Middle market companies are proving resilient in the face of economic uncertainty. While executives are optimistic about their own company's growth prospects, they are less confident in a broader economic recovery. To thrive, companies recognize the need for strategic agility and many expect to see growth through new products/services, marketing efforts, and technology. Maintaining flexibility is seen as key to adapting to changing market conditions.
4. ForEwOrd
What does it mean to be a middle market company in today’s economy? To gain some current
perspectives, we’ve partnered with BMO Harris to execute a survey supplemented by interviews
with senior business executives and consultants. And here’s what we learned.
You’re likely profitable – and that means you’re a growth engine within the U.S. economy. You’re optimistic about your
own company’s future – even if somewhat less upbeat about the broader economic picture. You’re agile – just the right
size to address the evolving needs of the marketplace. You’re also likely very close to your customers, employees and other
stakeholders. And for all of this, larger companies admire and even envy what you do.
But you can’t stand pat. The competition never sleeps. Technology is advancing and customer needs and wants are in
constant evolution. And you’re going to grow – and with that growth comes a host of new challenges.
You’re on a first-name basis with customers today. But as your customer list expands, how can you maintain such inti-
macy and focus? Your workforce is motivated, focused and entrepreneurial. But how will you sustain this culture as the
volume of work multiplies, employee ranks swell, and bureaucracy and control infiltrates? You know who does what today
– but what are you doing to anticipate future needs? Are you assessing your talent gaps? Do you have adequate training,
development and succession plans?
You’ve done very well. But continued success depends on how clearly you identify the challenges ahead and how capa-
bly you prioritize and execute your responses. To that end, please consider the following collection of statistical, anecdotal
and consultant-provided information – which we hope will prove useful.
-Bruce H. Rogers, Chief Insights Officer, Forbes Insights
2 | Lessons from middle market companies
6. Methodology
The insights and commentary found in this report are derived from both a survey instrument and personal interviews.
The survey, conducted by Forbes Insights in December 2011-January 2012, was completed by 313 executives.
Key demographics include:
Executive title: VP/Director (41%), CFO (12%), CEO/President (11%)
Company size: $250 million to $499 million (21%), $100 million to $249 million (35%), $50 million to $99 million (43%)
The sample features a wide spectrum of industries with no notable concentrations beyond retail and wholesale trade (20%)
and healthcare (14%). Respondents are also relatively evenly distributed throughout the U.S.: Northeast (27%), Midwest
(27%), Southeast (21%), Southwest (17%) and Northwest (7%).
Interviews were conducted with six senior executives representing businesses chosen from the Forbes 2011 list of the 100
Best Small Companies in America (rankings in parentheses). They include:
• onald Brown, chairman, president and CEO, Interactive Intelligence Group, Inc. (8)
D
• oe Chalhoub, president and CEO, Heritage-Crystal Clean (82)
J
• Edward Evans, CEO, Inteliquent (38)
• Harry Herington, CEO and chairman, NIC Inc. (20)
• Joe Mansueto, founder and CEO, Morningstar (70)
• rian Mueller, CEO, Grand Canyon Education, Inc. (4)
B
Then, to gain further perspective on key issues uncovered by the research, additional interviews were conducted with
three external consultants:
• aniel Friedman, senior partner and managing director, the Boston Consulting Group
D
• olleen O’Neil, PhD., senior partner, Mercer
C
• on Peppers, founding partner, The Peppers Rogers Group
D
Forbes Insights extends its gratitude to these executives.
Some charts may not add up to 100% due to rounding.
4 | Lessons from middle market companies
8. What’s driving growth?
Executives point to a range of growth initiatives and Figure 4: Where do you expect growth to come from?
drivers including not only organic growth but also new
Organic growth
products and even MA.
35%
At Heritage-Crystal Clean, a good deal of expected
revenue growth can be attributed to a new line of busi- Launch of new product or service
ness: re-refinement of oil. A just-completed facility in 35%
Indianapolis represents tremendous potential for the Sales and marketing efforts
company, says Chalhoub, as it leverages “the branch [dis- 33%
tribution] network we have built up over the past decade.” Use of technology
Inteliquent is a Chicago-based provider of voice, IP 26%
and Ethernet telecommunications. CEO Edward Evans
Mergers, acquisitions or joint ventures
attributes past growth both to new product offerings and
16%
to moving into new U.S. markets with existing products.
However, the executive sees organic growth also “going New distribution strategies
hand in hand with acquisitions, as and when the right 10%
opportunity occurs.” International sales
A similar story comes from Indiana-based Interactive 7%
Intelligence Group, Inc., a provider of unified IP business
communications software and services. “Our expansion 0% 25% 50%
has been mainly moving upmarket, selling our [existing] Note: Executives could select multiple responses.
software and services to larger organizations,” says Donald
Brown, founder, chairman and CEO.
Such vignettes closely align with the survey findings.
Growth initiatives and drivers include organic growth
(cited by 35% of respondents), new product or service
launches (35%), sales and marketing efforts (33%) and the
use of technology (26%). Mergers and acquisitions, new
distribution strategies and international sales will also play
a role (see figure 4).
6 | Lessons from middle market companies
10. How to grow when markets won’t
QA: Daniel Friedman, Senior Partner and Managing
Director, the Boston Consulting Group
What are you advising your clients in terms of achieving that applies. Apple is very well known for testing things and
growth in a slowing economy? We’ve identified almost adjusting as they go. I don’t think they launched necessarily
80 demographic, economic and behavioral megatrends, always the final and the best product, but tested and kept
which have the power to reshape economic opportunity refining as they went along.
and risk. They are to business growth what tailwinds are
to an airplane flight. Nearly 80% of these megatrends Do slower markets offer any opportunities? It’s a good time
continued to grow during the downturn, and 23 actually to think about mergers or acquisitions. Data shows that in
strengthened in importance. times of lower growth, the deals you make are more likely to
generate higher value, because you tend to avoid overpaying
The group that kept its momentum includes demographic for a business.
trends, such as the aging of the population, the rise in obesity
and dieting. This group also includes trends related to health We’re not in a healthy economy yet. There’s still quite a bit of
and wellness, such as organic products or nutraceuticals. uncertainty, so I would say that in terms of mergers or acquisi-
tions, there are good opportunities out there. To do nothing
The trends that strengthened and, according to our analysis, and just wait is probably the biggest risk.
will sustain their level of growth for the foreseeable future,
are: trading down, product commoditization, the dominance
of new media, the increase in wireless communications and
the rise of China, among others. Also strengthened is a group
focused around anxiety: identity theft, the rise of counterfeit
brands and loss of trust in organizations.
How can executives latch on to megatrends? The ability to
spot a megatrend and its effects on markets usually requires
mental if not physical distance from the trenches of day-to-
day business. It takes effort to spot the megatrends and to
position the business to benefit from it.
How important is changing the business model? It’s prob-
ably one of the toughest things to accomplish, because it re-
ally means fundamentally redesigning what you’re offering to
your clients. Probably the best example of all is Apple, the
way they totally redesigned the business model for how you
sell and access music. The genius of Steve Jobs was coming
up with a business model where they actually offered easy ac-
cess to music at one single price and song unbundling instead
of buying the whole CD. And they created a great device to
store and share the music, and to access it easily through the
computers and through the Internet.
Talking with executives, both at technology and non-technol-
ogy companies. I’ve heard a wide set of opinions about what’s
leverage-able for their own environments. There is one aspect
8 | Lessons from middle market companies
12. Establishing priorities
In terms of current priorities, improving the customer statistics in each instance show the percentage of executives
experience tops the list, with three out of five respondents, viewing an area as extremely important. Put another way,
60%, citing this initiative as extremely important. Five though neither strategic acquisitions nor global expansion
years hence, the objective still retains the top spot on exec- break into the top 10 ranking for today, they both remain
utive’s strategic to-do lists (see figure 8). extremely important to one out of five companies.
“We believe we already have a high standard of cus-
tomer service,” says Inteliquent’s Evans. “The challenge is
not to let that slip, making sure that people stay motivated Figure 9: Rankings
and focused on the customer as we expand.” Launch new products/services (an ext. of current offerings)
The next two most prominent issues in terms of stra- 44%
tegic priority are not only in a statistical dead heat for 50%
second place, but both involve an organization’s peo- Launch new products/services (entirely new)
ple. Optimizing sales force effectiveness edges building 40%
and retaining a qualified workforce by a single nominal 48%
percentage point. That is, 47% and 46% of executives,
respectively, regard these objectives as of today, extremely Streamline/update business model
38%
important. Five years hence, however, relative positions
44%
shift, with those viewing the broader workforce initiative
as extremely important rising to 54% versus only 49% for Develop new business models
31%
sales force effectiveness.
42%
Though viewed by fewer executives as extremely
important, a wide range of additional initiatives are by no U.S. expansion
means unimportant. For example, weighing in as the num- 29%
ber four and five priorities both today and in the next five 33%
years are the development and launch of new products Get involved in local community
and services as an extension of existing offering as well as 26%
entirely new categories (see figure 9). 29%
Again it must be emphasized that a low frequency of Improve government relationships
citation does not mean the issue is insignificant. Indeed, the 23%
26%
Strategic acquisitions
Figure 8: Strategic priorities: present, future and past 22%
30%
Improving customer experience
Establish/expand globally
60%
57% 20%
55% 31%
Optimizing sales force effectiveness Consolidation
47% 14%
49% 18%
45%
Building and retaining a qualified work force Today Five years hence
46%
54% *Numbers in parentheses are the percentages of executives
49% ranking the initiative as extremely important
Today Five years hence Five years ago
*Numbers in parentheses are the percentages of executives ranking
the initiative as extremely important
10 | Lessons from middle market companies
14. A good example is Heritage-Crystal Clean. Many com- Figure 11: What external forces are the likely biggest
panies rely on customer satisfaction surveys to gauge customer game changers for your company?
sentiment. However, says CEO Chaloub, “if you have a lead-
ing position in the market, customers may give you a high Pricing pressures
41%
score anyway as a matter of course – so we try to dig deeper.”
For example, the company looks for additional indicators of Decreased customer budgets / spending
customer satisfaction such as the ratio of competitive wins to 36%
competitive losses, or more simply, the rate of growth in the Regulatory and legislative pressures
customer base. And while there are no publicly reported statis- 35%
tics in this area, “it follows that if we are winning more than
Falling customer demand
we are losing, our customer retention rate is probably higher
31%
than others in our industry.”
Of course, there are many paths to customer satisfac- Increased domestic competition
30%
tion. At Interactive Intelligence, CEO Brown says “we spend
roughly 17% of revenues on RD, compared with 10% to Higher energy prices
12% for most companies of our size.” In this way, says Brown, 27%
the company is in a better position to “offer the products the Rising labor costs
[markets] need.” 27%
Emerging technologies
25%
Lack of qualified workforce
24%
Competing products/services
23%
Access and management of capital
22%
Risk management issues
22%
Volatile commodity/input prices
22%
High real estate costs
17%
Volatile export markets
17%
Increased foreign competition
16%
0% 25% 50%
12 | Lessons from middle market companies
16. Customers are like honeybees
QA: Don Peppers, founding partner,
Peppers Rogers Group
What do you mean when you talk about improving the cus- And this issue of metrics is especially important. Financial ac-
tomer experience? The customer experience is the sum of counting does a really poor job of capturing lifetime value of
every single interaction or interchange, whether that’s a web a customer. If a warehouse burns down, accounting registers
visit or mobile application, visiting your storefront or a dis- a loss. But if a poor experience with your company causes you
tributor, using your product or service, phoning for customer to lose a customer, even though the net present value of your
service – or increasingly, even when viewing or authoring con- relationship with that customer has just fallen to zero – there’s
tent about your company on social media. Customers don’t no accounting for that. So it’s very important for midsize com-
make distinctions – they view any interaction within the scope panies to supplement their financial metrics with a range of
of their total relationship. So businesses need to do their ut- customer-focused metrics.
most to optimize the customer experience and prevent simple
missteps that can harm these relationships. What are the most effective metrics? Some of the most uni-
versal include customer satisfaction, customer loyalty, renew-
What do midsize companies do well in this area? Being al rates, referrals – but in practice companies need to put in
smaller can have its advantages. Midsize companies are of- some time to develop what will be meaningful and effective
ten closer to their customers because they are more entre- for their specific circumstances.
preneurial. The list of key customers is often short enough to
reside in the founder’s head or in the memories of front line Is there any other aspect of managing the customer expe-
managers. Relationships are more intimate and responsive – rience you’d like to emphasize? The advent of social media
there’s no buffer between the customer and those who can is something that can’t be ignored. Think about this: when a
get things done. honeybee finds a food source, a flower, he goes back to the
hive and does a waggle dance. That dance is very sophisticat-
What should midsize companies do to improve the custom- ed and it tells others in the hive about not only the direction of
er experience? The single most important thing you can do is a food source, but also its distance and quality.
develop an employee culture where the central mission is do-
ing what’s right for the customer. You can use advertising and Let’s suppose your business is feeding honeybees. What de-
flash to tell the customer they’re getting a great value from termines whether they’ll come in or not is color and scent –
your company. But that will only drive the initial experience. that’s advertising and promotion. But what determines what
It is the quality of that initial experience, and then all the sub- they tell the rest of the hive is the total quality of the experi-
sequent experiences – product or service quality plus every ence. Is my core proposition – the nectar – worth the trip?
other aspect of the experience – that determines the degree With social media becoming more prevalent, companies will
of customer satisfaction, in turn driving trust and long-term have to do a lot more to ensure a consistently positive cus-
customer value. Every employee needs to understand and tomer experience. Otherwise, a lot fewer bees will come.
then commit to delivering on promises to customers.
Are there aspects of customer experience where mid-
size companies can learn from larger companies? Larger
companies have a lot of tools – like their customer relation-
ship management (CRM) systems – that can help institu-
tionalize essential processes and deliver data to be mined
for insight. Larger companies that “get it” are also getting
better at developing performance metrics that incentivize
a clearer customer focus.
14 | Lessons from middle market companies
18. Growing pains
Maintaining employee morale as a company grows to midsize requires special care and attention. Interactive Intelligence
Group’s Brown is particularly conscious of the need to motivate a growing workforce. “That’s especially true when you
are transitioning from a start-up, where people know they really matter,” says Brown, “to midsize, where that feeling
may dissipate.”
An area of critical focus is RD, where to remain excited about their work, research team members need to have a
sense of the value of that work. In response, says Brown, “we work hard to decompose company-wide objectives into
departmental, team and individual objectives so that everyone understands how their work impacts the overall organiza-
tion.” In turn, “I personally read every RD status report every week, and ping individual employees so they know that
what they do is important, and recognized by the CEO.”
16 | Lessons from middle market companies
20. Where are the challenges?
Though midsize company executives are indeed confident, Figure 14: Where do you expect declines in growth to
they are meanwhile cognizant of the risks and challenges come from?
ahead. Of course, specific potential risks vary by industry.
But many are also universally recognizable, including: Regulatory changes
• ompetition with larger businesses. For Interactive
C 38%
Intelligence’s Brown, competition with larger compa- Falling customer demand
nies is a constant concern. “Our products and IT skills 25%
are our major strengths, but we have to compete against Pricing pressure on margins
much bigger companies with significantly greater 25%
resources.” As Brown notes, “there is always the possi-
Political gridlock
bility of being outflanked, perhaps in the shape of new
23%
technology.”
• Competition with similar businesses. Competition
Lack of access to capital
is also of some concern for Mueller at Grand Canyon 20%
Education, especially as it relates to the university’s Loss of competitiveness
online programs. “There is a growth market for work- 18%
ing adults attending online, but the competition for Technology becoming obsolete
good ones is intense,” he says. “We have to develop 13%
good curriculums, hire the best instructors and be very
Inflation
competent at delivering higher education in a way that
13%
is revenue-efficient.”
• The risks of consolidation. At Heritage-Crystal
Loss of export markets
Clean, the risk of potential competition from out- 8%
side investors is on the rise. “The high price of oil Supply chain difficulties
is stirring interest among investors with a view to 5%
consolidating the industry,” he explains. Should this Foreign competition
happen, “we believe we are strongly positioned, 5%
as we have built out a comprehensive network of
Other (please specify)
branches to ensure a good supply of oil for recycling
5%
at the right price.”
• Continued volatility. Uncertainty can harm any
0% 25% 50%
business. “Although the U.S. equity market was Note: Executives could select multiple responses.
slightly positive in 2011,” says Morningstar’s Mansueto,
“it was also volatile.” This, the executive explains,
“creates uncertainty and slows purchasing decisions
across our three key audiences: individual investors,
financial advisors and institutions.”
18 | Lessons from middle market companies
22. Conclusion
Being midsize has its advantages, including greater agility, heightened customer intimacy and an overall more closely
aligned and entrepreneurial culture. But growth is coming. And as a business grows, it runs the risk losing many of the
attributes that enabled that growth in the first place.
The survey provides a snapshot of how middle market executives are guiding their organizations toward the next level.
What is clear is that the two most prominent challenges relate to customers and employees.
Consequently, companies are developing processes that promote, enable, incentivize and institutionalize a core com-
mitment to a customer focus. It is from this core that the business is able to better anticipate and address customer needs.
Companies are simultaneously taking a closer look at their workforce with an eye towards enhancing their talent man-
agement strategies. This begins with designing performance measures that build alignment with broader goals. But it also
means forecasting future talent needs and taking needed recruitment, training or other steps to address any gaps.
Beyond the challenges of customer relationships and talent management, executives must also address the full spectrum
of external risks. In addition to monitoring the actions of competitors or advancements in technology, executives should
also remain on high alert regarding a growing wave of government regulations.
Overall, the middle market performed remarkably well through the downturn. Now gearing for future growth, it will
be important to focus on those issues that matter most. The preceding report summarizes the views and priorities of the
broader marketplace. It is up to individual executives to assess how these findings can be harnessed to optimize opportuni-
ties for their own businesses.
20 | Lessons from middle market companies
23.
24. About
Forbes Insights
Forbes Insights is the strategic
research practice of Forbes Media,
publisher of Forbes magazine
and Forbes.com. Taking advantage
of a proprietary database of
senior-level executives in the
Forbes community, Forbes Insights’
research covers a wide range of
vital business issues, including:
talent management; marketing;
financial benchmarking; risk
and regulation; small/midsize
business; and more.
Bruce H. Rogers
Chief Insights Officer
Brenna Sniderman
Senior Director
Christiaan Rizy
Director
Kasia Moreno
Editorial Director
Nigel Adam
William Millar
Report AuthorS
Robert Azcuy
designer
60 Fifth Avenue, New York, NY 10011 | 212.367.2662 | www.forbes.com/forbesinsights