Forbes Insights – Inspired for Growth

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NIC CEO, Harry Herington, was recently one of six CEOs interviewed for this Forbes study on middle market companies.

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Forbes Insights – Inspired for Growth

  1. 1. Inspired for GrowthLessons From Middle Market Companies IN ASSOCIATION WITH:
  2. 2. ContentsForeword............................................................................................................2Key findings........................................................................................................3Methodology......................................................................................................4Optimism abounds.............................................................................................5What’s driving growth?......................................................................................6Agility is essential...............................................................................................7How to grow when markets won’t ....................................................................8Funding growth..................................................................................................9Establishing priorities…………….…………………………………………………………….………10The rise in customer focus……………………………………….…………………….……….……11Customers are like honeybees.........................................................................14A focus on the workforce.................................................................................15Growing pains..................................................................................................16Building a talent management function………………………………………….……………17Where are the challenges?..............................................................................18Conclusion.......................................................................................................20
  3. 3. 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 Insights2 | Lessons from middle market companies
  4. 4. Key findingsThe middle market defies the broader downturn. In spite of a weak U.S. economy, three out of five survey respon-dents experienced revenue growth over the past two years. Meanwhile, only one in eight reported revenue declines.Executives are optimistic about their own futures… Nearly three-quarters of mid-market executives say their compa-nies are poised for continued revenue growth. but less so about the broader economy. Outlooks for the U.S. economy as a whole are less sanguine, with one in…four survey respondents not seeing broader recovery until 2013 – and just under one in five looking to 2014 or beyond. gility is essential. Alongside optimism and plans for growth, middle market managers are also keenly aware of theAneed for strategic flexibility. These executives view agility as one of their core competitive weapons. Two-thirds say that togrow and thrive in today’s economy, companies have to change strategic course. Meanwhile, a third of executives say thatin order to grow, companies will need to completely change their business model. orporate ‘to do’ lists feature two imperatives. Executives are confident they understand what drives growth and are inCturn prioritizing their efforts. Improving the customer experience garners the top ranking by a wide margin – both now andin five years. Workforce issues – the need to more effectively manage talent – is the second highest ranking priority.The customer is king. Survey results and interview anecdotes show that midsize companies view customer intimacy andfocus as the keys both past and future success. Moreover, customer issues dominate the list of potential external risks – so-called “game changers” – that could conspire to inhibit growth. Consequently, executives aspire to building and sustainingcustomer-focused cultures and operations and are backing it up with resources and initiatives. mployees are more important than ever. Middle market executives recognize that without the right people in theEright roles, even the best-laid strategic plans fall short. Moreover, as a midsize company grows, it runs the risk of losing itsentrepreneurial character. Not surprisingly, the top six internal game changers – key risks to growth plans – all relate tothe workforce. Consequently, executives are recognizing their acute needs to develop more effective processes for recruit-ing, developing and retaining essential skills.Political headwinds don’t help. The survey shows that midsize companies view regulatory activism and uncertaintyas the greatest threat to their future growth prospects. In particular, executives are concerned about the implementationof new healthcare regulations. At the same time, midsize companies are also aware of their constant need to watch out forcompetition from peers, startups – and larger companies. Copyright © 2012 Forbes Insights | 3
  5. 5. 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
  6. 6. Optimism aboundsU.S.-based middle market companies are proving to be an Figure 1: How did your organization’s revenue changeengine of economic growth. Though far from immune to over the past two years?the economic downturn, both the survey and accompa-nying interviews indicate the sector is weathering things n rew significantly Gwell. Optimism among middle market enterprises is prev- 6% 16% (10%) 6%alent across a wide range of industries. Consider: n rew somewhat G • rivate education. Arizona-based Grand Canyon P 12% (6% to 10%) Education, Inc., offers postsecondary education services n Grew slightly (1% to 5%) through its private Grand Canyon University—online as 19% n Stayed the same well as on campus. CEO Brian Mueller says he expects n ontracted slightly C 15% (1% to 5%) swelling enrollments will drive his firm’s approximately n ontracted somewhat C $400 million in current annual revenues to grow from (6% to 10%) 13% to 15% in each of the next three years. 26% n ontracted significantly C • nvironmental services. Joe Chalhoub, presi- E (10%) dent and CEO of Illinois-based Heritage-Crystal Clean says the biggest challenge for his $120 mil- lion company “is to manage growth, as we expect Figure 2: How do you expect your organization’s our revenues to increase dramatically (by) the end revenue to change over the next two years? of 2012.” 1% • oftware and services. E-government-focused S 4% n row significantly G NIC Inc. builds official websites, online services 14% (10%) 8% and secure payment processing solutions for more n row somewhat G than 3,500 federal, state and local government 6% to 10%) agencies. Today, says CEO Harry Herington, the 15% n row slightly G company works mainly with state governments. (1% to 5%) 29% n Stay the same But over the next several years he anticipates that n ontract slightly C “federal agencies will become major contributors (1% to 5%) to our growth.” n ontract somewhat C 29% (6% to 10%) Such anecdotes are well-supported by the survey n ontract significantly Cresults. Over the past two years, three out of five respon- (10%)dents - 61% - experienced revenue growth. Only one ineight, 12%, reported revenues had contracted over the pasttwo years either somewhat (6%) or significantly (6%). Figure 3: When do you expect the economy to recover? Turning to the future, nearly three-quarters of mid-market executives, 72%, forecast that their own revenues 5%will continue to grow. This stands in contrast to a more 10%guarded outlook for the economy as a whole, where 44% 26% n 013 2of respondents do not expect recovery until later (26% n econd half of 2012 Ssay not until 2013 and 18% say 2014 or beyond). As NIC’s n It’s already recovering 18%Herington explains, “I have far more confidence in our n 014 or later 2own ability to grow than I do in prospects for the over- n irst half of 2012 Fall economy.” 22% n on’t know D 18% Copyright © 2012 Forbes Insights | 5
  7. 7. 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
  8. 8. Agility is essentialAlongside optimism and plans for growth, middle market Figure 5: In order to grow and thrive in today’s economy,managers also seem keenly aware of the need for strategic companies have to change strategic course.flexibility. Two-thirds of executives either strongly agree(23%) or somewhat agree (44%) that to grow and thrive 3%in today’s economy, companies have to change strate- 9%gic course (see figure 5). Meanwhile, a third of executives 23%either strongly agree (4%) or somewhat agree (30%) that in n trongly agree Sorder to grow, companies will need to completely change n omewhat agree Stheir business model. 22% n Neither agree nor disagree n omewhat disagree S n trongly disagree S 44% Figure 6: In order to grow and thrive in today’s economy, companies have to completely change their business model. 6% 4% n trongly agree S 26% 30% n omewhat agree S n Neither agree nor disagree n omewhat disagree S n trongly disagree S 34% Copyright © 2012 Forbes Insights | 7
  9. 9. 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 aspect8 | Lessons from middle market companies
  10. 10. Funding growthGrowth plans are seemingly unhampered by any lack of Figure 7: From where is your organization currentlycapital availability. Despite evidence of a general slow- receiving financing?down in commercial bank lending, two out of five surveyrespondents say they are able to access bank loans, and Bank loanalmost a third are able to rely on retained earnings. Hardly 41%any are depending on new share issues for funding, reflect- Retained earningsing the fact that only one-quarter of respondents were 30%from publicly traded companies. Grants At least some mid-size companies are in the sweet spot 17%of having cash on hand and little or no debt, with poten- Personal sourcestial access to the equity or debt markets when they need it. 17% Heritage-Crystal Clean launched an IPO in 2008 tohelp strengthen its balance sheet and provide greater access Private placementto capital. It later made a secondary share offering to partly 14%finance the used oil re-refining facility in Indianapolis. Government sources“We also have a bank line of credit if we need more capi- 13%tal,” says Chalhoub. Investment banking firms Chalhoub notes there are both advantages and disadvan- 10%tages of being a publicly traded company. On the plus side Foreign investmentthe executive sees more capital for expansion and growth, 9%a means to enable employee equity participation as well asimproved visibility and perceptions of the company. We don’t currently receive financing But in exchange, disadvantages include expanded 8%reporting and compliance along with associated costs Hire purchase or leasingincluding external audit and directors and officers liabil- 7%ity (DO) insurance. A public company also loses, to a Loan stocksignificant degree, its ability to hide its strategies from 7%competitors, says Chalhoub. Still, “overall, for our com- Venture capital firmspany, we feel strongly that the benefits exceed the costs.” 7% Publicly traded Inteliquent was able to finance itsacquisition of Tinet with internal cash balances. “We New share issue or IPOgenerated approximately $42 million of free cash flow 4%in 2010,” says Evans, “and we don’t have any debt.” FranchisingHowever, he adds, “access to capital markets is impor- 3%tant, especially for mergers and acquisitions, and we are Rights issuewell positioned to go back to those markets when we 2%need to.” Small Business Administration At Interactive Intelligence the issue is what to do with 1%surplus cash rather than how to raise more of it. As Brownexplains, “we have not paid dividends to date, but we did Other (please specify)repurchase stock a few years ago, and we have made a few 1%small acquisitions, all from internal cash balances.” 0% 25% 50% Note: Executives could select multiple responses. Copyright © 2012 Forbes Insights | 9
  11. 11. 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 important10 | Lessons from middle market companies
  12. 12. The rise in customer focusOne of the most consistent sets of findings across the whole Figure 10: What do you think have been the most criticalof the survey is that middle market companies appear to be factors contributing to your organization’s successful growth?operating with a heightened awareness of the importance Focus on customer experienceof a customer focus. Improving the customer experience 46%has already been highlighted as the priority most fre-quently cited as extremely important. But responses to Getting new products/services out in a timely mannerthree additional questions show that customer awareness 33%and focus literally pervades middle market mindsets. Investments in new technology For example, asked to identify the factors con- 29%tributing most to their organization’s growth, the Adequate financingmost frequently cited is a focus on customer expe- 25%rience – mentioned by 46% of respondents. Then in Emphasis on attracting and retaining the best talentanother question, executives were asked to evaluate 23%the criticality of a list of potential external forces orgame changers. Here, four of the top f ive issues most Wider use of social mediafrequently rated as extremely signif icant all exact an 16%impact on customer relationships, including: pricing Ability to adapt to regulatory changespressures, decreased customer budgets/spending, falling 16%customer demand and increased domestic competition. Changing business model And in a third survey question, executives were asked 14%where they would be focusing their resources going Deep bench of experienced senior executivesforward. Here, three of the top four areas are again cus- 12%tomer-related, including: customer service, new product/service development and sales (see figures 10, 11 and 12.) Ability to adapt to changes in market pricing of inputs or raw materials All of the above underscores the middle market’s belief 11%in the importance of customer relationships. It also goesa long way towards explaining why many middle market Participating in a successful merger or joint venturecompanies feel they need to devote greater resources and 11%attention to these issues. Industry consolidation/faltering competition 8% Return on investment in RD or product innovation 7% Acquisition 5% 0% 25% 50% Note: Executives could select multiple responses. Copyright © 2012 Forbes Insights | 11
  13. 13. 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
  14. 14. Figure 12: Where are you focusing your resources withinyour organization?Customer service (adding, retaining and servicing clients) 43%Changing or evolving our business model 35%Developing new products and services 35%Sales 33%Geographic expansion 27%Technology/IT 26%Hiring, employee compensation, and/or employee training 25%Expanding facilities we already have 22%Advertising and marketing 22%Acquisition of a business 20%Manufacturing 15%Procurement/purchasing 11%Community initiatives/giving back to the community 9%Shipping, distribution or logistics 7%Other (please specify) 1%0% 25% 50%Note: Executives could select multiple responses. Copyright © 2012 Forbes Insights | 13
  15. 15. 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
  16. 16. A focus on the workforceIn terms of priorities, building and retaining a qualified Figure 13: What internal challenges are likely the biggestworkforce is in a virtual tie with optimizing sales force game changers for your company?effectiveness for second place today—and in five years takessole possession (see prior figure 8). As for internal game Sustaining employee morale 43%changers, the top six most often cited issues are also work-force related. (See figure 13.) Combining these two sets of Need to increase employee productivityinsights elevates talent management to the forefront of stra- 37%tegic challenges for the middle market. Attract a young or new generation of employees The importance of paying closer attention to tal- 32%ent management resonates clearly with interviewees. For Ensure a steady talent pipelineexample, as Inteliquent CEO Evans explains, one of his 31%group’s key strategic challenges is to move from depen-dence on voice-centric revenues to a business based more Succession planning 31%on data transfer and the provision of solutions. The rightemployees are crucial to this effort. “We have to make sure Need to train employeesthat we have the right people to manage this migration 30%successfully,” says Evans. “In light of the complexities, we Shift in business strategy/plansneed new skill sets.” 28% At NIC, Herington is emphatic that employees are the Ensuring adequate investment in new technologiesmost significant part of the company’s success. “It’s not just 28%a question of keeping people, it’s making sure you have theright people and motivating them so they don’t become Generate cash flow to meet investment needs 27%stale.” Consequently the company empowers its employees,encouraging innovation while discouraging bureaucracy. Sharply rising operation costsFurther, the culture is one, says Herington, “where people 24%are rewarded not only in financial terms but [also] through Executive compensation issuesrecognition by peers and management.” 19% Also worth noting, Herington believes the best hires are Reduce employee head countthose that arrive with a passion for the mission – more so 18%than having the necessary skill sets. “You can teach certainjob skills,” says Herington. “But you can’t train someone to Corporate social responsibility 14%have passion and be energetic.” 0% 25% 50% Note: Executives could select multiple responses. Copyright © 2012 Forbes Insights | 15
  17. 17. 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
  18. 18. Build a talent management functionQA: Colleen O’Neil, PhDSenior Partner, MercerWhat are the key HR challenges for midsize companies? Top information, this doesn’t have to be a huge ticket item. Soexecutives, whether from a large or a midsize company, worry midsize companies how have more tools available to get toabout a lot of the same things. I’ve got to build this talent the diagnostic work that can help them prioritize.pipeline. I’ve got gaps. Am I doing the right things to prepareme for stronger, more profitable growth? Are we retaining Do you have any other advice for midsize companies? Oneand developing our talent? So the issues are similar but the thing I would mention is the advantages of collaboration withdifferences are in the execution. other businesses. Midsize companies, more so than larger companies, are in a position to develop creative ways ofWhat are midsize companies doing well? Smaller compa- partnering with others to share or develop what they need. Itnies tend to have more direct contact between who’s doing might be working with customers or suppliers, but you needthe hiring and who needs the talent. So there’s high-touch in to think more broadly in terms of the complementary talentterms of what they need and who they bring in. that already exists or could be developed.They also have something different to offer relative to larger And finally, it’s important to emphasize that whatever youcompanies in terms of working environment. There’s less bureau- do, it has to make sense for your company. What happenscracy. You can move faster with more latitude. When you think too often is we gravitate to what we heard they do at [someabout younger people in particular, that can be very appealing. other well-known company]. But what works at one com- pany isn’t necessarily going to be a best practice at yourAnother advantage is that during the downturn, midsize company. All companies have differing core cultures, cus-businesses generally performed better than the largest com- tomers and processes. So I’d say the growth lesson is thatpanies. They didn’t lay off 30,000 employees, so when they you have to develop a talent strategy that works for yourare looking to hire, they don’t have some massive downsiz- individual company.ing to defend.What can midsize companies do to take their talent man-agement to the next level? They need to take a look at theirbusiness and build a talent management function that deliv-ers against its challenges. They’re probably already doing thisin other areas like RD, supply chain or distribution. But theyneed to develop, articulate and deliver against a similar visionfor their talent management.What does that mean in practical terms? All businesses,large or midsize, face a range of talent issues. Do we needto address succession planning? Recruitment? Productivity?Training and development? Performance management? Inter-national expertise? You realize you need to make progress inall of these areas, but you have to be judicious.Leveraging technology can help. When the tactical issuestake less effort, managers can then focus more on refiningand prioritizing their talent strategy. And what’s interesting isthat tools like employee engagement surveys, sophisticatedanalytics – all that used to be for big companies only. But withimprovements in technology and all the ways we can gather Copyright © 2012 Forbes Insights | 17
  19. 19. 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
  20. 20. Regulatory fearsContinuing volatility and uncertainty in so many areas Figure 15: Over the next two years, what do you thinkof the economy, no doubt, casts a continuing pall across will pose the biggest challenge to your business growth?virtually all of the U.S. middle market. Beyond anecdotalfindings, the survey shows that among midsize companies 5% n Healthcare legislation 5%regulatory changes are the most frequently cited threats to 19% n olitical gridlock in P 5%growth plans (see figure 15). Next, asked to select a sin- Washingtongle most detrimental force from among a list of options, 7% n ncreased regulation Ithe most frequently cited concern was the implementation of my industryof healthcare legislation – followed by gridlock in govern- 7% n Ability to attract and retain 16% a skilled workforcement and then additional industry regulation. n Access to capital NIC Inc.’s Herington worries that an increasing num- 10% n Foreign competitionber of regulations emerging from Washington could mean 13% n Scarcity of resources/ 13%“that in the boardroom we have to switch our focus to supply chain disruptionscompliance issues.” Grand Canyon’s Mueller is also keep- n Obsolete business modeling an eye on the regulatory environment, as Grand n Changing technologyCanyon is, as he puts it, an emerging model for educa- n Othertion. “The idea of private, publicly traded educationcompanies will at some point be debated from a regula-tory standpoint.” Copyright © 2012 Forbes Insights | 19
  21. 21. 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
  22. 22. AboutForbes InsightsForbes Insights is the strategicresearch practice of Forbes Media,publisher of Forbes magazineand Forbes.com. Taking advantageof a proprietary database ofsenior-level executives in theForbes community, Forbes Insights’research covers a wide range ofvital business issues, including:talent management; marketing;financial benchmarking; riskand regulation; small/midsizebusiness; and more.Bruce H. RogersChief Insights OfficerBrenna SnidermanSenior DirectorChristiaan RizyDirectorKasia MorenoEditorial DirectorNigel Adam William MillarReport AuthorSRobert Azcuydesigner 60 Fifth Avenue, New York, NY 10011 | 212.367.2662 | www.forbes.com/forbesinsights

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