Transcript
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.
Speaker: Welcome to the market that moves America. My name is Doug Farron, executive director of the National Center for the Middle Market located at the Fisher College of Business at The Ohio State University.
Speaker: Today I'm joined by Roger Bailey, faculty member and associate dean who oversees our research centers as well as executive education. Welcome, Roger. Thanks, Doug. Glad to be here.
Speaker: Today, we're going dive into our latest version of the middle market indicator research. If you're not familiar with that piece of research, we've actually been doing it since 2012.
Speaker: MMI is a semi-annual study of a thousand midsize companies all across the country. We um weight that data to the US Business Census and then generate all types of insights about performance, sentiment, challenge, challenges that these companies are facing, capital investment planning.
Speaker: And so we measure these areas, throw in special questions. It's just become a very valuable study to a lot of stakeholders around the middle market. so Wanted to have you on, Roger, as an economist by training and someone who's you familiar with the work that we do here at NCMM to talk a little bit about this most recent wave. So let's start with the big picture. When you look at the data overall, what are some of the headlines that you see from your perspective or the the story of things that are happening around middle market companies?
Speaker: I think the story that's being told is that economic headwinds right now are real. You know, companies in many situations like this would be tightening their belts. But the surprising piece is that middle market companies are still investing strategically to grow.
Speaker: They're finding ways around the bottlenecks, and that's encouraging.
Speaker: Yeah. And so one of the things that we track most closely, we look at growth, just top line revenue growth. And again, you know this has been a trend ah so actually for the last six years, but we see really strong year over year revenue growth. It's it's actually 11 percent average.
Speaker: on average um But as we know, there are also some economic challenges that they're telling us about. So from your perspective, what do you think is kind of that blend of um the resilience of these businesses, but also the fact that they are approaching their future growth with maybe a little bit of caution, ah given these headwinds?
Speaker: Yeah, I'll start out with just a couple of caveats. You know, inflation has been rather high, hovering between, you know, 3.5% and 4% over the last few months.
Speaker: And so we have to be honest about pass-through of these costs and even tariff costs. So real revenue growth is is somewhat lower. But relative to what we've seen over the last year, it is still encouraging.
Speaker: I also want to point out, digging a little bit deeper, the result is somewhat uneven. the Companies between $50 and $100 million dollars actually grew in revenue, ah but those above and below that bracket actually decreased. And so the mean hides a little bit of it, but that core group right in the middle ah is is doing quite well with respect to revenue.
Speaker: But larger picture, you know, the S&P 500 year-over-year revenue growth is over 13%. So in some ways, it's at least possible that the middle market is behind larger companies in terms of revenue growth.
Speaker: Now, some of that could also be explained in cost pass-through and other things where larger companies are maybe just able to pass those costs through more easily to their customers. But it could be several other things as well. And I think the interesting story is while revenue is holding steady, ah revenue expectations going forward dropped by twice as much as year-over-year revenue.
Speaker: So it's clear that confidence in the future is dropping, and that really highlights those economic concerns. You can also see it if you take a look at the economic confidence measures, which the confidence in local economy actually increased while trust in the larger economy dropped.
Speaker: So that's the sort of what's close to me, what do I know, what's the least ambiguous, that's what I'm comfortable with. right And so those economic concerns are really shining through.
Speaker: But nevertheless, i I do think that middle market companies can be more agile, and and they're finding ways to invest that don't require long-term commitment. And it's easier for them to adjust to these market conditions. So that's sort of the the upswing.
Speaker: Yeah, sure. Well, revenue is just one of the um kind of indicators that we look at in this study. Another one being hiring and and growth of the of the workforce. So we see in this latest round that while middle market companies are still adding to their workforces, that hiring rate has moderated quite a bit.
Speaker: It's down to around so a little over 7%. What do you think would be some of the factors around maybe a little bit more measured approach to hiring more people? Yeah, I've been talking about this for about a year, this low hire, low fire job market.
Speaker: and The JOLTS measure around ah job openings and labor turnover around 4.5%. That would normally be associated with a much higher unemployment rate than the low 4% that we're seeing right now.
Speaker: So it's it's kind of a anomaly almost. And the quit rate has been very low too, under 2%. you know, also historically low. So there are some behavioral reasons this might be happening.
Speaker: Part of it is uncertainty and we'll get back to that. But, know, thinking back to the 2022, 23, 24 job markets, those job markets were so tight and finding talent was sort of a nightmare for ah HR managers. You just couldn't find the people.
Speaker: and And so some of this could be a lingering sort of hoarding effect that just wanting to make sure that you keep the talent you have, maybe a better the devil we know sort of strategy.
Speaker: I was talking with a VP friend of mine quite recently about employment, and he had mentioned, you know, I have a significant percentage of my employees are doing about three quarters of the work that they should be doing.
Speaker: But I don't want to fire them because the employees that replace them might only do half of it. So it kind of backs up this thought. With that said, though, i I do think the economic conditions are playing a significant part. It's that the loss to firms of a potential economic downturn or a tariff shock or a cost shock from you geopolitical events.
Speaker: Those are real. And no company wants to go out and hire a bunch of folks, acquire a bunch of talent, and then start rifting positions immediately thereafter. So even if the net present value of a hire looks really good, there's a real possibility that loss aversion is holding back managers from investing in employment growth.
Speaker: Right, right. And related to the comment that you made, even though we're seeing lower rates of hiring, we're seeing investment in things like training, process improvement, even investing in technology, which may be taking more precedent than simply adding more people. So do you think that just is a continuation of that line of thinking that there are other ways to maybe optimize the workplace rather than just hire, hire, hire?
Speaker: No, for sure. i mean, the the job market has loosened, and it's easier to find qualified workers. Although the skills gap is still present, it's become somewhat easier. And we know experienced employees are likely more productive, and increasing productivity is a win-win no matter what. There's never going to be a time in the future ah where I want to decrease my productivity, even if I want to decrease my productivity.
Speaker: number of employees. So the the loss aversion is not there for productivity investments. and So the message seems to be hire the highest productivity workers you can get and then invest in them being even more productive.
Speaker: And so maybe an interesting note is that the larger companies are cutting back on their employment growth even more than the smaller companies are. So you're seeing in the data those smallest companies actually increased employment relative to the the previous MMI.
Speaker: So it' it's kind of an interesting situation. and There's some potential explanations. Maybe the the benefit of that incremental productivity growth for small companies may not be enough to really grow, right? If you only have so many employees, even making those employees more productive might not be enough, right?
Speaker: But something else that I noticed in the Business Outlook and Trends survey from December is that smaller companies were not investing as much in AI. ah But that doesn't seem to be the case in the data we're seeing here, actually.
Speaker: ah smaller companies companies and and the smallest group of companies in this data seem to be investing very heavily in AI and getting quite a high return from it. So yeah, it's it's an interesting sort of paradox there. Our smallest companies are investing heavily and seeing ah ah ROI from their investments in AI, but also still continuing to hire more employees. So it's it's interesting.
Speaker: Yeah, that's a great a segue into the next topic um that you mentioned, AI. And in this particular wave, we had the opportunity to expand our question set pretty substantially around AI adoption, uses, challenges, and so forth.
Speaker: And I know this is an area that you've you've taken a lot of interest in personally, so interested to talk more about this topic. um So let's just start at the very broad view, um you know ai adoption. If we looked at the MMI data from two years ago, yeah i believe it was a very small percentage of companies that told us they were just maybe experimenting with AI.
Speaker: And now we're at a point where nine out of 10 middle market companies are saying that they're actively using it in some way. um and So in your mind or maybe what you see across other you know size businesses, does is it safe to say that we've moved beyond kind of experimentation and pilot and into kind of real adoption of AI?
Speaker: ah Yes and no. I want to be careful with this because ah productivity is definitely up right now. Year over year, non-farm business product productivity rose 2.8% in the first quarter of this year.
Speaker: So we're definitely seeing productivity boom. and And that's a great thing. We we want to see that. But I also want to point out, we're we're seeing a big investment in the technology right now.
Speaker: And we've been through something like this before. I remember the PC boom. And while we invested very heavily on the technology on the forefront, the backend productivity increase took time, the the solo paradox, if you want to look that up.
Speaker: ah and And so, you know, there's some there's some concerns of whether this is something that's going to be long lasting. Have we actually reached it? or Are we just starting? And so, for example, the...
Speaker: percentage of companies that are adopting AI, this is actually in contrast to the business outlook and trends survey I mentioned earlier, where the number was quite low, down in the 30%. And part of the discrepancy there can be, well, there's a big difference between using an embedded LLM to write my emails slightly better or specking out a hierarchy of agents to do research for me and assist me in managerial decision-making.
Speaker: So the the definition of what it means to use AI, i mean, there's any way we can parse that data. And I think the understanding is that productivity is hard to deliver and companies are investing to do that. And so when i i talk about operational execution of AI, I want to be really, really clear that it's It's not just the technology. It's not just like deploying Excel.
Speaker: We really have to rethink the way we use AI and what it means to co-think with AI rather than just deploying it as a technology. It's something we try to avoid. We want to make sure to push and even incentivize that innovation throughout the organization before we can really reach that operational ah efficiency.
Speaker: Yeah. And even outside of this MMI survey, we are hearing from a lot of middle market leaders who ah they're a bit frustrated. Like there's this friction that's like, hey, we're investing all this you know capital and time and and they expect to see these immediate results. from But from what you just described, that may not happen right away. I mean, in other words, they have to be patient and maybe a little bit more planful in how they implement this stuff.
Speaker: Oh, precisely. You know, the the study out of MIT that 95%, I believe this is from later last year, 95% of AI implementation pilots fail to deliver or return on investment.
Speaker: That's ah that's and a staggering percentage. And so the question is, how do you do this the right way? Yeah. and And what we're seeing in this data is kind of in line more with, I believe it was RAND study that said around 80% of them failed to deliver our ROI. But we are seeing some of these companies delivering and seeing a clearly positive return.
Speaker: So it's sort of mixed. that My recommendation for anybody listening would be, you know, do this carefully. Don't just hand it to your CIO and say, hey here's a new technology. I've given you access to Claude. Go do magic. There is a way to do this the right way. And there's AI fluency programs, you know, that we've developed here at at Fisher. And they're really happening all over the country.
Speaker: it's It's important to be thoughtful. Mm-hmm. Yeah. I mean, so yeah, speaking of the college, I mean, as a Microsoft university, we have the co-pilot tools embedded, but I personally have found until I was able to take a few courses on prompt engineering and how to best optimize all the tools that are available, and I was somewhat lost. And so there needs to be some guidance and training around kind of the best use cases for all for all of this technology, which is which is really interesting.
Speaker: um Yeah, and you dove into the data a bit, and I know you have some observations, ah particularly on some of the revenue differences. So when you look at like the smaller end, you so you found that those companies were actually experiencing some higher returns or at least satisfaction with AI? Yeah.
Speaker: Yeah, which is again, kind of against what that business outlook and trends survey found, where smaller companies were actually struggling a little bit more with AI. And, you know, I want to be careful. i i kind of questioned that result because our smaller companies tend to be able to be more agile and doing these sorts of things. There's, there's less red tape.
Speaker: ah The champion model tends to work better when there are fewer people to champion. So ah it may be an actual change through time where smaller companies are realizing the necessity of investing in this technology. And again, I want to be careful not to just call it a technology, ah investing in learning how to, to do this the right way.
Speaker: And what's interesting is again, It's not just the technology. We don't deploy it just like it's in Excel. There's a lot to be done here. And AI moves so quickly. What I taught two years ago in the space of AI and just using LLMs is not something I would teach now. And so if you deploy it as a technology, it's going to be quite difficult. We need to be agile in responding to what the technology can do.
Speaker: We don't want to be overly focused on cost reduction, for example. We really want to be focused on value creation. And that requires innovation and out-of-the-box thinking.
Speaker: And so that's that's a lot harder to incentivize and develop than just simple implementation of a tool. Yeah, sure. So we've been talking for years about the yeah one of the overarching characteristics of middle market companies is they that they are very resilient. They tend to have, you know, they're at the sweet spot where they have the scale to grow, but they also are very agile to shift and make you know quick decisions, as you mentioned earlier.
Speaker: And they're doing all this in spite of some of those macro conditions that you described, high inflation, rising costs. I mean, we had the tariffs over the last year that have um created a little bit of chaos. But yet, on the other hand, they're still investing.
Speaker: you know Two thirds of them are saying, you We're pouring capital back into our companies. What is it that you think gives these leaders confidence to make those types of investments, even when there is all this uncertainty swirling about them?
Speaker: ah It's a great question. You know, it i realize, and I don't want to come across as negative about AI and productivity increases, quite the opposite. I'm a huge believer in adapting AI. And I really do think it's going to be the next golden age of of humanity that will stem from this source.
Speaker: And companies are figuring it out. And I think middle market companies, like you said, are are positioned well to do so. But it is important to do so. Access to the technology is the easy part.
Speaker: We can always deploy this. I mean, Everywhere you look, there's somebody offering you access to some form of artificial intelligence. And that generating productivity does take time.
Speaker: And if you wait for your competitors to solve the puzzle before you even begin, it's too late. this is i I would consider this a buy now or pay later sort of situation.
Speaker: If you don't invest, ah you're you're going to be in trouble. And so because the investment is not necessarily perceived as a cost, more of a necessity, i think they're jumping in. And and the data kind of it kind of tells us why, which is interesting. So 84% of the respondents...
Speaker: Yeah.
Speaker: would be either extremely or very important for achieving their growth goals in the next year yeah simultaneously the biggest expectations of ai roi are an efficiency and operating cost reduction I mean, you're looking at this and saying, well, here's what they need, and they perceive AI as being able to do it for them.
Speaker: So in in this situation, the cost of not investing is higher than the cost of investing, at least in terms of AI. and And even on top of that, note that the level of concern around the threat of AI was the second highest only behind economic concerns.
Speaker: followed up by their preparation being among the lowest, preparation for the threat of AI being among the lowest. So companies realize the importance, they realize what it can deliver, and they realize that it's a necessity. So it's really a no-brainer. It's a win-win to invest here.
Speaker: Yeah, absolutely. So we're heading into the back half of 2026, kind of hard to believe. um But what would be some trends or or things that you're keeping your eye on, Roger, just in the larger business landscape? And then maybe on the flip side of that, what are some of the maybe biggest risks or areas of of uncertainty outside of maybe some of the things we've already touched on?
Speaker: Yeah, I mean, uncertainty in the economy is hard right now. hi It's very clear that there is at least ambiguity on on what is likely to happen any given week, month.
Speaker: ah Geopolitical concerns are real. ah But some things require investment regardless of economic conditions, AI being one of them, but investing in your customers and your customer base, continuing to innovate on your products, et cetera. You can't fall behind on those things.
Speaker: So first I'd say, well, of course, you want to pick your bets carefully and and focusing maybe on some of those longer term bets that, you you know, are always going to have some level of risk, but are those that you know you can expect some return for as long as you're consistent.
Speaker: But, you know, the data shows some positives. You know, we we know that investing in people is wise, and and that's what we see. ah my My primary concern, I guess, would be Markets are kind of on a knife's edge right now.
Speaker: and And this is not doom or gloom, but rather just an observation. if there's a boom in layoffs, for whatever reason, doesn't have to be because of AI, the behavioral effects on consumer confidence could be dramatic.
Speaker: right And so the subsequent shift in the political landscape could also cause significant upheaval. So I would tell companies, mean, you don't want to forget that your employees are also your customers.
Speaker: and And while it's tempting to go out and aim strategically for those greater experience, older workforce employees alone, i think you want to have a more robust approach for your talent pipeline going forward.
Speaker: And keeping in mind that, you know, the health of the economy right now is really being driven by the companies that you're representing in this data. Well, I was going to ask if you had any advice for middle market leaders going forward. We typically wrap our episodes with that, but I think what you just said were some great ah kind of touch points and and a way to recap.
Speaker: how middle market companies should be thinking about the future. So have really enjoyed the conversation, Roger. I think this was great. We covered a lot of different areas in a short amount of time and appreciate you looking at our data a little bit more closely. And thanks again for being on the podcast.
Speaker: That's my pleasure, Doug. Thank you. All right. Thanks. And for more information about about NCMM, visit our website at middlemarketcenter.org and we will talk to you next time. Thank you.
Speaker: 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.
