Transcript
Speaker: No sector of the economy grows faster than tech. In this episode of The Market That Moves America, we'll talk to a 35 -year veteran of the industry about how middle market companies can learn from them to discover and exploit their own growth DNA.
Speaker: Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: We're going to talk about growth today, and in particular, about fast growth, how it happens, and how middle market companies are managing it. I'm Tom Stewart. I'm the executive director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We're the nation's leading research group studying mid -sized companies, which account for a third of private sector employment and GDP, and the lion's share of economic growth.
Speaker: It's the market that moves America. The National Center for the Middle Market is a partnership between Ohio State and Central Bank's Cisco Systems and Grant Thornton LLP. Indeed with me today is a special guest, Steve Perkins, who comes to us from Grant Thornton. Steve is based in Northern Virginia, and he is the National Managing Director of the firm's technology practice. Steve, welcome to the market that moves America.
Speaker: Thanks, Tom. Great to be here, and I look forward to our discussion. How long have you been working with tech companies? Well, believe it or not, I'm a dinosaur by tech standards, but 40 years and some change. The last 25 of those working either in technology, so for technology companies or advising technology companies, as you mentioned, I lead the technology practice
Speaker: for Grant Thornton in the US and globally and that's the work we do for tech companies. Those are information technology products and services companies or media companies or telecommunication companies as we describe it. I've been doing that for about eight years and prior to that I spent 70 quarters. That's the way I think about it.
Speaker: in two Fortune 50 tech companies. So you thought about quarters because you were thinking about quarterly earnings and quarterly reports or because you were counting the months till you could leave.
Speaker: all the scars from those days. OK. So talk a little bit. One of the things that's interesting is you have a bit of a compare contrast view of these big companies with the quarterly pressures and so on and so forth and smaller and mid -market companies. And in our research on middle market companies, we spend a lot of time looking at growth
Speaker: Partly because they grow faster, at least organically, they grow faster than either small or big businesses do. We've just released a new study called the DNA of Middle Market Growth, which we can talk about in a bit. But I want to learn what you see looking at technology. The tech sector itself is growing, but what are the trends you're seeing in technology growth? Well, a couple of things come to mind. First, if
Speaker: If you had to pick a word to describe the tech industry, it would be growth. I think at tech companies, it's kind of like meteors. They're either flashing brilliantly through the sky or they're dying and falling to earth. It's constantly growth and moving forward. Good news is, if I look back to 2016, it was
Speaker: the sixth consecutive year of growth for kind of the number of technology business establishments in the US. There are over 500 of those formed. And interestingly, that definition includes new establishments in existing technology companies. So if you go kind of small and mid market technology companies growing, we actually saw a slight
Speaker: decline in a number of new startups. So the good news is that middle market is expanding and larger techs are expanding as well. And in terms of trends, you know, again, I've, as I mentioned, I've been around kind of 40 years, you see these things coming in the, in the one, the one trend I would point to is actually an oxymoron. It's constant change. So, you know, it's just the accelerating pace of change really architecturally,
Speaker: in the technology industry and that drives new business models and creates opportunities for new companies, presents threats to the existing leadership. When you say architecturally, what do you mean by architecturally? Do you mean new ways of organizing companies or? Well, it's really the technology infrastructure on which products and services get delivered and at which companies consume those. And that kind of an easy way to make
Speaker: For me to think about it is historically, you had a mainframe model, kind of centralized computing that people bought in and implemented. You moved to client server. From client server, you went to PC. From PC, you went to an internet -based model and the kind of internet now has moved to kind of mobile and internet of things. So kind of the organizing principle
Speaker: of the technology and then the way everything kind of operated around it has changed. And that really has fundamentally changed really every aspect from product to distribution to customer support in a technology company. And those used to be, you know, every decade or so we would see a kind of architectural revolution and rotation. And now those changes are really measured in a couple of years or in some cases.
Speaker: wants to the pace is accelerating if anything else. So Steve, one of the things you said was interesting. You said many things that were interesting. But one thing that struck me in what you just said is that within the tech sector of software services, products, and so on and so forth, A, we're seeing a lot of growth, just revenue growth. B, we're seeing a lot of growth in terms of more companies being spawned and created. So a bigger pool of money.
Speaker: a larger number of fish in that pool or people trying to fish in that pool for the money or whatever that metaphor is going to be. But you also said that you saw companies that are really thriving and companies that are flaming out. And what are some of the things that the thrivers—
Speaker: I mean, if you were to sort of look at, you know, two companies standing next to each other and they might look alike and you say, you know, this one's going to win and this one's going to kind of flame out. What would be the characteristics of the winners? You know, a couple of things come to mind. One is a relentless focus on customer and in regards servicing that customer, but also listening to that customer because they're going to tell you when the shift is needed.
Speaker: Many companies start, as you know, with a tremendous product idea. And it's the early strength of that product that drives the marketplace. But over time, you need to expand that product. You need to take it to the new market. You need to enhance that to continue to grow. And if you sit in your engineering lab and work on that problem
Speaker: you tend to miss the market, either from a timing perspective or what the market really needs. So it's this focus on competition, I think, a big one. Another one is, and this gets back to our discussion about the pace of architectural change, is looking out below for new competition. And I think I'm an old strategy partner, so I think back to Michael Porter, Harvard Business Model 6 forces.
Speaker: And you talk about disruptors. This is particularly true in the technology industry where products and services that are kind of inherently not yet at scale or not fully functional, all of a sudden grow up really, really quickly to be threats. An easy example to think about is the whole move to cloud or as a service functionality. So, you know, Amazon Web Services, which
Speaker: In its early days, you know, it was a web hosting kind of capability as a service infrastructure. All of a sudden is single largest infrastructure or as a service provider in the world in large companies are moving there. That shocked many established infrastructure companies. Same thing's true in the application space of what Salesforce did around a customer relationship management and really took apart the on -prem.
Speaker: players were much, much more established. So those, you know, this below the bottom is one. And I guess the third thing I'd say is, you know, culture matters even in technology companies and those that kind of build and embrace a culture and then adjust that culture as they need to change are the ones that survive. An example in the culture space, so we think about
Speaker: It seems like a long time ago, but a half a dozen years ago, the sales model and corporate culture in many technology companies was all around selling new customers, new products, which they would have in an on -premises model they'd buy and keep for life. That model shifted to a model now where you rent the software, rent the infrastructure,
Speaker: So rather than now having to sell a deal at a time to new customers, you really have to sell that same set of customers on a constant basis to shift from a deal culture to a customer for life culture. And those are two fundamentally different cultures.
Speaker: That's interesting. If you think about your three points, I want to pick each of them apart a little bit. In our study on the DNA of middle market growth, we identified seven key growth drivers, and one of those drivers
Speaker: is the search for new markets, which can be new customers, selling more stuff to existing customers, adding new customers, geographical expansion, that sort of thing. And a second, of course, is new products and services, so innovators. And one of the things that's interesting is when we looked at the companies that
Speaker: tended to emphasize. They majored in innovation. They tended to be a little smaller and a little younger than the companies that majored in scaling and majored in that market expansion. So the point that you made about
Speaker: about a company as a startup, you got a wacky engineer with a great product and he's sitting there tinkering or she, and then comes out and encounters customers and your eye needs to get up from the screen and meet your customer in the eye. That seems to show up on a large level as you look at middle market companies growing, there seems to be some evidence that they move from becoming emphasizing innovation first and foremost to
Speaker: emphasizing the expansion of their market footprint. Does that does that resonate with your experience? It does. And I've had a personal experience, as I mentioned, I came out of the software world and the big enterprise software world. And, you know, there's a tendency to believe, and this is probably rightly true, that you can build a set of products better than anybody else. And that's that, as you said, that innovator engineering mindset as a startup.
Speaker: But there's always a question about whether you can build that set of products quickly enough to time the market. So it's this balance as you get larger between what do I build and what do I buy and how do I manage that? And you've seen companies, like Oracle's a great example for the first couple of decades that they were around, it was largely organic product strategy.
Speaker: where they built an infrastructure database in middleware and then moved to the application space and then shifted when the market began to shift underneath them as a service or a cloud model going through an acquisition model. They completely changed the way their product development philosophy worked. And those that are nimble enough to adapt like that are those that survive.
Speaker: Yeah, and that sort of brings to that second point that you made, which was really interesting about companies like Salesforce and others that create platforms, Amazon Web Services was another you mentioned, that create sort of large software ecosystems, environments that other companies can use and leverage for growth. And you go back to
Speaker: You know, to the beginning of your career, if I were going to be building my company, I would need to build my IT infrastructure out myself as, you know, adding more servers and adding more guys in the glasshouse with pocket protectors, right, as I'm building out my capabilities.
Speaker: I think now I can grow by leveraging these others. And it seems to me that this is something that mid -sized companies particularly should really be trying to understand. How do I leverage these others platforms so that I don't need to build it myself? I think that's exactly right. And there are two parts of that. As I'm starting out,
Speaker: As you've described in the past, I had to commit a significant amount of financing just to build my infrastructure, kind of lay the track before the train. In today's, I can rent that infrastructure and scale it up and down as I need to. I can dedicate more of that early financing to product development and salesforce and the salesforce development, those kinds of things. So I've got, I'm more focused on product than the structure.
Speaker: The other is the question of strategy, and I'm a little biased as an old strategy partner, but strategy matters. So if I think about the platform business, I think it's very important for a product company or service company to think about, as I'm going to new markets or I'm going to new products, do I do that directly? Do I build that capability myself? Or do I partner for that? What's my ecosystem model?
Speaker: What does that ecosystem model need to change to over time? And there are good examples of companies who've done that. It's an interesting paradox, right? Because when we think about strategy, you sort of think, double down on those things that make you different. Double down on those things that are absolutely core. So we start with that idea.
Speaker: And then we think companies are becoming more digital. Everything's becoming more digital, but at the same time, I can outsource more digital. So there's this interesting question about how I make these choices about—
Speaker: as a growing company, what digital am I going to do myself? Or what part of digitization embodies my DNA? And what part of my digitization can I leverage off the DNA and off the capabilities of other companies? How do you make those choices as a strategist? I mean, if I'm not an IT company, but I'm an IT customer. Well, I think, as you mentioned, it's kind of isolating. You've got to isolate the problem.
Speaker: So is my problem that I've got for growth now? My current products are fine. I need to take them to new markets. So what's my next market? Am I going from small and medium sized business to enterprise? Am I going from the US market to Europe? What is the change? Am I going from
Speaker: a set of products that work perfectly fine in the industry they were built for. So maybe retail, but I want to take that set of capabilities to an industry, thinking about what that product set is, and then how do I get there? So again, if you look at the example of Salesforce through the Microsoft holidays, they had infrastructure products, and to get the industry specialization they needed,
Speaker: they partnered. They created ecosystems around them so that companies would build on top of their infrastructure, set of industry -specific features and functions they needed. And they got to reach a broader set of customers that way. And then, obviously, it was good for their third -party partners as well. Behind them, the power of those
Speaker: And then over time, you begin to think about that strategy. Is that still the right way for me to do it? Do I have enough control over my products? Do I need to acquire one of those third parties? Do I need to build it myself? Think about the same thing on the distributions I do. Do I use agents to enter the market? Do I use resellers?
Speaker: Yeah, do I use assessment integrators in this model? And then constantly re -evaluating that model as things change because they will. You just get, for some reason, you put into my head a screwball question. So let me throw a screwball at you. We hear a lot about the lessons that non -tech companies can learn from tech.
Speaker: And it sometimes makes me wonder, what are the lessons from technology that I should avoid if I'm a non -tech company? Or flip side, what are the lessons technology companies should learn from, I don't know, bowling alleys, auto dealers, non -tech companies? So you think about these things in this rapidly changing tech environment. Sometimes I wonder whether
Speaker: Whether the emulation of technology can be a mistake and what are some of the of technology companies can be a mistake and What are some of what is some of the advice you might give to companies that when you say no? No, no, really don't try to do that at home. You're not it. This is you're not your business It's interesting the And a baseball analogy is great because we've got the all -star game here in Washington this week so
Speaker: Or you can flip the question. You can flip the question. What advice you give to technology companies saying, learn from GM on this one, guys. It's terrific. The first thing I'd say is the difference between a tech company and a non -tech company is blurring dramatically, as you well know. And that's not just the digitization of every industry through new technology, architectures, and products and services, but it's the fact that many
Speaker: companies now are selling technology products. I think of the Amazon example, you know, for their publishing business. I guess this is really a Jeff Bezos business. The Washington Post, they built a content management system that they're selling into the marketplace, not commercially. General Electric has, I'd have to check my number, but at one point had a $4 billion software business.
Speaker: That's not money they were making using software. That's money they were making selling industrial internet products and those things. So I think there are lessons that traditional companies need to learn as they become technology companies. And part of this, I think, is this pace of change, the willing to experiment,
Speaker: You know, the old story in technology, you know, fail, but fail fast. And also maybe that managing the customer, not just for transactions, but for a relationship as if they were renters. Yeah. That's exactly right. Conversely, I think technology companies, especially as they mature, you don't need to think about things that other industries think about, this customer orientation,
Speaker: a focus on right -sizing infrastructure and process, kind of moving from growth and quality growth to quality earnings. How do I, as I mature, revisit all of the infrastructure, the processes that I've built over time very, very quickly?
Speaker: to rationalize and improve profitability as I mature and growth plateaus. These tech companies are all s -curves, right? They kind of start out, they grow very quickly and then they mature. The successful tech companies over time have multiple s -curves, but many don't. So I think that's another one. And then I'd go back to strategy. Having a plan, having executive agreement about that plan, then execute that plan.
Speaker: I think is another one. And then the final one for me is talent, especially as companies move to new markets, accelerate growth. The people who are the successful team that you started with are most likely not the team that you next place. You need more experience, different experiences.
Speaker: And that idea of managing talent as a corporate asset, I think you see in more established industries.
Speaker: You don't know this, but you just ticked off, in order, the four most important drivers of growth. We did this study, as I said, of 20 ,000 companies and hundreds of data points from each one, and were able to do with a Bayesian and factor analysis, these factors that influence growth. And in order of impact, those four are
Speaker: The focus on customers and markets, as I mentioned, then you mentioned the multiple S curves, the focus on innovation, making sure you're refreshing it. The third element was having a formal growth strategy and a process for putting that for developing that strategy and executing it.
Speaker: And the fourth was developing the right talent. And there were three others that matter in there, too, but those are the big four factors.
Speaker: Nailed it. It's wonderful. Let me close with one question, Steve, as you think about this. You hit on this now when you were talking about multiple S -curves. You see companies going through this rapid growth
Speaker: And then it always flattens out. And if you have another S -curve coming, it takes a little while. But there's always that danger, I suppose, that it's sort of like, you know, you're going to fly up that S -curve and fly off into outer space.
Speaker: and get way out over your skis and not know what you're doing. How do companies avoid that fate while at the same time capturing as much as they possibly can of that rapid growth? Because they don't give that back to you. You don't get a second chance to ride that S -curve. I mentioned this constant re -evaluating what you're doing and how you're doing it.
Speaker: and then optimizing that performance. This idea of, you know, I'm growing at a pace where I can hear the rivets rattling because I'm growing so quickly and almost necessarily the infrastructure I put in place, the processes I put in place, you know, are not going to be the optimized or practiced big term you think.
Speaker: Yeah, I'm just doing the best. I'm slapdashing. I'm running so fast that I can't do anything. I can't do anything else. I'm just growing so fast. So figuring that out and beginning to look and putting somebody in charge of rationalizing that infrastructure, driving best practice, and elevating that as a leadership role and goodness within the company.
Speaker: Many times those folks are viewed as a deal police or people are slowing down growth. But recognition that we need to turn growth to profit. Profit to high quality consistent profit I think is something that you need to do on a regular basis. That's the one that I would stay focused on. We talked about this looking from the bottom.
Speaker: And I think, especially in the technology industry, it's good to be frightened because you absolutely know that there is a wave of architecture coming through that's going to challenge you. And that can either be an opportunity or a risk. So this idea of setting up within your company groups who are focused on putting you out of business,
Speaker: What's the set of products and services that will be my direct competitors and kind of testing those? I think it's fascinating. Steve, as you were talking about this, you at the beginning of this conversation, you said you've been in the technology space for four decades, for two generations of people.
Speaker: 200 generations of technology. And I think what we've just heard there is the wisdom or the value of having the long view of something that has so much short -term spin in it, to be able to see the road as well as the speed with which the wheels are turning on it, I think is pretty critical and a good example of how somebody like you can provide good advice.
Speaker: So with that, Steve Perkins, who is the director of the technology practice, the national managing director for the technology practice for Grant Thornton. Thank you very much for joining us. You can learn more about Grant Thornton's technology practice by going to their website, which is grantthorton .com slash industries slash technology. And as I mentioned, our new report, the DNA of middle market growth,
Speaker: A study based on five years of data from 20 ,000 middle market companies. You can find that on the website of the National Center for the Middle Market, and that website is middlemarketcenter .org. So thank you all for listening to The Market That Moves America. Never miss a new episode. Subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever fine podcasts can be found. Or, as I said, you can subscribe and learn more about us at our website, middlemarketcenter .org.
Speaker: Thanks very much.
