Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Middle Market Indicator Readout: Trends and Emerging Issues
1.5k Plays1 year ago
Doug Farren, Managing Director of the National Center for the Middle Market provides an in-depth analysis of our most recent research findings on the US Middle Market. Revenue, employment, economic confidence, expansion, capital investment, Gen AI use, and more are all discussed in this episode of The Market That Moves America.
The Middle Market Indicator surveys 1,000 CEOs, CFOs, and other C-suite executives of America’s middle market companies on key indicators of past and future performance in revenue, employment, and allocation of cash. The survey also reports middle market company confidence in the global, U.S., and local economies and identifies key business challenge areas. The survey was designed to accurately reflect the nearly 200,000 U.S. businesses with revenues between $10 million and $1 billion, the lower and upper limits of middle market annual revenue. The survey is designed and managed by the National Center for the Middle Market. The data shared in this episode was fielded in June of 2023
Recommended
Transcript
Introduction to the Podcast and the National Center for the Middle Market
00:00:04
Speaker
Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market. The center is the leading source of knowledge, leadership and innovative research on the middle market economy. Throughout our podcast, we will feature middle market leaders and stakeholders to hear their real world perspectives on trends and emerging issues. Thank you for your interest in joining our middle market indicator update.
00:00:30
Speaker
This is our mid-year update, so hard to believe that we're already into August seven months through 2023. But I'm going to talk a little bit about the indicator itself and obviously go through a lot of data with you all. So we are broadcasting this from the campus of the Ohio State University, where the National Center for the Middle Market is located.
Mission, Partnerships, and the Middle Market Indicator
00:00:56
Speaker
And just under two weeks from now, we'll
00:01:00
Speaker
be buzzing with students back on campus and starting the fall semester. So again, appreciate your time and your interest. Our plan today, for those who may be new to these webinars, I'll tell you a little bit about the center, specifically how we define the middle market and then more about the middle market indicator report, which is now in its 12th year. So we've got quite a bit of data, historic trend data.
00:01:29
Speaker
I'll talk about the new data that we've collected. So this mid-year update is from earlier this summer. We're in the field in June, collecting all these new insights from middle market leaders. We'll talk a little bit about the projections for the coming 12 months, and then a few special issues that we tend to vary from survey to survey. This time we'll be focusing on some of the external headwinds that are being called out by these companies.
00:01:58
Speaker
as well as a topic that's probably top of mind, or at least most of the conversation we see in here out there over the past few months has been around the topic of AI. So we've explored that a little bit in this latest round. And then hopefully we can get through this information in about 40, 45 minutes, which should leave some time for Q&A. So again, I would invite you to submit a question if you have that, and we'll try to address all those.
Economic Significance and Definition of the Middle Market
00:02:28
Speaker
So the National Center for the Middle Market, we are the only research center of our kind. We are located at the Fisher College of Business at The Ohio State University. We opened our doors in October of 2011, which means we are approaching our 12th anniversary. Pretty hard to believe. We are a partnership currently with Chubb, which is the world's largest publicly traded commercial insurance company and Visa.
00:02:58
Speaker
And those partners are vital to the work that we do here, not only supporting our work financially, but also from a subject matter expertise standpoint, helping to direct and guide our research, helping to provide channels and outlets for the content.
00:03:16
Speaker
Essentially, our mission has remained unchanged. We're here to study, support, and help the growth of U.S. middle market businesses. We do that primarily by conducting research such as the MMI. It's probably our most well-known piece of content. We also do lots of outreach. We have a large network of organizations that we work with from coast to coast.
00:03:38
Speaker
And then from an education standpoint, we work both with our students here at Fisher College of Business, as well as executives and others in a number of educational forums. Probably the place to start would be our definition of the middle market. We use a revenue based definition of 10 million to $1 billion. We know that's a wide range in a lot of the work and particularly the MMI.
00:04:06
Speaker
we have the ability to sub-segment. So we do have three segments that we typically look at, the lower middle market, which is 10 million to 50 million in revenue, core middle market is 50 million to 100 million revenue, and then upper middle market, 100 million and above. Roughly 200,000 or so businesses fit that description in the US. It's about 3% of all businesses, but again, contributing one third of private sector GDP and employment. So it is an important sector.
00:04:37
Speaker
It does validate the importance of having a center like ours that can really uncover some of the insights, the key challenges and opportunities that these companies face.
Survey Process and Participant Roles
00:04:49
Speaker
So I'll talk a little bit about the middle market indicator. As I mentioned, this was launched shortly after the center opened its doors. We actually released the first middle market indicator report in April, 2012. So this update that I'm sharing today
00:05:06
Speaker
And the report that we released several weeks ago represents our 39th wave of the MMI. To our knowledge, this project or should say ongoing piece of research represents the longest continuously running study of the middle market in the United States. The way we do this, we put together a self-administered survey online. We work with a third party market research firm called RTI Research.
00:05:35
Speaker
We feel this to 1,000 kind of pre-screened, meaning that we know that they're financial decision makers. Typically, that means leadership, C-suite, could be the founder, owner, CEO, CFO, COO. Those are typically the roles that we interview.
Focus Areas: Revenue and Employment Growth
00:05:53
Speaker
And we ask them a series of questions. The five categories that have remained largely unchanged are around revenue growth, employment growth, confidence in various levels of the economy,
00:06:05
Speaker
capital investment planning and challenges to growth. So those have remained largely unchanged over the 12 years. And then frequently we insert topical questions. We call them variable or kind of, I don't know, special questions, I guess would be a good term. And those change from survey to survey. So we can look at topics like the COVID-19 pandemic.
00:06:31
Speaker
We can look at things like digitization. And as I mentioned in this one, we focus specifically on AI and a little bit on the banking crisis that hit earlier this spring in the US. So I'll talk a little bit more about that. Just one final reminder, this survey was fielded in the first three weeks of June of 2023.
00:06:54
Speaker
And that gave us about a month or so to go through all the data, conduct all the analytics, and then put together the report. So today's presentation, if you've been in these before, you'll kind of know that it's a data march. There'll be lots of slides and graphs. We will be able to share these slides after the presentation. That's a common question that we get.
00:07:16
Speaker
So don't feel as if you need to take down notes on all the data points. We can share this information after the presentation. So let's dive right in. So what's new with the middle market?
Growth Trends: Revenue and Employment Comparisons
00:07:28
Speaker
Always like to start with this kind of an overview. And it's largely a qualitative question. We start the survey with asking these leaders, essentially, how do you feel your company is doing versus one year ago?
00:07:43
Speaker
And as you can see, most of the middle market remains really, really confident and feels that they're doing very well. You know, 75% or so of these companies say that their business is performing better than last year. If you take this historic average back over the 39 waves, it's been about two thirds, so 63 or so percent. So we're running higher than that. And that's been consistent over the last two years.
00:08:14
Speaker
There are some headwinds that I should note though, and we're going to talk a little bit more about these. Of course, inflation has been troublesome over the last year plus now. Talent is an evergreen topic in terms of the middle market. We've been monitoring this issue for almost eight years now. Certainly, whether we're entering a recession, whether there may be a recession or we're going to avoid a recession, those are all
00:08:43
Speaker
unanswered questions out there, but a lot of that is creating ongoing uncertainty, which we'll uncover here a little bit more. This is our dashboard. Really, you know, if I were to only have one slide to share today, it would probably be this one, because this summarizes those five key areas, I think, pretty well, the ones that I had mentioned that have been a consistent part of all the surveys. So let's just go through these quickly. Starting on the far left,
00:09:13
Speaker
We look at top line revenue growth. So for the past 12 months, middle market companies are reporting close to 12% top line revenue growth, which as you can see, we do compare this to growth in large companies using the S&P 500. And it's close to three times that. S&P 500 was reporting about 4.8% revenue growth as of the middle of July.
00:09:42
Speaker
The projection going forward for the next 12 months is a bit muted, down over two points at 9.6%. But as we've seen in the past, those are typically very, very conservative projections. So as we, you know, a year from now, as I sit here and report out on our 2024 mid-year MMI, it would not surprise me to see that projection exceeded. Moving on to employment growth, again, very strong at 10.1%.
00:10:11
Speaker
We do also compare this to large as well as small business. And we do that by using a report that comes from ADP, the large payroll and HR company. They have a nice monthly job summary, which I should mention is reported based on headcount variables, but it serves as a really good proxy. So we look at companies with headcounts between 50
00:10:35
Speaker
and 500. Again, it's not perfect. It's going to vary quite a bit depending on industry and some other factors. But it served as a pretty useful proxy, as I said, for us to compare growth across those other two segments. And we can see that it's middle market, again, far outpacing the growth of large and small companies.
Capital Investment and Economic Confidence
00:10:54
Speaker
And that growth is projected to remain very strong over the next 12 months at 10%. The challenge here that I've been calling out now for a couple of
00:11:05
Speaker
of these updates is going to be the ongoing high levels, I guess I should say low levels of unemployment in the US and market and job participation in the US is creating this kind of overly exaggerated war for talent. A lot of companies, big, small, mid-size are all kind of fighting this same challenge. So it'll be interesting to see if those numbers can be achieved.
00:11:36
Speaker
Next, we move to capital investment planning. We've got some more detail on this, but essentially six out of 10 companies are looking to reinvest back into their business to help drive growth. And then finally, we measure confidence across various levels of the economy, globally, nationally, and locally. I'll show you a little bit more detail on these, but this pattern is pretty typical as well, where we see confidence the highest
00:12:03
Speaker
at the local level and this time approaching close to 90% of the companies saying that they're confident in their local economies, which is a great sign. If we dig a little bit deeper into that revenue growth, this is actually showing the trend over the past four plus years. You can see that 11.8% a little bit down from the last three waves, but well above the
00:12:29
Speaker
four and a half year average of 8.8%. That does include two waves of negative growth or decline, which happened primarily during 2020, which is the start, as we know, of the pandemic. That red line there, of course, the middle market, you can see how it compares to the trend of the S&P 500, and then you can see the projection of 9.6.
00:12:55
Speaker
More interestingly, if we start to break this out by percentage growth rates, I think it becomes a little bit more interesting. We've kind of seen a flattening and a stabilization of not only the number of companies where revenue is increased, you can see that at 56%, so over half of the companies are reporting revenue increases.
00:13:17
Speaker
And a lot of them are reporting double digit growth. So 10% or higher, you can see this has remained fairly consistent over the last two years. We're at 42% now, very comparable again to the last three waves that we've had prior to this. And then interestingly, the number of companies that are reporting declining revenues continues to decrease as we have come out of the post pandemic phase. We're now down to only 8%
00:13:48
Speaker
companies struggling from a revenue standpoint. Certainly good news as you dig a little bit deeper into where that growth is coming from. Then one more view we can take a look at is by industry, which is always interesting for a lot of our audiences. You can see here that the three main drivers are
Industry-Specific Growth Trends
00:14:07
Speaker
the financial services industry. These would be banks, insurance agencies, services like that.
00:14:16
Speaker
services in general, so this would include non-financial business services, law firms, B2B service companies and so forth, and then construction, which as we all know is a largely seasonal industry. As we look forward to the next 12 months, those three are generally driving a lot of the future projected growth as well, although manufacturing is projecting a pretty strong upcoming year at close to 12% revenue
00:14:46
Speaker
growth projected. So where's this growth coming from? I mean, of course, we know that inflation has some impact upon top line revenue. But there's also expansionary activity that's happening. And please report after a few surveys of decline in some of these areas, we can see pretty consistent activity across areas that we measure, including introducing a new product or service. So close to 60% of the companies
00:15:16
Speaker
telling us they've done that in the last year. Expanding into new domestic markets, this has picked up where close to 40% of the companies have done this since a year ago. Adding a new plant or facility, a quarter of the middle market companies have done this. There are signs pointing to investment and expansion as a driver of growth.
00:15:42
Speaker
Let's then look at the next variable, which is employment. Similar chart here as I showed to revenue, where you can see the trend going back to the mid-year 2019 update. So again, it's kind of a same story here. We've got consistently strong growth over the last two years, that 10% average outpacing the historic average of 7.2% revenue growth, which also included some declines
00:16:11
Speaker
at that same time period in early 2020. And then you can see the consistent nature of the middle market outpacing both large and small business based on those ADP numbers. And again, kind of a similar thing here. We think about, you know, what are companies adding jobs at what rates? The numbers are nearly identical to revenue growth. 56% of the companies saying that they've added workers in the last 12 months.
00:16:40
Speaker
And that has been fairly stable over the last two years as well. Very, very few declines in terms of headcount or payroll being shed within the middle market. And then similarly by industry, those same three industries with high revenue growth are also adding the most people. So financial services, close to 18% employment growth, followed by business services and then construction. And you can see,
00:17:10
Speaker
you know, there's a little bit of a dampening when we look at the projections, but certainly not in the financial services area, close to 16% employment growth projected over the coming year. So very strong projections there in that particular industry segment. Now let's take a look at confidence. At the year end 2022,
00:17:34
Speaker
presentation that we did in February. I was very curious to see if the confidence would remain where it was simply because we were rebounding from a year ago when inflation was really starting to become an issue. The war in Eastern Europe was only a few months old, so there were a lot of kind of global and macroeconomic issues that were certainly weighing on the minds of these leaders as we were midway through the summer of 2022.
00:18:04
Speaker
Here we are a year later, and it's great to see that the confidence numbers have remained consistent. And not only that, they are well above where they were a year ago. As we can see, you know, the local economic confidence, which I said has typically been the highest, and you can see that here with the green trend line, is nine percentage points higher than it was a year ago. Nationally, five percentage points higher than a year ago at 74% confident.
00:18:32
Speaker
and then globally 10 percentage points higher. So all three of these levels are showing increased confidence in the economy.
Technology Investments and Long-term Forecasts
00:18:40
Speaker
In terms of investment plans, they are starting to rebound a bit. This is an area coming out of post COVID where we've seen a lag versus the results. So all these other indicators pointing towards strong performance, growth, adding people, reinvesting in the business,
00:19:01
Speaker
But this is the one number that is yet to kind of return to pre-pandemic levels where typically we were seeing anywhere from high 60s to low 70% of the companies saying that they would invest back into their business. We're still at that 60% number. And when we think about where they're investing,
00:19:20
Speaker
Right now, information technology at close to a quarter of the allocation and then plant and equipment are the two basic destinations that we're being told. If you compare that to a year ago, IT was in the exact same spot, 23% of the companies pointing to that as their number one investment goal, and then personnel was the second. So pretty similar to about a year ago.
00:19:49
Speaker
So what's up next for the middle market as we move a little bit more toward the projections. So this is the long term revenue growth forecast, we asked these leaders in the survey, can you project out the coming 12 months for your companies, you can see that it's projected at 9.6, fairly consistent with the last couple of surveys that we've done. And as I mentioned, these tend to be fairly conservative as these managers tend to
00:20:18
Speaker
under-promise and over-deliver when it comes to these types of results. So I would not be surprised to see these numbers higher when we report the actual. And similarly, from an employment growth forecast, 10%, which is pretty much in line with the last handful of surveys that we've done with the MMI. In terms of the biggest external challenges these companies are facing, similar to the year-end 2022,
00:20:47
Speaker
40% of the companies are telling us there are core business issues that they're facing. Another quarter saying the economy as a whole is presenting challenges. And we'll talk a little bit more about each of these. So let's talk about the core business issues first. Inflation, although it's starting to slowly come under control a bit, remains largely a negative impact for the middle market. We can see, particularly over the last two ways, as I'm showing here in this slide,
00:21:16
Speaker
Four out of 10 companies are saying it's had either a minor or strong negative impact on their business. And about a third saying no impact. So what we can see is the ongoing burden that comes in this inflationary environment that we've been experiencing continues to weigh on the minds of these leaders. In terms of where the impact is hitting the business, wages and salary remains the number one negative impact.
00:21:46
Speaker
but close to 50% of the companies are citing that as their biggest challenge. Costs of doing business specifically as it relates to raw goods and materials, 41% fuel, which was initially, again, a year ago, that was the number one biggest impact, was how expensive it was to not only pay for fuel for say a fleet, but also to ship goods and services.
00:22:14
Speaker
So that it remains in the third spot with about a third of the company citing that as a challenge. And then we've got some others on here in terms of indirect costs, like their own professional services or paying for insurance, shipping, things of that nature. The tactics in and of themselves, and it comes as no surprise, but these remain largely unchanged. So upwards of two thirds of the middle market companies are taking these cost increases.
00:22:44
Speaker
are due to inflation, basically passing that on to their customers in terms of higher prices and rates for their businesses. As I just mentioned,
Economic Challenges: Inflation and Interest Rates
00:22:53
Speaker
almost half of them are paying higher wages and salaries to their employees as a result of inflation, and about almost a third are also saying that they're delaying capital investment. This, again, relates back to the slide I showed
00:23:08
Speaker
few minutes ago with that kind of lagging willingness to invest where 60% of the companies were doing that. This starts to explain a little bit of the thinking around being in such a high cost, high inflation and certainly high interest rate environment where capital becomes more expensive and not as easy to obtain and then of course to manage.
00:23:35
Speaker
Extending contracts with suppliers is also a tactic we're seeing, and then reevaluating the adequacy of insurance coverage for their assets being another. The impact of rising interest rates, so as the Fed continues to raise rates to try to combat inflation, we're seeing that companies are
00:23:59
Speaker
thinking about ways to fight that themselves. So cutting costs and seeking operational efficiency along with delaying capital investment are the two impacts to a lot of these businesses that are being cited. Interestingly, in the third spot there, we've got the acceleration of digital transformation. I'll talk about that in a few more minutes as we get into some of the digital aspects of this wave of the MMI.
00:24:27
Speaker
about a quarter of the company saying that they're slowing down hiring. So again, we look at that 10% projected growth rate in terms of employment, and then you have to counterbalance that with a quarter of the firm saying that they're going to pull back a little bit when it comes to adding headcount. So those two things need to be weighed together. Increasing insurance, as I mentioned, just based on the rising value of assets, delaying new products and services, seeking new sources of capital,
00:24:56
Speaker
kind of all impacts that we're seeing in this high interest rate environment. A potential recession. So again, this isn't something that we're looking to closely at a year ago, but we did start inserting questions six months ago at the 2022 year end survey. And as we can see, half of the companies are saying that a recession would have a negative impact on their business.
00:25:23
Speaker
Fortunately, only about 12% of them are saying it would be a strong negative impact. But again, lots of debate, depending on which economist you listen to or talk to, or even from week to week, the opinions tend to vary quite a bit, as the economy still has proven itself to be pretty resilient and is chugging along quite well despite all of the things that are happening within that environment.
00:25:50
Speaker
So still debate as to whether this is going to happen, if it does, when, how severe is it going to be. But obviously, middle market companies are thinking about this, and leaders are certainly thinking about it. And that's evidenced by this next set of data, where we can see on the left, 8 out of 10 companies have already started taking steps to prepare for a potential recession. So they've had close to a year now to start thinking about these things.
00:26:20
Speaker
and what they could do within their own businesses to try to best combat potential recessionary environments. Not much has changed in the last six months, where 35% of the companies would start thinking about where they could cut expenses, where they could maybe reduce budget, get by,
Risk Management and Emerging Threats
00:26:41
Speaker
do a little bit more with a little less, so to speak. Conserving cash, we know a lot of middle market businesses still view cash as king and cash flow, certainly. Cutting expenses via efficiency, so how do you increase productivity in ways that may include introducing technology and things of that nature. Leaving positions unfilled, again, a quarter of the company saying that they're going to invest more heavily
00:27:09
Speaker
in digital opportunities. One thing we added on here that wasn't a part of our year end was raising capital. One in five companies are saying that they're starting to look at that as we think about potential recession. Then just stepping back and thinking about things a little bit
00:27:32
Speaker
More broadly, we think about disruptions, whether they be strategic in the forms of new competition, thinking about new markets, has there been a change in your supply chain, cyber and data disruptions. These are certainly maybe a little bit of an oversight in the middle market where a lot of these businesses don't think they're necessarily targets.
00:27:59
Speaker
for a data breach or cybersecurity breach when in fact the middle market is a prime target simply because they may not have the right protections in place. And then operational disruptions are the ones that most people probably think of first when you think of port closures, natural disasters, shutdowns, things of that nature. So as you can see over the last two and a half years, there's been certainly,
00:28:29
Speaker
Far majority of the companies have said they've been disrupted in some way and a majority of those citing those strategic disruption that I've mentioned earlier. Maybe there's consolidation within their industry or their new regulations or things that perhaps fall outside of the control of the leadership team that are affecting their business. And then as a follow up to that, we think about risks that these companies are facing
00:28:55
Speaker
And no surprise given some of the data that I showed earlier, the top emerging risk cited at 43% is inflation, followed closely by the talent shortage and retention risk, which has continued to play the middle market pre pandemic and post pandemic, followed by recession supply chain, which I've been talking about that in the last couple of middle market updates. I did not include it this time because it continues to improve slowly.
00:29:26
Speaker
just at a very high level at its peak, close to 60% of middle market companies had experienced a supply chain disruption in the prior six months. That number is now almost half, it's down to close to 30%. So we're seeing, again, those aren't quick fix issues. A lot of times those take longer term approaches to either adjusting supply chains, maybe finding new suppliers and new geographic areas.
00:29:56
Speaker
But that appears to be slowly improving, so I did not include a section on that this time. But you can see some of the other risks cited, including competitive, regulatory, cybersecurity, and so forth. And then I mentioned at the top of the presentation, the banking crisis. So we did want to understand if and how this was impacting the middle market, or just what the view
Digitization and AI Adoption in the Middle Market
00:30:21
Speaker
of Silicon Valley Bank and that whole issue that happened in March of this year. Right in between our surveys was that mini crisis that hit the US banking industry. On the left, you can see that it was of some concern. Two-thirds of the company cited having some concern about this shock and perceived instability in the banking system.
00:30:49
Speaker
Then what do they do as a result of that? Well, as a natural reaction, 30% decided to split up money and spread that across different banks to hedge some of that risk. Another 30% purchased additional insurance coverage via the FDIC. Some moved money to a completely different bank, maybe went to a larger bank, some withdrew and so forth. A lot of different actions
00:31:17
Speaker
which signaled to us that the middle market wasn't necessarily immune to some of those shocks that came across in the middle of the spring. So let's talk a little bit more about digitization and specifically the area of artificial intelligence. There probably hasn't been an event, a conference, a presentation,
00:31:44
Speaker
even kind of just informal networking or gatherings that I've been to over the last three to four months, where the topic of AI, generative AI has not come up at some point. So we felt it would be prudent to at least collect some preliminary data about how the middle market is viewing AI. Are they even considering it yet? Are there applications that are being used within these businesses? And so we've got some,
00:32:11
Speaker
I think pretty interesting data to share at least at this point. So the starting point would be, what would be the goals in the middle market when thinking about digitization, upgrading old processes, systems, moving into more of a technology focused work environment. No surprise over half the companies are looking to increase productivity as a result of those efforts.
00:32:39
Speaker
and close to half are looking to increase costs or I'm sorry, increase cost savings while also improving their customer experience. So back to again, some of that earlier information around the pressures related to both inflation, recession, human capital. We can clearly see on this slide that the goals of digitization would be to at least try to address some of those challenges facing the middle market.
00:33:08
Speaker
Now, historically, the barriers have typically been, even qualitatively, I could have told you, but the data supports it, that a lot of times it comes down to costs. Sometimes when looking at a lot of the name brand or large digital platforms, whether they be ERP systems or CRM systems or warehouse management systems,
00:33:36
Speaker
A lot of times they're just overpriced and outside of the range of what middle market companies can afford or at least afford to do on a large scale. And so the result is that we typically see these businesses invest smaller, more incrementally, maybe putting in pieces of these technologies on a scaled approach so that they can manage the capital piece of it
00:34:02
Speaker
manage the internal learning that comes along with it with having to run these systems and of course gaining more expertise and experience over time and really learning how to use these systems most effectively. Time is another big constraint simply because as we know through our years of studying the middle market that a lot of these businesses are quite lean, especially at the leadership levels. So having the right people in place
00:34:30
Speaker
that can not only make the decisions around the investments, but then also manage the operating environments can be a challenge. And that directly relates to the third one on this list, which is the resources. So certainly there's a capital element, but there's also having the right internal, as well as external advice. The trusted advisors, kind of the key vendors that can help a lot of times customize
00:35:00
Speaker
and provide the right implementation strategy and approach and support over the course of what could be many, many months can be a challenge because the middle market companies are kind of thinking about where to find those partners, the right way to source them, and then of course, making a decision on who to ultimately work with. And you can see some other kind of challenges, whether they're perceived or real around feeling too far behind, feeling overwhelmed, so on and so forth.
00:35:30
Speaker
So the real interesting topic is around AI. So we just had space for a few questions, but I think this is pretty interesting to kind of go through. And that our first question was, is this important? And yes, it is. 83% of the companies have recognized that AI has some level importance to their organization.
00:35:57
Speaker
You can see here the breakout, you know, about 25% or so a quarter saying that it's extremely important. There's going to be industry variation among this certainly, and we've got that data as kind of too much to put in here today, but we certainly have that breakout by industry sector to see where different industries put more importance on AI. But our first question is answered essentially here in that it is being looked at, and it is considered important.
00:36:28
Speaker
So where are they at in terms of implementation or where are they at along the journey? So really only about 30% of the companies today are either actively testing or using AI in some part of their business, or they may have it already embedded. That's by far the minority, less than 10% of the companies are saying it's already embedded within a business function.
00:36:55
Speaker
The larger group, you see in the blue and then kind of the burnt orange there, are still in the learning and discovery phase or maybe doing some exploration, trying to educate themselves a little bit about exactly where this could be most applicable, what could be some of the uses. I know at the center, we are certainly not experts on this, but we've got really strong partners who are a lot more engaged in a lot of not only the development, but
00:37:25
Speaker
the implementation of AI in different forms. And certainly there are a lot of questions around there, right? Security, we've seen it in some work we've done with our friends at Google Cloud that some of the use of cloud, for instance, security is cited as the number one benefit, but also as the number one risk. And so, you know, thinking about those two things in that way is pretty interesting.
00:37:52
Speaker
And there are a lot of open questions out there about the intellectual property of what goes into AI and all those types of things. So interesting to see though that 30% of the companies are doing something with it today.
Summary and Future Outlook
00:38:08
Speaker
When we ask this again in six months, I'm sure that number will just only continue to grow.
00:38:15
Speaker
And again, these are some of the considerations and important elements that these companies are thinking about as they approach the AI question. It goes back to what I mentioned a few minutes ago around the digital journey for a lot of these businesses. Cost remains the number one factor. That privacy security aspect that I mentioned is cited by one in five companies. Having a real business need and a use case
00:38:44
Speaker
I think this is something that along that exploratory journey and discovery, my prediction is that over the next year or two, the middle market will come to see that a lot of others in their industry are probably implementing AI in some way, shape or form, and that business need will become a lot more clear. And then ease of use for their own internal teams and developers and implementation.
00:39:11
Speaker
or some of the concerns that these companies are citing. That brings me to the end of the formal presentation. To summarize a bit, there's a strong growth trend, sound like a broken record, but it has been true over the last two years that both revenue and employment growth remains very consistent in the middle market.
00:39:38
Speaker
Confidence has rebounded certainly from a lot of that uncertainty that was in the environment a year ago. We've now seen two consecutive waves. We hope to see this continue forward as we reach the end of this year. But we also see that there are some lower projections coming in the next 12 months. And that's going to be largely dependent on what occurs in the macroeconomic conditions.
00:40:04
Speaker
Does inflation continue to come down? Does unemployment continue to stay low? Or is there not a recession, as I talked about quite a bit earlier? And then using technology to drive both efficiency as well as managed costs. And in addition to that, kind of this evergreen issue of both attracting as well as retaining talent in the middle market. Inflation and other headwinds,
00:40:31
Speaker
appear to be, at this point, the biggest challenge. And digitization, as I just pointed out, remains a priority to kind of address a lot of these issues on a much longer timeline. AI being a perfect example of that. And that's where most of the middle market is at right now. So again, I think a really good story.
00:40:55
Speaker
We're going to continue to monitor as we do. We're already starting to think about the next survey, so we'll start developing our year-end instrument later this fall. The year-end MMI will go out shortly after Thanksgiving. We typically feel that in the first couple months of December, with the report then coming out shortly after the beginning of
00:41:19
Speaker
of the next calendar year, which will represent our 40th MMI. It's kind of hard to believe that we've put together that many iterations of this survey. But again, hopefully the information is useful. Hopefully you're able to take this and maybe share it with colleagues or clients or do it. That is our function here at the NCMM is to help put a spotlight on these businesses and point out
00:41:49
Speaker
Not only their performance, but what are some of the unique challenges and issues that they're facing. Thank you for listening to The Market That Moves America. Never miss a new episode by subscribing anywhere podcasts can be found. You can also subscribe to our email newsletter at middlemarketcenter.org.