The close of 2023 signifies yet another year of impressive growth in the U.S. middle market. It also marks the 12th year of full MMI results, with NCMM launching its initial survey in April 2012. Over the course of 40 distinct reports, we have continued to monitor performance data such as growth, confidence, capital planning and challenges while also collecting insightful data on relevant topics such as healthcare, elections, the pandemic, inflation, supply chain disruptions and artificial intelligence (AI).
When we started this effort, the NCMM enthusiastically labeled this important group of businesses “The Market that Moves America.” That sentiment remains relevant today and we have adopted it as the name of our podcast. The impressive growth rates – both revenue and employment – are tempered by concerns around the macroeconomic environment, geopolitical issues, talent and technology. As with past challenges, the expectation is that middle market firms will continue to grow and thrive doing what they do best: more with less.
High-growth firms demonstrate some unique aspects
The average revenue growth rate for 2023 was 12.2% driven by over 50% of companies reporting revenue gains of 10% or more over the prior year. While overall employment growth has declined to 9.6% -- a drop from the past two years – these high-growth businesses are adding workers at a much higher rate: 14.4% growth on average. So, what’s driving this success?
Taking a closer look into high revenue growth firms (5% or more and 10% or more vs. 2022) reveals some interesting commonalities. Not surprisingly, these companies have an expansionary mindset and are more likely to have introduced a new product or service or entered a new domestic market in the past 12 months. They are more likely to believe digitization is important and over 50% have a technology roadmap in place (vs. 35% among all other companies). Subsequently, they are also quicker adopters of AI. Finally, they tend to allocate a higher proportion of revenue to R&D: 24% vs. 14% for all others.
Differences in Digital Skills Gaps
In the MMI we ask questions about workforce and talent, specifically on the types of technology and digital skills required, whether a skills gap exists and what impact it has on business performance. Over 40% of respondents cite a digital skills gap currently in their business. Interestingly, those businesses are also the ones growing faster during the past year and predicting continued rapid growth in 2024. For example, companies with a skills issues grew revenues 12.9% on average in 2023 and are projecting 8.5% growth in the coming year.
There are other differences beyond growth worth noting. Skills-challenged businesses face more external issues, find managing risks difficult and have been more impacted by rising interest rates. They also plan to invest more heavily in technology and, therefore, are more burdened finding and hiring employees with the right skills. Companies without a skills gap, however, are more confident in the local economy, rate themselves higher at using digital solutions and have more employees.
Technology integration is a key to growth
By asking senior leaders to self-assess the integration of technology into their business, we see some interesting insights. Those considering their processes more fully integrated with digital platforms and tools are more likely to also have an enterprise risk management (ERM) or enterprise resource planning (ERP) system in place. They are more likely to have higher-than-average revenue and more employees and to source some revenue internationally. The downside is they are likely to face more challenges with data security and privacy. Companies that do not consider themselves integrated (40% of middle market businesses) are more likely to experience a skills gap and talent shortage.
The common theme moving forward is the search for efficiency, productivity and cost savings achieved through the implementation of technology tools. As we have seen with past research, these tools will not necessarily replace people but undoubtedly will change the nature of work. Given the challenges middle market companies have faced over the years finding, attracting and retaining talent, these businesses can benefit from identifying the proper utilization of technology to support ongoing growth.