Powering the middle market - RSM UK

Powering the middle marketControl risk and accelerate growth

Powering the middle market04

Control risk and accelerate growth

The middle market is the powerhouse of the British economy. Adding more than a third of private-sector GDP, revenues and employment1, it is a driving force of UK prosperity. In a time of global economic and political upheaval, this role is more important than ever.

Organisations face an increasingly volatile operating environment. In the short-term, market jitters and currency fluctuations pose some of the greatest threats to cash flow and profits. Further forward, labour

uncertainties and changing trade deals could threaten business models and productivity.

Businesses must be in the best possible shape if they are to manage looming threats. In recent years many have struggled to make the right decisions about how to recruit and retain top talent, raise finance for growth, understand overseas opportunities and harness technology for success. Businesses must now confront these challenges or risk stagnation.

Over recent months we have listened to middle market decision makers to understand the issues they face. Here our experts set out the practical steps all businesses can take to control risk and accelerate growth. In an uncertain world, complacency is not an option. Now is the time to power middle market success.

The UK middle market is home to some of the world’s most dynamic and exciting businesses. But in an uncertain economy, success is not guaranteed. Firms must now overcome a series of challenges if they are to control risk and accelerate growth.

1 Source: The Economist Middle Market Forum, November 2016

Contents

Control risk and accelerate growth 05

Middle market snapshot 06

Recruit and retain: managing looming tenure threats 08

Raise finance for growth: walking the tightrope 16

Going global: understanding overseas opportunities 22

Digital change: harnessing technology for success 30


RSM surveyed 147 middle market decision makers between November and December 2016. The results were supplemented by social media polls that ran during the same period.

How long it takes for new hires to become fully effective

Recruit and retain

Average tenure of non-leadership staff

11%

26%

32%

31%

3 to 5 months35%

6 to 8 months28%

9 months and above19%

Less than 3 months18%

Overseas opportunities

don’t know if it’s right for them

Raise finance for growth Businesses’ preferred route to finance

public marketsother

bank loans

private equity

mezzanine finance/other secondary debt

47%

22%

19%

10% 2%

Harness technology Readiness for digital change

15%

21%27%

37%

plan to have a

digital strategy

don’t have a

digital strategyhave an incom

plete

digital strategy have a form

al

digital strategy

The importance of overseas growth

20%

say it’s not relevant to the business

33%

say it’s a core part of their growth strategy

47%

Sentiment towards expansion

plans

Not confidentVery confident

Fairly confident

32%

18%

Less than 2 years

2 to 4 years

5 to 7 years

7+ years

Middle market snapshot

50%

Recruit and retain: managing looming tenure threatsThe right people power business growth. They allow an organisation to innovate, push forward and thrive. But while talent is often a firm’s greatest asset, it is also its greatest threat.


Extracting maximum value A job is no longer for life. Over the past decade tenure has continued to fall as millennial workers increasingly swap companies or careers to get ahead. Over the next three to five years, Gen Z will enter the workforce; firms should prepare for more disruption.

Today, non-leadership workers typically spend seven years with a middle market company. But average tenure is expected to fall dramatically as Gen Z intensify demands for fast career development and flexible working. Like millennials, they are expected to regularly swap organisations if their needs for progression and a good work/life balance are not met.

As loyalty declines, firms must seek to extract maximum value from employees from the start. The so-called time to effectiveness must reduce. It often takes new recruits up to five months to become proficient in their role. While employees need time to learn a job, taking nearly half a year to become fully effective translates to 700 hours of dampened productivity.

To ensure talent does not impede growth, firms must improve internal processes to better support workers and reduce time to effectiveness. With the recruitment outlook becoming more challenging in the wake of Brexit, the consequences of doing nothing should not be underestimated.

With capital expenditure focused on day-to-day operations, product innovation and business development, middle market firms are often unable to invest heavily in HR. Many lack the resources to offer top-quartile salaries. On remuneration alone, they cannot compete with larger multinationals.

Competition for workers has never been higher. But with less spending power than multinational companies, middle market businesses are often left behind. As firms battle for talent, finding the right people has become a major distraction for management.

Challenges will only intensify. Economic uncertainty and the rise of Gen Z workers – those born around the turn of the millennium – are set to cause new tenure threats. The time to act is now.

Disproportionate impacts While all businesses struggle to hire top talent, the problem is perhaps most acute in the middle market.

With capital expenditure focused on day-to-day operations, product innovation and business development, middle market firms are often unable to invest heavily in HR. Many lack the resources to offer top-quartile salaries. On remuneration alone, they cannot compete with larger multinationals.

The middle market will also be disproportionately impacted by looming tenure threats. Small teams and high reliance on key workers increases their risk. Every significant staff departure will create a repeating cycle of challenges: a major knowledge drain, reduced returns on training investment and spiralling recruitment costs.

A lack of development opportunities will continue to be a key reason employees change companies over the short to medium-term. But with management positions gridlocked, many middle market firms will struggle to help employees advance. As younger workers increasingly demand varied career paths, middle market businesses could be left behind.

32%

35%

say non-leadership staff stay 7+ years

say it takes 3 to 5 months for employees to become fully effective


How to recruit and retain top talent

Play to your strengths Middle market firms are more agile than larger multinationals. Decision making is quicker and employees more autonomous. These strengths create an attractive proposition for new recruits; they should be actively promoted.

Create a robust onboarding strategyAn effective induction process allows new starters to quickly assimilate the organisational culture. They better understand business drivers and their role in achieving long-term objectives. Time to effectiveness is substantially reduced.

Consider positive attritionFresh talent can bring fresh thinking. Encouraging a positive culture of progression, job rotation, secondments and talent mobility at the top can create development opportunities for younger workforces.

Introduce apprenticeshipsApprenticeships can offer a cost-effective way to secure high-potential talent. But rules changed in April 2017. Firms must make sure their strategy can weather the implications.

Look for personalitiesBusinesses typically focus on workers with the right skills and experience, but personality and cultural fit should also be top considerations. When motivations are shared and values matched, employees feel more engaged and tenure increases.

Use technology to boost moraleAutomating repetitive or mundane tasks boosts job satisfaction as it allows employees to concentrate on more strategic goals. Big gains can be made by freeing up staff time in the HR and finance functions.

We hear time and again that people are an organisation’s greatest asset. Yet many have failed to keep pace with changing worker demands. With pressures set to intensify, the middle market is at a critical crossroad. Firms must act now or risk decline. They must innovate and be brave. Talent threats will not be solved by old thinking.

David GibbensAssociate director, HR consulting

Raise finance for growth: walking the tightropeAll businesses need money to grow. Whether to buy physical assets, expand into new markets or service areas, attract top hires or reward risk-taking shareholders, the right cash injection can help a company move forward with confidence.


Only the most profitable businesses generate enough cash to fund their growth. Many will need to turn to external funders or investors if they are to continue their growth trajectory or successfully react to new opportunities.

Today’s finance market is buoyant: businesses can choose from a wide range of options, cash is accessible and terms remain favourable. But each funding route comes at a price; the wrong decision can have far-reaching implications. In an uncertain operating environment, it’s more important than ever to make the right choice.

The finance challenge Today, major multinationals are more cash rich than ever before. In 2015, Apple’s cash balance topped $215bn, Microsoft’s hit more than $102bn and Google held more than $73bn2. The cash collectively held by three tech giants was more than the GDP of Norway, Austria, United Arab Emirates or Egypt3.

In the middle market, however, businesses can be quickly hamstrung by a lack of cash. The sector may be home to some of the world’s most ambitious and dynamic firms but cash flow is often soon exhausted. Many will need to turn to third party funders and investors to reach their goals.

But how many make the right decision? Businesses can now choose from a wide range of opportunities, including debt, private equity, the public markets, crowdfunding and peer-to-peer lending. But nearly half of middle market companies say traditional bank loans are their preferred route to raise capital for growth.

A funding knowledge gap exists across the sector, with non-traditional finance routes often poorly understood. Looking forward this gap must be closed: if the banking appetite weakens in the wake of Brexit, a lack of funding know-how will only hold firms back.

Raising finance can often feel like a tightrope walk. Handled carefully and confidently, it can help a company push through challenges to achieve its goals. But one wrong step can have catastrophic consequences. Businesses must tread carefully.

Making the right choice Raising finance for growth can often feel like a tightrope walk. Handled carefully and confidently, it can help a company push through challenges to achieve its goals. But one wrong step can have catastrophic consequences. Businesses must tread carefully.

There are risks at every stage, but the first step is perhaps the most perilous: businesses must select the right financing route if they are to reach their goals. The wrong decision can become a major distraction. Core business operations can suffer if management waste time and money on a deal that was unlikely to ever succeed.

When choosing a funding route, many businesses prioritise control. Bank loans and debt financing are popular choices as they don’t require

1. Bank loans

2. Private equity

firms to give up equity. Floating on the public markets and private equity (PE) are regularly overlooked as firms try to avoid rescinding power to new shareholders.

But bank loans and debt financing are not automatically the best options. In some cases, businesses may be able to secure better deals or more funding through other routes. In the PE market in 2016, for example, there was more than $1.7tn waiting to be deployed.

Every type of finance has a price. Preparation is key if businesses are to make the right decision, negotiate the best deal and, ultimately, realise their ambitions.

Preferred routes to finance

3. Public markets

2 Source: Moody’s Investors Services, May 20163Source: World Bank, World Development Indicators Database, February 2017

18 Powering the middle market

How to raise finance for growth

Be clear about your goals Clarity at the outset will save time and effort down the line. Setting out funding ambitions early on creates focus and guides confident decisions. Why is the business raising capital, how much do you need and what are you willing to sacrifice?

Consider all options Non-traditional finance routes are often poorly understood. To make an informed decision about funding, businesses must understand all options. The most familiar route won’t always deliver the best benefits. An option analysis of all fundraising opportunities will help a company pick the right course.

Package the opportunity When raising finance, a business is selling an opportunity. The rules of selling an investment opportunity are the same as the rules of selling anything else: the packaging and presentation matter. When this looks good, investors and funders put forward a better deal.

Think like an outsider All buyers carry out due diligence to verify and clarify the business information that’s been provided. Your job is to inspire confidence. Anticipate questions investors and funders are likely to ask, and be ready to respond quickly and clearly.

Invest in relationships Investors and funders bring new expectations; it’s important to understand what these are early on. Once the deal is signed, relationships must be nurtured. The more third parties trust management, the more likely they are to take a hands-off approach, and stick around if the economic tide turns.

Don’t fall at the last hurdle Deals can fall over at any time, even hours before completion. The most successful businesses understand what’s required at each stage and anticipate potential pitfalls. Those that rush to the finish line often fail.

Raising finance can be a daunting process. We often find businesses lack the experience and know-how to confidently reach the right deal. Management must remember that they are selling an opportunity. Presentation matters. Take time to do it properly, identify the attractions for investors, mitigate their fears and be ready to provide high-quality information. If you fail to prepare then prepare to fail.

Rob DonaldsonPartner, head of corporate finance

Going global: understanding overseas opportunitiesInternational expansion can create big opportunities for the UK middle market, offering the chance to target new customers, secure larger workforces and reduce production costs. But in an uncertain global economy, how can businesses make confident decisions about overseas growth?

24

The road to global expansion is often long and hazardous; businesses must successfully navigate significant cultural, political and financial risks. Recent events in Europe and the United States have only magnified challenges, with new question marks over global economics, currency trends and future trade tariffs.

To make sure rewards outweigh risks, businesses must explore all routes to international growth. The right approach and timing has become ever-more critical.

Those that develop strategies that can adapt to changing world markets will reap the biggest returns.

Powering the middle market

Cross-border challenges Global expansion is now a strategic goal for nearly 50 per cent of middle market businesses, but only 32 per cent are very confident about their plans. High-profile reports of major corporations retreating from international markets or scaling back overseas operations will have done little to allay concerns.

Setting up any venture is inherent with challenges, and these are only magnified when working overseas. With tighter margins, fewer resources and less well-known brands, middle market businesses face some of the greatest risks. Even the most successful will likely face losses initially.

When expanding internationally, businesses must overcome significant cultural barriers. While Brand Britain can be a successful proposition in some territories, not all UK goods and services resonate overseas. Products, services and marketing strategies may need to be tailored to the local market.

In other territories, political and financial risks pose even greater challenges. Local red tape and stringent monetary policies can create significant tax liabilities and make it difficult to remove money from the overseas market. Corruption, currency fluctuations and political shifts can also quickly undermine cost savings.

Setting up any venture is inherent with challenges, and these are only magnified when working overseas. With tighter margins, fewer resources and less well-known brands, middle market businesses face some of the greatest risks. Even the most successful will likely face losses initially.

Despite the risks, opportunities remain for businesses with the right strategies. Robust research is critical if businesses are to understand market nuances and successfully sidestep challenges. The costs of failure should not be underestimated.

When to grow overseas When should businesses start thinking about international growth? Ultimately, there must be a compelling reason to expand overseas. A useful first step is to consider where the business wants to be in 10 years’ time, and whether goals can be met through domestic growth alone.

To reach the right decision, businesses should look at the dynamics of their target customer base, including its size, growth rate and future spending power. If there are question marks over its long-term sustainability, overseas expansion may offer new opportunities for success.

Customers in many sectors are increasingly becoming global. Following key clients into new territories can be a fast-track to overseas success, but risks remain. Assessing long-term sustainability is crucial. If your major customers pull out of the market, will your international operations survive?

Businesses must also weigh up whether UK labour supplies will support growth ambitions. For some, increasing skills shortages or an ageing workforce could become a barrier to long-term growth. Moving certain operations overseas may allow companies to access a larger, more sustainable or cost-effective talent pool.

While many will never feel completely ready to expand internationally, the right timing remains important. Early losses are likely when entering overseas markets. To ensure success, businesses must confront some uncomfortable questions: will we be able to absorb international shortfalls? Can we afford to fail?

47%

32%

say international expansion is a core part of their growth strategy

are very confident about their plans


How to understand overseas opportunities

Understand the rationale Businesses must have a compelling reason for overseas expansion. Challenge management on its rationale for global growth and why expected benefits could not be achieved domestically.

Don’t forget the day job It’s easy for management to become distracted by international growth plans. Putting the right teams in place at home and abroad can help ensure overseas activity doesn’t undermine everyday operations.

How much are you willing to lose?Expanding internationally is inherent with risk. The smartest businesses will set out at the start how much they are willing to invest in setting up overseas. When this limit is reached, who is prepared to say stop?

Build a flexible strategyTo minimise risks, businesses need strategies that can adapt to changing world markets. Scenario planning and forecasting will help management sidestep challenges. It should be repeated each time macroeconomics shift.

Manage expectationsIt can take a long time to become established overseas and initial losses are common. Businesses must secure buy-in from key stakeholders, and manage their expectations about what international success looks like.

Understand tax implications Overseas tax rules can bring additional costs or compliance burdens. These must be properly understood before expanding. Tax planning that supports commercial objectives is the best approach early on - keep it simple. It is also useful to find out if you qualify for special tax breaks in the destination country.

While global economic and political change can create challenges for businesses looking to expand overseas, it can also generate significant opportunity. Those that pursue international growth as part of a carefully considered corporate strategy will reap the biggest rewards. Take time to understand markets, find reliable local partners and stay flexible. Success can still be found in uncertain times.

Mark HarwoodPartner, US business lead

Digital change: harnessing technology for successIn an increasingly digital world, technology can make or break a business. The right IT solutions help organisations become smarter, more efficient and productive. They help them remain competitive and better able to meet changing customer demands.


Many middle market businesses struggle to keep pace with digital innovation. Some don’t have the capital to invest in the changes they need. Others have installed new systems but lack the expertise to integrate them across the wider organisation. Often they do not know about innovations that can make a difference to their bottom line.

Today, technology must be a fundamental part of the business strategy. But where should organisations start and how can they guarantee that investment will lead to returns? To move forward with confidence, businesses must first challenge their perceptions of digital change.

37% have a formal digital strategy

Digital barriers Middle market businesses cannot ignore technology if they are to grow and thrive in an increasingly competitive landscape. The scope of their operations means they need digital systems that can co-ordinate activities across teams and borders.

Yet throughout the middle market, IT too often remains a back-office support function. Few are considering how technology can drive growth and only 37 per cent have a formal digital strategy that sets out a vision for change.

Today, many middle market businesses have outgrown their IT infrastructure. Although some have continued to invest in new technology, they have often struggled to manage changes to ensure they deliver return on investment. Data is often isolated in silos and information disconnected across an organisation. It is vital these issues are addressed.

However, resource constraints mean many are failing to make the updates they need: the cost of technology and a lack of skills are the top barriers to digital investment. Businesses know they need to innovate, but many don’t know where to start. The result is inertia.

When it comes to digital change, having the right people in place is just as important as selecting the right technologies. Before investing in new systems, businesses must focus on hiring and nurturing employees with the skills and enthusiasm to drive transformation.

Businesses must take action now or risk being left behind. The pace of technological change means the digital gap will only get wider. While resource constraints make the challenge harder, they cannot become an excuse to stand still. Experimentation and smarter investment must now become the priority.

People power When it comes to digital change, having the right people in place is just as important as selecting the right technologies. Before investing in new systems, businesses must focus on hiring and nurturing employees with the skills and enthusiasm to drive transformation.

Setting up a small team to spearhead digital updates can often be a low-risk and low-cost starting point. Rather than attempting to modernise the whole organisation in one go, a focused group can help identify where investment would create the biggest returns.

While the digital working group must involve those with specialist digital expertise, it must also include individuals who have a firm grasp of business operations. All must have the soft skills to engage and drive change, and the curiosity to keep pace with the latest digital thinking.

Today’s leading companies use techniques like hackathons and boot camps to encourage staff to work together to solve digital problems. They can be useful tools to embed a culture of innovation and tap into the digital expertise that already exists across the organisation, particularly among younger employees.

Ultimately, the team must be empowered if it is to have a tangible impact. There must be buy-in from the top, including a commitment to hear ideas and a willingness to invest and experiment. Without this, businesses will struggle to ever make the changes they need.

1. Cost of updates

2. Lack of skills

Top barriers to digital investment

3. Not a business priority


How to harness technology for success

The need for speed Just a few years ago, it often took up to three years to realise benefits from a new digital initiative. Today, IT solutions must start delivering tangible improvements within a matter of weeks. Companies should consider taking an agile, iterative approach to reduce the time to value.

Elevate technologyThe executive team must actively consider how technology can drive growth and efficiencies across the business. The board should also include a digital change sponsor, whether that’s the head of IT, the CFO, the CMO or another senior party.

Rethink perceptionsBusinesses often assume that digital change requires huge capital investment. But as software and technology evolve, pricing models are becoming more accessible. Understanding software vendor options and knowing what is possible is key.

Invest in digital expertise New skills are required to embed digital change. The right recruitment approach is critical. Businesses must hire people who can spot opportunities to use digital technology to improve working practices. They must have the expertise to select and deploy IT solutions in an agile way.

Remember securityAs the threat of cybercrime increases, businesses must take steps to guard their systems. Information security specialists must not just police new initiatives but take steps to embed a positive organisational ethos around data protection.

Digital technology is one of the biggest challenges facing middle market businesses today. We hear again and again that management lack the skills, time and confidence to embed solutions. But digital change is not insurmountable. The key is to start small, focus on the right technologies and deliver value early. The first step is often the hardest, but it is one all businesses must take if they are to move forward.

Chris KnowlesPartner, head of technology consulting

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