PODCAST: Unpacking Inflation, Recession, Talent & Tech with Doug Farren of the National Center for the Middle Market
Representing one-third of the U.S. economy, the middle market is comprised of nearly 200,000 businesses that make between $10 million and $1 billion. These companies experience unique challenges and advantages we don’t often hear about in the mainstream media.
Enter the National Center for the Middle Market (NCMM). This organization provides data analysis and insights on the middle market to help accelerate growth in this sector.
In the latest episode of our Middle Market Report podcast, host Travis Durkee interviewed Doug Farren, managing director of the NCMM, on its recent Year-End 2022 Middle Market Indicator (MMI) report.
Continue reading for a summary of the podcast. Or listen to the full episode now:
Why the Middle Market?
Farren shared a bit about the NCMM’s mission to support middle market companies through education and research. He believes the outlook for these businesses serves as an indicator for the U.S. economy as a whole.
At the same time, middle market companies deal with issues separate from those of other businesses. So, the NCMM conducts research and outreach to share timely industry trends and topics of interest for these organizations.
The current MMI is the 38th report of its kind by NCMM.
Consistency in the Middle Market
The middle market has a reputation for resilience. The latest MMI reflects this, with more than 70% of middle market companies reporting that they’re doing better now than a year ago.
In a time when talk of inflation and recession is pervasive, the positive sentiment from the middle market is noteworthy. In fact, 40% of MMI survey respondents said a recession would have a positive impact on their company.
Digital Transformation to Combat Inflation
Of course, in the wake of economic uncertainty, companies are looking for ways to save money and improve efficiencies. Many mid-market businesses are relying on technology to streamline operations and cut costs.
Farren said departmental leaders within middle market companies should build digital transformation strategies with a long-term view. Rather than rolling out solutions ad hoc, technology investments should be part of a comprehensive plan.
“You can almost look at it by function, right,” Farren said. “The finance function, the HR function, the operation function, all of them have multiple options when it comes to making technology investments.
“But what we’ve been trying to preach is you need to think about it as a company and as an enterprise. So actually having a strategy around that is going to make that process better for you in the long run than just trying to pursue one thing at a time off the shelf. If these leaders could just step back and think a little bit about what their digital transformation strategy is and then get the organization on board, they’re going to see longer-term benefits.”
Hiring and Internal Training
Middle market companies are addressing a lack of talent by creating it from within. According to the MMI, 37% of companies said they’re tackling hiring issues in the next 6-12 months by changing internal training.
While some organizations are deploying technology in lieu of hiring, others see technology as an opportunity for existing employees to “upskill.” Upskilling benefits businesses and employees, as it improves retention and gives individuals an opportunity to learn new skills.
Middle Market Report: Unpacking Inflation, Recession, Talent & Tech with Doug Farren
Please note: The “Middle Market Report” podcast is designed for audio consumption. Transcripts are generated using speech recognition software and may contain errors. Please check the corresponding audio before quoting in print.
- Travis Durkee, Sr. Content Strategy Manager, AvidXchange
- Doug Farren, Managing Director, National Center for the Middle Market
Welcome to the Middle Market Report podcast. I’m your host and producer, TRAVIS DURKEE, senior content strategy manager at AvidXchange, a leading provider of accounts payable automation software and payment solutions for middle market businesses and their suppliers. Each month on the Middle Market Report podcast, I’ll sit down with thought leaders from various sectors of the middle market to discuss the trends and innovations impacting their industry.
On this episode of the Middle Market Report, I’m talking to DOUG FARREN, the managing director for the National Center for the Middle Market. Doug and I discuss the center’s latest survey of 1000 C-suite executives at Middle Market companies and dive into the middle market’s perceptions around inflation and a potential recession, as well as its strategy to overcome ongoing challenges around hiring and talent management.
This data is vital as it helps to paint a picture of the overall health of the middle market, which represents nearly 20,000 U.S. businesses, one third of private sector GDP and around 48 million members of the country’s workforce. With that said, here’s my conversation with DOUG FARREN.
All right. I’m sitting down virtually across from Doug Ferrin, the managing director of the National Center for the Middle Market. I’m going to get this out of the way upfront. I’m a bit of a fanboy of your work, Doug, and what the center has been doing. I’ve been following your work pretty religiously for the past three years or so.
Here at AvidXchange, we cater our solutions and our services to middle market companies. So, to have a report like yours is really helpful for me and our company to understand, you know, the pulse of the middle market. So, if you ever wonder if your work is making a difference, know it’s at least making a difference for me.
So, can you go ahead and give us a brief overview of your role with the National Center for the Middle Market and the work that you’ve been doing for really the better part of a decade?
Yeah, happy to do it. And thanks again for having me on. I’m glad to hear that, you know, the work that we’re doing is valuable and it’s always great to hear that kind of reaffirmation. So yeah, my role here at the center as managing director, I basically oversee, you know, all our activities. I was one of the co-founders of the center back in 2011 when we originally launched as a partnership, actually, between Ohio State University, Fisher College of Business and GE Capital.
Our dean at the time, Dr. Neil Makhija, was our academic director and I served as our associate director. So, we kind of shared that role. And then since that time, he’s been promoted to lead the college. And so really what I oversee is all of our research activities, all of our partnerships, which include corporate sponsorships, as we have now with Chubb and Visa.
We just launched a membership campaign, our category, over the summer. And so that’s another thing that we we look to grow. And then the final piece that I manage is kind of student related educational activity. So I do teach a class here at Fisher College of Business on the middle market. We think it’s the only one of its kind in the country.
And we also do some other things around case competitions. We’ve done executive education and just a number of things around the training element. My background, to be honest, when I was approached with this opportunity, I had no idea what the middle market was. Most of my career previously, I started my career with a small consulting firm in the Six Sigma area.
So, I was fortunate enough to be introduced to that right around its peak when G.E. and a lot of big companies around the world were implementing Six Sigma. And so, I worked for a firm out of Scottsdale, Arizona, did that for a couple of years, and then came to Ohio State actually to pursue my MBA. After I left school, I worked for almost 11 years for a large retailer here in town called L Brands, which would be mainly known for their two largest brands at the time, Victoria’s Secret and Bath and Body Works.
So, I was in the internal supply chain and logistics group that supported those brands. So I spent a little bit of time in distribution management, inventory planning, and my last role was actually in a international expansion. So I helped open some stores overseas, particularly in Turkey. And then, yeah, this opportunity came along. Like I said, it seemed really interesting the chance for us as a college, again, with a corporate partner, to really shed light on a segment of the US economy at the time.
So, this is going back again to late 2010, early 2011. You know, not a lot of people knew what the middle market was. And so our mission since our founding has been to really support these companies, understand their issues and challenges, get their names out there and really, you know, get the entire ecosystem of service providers, academics, students, and certainly, you know, supporting the companies themselves as they think about growth.
That’s all great stuff. The reason I have you on today is because you guys recently put out your 2022 year-end middle market indicator report and we’re going to talk a lot about that data. But before we dove into that; I want to spend a few minutes sort of just talking about the middle market in general.
Can you give a quick recap of what exactly the middle market is as defined by your organization, why it’s important, and what the center is trying to accomplish with this middle market indicator report that you put out twice a year?
Defining the Middle Market
Yeah. You know, as we thought about what role the center should play, you know, certainly we had to start with a definition. I think part of the confusion for so long has been that there is not a standard definition of what the middle market is. If for example, if you talk to various financial institutions, many of them have their own unique views of the middle market.
And, you know, it could be revenue based, it could be EBITDA based, it could be headcount based. And so that was one of the first things we wanted to approach was, okay, in order to not only provide some consistency, but also quite honestly guide our research activities, we needed to create a definition to your point. So we landed on 10 million to $1000000000 in annual revenue.
That has been our consistent definition of the middle market. About 200,000 businesses in the U.S. fit that description. More importantly, it’s the middle third of the U.S. economy. So when you think about private sector GDP as well as private sector employment, that that definition, while vast, we certainly recognize that it’s a huge range that gets you to roughly the middle third of the US economy.
So in a lot of our work, you know, you mentioned the MMI, which I think we’re going to chat about today. We do have the ability to segment. You know, so that’s been really helpful because, you know, a $30 million business is nothing like an eight or $900 million business. So within a lot of this data, we have the ability to cut, you know, the results by different revenue segments.
So for example, we use $10 million to $50 million as what we call the lower middle market or a lot of organizations call, you know, the bottom end, the lower middle market. And so what makes that segment different other than just their, you know, revenue size is they tend to be more family owned. You tend to see a lot more founder owners that are still running the business.
You know, it could be an entrepreneur who has grown that business over 20, 30, 40 years tend to be a little less sophisticated. You know, they may not have a full C-suite, probably don’t have an advisory board or a board of directors, even if that’s like an informal board. And then certainly as you progress through size, you start to see differences like, you know, advisory boards, maybe multination or maybe investing more in certain sophisticated platforms and technologies and things like that.
So yeah, you know, it’s an interesting segment, too, because you basically cover all industries. Right. We in particular track about eight of these industries in our research. But middle market companies are literally everywhere. I mean, that’s one of the questions we wanted to answer early on was, you know, are they aggregated in certain parts of the country? Do they tend to, you know, navigate toward the Midwest versus the East or West Coast, for example?
And while there are a few differences like that, we can say with confidence that middle market companies are literally everywhere, every city, every town, and they’re across all these different industries. So that also has made it a little bit challenging, you know, to look at as a segment, because there’s so much difference from size to industry to location to all different types of things.
So it’s been fun and interesting.
Absolutely. I mean, that $10 million to $1 billion is a very, very wide range. It’s much wider than $0 to $10 million. So there’s certainly a lot of demographics represented there.
I think this the so the second part, you know, about the MMI itself, this is probably you know, I would say it’s our flagship piece of research. It’s certainly one that we’ve been repeating over time. So we launched it in April of 2012, this latest wave, which we completed for the year-end 2020 represents our 38th survey.
So as far as we know, this is the longest continually running survey of the US middle market where, you know, we’re measuring things like performance growth, confidence, investment planning challenges. And it’s well designed in that we survey a thousand businesses. That’s a different set of a thousand every wave. It is a blind survey. So they do not know that this is coming from the NCMM and subsequently we don’t know the names of the companies.
So that’s important from the standpoint of, you know, just assuring that their responses are honest and accurate and that, you know, there’s no fear of them being identified or called out in any way. We also work the survey company that we work with, also takes the survey results and weights that data to the U.S. Census. So regardless of who responds, all the data is weighted to accurately reflect the middle market.
In those three demographics that I talked about earlier, size, geography and industry. And so that just ensures that we don’t have any bias, right? Like if 500 of the thousand companies tend to be, you know, happened to be manufacturers, let’s say that we’re not speaking on behalf of the middle market when it’s really being influenced by one certain industry or one particular geographic area.
No, that’s great. So let’s get into it. You know, I think that when I read your report and I’ve watched your webinars and watched you explain this report, there are really two big chunks of stick out to me there. There’s always you’re tracking data as far as macroeconomic factors and economic confidence and those sorts of things. And then there are sort of the more timely, you know, underlying things that are influencing those previous numbers.
Right. So I want to start with sort of the impacts of these macroeconomic factors and sort of the perceived hurdles in the economy. So I’m just going to rattle off of a few a few key metrics that I found from your report and your presentation in your report. It says Year over year growth for the middle market held steady at around 12%.
For the third consecutive report, 81% of companies reported revenue growth. Only 6% said overall performance took a step back in 2022, and 74% of companies expressed confidence in the national economy. Now you can tell me if I’m wrong, but personally, those numbers feel pretty good given the the often grim perception of the economy that we tend to read about every day in our newsletter inboxes or just in the general news.
And we often talk about the resilience of the middle market. That’s sort of been a theme that’s carried through obviously the last few years. But even going back to the recession and those types of days, do you believe that these numbers reinforce that notion and that reputation of the middle market being resilient? What do those numbers say to you?
Discussing the Consistency of the Middle Market
Well, there’s a few things. And so, I mean, you called out some interesting numbers that we shared in this latest wave. So for us at the center, you know, this isn’t necessarily all that surprising and it demonstrates consistency. You know, I mentioned 38 waves of this data. So we can literally go back to the beginning of 2012 and look at growth trends over time through various, you know, shocks and disrupt patterns and things in the macro environment that certainly impacts businesses of all size.
I think what this reinforces primarily is that the middle market is uniquely positioned to be resilient and provide consistent growth and results. You know, small businesses, they’re going to you know, they’re going to get probably impacted the greatest when it comes to some of these shocks, particularly, you know, if we look back a few years to the pandemic and how that devastated the small business segment, just because they don’t have the resources and, you know, haven’t been around long enough to necessarily weather that through.
And on the other hand, we know that big companies oftentimes are, you know, have a lot of resources. They have, you know, larger teams. They have a lot more capital typically at their disposal. Most of them are publicly traded. Right. So they have access to, you know, the stock market and things like that. And conversely, we also have been seeing recently a lot of big companies, you know, talking about layoffs and things of that nature.
So when I think about those two segments and again, we don’t there’s nothing wrong with those two, we fully support large and small business. It’s this isn’t about that at all. It’s more to say, why does the middle market behave differently? It’s because they can afford to take a little bit longer view. Right. They they aren’t necessarily worried about the next quarterly earnings report or satisfying, you know, Wall Street analysts, because over 90% of them are privately held enterprises.
Conversely, they’re about the average age of a middle market company you say is about 35, 40 years. That means they’ve been around a while. They’ve seen a lot of things. And they’ve been able to weather, you know, bumps in the past. So they take that learning and they apply it to what’s going on today. Certainly some of the growth, I mean, we have to acknowledge that because we asked them about top line revenue growth.
Inflation has to play a role in that because when we ask them what they’ve been doing as a result of inflation, most of them tell us they are certainly passing along their increased costs of raw materials and goods and fuel and wages. They’re passing that on to their customers. So there has to be some degree of influence on that.
But I would also say even prior to inflation freally heating up, you know, almost a year ago now, we were still seeing pretty consistently high growth, especially coming out of 2020, which was a terrible year for our economy and society in general. Right. So I would say across the history that we’ve been tracking this, you know, 11 years or so, we’re seeing survey to survey eight, nine, 10% growth that consistently outpaces the S&P 500.
So for me, that it’s the it’s more important to look at the consistency over time than just one or two data points, right? So yeah, I think that’s kind of a great synopsis of why we see the middle market uniquely positioned to do well despite some of these headwinds.
Inflation’s Impact on the Middle Market
Absolutely. I’m glad you brought up inflation. We’ll talk about that again in a few more minutes. But first, I want to talk a little bit about the recession and the impending recession and all this talk.
This is your first report that touches on the subject. And unsurprisingly, the perception of a of a potential recession is a bit divisive for the middle market as approximately and your survey, 40% of respondents said a recession would have a positive impact on their company, while 42% expect negative impacts whether those are large or major negative impacts.
Why do you think there’s such a divide here and why did the center feel comfortable diving into this recession topic this time around after bypassing it in the midyear 2022 report?
I’ll actually address the second part of your question first.
So our midyear survey was done in June of 2020 to, you know, in order to prepare for that, we’re typically, you know, a bulk of the survey stays the same from quarter to quarter. But we do change, you know, a portion of it, probably 30 to 40% of the questions do tend to vary from time to time.
And so the reason we do that is to be able to insert, you know, topical issues like inflation, recession, supply chain disruption is another one that we’ve been looking at for the last 18 months or so. We to be honest, we weren’t really in a position to be able to start asking about that last, you know, April May, because inflation was just starting to heat up.
And I think it if I recall correctly, it really peaked out at around July. So by that time, our survey had already been collected. And then, you know, we really wanted to kind of wait and see if it was going to recede quickly, which we’ve seen it hasn’t. You know, the Fed’s been doing a lot of things to try to get it under control.
But everything I read and hear, whether there’s a recession or not. Right. And there’s a lot of disagreement about whether we’re already in one, whether we’re going to avoid one. It’s still going to take a long time for inflation to go down to the targeted rate of around 2%. So essentially, we felt like, look, we need to address this, we need to collect some data on it because we know that everyone’s talking about it.
And so we just wanted to be able to speak, you know, as to the viewpoint of what mid-size companies were doing in terms of the, I guess, divisiveness or polarized nature of the response, given the fact that companies were viewing inflation the same way as recession, it didn’t surprise me as much. And we have to think of it in terms of, you know, an economic recession for the country is the overall economy.
But there are going to be differences from industry to industry from areas of the country. Right. Some places are going to get harder than hit hit harder than others, whether it’s due to lack of labor, talent, resources, those types of things. So when we dig a little bit deeper, we, you know, we see some of the companies saying, well, yeah, we’ve certainly been forced to raise our wages and our salaries in response to cost of living.
But that’s a great thing because we’re also trying to keep our people and in this war for talent like that’s I think I see that as being viewed as a positive change, even though, you know, maybe spurred by these inflation and recessionary topics that a lot of businesses are saying, look, we have to pay our people more, we have to respond to these macroeconomic issues.
But we also want to make sure that they stay in our business because it’s important to keep them and it’s important to grow and develop them. And, you know, as you think about succession planning and future leadership and all those types of things, so, so yeah, you know, it’s going to be interesting to follow this, right? Like, where are we going to be at midyear, 2023?
We’ll find out when we collect the next wave of data this coming June. But yeah, I think when we first ask about inflation, I thought it would be a much greater negative impact. And then when we added this recession question to see it be fairly similar, I guess it wasn’t as surprising to me.
Yeah, I remember seeing in the mid-year that it was a clear 40/40 split around inflation. Now that’s dropped down to where 32% of respondents are citing positive impacts. So maybe there’s a little bit of is that ability to pass on cost wearing? Is it is it just kind of starting to get old for folks?
I mean, now that those numbers are dropped, you know, what’s changed in that perception of inflation?
Yeah. So when we when we thought about what were the specific aspects that proved to be most challenging, they’ve changed a little bit. You know, in the summer it was 50% of the companies were saying fuel costs were a big deal. Right. So paying to ship your products, even if you’re using a third-party logistics service, I mean, they’re going to charge you more to ship freight, to ship goods, FedEx, UPS.
I mean, having been in the logistics industry, I know, you know, that fuel surcharge tends to get tacked on there. So that was kind of like the number one thing cost of raw materials. Obviously, as those continue to increase, it just is more costly to produce your products and then wages and salaries. And now where we’re at today with this year-end report is that the wages and salaries is kind of the biggest issue, followed by raw materials and the cost of goods.
Fuel has come down. I mean, I think we were looking at, you know, even for a consumer gas was something like $4.50 a gallon at its peak this summer. And now it’s hovering around $3.50 here, you know, depending on where you live. So those concerns kind of ebb and flow a little bit over time. But I think as this continues to drag on, that’s why we’re seeing more of the companies saying it’s having a negative effect because, yeah, it gets a little tiring, right, to continually be paying more and more and more, you know.
Right, right. It’s just like being at the gas pump. Like, I’ll go back to that. It’s like, hey, all right, I can tolerate this for a month or two, but now I’m six months into paying, you know, 4.50 a gallon. This is starting to become a drag. So, yeah, I think the longer this plays out, right. And again, like I said, the latest that we’re seeing and hearing from the Fed is that’s going to take a long time.
I think we’re going to continue to see more negative impacts.
How Digital Transformation Helps Combat Inflation
Right. And you mentioned that the negative impacts have shifted from fuel and cost of goods and now it’s more of a wages and salaries thing. Yeah. And your latest report, The most common strategy for combating inflation is, of course, cost cutting, but wrapped up in that is seeking operational efficiency. And you said in your webinar that companies will likely accelerate digital transformation as part of that strategy.
So I have a sort of a two-pronged question. I’ll ask the first one now for your input there, and then I’ll ask the second one. And that’s what efficiencies or digital transformation projects do you believe can have the biggest impact as companies combat inflation this way?
Yeah, I mean, you know, I think it’s it’s highly dependent on industry. I think it’s highly dependent on what these companies already have in place. But essentially, the center started looking at this topic of digital transformation way back in 2019. So over four years ago, we started exploring, you know, what, what was the impact of digital and technology.
And, you know, again, it’s all about sophisticated and kind of upskilling your business when you think about those different segments that we talked about earlier. Again, there’s resource constraints that, you know, a lower middle market company isn’t going to have the capital to go in and, you know, implement four or five major, whether it’s an ERP system like an SAP.
Right. Or I think about some of the common like HR process systems, a workday, for instance, or, you know, a CRM system like a Salesforce number one. Those are very expensive. And so it becomes, I think, a costs and a budget concern. The second thing is that that a lot of times there’s a lot of bells and whistles in those platforms that the middle market companies may not necessarily need.
Right. Fortunately, though, what we’ve been seeing and we know this because we’ve worked with a couple of these technology companies, they are addressing the cost issue by providing more flexible options, whether it’s a trial, whether it’s, again, something more scaled for a mid-sized business where, again, you’re not just taking an enterprise solution and cutting it up and saying, here, we’ll just take a little bit off the the implementation cost.
I think scaling it appropriately in terms of the tools it provides and then providing kind of price and investment flexibility is where we’re going to see the most benefit to mid-sized companies. We have a report with a large, for example, a cloud technology provider, which we’ll be releasing here very soon. And we were looking at the use of cloud for exists for it, for example.
And a lot of middle market companies are already in the cloud, but it may be for something as simple as, you know, office productivity tools. Sure. Right. Like a Microsoft 365 or so, there are various ways that you can define what cloud is. But when we were thinking about it and working with this partner, it was more about what are the other aspects of cloud that can actually help your business become stronger, maybe, you know, more robust, maybe more secure from a data standpoint so that your your cybersecurity issues are a little bit less of a risk.
So, yeah, I think it’s across the board. Travis. You know, it’s really thinking about planning and operations. So SAP, you know, for example, I know they’ve done some things that are more middle market focused cloud technology, CRM technology. You can almost look at it by function, right? The finance function, the HR function, the operation function, all of them have multiple options when it comes to making technology investments.
But what we’ve been trying to preach is you need to think about it as a company and as an enterprise. So actually having a strategy around that is going to make that process better for you in the long run than just trying to pursue like one thing at a time off the shelf. If these leaders could just step back and think a little bit about what their digital transformation strategy is and then get the organization on board, they’re going to see longer term benefits.
That all make sense. I wanted to sort of step back from the data a little bit, and I know you get out in the field a little bit and visit some middle market companies. So do you have any anecdotal evidence of how some of these middle market companies are combating inflation, whether they’re these lower middle market sectors or even a larger company?
Yeah. Yeah. I mean, I think it’s, you know, investing in technology. Um, you know, again, when we, when we asked about what are the steps that you’re taking, I said, Well, we’re cutting costs and we’re becoming more efficient. Well, what’s the best way to do that, sir? You could look at your budget and, you know, the easy way out would just be to cut 10% of everything.
But that’s probably not the smartest or the best way to manage your business. So, again, I think I think one of the strengths and really the advantages that mid-sized companies have is their ability to, you know, think longer term and say, okay, where we want to be 3 to 5 years from now. And so let’s, you know, let’s make some investments that are appropriate for our business.
In terms of some examples, there’s a great one I can share from a company outside of Philadelphia. They make basically gas cylinders for the clean energy industry. So a lot of their customers are, you know, bus manufacturers and large like mass transit, transportation nation, and they sell to other manufacturers, for instance. Well, when the pandemic hit, a lot of their sales were just done face to face, like their team would fly back and forth to Asia.
They do a lot of business in Asia and Europe. And because of all the restrictions, they said, you know what, we can’t just stop meeting our customers. So they invested in drone technology, they hired a professional production company, and they started doing virtual meetings with their customers all over the world, and they were showing them their orders during production.
So the drone would fly over the floor and say, look, this is your particular order. Here’s where we’re at. Like, you know, we’re 70% done. And they said it drove up engagement. You know, even higher than they had in their face-to-face conversation. So that company, they grew during the first year of the pandemic, so 2020, I think their revenues grew 70%.
Incredible rate like this could have been a company that you could have seen potentially going under. Because all their business got shut down, but they figured out a way to do it. I mean, that was super creative, very innovative, but it’s something that they’re going to look to continue in the future. You know, just other things around, you know, we’re going to put in an ERP system that helps us manage inventory better so that we can, you know, save some working capital, like little things like that.
We see that all the time.
Talent Management Challenges in the Middle Market
Sure. Now I want to transition a little bit and talk about the other big theme that I saw in the report and in your other work around this survey data. And that’s challenges around talent and talent management. According to the center’s report, employment growth reached a year-over-year high of 11.1% in the fourth quarter of 2022..
But while hiring numbers are up, 23% of middle market companies still say their workforce is, quote, insufficient for current market conditions and that they will have to hire. You know, you said in your webinar that companies are obviously struggling to find people to hire, but the problem really isn’t that cut and dry. It’s about finding the right people.
And you said half of companies cite a digital skills gap as a major hurdle in the hiring process. Can you tell us what you mean by that digital skills gap?
Sure. Yeah. So this talent issue, by the way, has been going on for eight years. I mean, when we measured key challenges in my survey, I want to say it was around early 2015 when the talent challenge started to rise to the top. So this is not a new issue, right? There’s as our country has been in historically low unemployment, there is a battle across businesses of all size to hire people.
Right. We’re hovering around, I don’t know, 3.4%, something like that. Unemployment. And we’ve had people drop out of the workforce. And so there are a number of issues, just, you know, economic issues that are playing into this. But so when we talk about digital skills, you know, we just talked a little bit about technology investments, whether it be automation systems, platform.
You still need people who can manage those things, right? I mean, you know, putting in an ERP system or a CRM, I mean, it’s one thing to have data and have it spit out reports and do things for you and automate some, some certain processes. But you still need to interpret that right? I mean, it’s no different than us collecting survey data.
It’s one thing to have data, but then what are the insights that you get out of that? What’s the story you’re trying to tell? I’ll say the good example of a manufacturing study we did back in 2018 where we looked at the state of manufacturing in the middle market and we saw that companies that were implementing things like AI or robotics, for example, on their shop floor were actually hiring more people because now you need technicians who can not only operate those robotics, but also maintain them, service them, right?
Upgrade them. So those are the types of skills. Right. It could be, you know, being able to run a platform, being able to operate on these different types of technology platforms that are presenting a challenge because middle market companies, like I said, they’re fighting big companies and they’re fighting startups and small businesses to bring in those type of valued people who already have those skills and kind of hit the ground running from day one.
Yeah. And it’s one of those things where it’s a challenge for the company, but it’s such an opportunity for the workforce, right? Yeah.
Oh, yeah, totally.
Absolutely. So I really liked the part of your webinar when I watched it, when you said that the lack of available talent will force companies to create or develop the right talent from within. This seems to show in your data, you know, 37% of companies said they plan to attack their hiring issues in the next six months to a year by changing how they train employees.
That was the most common strategy closely, followed by just straight transitioning from employees to tech and automation alternatives. Now, this is a big shift from the midyear report when the top tactic was implementing flexible schedules or simply increasing the workload of current employees, not training them, but just giving them more work to keep up with it.
Where do you and midmarket companies see the opportunity in both more robust training and upskilling programs, as well as teaching, as well as tech and automation to create more capable workforces and more efficient operations?
Yeah, yeah, great question. I mean, I think what we’re seeing is, you know, stabilization in some of those other tactics and policies. You know, companies are starting to figure out the whole hybrid remote, like should we that’s starting to settle down a little bit and similarly, like, you can only ask your team to work harder and more for so long.
And so I think for us, you know, what we see is, look, if you can’t go out and find the people with the right skills, then you kind of have to do it yourself. So it’s building that internally, training and development programs skills, right? Whether it’s like classroom or you’re sending people external externally out to a, I don’t know, open enrollment at a local college or a community college.
I mean, all those are viable options. And the problem boils down to resources because I think if you look at society for Human Resources managers, it would say that the average HR department has about one person for every 75 employees. Well, if you’re looking at a midsize company that has 200 people or so, you’re talking like maybe two or three people in HR.
And more often than not, I bet I would be willing to bet that those HR people are focused on transactional issues like getting paychecks and benefits and, you know, it’s less about strategic HR than more about tactical HR. So the challenge becomes, yeah, do you have the resources internally to, to develop a training program? Do you have to outsource that and maybe hire a team that comes in and can train your people?
And how are you going to fund that? Right. So it’s always going to be a tug of war among all the other investment opportunities. Right. Do I need to grow by introducing new products and services and putting my money into R&D? Or should I be doing training and development? I think at the end of the day, the training and development aspect does a couple of things.
It gets you those skills that you particularly need for your business, but it also shows your employees that you’re willing to invest in them and develop them, and that could lead to longer term benefits in terms of retention, potential succession planning, because now you’ve got people who, the longer they stick around, you know, they’re going to be eligible to maybe move up into higher and higher leadership roles.
So, yeah, lots of different ways to approach this. I haven’t seen, you know, one that I would say is 100% right, but that’s again, a benefit of the middle market is that they have the ability to to be creative and tackle this in a lot of different ways.
No, that’s fantastic. Around like this, the workforce situation, do you deal much and focus on middle market companies and how they’re handling their finances? Like we see that these companies are growing revenues growing, they’re investing in tech and especially in our space. You know, being an AP automation software company, we focus on those finance departments and how they can continue to scale without being overwhelmed and using technology.
Do you see much of that in your work?
Yeah, a little bit. I mean, so, you know, one of our partners is Visa, right? Their business solutions team is highly focused on automated payments. Right. So they’re really their goal is to try to get middle market companies off of physical check writing and getting them more onto some of these technology platforms where they can be working with their suppliers and customers to transition to more of a digital payment world and environment.
A lot of benefits to that, right? It’s cleaner. It’s more accurate. It probably helps your working capital because, you know, you could get paid quicker by your customers. So, yeah, we see we see a lot of that happening. And, you know, as we worked with a couple of large financial institutions over the years those have been areas they’ve looked at as well how do you help these companies get better at managing their working capital?
And so whether, you know, whether it’s a payment piece or a, you know, advisors like I’ll give you another example like we just did a study a little bit more focused on like owner transitions and selling a business, but who are the advisors that are at the table? What’s typically your banker, your accountant, your lawyer, you know, maybe somebody else, but, you know, maybe there should be more focus on people who can help you get better with your capital management.
All right. Well, this has been a fantastic conversation. Doug, I really appreciate your time. And before I let you go, just give us a glimpse into the future of the middle market indicator in the work that you guys are doing up there in Ohio. And, you know, get tell us what you have planned for the rest of 2023.
Yeah so we’ll have you know what’s he up two more Emmys for this year we’ll do our midyear survey in June with a report coming out in July. And then, you know, of course, we’ll wrap up the year again with a December survey that will release in early 2024. I mentioned this cloud report that we’ve got coming out very soon, very excited about that because it will touch on a lot of these technology issues.
We also have, through the US Department of Education, Fisher College of Business has received some grant funding which the NCAA is going to benefit from. We’re going to be doing some global supply chain research work, so that’ll probably result in a report, I want to say later this fall, maybe end of the year, but that that’ll be great for us because again, supply chain disruptions been an issue for about 18 months.
And so the ability for us to dove in that into that a little bit deeper and understand, you know, exactly what middle market companies are doing from a capability standpoint, from a technology standpoint, from a payment standpoint, you know, where you find partners, how you enter new markets could be some very interesting work as well. And then, yeah, we’re going to continue to think about how we can pivot to and become.
You know, certainly our focus has been research and data collection and turning that into thought leadership. But how can we be a little bit more engaged with businesses, whether that be training programs or, you know, self-driven education modules? So I’m excited about that because that gets us closer to middle market companies and actually becoming more of a resource for them rather than just, you know, some high-level things for them to think about.
Sure. No, that’s exciting stuff, you know? You know I love your work. I’ll say it again. But again, I appreciate your time, Doug, and thanks again. And we’ll talk soon.
Yeah, thank you.
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