The 5 Fronts of Digital Transformation in the Middle Market
by Doug Farren and Anil K. Makhija
The past 18 months have brought unprecedented challenges to businesses of all sizes, and the U.S. middle market was not immune.
The National Center for the Middle Market (NCMM) has been tracking the performance and sentiments of companies between $10 million and $1 billion in annual revenues since 2012. After experiencing negative growth rates in 2020, average revenue growth for the period of June 2020 to June 2021 was 8%. That’s good news, as average annual growth dating back to 2012 has been approximately 6.5%. However, a closer look reveals a split recovery: 45% of companies reported revenue growth of 10% or more, but another 34% experienced flat or declining revenue.
Employment growth also returned to positive rates, with an average growth of 5.9% across the sector. In addition, 70% of the middle-market workforce reported being back to their primary work location as of June 2021. Leaders of midsize companies also cited the two most difficult aspects of running their business in the current environment: 51% said they are challenged by employee communications, engagement, and productivity, and 45% reported issues with customer engagement.
The severity of these challenges varies by industry. For example, 60% of healthcare companies say they struggle with employee engagement, and 55% of construction companies find it difficult to engage customers in new and beneficial ways.
With an uneven recovery and ongoing challenges, how can midsize companies continue to thrive? We know from our research over the past decade that they’re generally resourceful in the face of constraints such as capital, expertise, and time. Focusing on digitizing their businesses will help address challenges around customer and employee engagement.
The Pandemic Has Shifted Priorities
Investment in various technologies has accelerated because of the pandemic, with the goal of addressing a number of operational areas, such as cybersecurity, customer engagement, and communications. But this shift to digitization does not necessarily reflect how executives are feeling about the state of their own businesses.
We asked leaders about the importance of digitization, and while 52% cited it as either important or extremely important, only 35% considered themselves advanced or ahead of their peers. In addition, only 46% of middle-market companies say they have a digital roadmap built into their strategy, meaning the rest either have no defined plan or are unable to address it at this time.
As with other challenges, digital maturity levels differ by industry. Take the manufacturing industry, which is one of the largest sectors in the middle market at approximately 17% of all companies. Nearly 50% of these businesses say they’re concerned with keeping pace with the right technology in order to compete. This is concerning because it’s not just about advanced manufacturing and artificial intelligence in the factory — technology touches all aspects of the business.
For example, Gertrude Hawk is a chocolate manufacturer based in Scranton, Pennsylvania. The 85-year-old company operates 40 physical locations across three states, as well as a consumer e-commerce site and a B2B platform. While their internal processes are excellent, the company had long ignored the importance of strong digital platforms as a means to engage customers. Recently, they focused investment on digital marketing tools, such as an improved website with high-quality photography, in addition to a customer rewards program accessible via mobile devices for easier shopping and ordering. By acknowledging that they were behind their peers, the company has seen increased site traffic, longer average visit times to the site, and a growth in rewards membership as a result of their investments.
While most of the concerns seen early in the pandemic — uncertainty, continuity of operations, working capital — have largely subsided, customer engagement and employee communications remain a challenge. Nearly one-third of midsize companies say they have moved permanently to digital communications internally, with another 24% planning to do so in the near future. Additionally, 31% of companies have permanently implemented technology to engage with customers.
A great example is Twiddy and Company, a hospitality firm located in Duck, North Carolina. The proprietor of hundreds of rental properties in the Outer Banks, Twiddy traditionally relied on its strong customer relationships, repeat business, and word-of-mouth referrals. However, with the industry literally shut down during spring 2020, company president Clark Twiddy began leveraging investments in CRM platforms to reach customers in new ways. For example, they found that prospects and past renters responded better to text updates than phone calls or emails. The CRM also allowed the Twiddy marketing and sales teams to collect and monitor every contact point, regardless of method, to ensure the right mix and cadence as well as calculating conversion rates. The results have been impressive, driving historic growth and occupancy. Going forward, the company has made a commitment to ongoing innovation, experimentation, and investment in digital communication practices.
Many middle-market companies are also challenged by resource constraints. Therefore, making similar investments is easier said than done. When asked about obstacles, most companies reference the costs and budget issues associated with new technology. Middle-market IT spending is focused on daily operations of the business and cybersecurity, both representing approximately 11% of total budgets. In addition, firms note a lack of time given other priorities and a lack of proper internal resources to implement these technologies effectively.
A Framework for Digital Transformation
Investment in digital tools and processes has not suffered as much over the past 18 months as other business functions, partly out of necessity. Indeed, investment also accelerated as a way to achieve the goal of a more efficient, profitable, and productive future state of work, and the investment has paid off. Middle-market companies with a digital vision that is clear, comprehensive, and guides strategic decisions grow 75% faster on average than less digitally sophisticated peers.
While impressive, nearly two-thirds of leaders also say a digital skills gap in their workforce is holding them back from even more aggressive pursuits. So how should executives address these issues? The NCMM developed a framework to help guide middle-market companies in the process of digital transformation. Essentially, the enterprise sits in the middle of five distinct but interconnected activities:
- What We Sell – product and service offerings
- How We Produce It – supply chain, manufacturing, operations
- How We Sell It – customer experience, channels, marketing
- Our IT Backbone – infrastructure, security
- Our Workforce – talent, digital skills
See more HBR charts in Data & Visuals
To address two of the middle market’s biggest challenges, we will focus on How We Sell It (customer engagement) and Our Workforce (employee engagement).
Customer engagement.
Middle-market companies say customer experience, lead generation, and marketing tools are currently their top three customer-facing digital priorities. Here are some best practices for making progress in these areas:
- Place greater importance on integrated multichannel marketing and sales, finding the right mix of online and offline marketing, sales, and service.
- Develop a more functional website that connects customers with employees and offers support for products and services.
- Increase online interaction with customers (website, social media, mobile).
- Use a variety of digital customer experience and analytics tools.
- Use technologies that support the sales force, such as CRM systems and social media.
- Work toward an omni-channel, end-to-end digital experience on all platforms and channels.
Employee engagement.
Accessing, attracting, and retaining the right talent has been a challenge in the middle market for several years. Leaders are especially challenged when it comes to finding potential employees with the right digital skills. To address these issues, middle-market companies should do the following:
- Make a concerted effort to invest in people with specific digital expertise and be willing to pay a premium for the right skillsets.
- Adopt the latest and best technology and digital processes, including using digital platforms for employee goal setting and performance management and using mobile apps for talent acquisition.
- Take a strategic approach to realigning the workforce and deciding which activities can be contracted to outside specialists in order to combat the digital skills gap.
- Provide career training and development and clear career paths.
Insaco, started in 1947 near Philadelphia, develops and produces high-precision machine parts (originally for the phonograph and textile industries, but more recently for medical, defense, and aerospace customers). Their investments in advanced manufacturing technology have preserved their ability to meet stringent production requirements to the millionths of an inch. While operational investments have helped them maintain their place as a leader in their industry, the focus on customer and employee engagement has also been an important part of their growth. They’ve revamped their website into a one-stop-shop, which is easy to navigate for customers and allows employees to access product materials and make updates easily. Since the launch of the new site, Insaco has seen significant increases in page views, pages per session, and average session duration. They’ve also seen a lower bounce rate, indicating the redesign has made a meaningful impact.
By utilizing some of these best practices, middle-market companies can kick-start or help strengthen their own digital journeys and set themselves up for future growth in the process.
SOURCE: Havard Business Review
