You know, just the long length of this cycle would suggest that you want to make sure you've got your left hand and right hand well-coordinated there.
We haven't seen-- I'm just looking at some numbers here. We haven't seen a revenue growth rate at below 5% in four years.
Yeah.
In all the quarters that we track this data. We haven't seen an employment growth rate below 3%. So those lines, as you're mentioning, labor productivity, those lines continue to get closer together.
And I'm no economic forecaster, but-- and no stock market forecaster as my broker can tell you well, but if you look at some of the things that could make you nervous, you could see, you know, uncertainty about key policy issues. Like uncertainty about health care costs, uncertainty about trade policy, uncertainty about taxes, those are three things. Who knows what's going to happen to energy costs, which have been pretty benign. So that's one question.
You see some sort of worrisome numbers in the middle market and across the economy about productivity, and Larry Summers as you know, former Secretary of the Treasury, worries a lot about this and suggests that we may be-- we as a country may be underinvesting in infrastructure necessary to improve productivity, that without stronger ports and highways and cyber infrastructure, you know, there's only so much that $100 million company can do to increase productivity without additional support from infrastructure.
So that plus, of course, what changes may be going on in retail or some other industries, you can find a number of things that you can point to and say, mmm, s make me feel a little nervous, and I want to make sure that I'm planning for, you know, not only for our confident future, but also for building whatever war chest or whatever defense mechanisms I might need in case things turn south.
Right, right.
What do you think? I mean, as we go forward, we've talked a little bit about some of those key issues about various industry opportunities, key issues about challenge, so on and so forth. We've been doing-- as we look back on our own year in the last year, Doug, we've mentioned some of the research that we did about supply chain, working capital, talent, customer experience, but there's been a whole lot of other activity where we've tried to bring some of this message to middle market companies, and Doug, you've been leading a lot of it.
Yeah, we've done, you know, just, again, another year of robust events from coast to coast with a number of different partners and audiences, you know, ranging from service providers, middle market executives, you know, folks in the private equity community-- have a number of partnerships that have really strengthened this year, and I think have helped leverage a lot of our center insights, again, across a number of those audiences.
I can think-- not to leave anybody out here, but for this year, we'd love to highlight the work that we've done with Vistage, for example. You know, they've been a really good partner going back to our work that we did around talent. Our friends at Brookings who, you know, helped us with the workforce study that we mentioned a little bit earlier today.
We've also done work with several chambers. They continue to be great sources of local champions. I think they're still learning about the middle market and understanding that they don't necessarily know the middle market in their own backyard, but we've had a number of these chambers in key markets across the company, you know, reach out to work with us and continue to strengthen those relationships in places like Cleveland and Chicago and Philadelphia and others.
I would like to also call out our kind of successful collaboration with the Small Business Investors Alliance and the recognition, I should say, of our Exec Ed Training Program here on campus. So we've had maybe 100 execs? Just under 100--
I think that-- yeah, I think it's about 75 right now with plans for 100, 150 in the year to come.
--in 2018. So that's always been I think a really effective program for us is to actually have middle market CEOs and executives come here and, you know, reinvest in theirselves and get a little training and development on how they can improve and lead their companies even better than they are today.
From a student-related standpoint, we had a very successful case competition. We've been sponsoring the Fisher Invitational, which brings together MBA students from across the Big 10 in the Midwest for a 24-hour case competition. This past year we worked with a middle market company here in Columbus, Ohio called Installed Building Products, which was great.
And that I mentioned, the Immersion course, which is an undergraduate program here at Fisher, and this is the fourth year that we've had middle market companies involved, coming in and not only teaching students about their own businesses, but what it's like to be a leader in the middle market, as well as hosting projects with our students. So all in all, that's become a very effective way to expose our students to what the middle market is all about, and potentially even a source of talent for middle market companies as they think about their recruiting.
And at the same time and sort of at the opposite end from undergraduate students, we've also conducted a couple of briefings on Capitol Hill, on the House side and on the Senate side with members of Congress and also with their staffs.
I think one of the things that-- the messages that we always want to convey about the middle market, whether it's to city halls or state houses or in the halls of Congress or the White House is, to recognize that this middle third of the private sector, these companies-- 200,000 businesses-- with revenues between $10 million and a billion dollars a year, that's a third of private GDP, a third of private employment, and the lion's share of growth-- I mean, I was citing some numbers earlier about employment growth and revenue growth.
The middle market, whatever your political persuasion is, it's really important that the interests of these companies and the special concerns of these companies be reflected in the work that the media does, the work that scholars do, and the work that policymakers at all levels do, because if they're missing that, they're just not, you know, they're just not paying attention to the market that moves America, which is, of course, the title of this podcast.
It's been a pleasure to be able to work with that, and as we come to the end of this year, the end of this particular edition of the Market That Moves America, I think we should thank our sponsors, SunTrust and Grant Thornton and Cisco Systems, who have been great supporters of us and also have helped us bring in some real experts to some of these podcasts, but most of all, I think we want to thank you, our listeners, and our increasing number of listeners as we roll into the second year of the Market That Moves America and an expanding audience of listeners.
We want to hear from you and we want you to discover us. You can find the Market That Moves America on iTunes, Stitcher, Google Play, or wherever fine podcasts can be found. And you can also subscribe to the podcast and learn more about us at our website, MiddleMarketCenter.org. Thanks very much.
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