Forbes Insights – Inspired for Growth

InspIred for Growth

Lessons from mIddLe market CompanIes

In assoCIatIon wIth:

ContentsForeword............................................................................................................2

Key findings........................................................................................................3

Methodology......................................................................................................4

Optimism abounds.............................................................................................5

What’s driving growth?......................................................................................6

Agility is essential...............................................................................................7

How to grow when markets won’t ....................................................................8

Funding growth..................................................................................................9

Establishing priorities…………….…………………………………………………………….………10

The rise in customer focus……………………………………….…………………….……….……11

Customers are like honeybees.........................................................................14

A focus on the workforce.................................................................................15

Growing pains..................................................................................................16

Building a talent management function………………………………………….……………17

Where are the challenges?..............................................................................18

Conclusion.......................................................................................................20

2 | Lessons from middLe market companies

foreword What does it mean to be a middle market company in today’s economy? to gain some current

perspectives, we’ve partnered with Bmo Harris to execute a survey supplemented by interviews

with senior business executives and consultants. and here’s what we learned.

You’re likely profitable – and that means you’re a growth engine within the U.S. economy. You’re optimistic about your own company’s future – even if somewhat less upbeat about the broader economic picture. You’re agile – just the right size to address the evolving needs of the marketplace. You’re also likely very close to your customers, employees and other stakeholders. And for all of this, larger companies admire and even envy what you do.

But you can’t stand pat. The competition never sleeps. Technology is advancing and customer needs and wants are in constant evolution. And you’re going to grow – and with that growth comes a host of new challenges.

You’re on a first-name basis with customers today. But as your customer list expands, how can you maintain such inti-macy and focus? Your workforce is motivated, focused and entrepreneurial. But how will you sustain this culture as the volume of work multiplies, employee ranks swell, and bureaucracy and control infiltrates? You know who does what today – but what are you doing to anticipate future needs? Are you assessing your talent gaps? Do you have adequate training, development and succession plans?

You’ve done very well. But continued success depends on how clearly you identify the challenges ahead and how capa-bly you prioritize and execute your responses. To that end, please consider the following collection of statistical, anecdotal and consultant-provided information – which we hope will prove useful.

-Bruce H. Rogers, Chief Insights Officer, Forbes Insights

copyrigHt © 2012 Forbes InsIghts | 3

foreword key fIndInGsThe middle market defies the broader downturn. In spite of a weak U.S. economy, three out of five survey respon-dents experienced revenue growth over the past two years. Meanwhile, only one in eight reported revenue declines.

Executives are optimistic about their own futures… Nearly three-quarters of mid-market executives say their compa-nies are poised for continued revenue growth.

…but less so about the broader economy. Outlooks for the U.S. economy as a whole are less sanguine, with one in four survey respondents not seeing broader recovery until 2013 – and just under one in five looking to 2014 or beyond.

Agility is essential. Alongside optimism and plans for growth, middle market managers are also keenly aware of the need for strategic flexibility. These executives view agility as one of their core competitive weapons. Two-thirds say that to grow and thrive in today’s economy, companies have to change strategic course. Meanwhile, a third of executives say that in order to grow, companies will need to completely change their business model.

Corporate ‘to do’ lists feature two imperatives. Executives are confident they understand what drives growth and are in turn prioritizing their efforts. Improving the customer experience garners the top ranking by a wide margin – both now and in five years. Workforce issues – the need to more effectively manage talent – is the second highest ranking priority.

The customer is king. Survey results and interview anecdotes show that midsize companies view customer intimacy and focus as the keys both past and future success. Moreover, customer issues dominate the list of potential external risks – so-called “game changers” – that could conspire to inhibit growth. Consequently, executives aspire to building and sustaining customer-focused cultures and operations and are backing it up with resources and initiatives.

Employees are more important than ever. Middle market executives recognize that without the right people in the right roles, even the best-laid strategic plans fall short. Moreover, as a midsize company grows, it runs the risk of losing its entrepreneurial character. Not surprisingly, the top six internal game changers – key risks to growth plans – all relate to the workforce. Consequently, executives are recognizing their acute needs to develop more effective processes for recruit-ing, developing and retaining essential skills.

Political headwinds don’t help. The survey shows that midsize companies view regulatory activism and uncertainty as the greatest threat to their future growth prospects. In particular, executives are concerned about the implementation of new healthcare regulations. At the same time, midsize companies are also aware of their constant need to watch out for competition from peers, startups – and larger companies.


methodoLoGy The insights and commentary found in this report are derived from both a survey instrument and personal interviews.

The survey, conducted by Forbes Insights in December 2011-January 2012, was completed by 313 executives. Key demographics include:

Executive title: VP/Director (41%), CFO (12%), CEO/President (11%)

Company size: $250 million to $499 million (21%), $100 million to $249 million (35%), $50 million to $99 million (43%)

The sample features a wide spectrum of industries with no notable concentrations beyond retail and wholesale trade (20%) and healthcare (14%). Respondents are also relatively evenly distributed throughout the U.S.: Northeast (27%), Midwest (27%), Southeast (21%), Southwest (17%) and Northwest (7%).

Interviews were conducted with six senior executives representing businesses chosen from the Forbes 2011 list of the 100 Best Small Companies in America (rankings in parentheses). They include:

• Donald Brown, chairman, president and CEO, Interactive Intelligence Group, Inc. (8)• Joe Chalhoub, president and CEO, Heritage-Crystal Clean (82)• Edward Evans, CEO, Inteliquent (38) • Harry Herington, CEO and chairman, NIC Inc. (20)• Joe Mansueto, founder and CEO, Morningstar (70)• Brian Mueller, CEO, Grand Canyon Education, Inc. (4)

Then, to gain further perspective on key issues uncovered by the research, additional interviews were conducted with three external consultants:

• Daniel Friedman, senior partner and managing director, the Boston Consulting Group • Colleen O’Neil, PhD., senior partner, Mercer • Don Peppers, founding partner, The Peppers & Rogers Group

Forbes Insights extends its gratitude to these executives.

Some charts may not add up to 100% due to rounding.


optImIsm abounds U.S.-based middle market companies are proving to be an engine of economic growth. Though far from immune to the economic downturn, both the survey and accompa-nying interviews indicate the sector is weathering things well. Optimism among middle market enterprises is prev-alent across a wide range of industries. Consider:

• Private education. Arizona-based Grand Canyon Education, Inc., offers postsecondary education services through its private Grand Canyon University—online as well as on campus. CEO Brian Mueller says he expects swelling enrollments will drive his firm’s approximately $400 million in current annual revenues to grow from 13% to 15% in each of the next three years.

• Environmental services. Joe Chalhoub, presi-dent and CEO of Illinois-based Heritage-Crystal Clean says the biggest challenge for his $120 mil-lion company “is to manage growth, as we expect our revenues to increase dramatically (by) the end of 2012.”

• Software and services. E-government-focused NIC Inc. builds official websites, online services and secure payment processing solutions for more than 3,500 federal, state and local government agencies. Today, says CEO Harry Herington, the company works mainly with state governments. But over the next several years he anticipates that “federal agencies will become major contributors to our growth.”

Such anecdotes are well-supported by the survey results. Over the past two years, three out of five respon-dents - 61% - experienced revenue growth. Only one in eight, 12%, reported revenues had contracted over the past two years either somewhat (6%) or significantly (6%).

Turning to the future, nearly three-quarters of mid-market executives, 72%, forecast that their own revenues will continue to grow. This stands in contrast to a more guarded outlook for the economy as a whole, where 44% of respondents do not expect recovery until later (26% say not until 2013 and 18% say 2014 or beyond). As NIC’s Herington explains, “I have far more confidence in our own ability to grow than I do in prospects for the over-all economy.”

FIgure 1: How did your organization’s revenue change over the past two years?

26%

19%

16%

15%

12%

6%6%

n grew significantly (>10%)

n grew somewhat (6% to 10%)

n grew slightly (1% to 5%)

n stayed the same

n contracted slightly (1% to 5%)

n contracted somewhat (6% to 10%)

n contracted significantly (>10%)

FIgure 2: How do you expect your organization’s revenue to change over the next two years?

29%

29%

15%

14%8%

4%

1%

n grow significantly (>10%)

n grow somewhat 6% to 10%)

n grow slightly (1% to 5%)

n stay the same

n contract slightly (1% to 5%)

n contract somewhat (6% to 10%)

n contract significantly (>10%)

FIgure 3: When do you expect the economy to recover?

22%

18%

18%

26%10%

5%

n 2013

n second half of 2012

n it’s already recovering

n 2014 or later

n first half of 2012

n don’t know


what’s drIvInG Growth? Executives point to a range of growth initiatives and drivers including not only organic growth but also new products and even M&A.

At Heritage-Crystal Clean, a good deal of expected revenue growth can be attributed to a new line of busi-ness: re-refinement of oil. A just-completed facility in Indianapolis represents tremendous potential for the company, says Chalhoub, as it leverages “the branch [dis-tribution] network we have built up over the past decade.”

Inteliquent is a Chicago-based provider of voice, IP and Ethernet telecommunications. CEO Edward Evans attributes past growth both to new product offerings and to moving into new U.S. markets with existing products. However, the executive sees organic growth also “going hand in hand with acquisitions, as and when the right opportunity occurs.”

A similar story comes from Indiana-based Interactive Intelligence Group, Inc., a provider of unified IP business communications software and services. “Our expansion has been mainly moving upmarket, selling our [existing] software and services to larger organizations,” says Donald Brown, founder, chairman and CEO.

Such vignettes closely align with the survey findings. Growth initiatives and drivers include organic growth (cited by 35% of respondents), new product or service launches (35%), sales and marketing efforts (33%) and the use of technology (26%). Mergers and acquisitions, new distribution strategies and international sales will also play a role (see figure 4).

FIgure 4: Where do you expect growth to come from?

Organic growth

Launch of new product or service

Sales and marketing efforts

Use of technology

Mergers, acquisitions or joint ventures

New distribution strategies

International sales

35%

35%

33%

26%

16%

10%

7%

0% 25% 50%

note: executives could select multiple responses.


aGILIty Is essentIaL Alongside optimism and plans for growth, middle market managers also seem keenly aware of the need for strategic flexibility. Two-thirds of executives either strongly agree (23%) or somewhat agree (44%) that to grow and thrive in today’s economy, companies have to change strate-gic course (see figure 5). Meanwhile, a third of executives either strongly agree (4%) or somewhat agree (30%) that in order to grow, companies will need to completely change their business model.

FIgure 5: in order to grow and thrive in today’s economy, companies have to change strategic course.

44%

22%

23%

9%3%

n strongly agree

n somewhat agree

n neither agree nor disagree

n somewhat disagree

n strongly disagree

FIgure 6: in order to grow and thrive in today’s economy, companies have to completely change their business model.

34%

26% 30%

6% 4%

n strongly agree

n somewhat agree

n neither agree nor disagree

n somewhat disagree

n strongly disagree


HoW to groW WHen markets Won’t

What are you advising your clients in terms of achieving growth in a slowing economy? We’ve identified almost 80 demographic, economic and behavioral megatrends, which have the power to reshape economic opportunity and risk. they are to business growth what tailwinds are to an airplane flight. nearly 80% of these megatrends continued to grow during the downturn, and 23 actually strengthened in importance.

the group that kept its momentum includes demographic trends, such as the aging of the population, the rise in obesity and dieting. this group also includes trends related to health and wellness, such as organic products or nutraceuticals.

the trends that strengthened and, according to our analysis, will sustain their level of growth for the foreseeable future, are: trading down, product commoditization, the dominance of new media, the increase in wireless communications and the rise of china, among others. also strengthened is a group focused around anxiety: identity theft, the rise of counterfeit brands and loss of trust in organizations.

how can executives latch on to megatrends? the ability to spot a megatrend and its effects on markets usually requires mental if not physical distance from the trenches of day-to-day business. it takes effort to spot the megatrends and to position the business to benefit from it.

how important is changing the business model? it’s prob-ably one of the toughest things to accomplish, because it re-ally means fundamentally redesigning what you’re offering to your clients. probably the best example of all is apple, the way they totally redesigned the business model for how you sell and access music. the genius of steve Jobs was coming up with a business model where they actually offered easy ac-cess to music at one single price and song unbundling instead of buying the whole cd. and they created a great device to store and share the music, and to access it easily through the computers and through the internet.

talking with executives, both at technology and non-technol-ogy companies. i’ve heard a wide set of opinions about what’s leverage-able for their own environments. there is one aspect

that applies. apple is very well known for testing things and adjusting as they go. i don’t think they launched necessarily always the final and the best product, but tested and kept refining as they went along.

Do slower markets offer any opportunities? it’s a good time to think about mergers or acquisitions. data shows that in times of lower growth, the deals you make are more likely to generate higher value, because you tend to avoid overpaying for a business.

We’re not in a healthy economy yet. there’s still quite a bit of uncertainty, so i would say that in terms of mergers or acquisi-tions, there are good opportunities out there. to do nothing and just wait is probably the biggest risk.

Q&a: daniel friedman, senior partner and managing director, the Boston consulting group


fundInG GrowthGrowth plans are seemingly unhampered by any lack of capital availability. Despite evidence of a general slow-down in commercial bank lending, two out of five survey respondents say they are able to access bank loans, and almost a third are able to rely on retained earnings. Hardly any are depending on new share issues for funding, reflect-ing the fact that only one-quarter of respondents were from publicly traded companies.

At least some mid-size companies are in the sweet spot of having cash on hand and little or no debt, with poten-tial access to the equity or debt markets when they need it.

Heritage-Crystal Clean launched an IPO in 2008 to help strengthen its balance sheet and provide greater access to capital. It later made a secondary share offering to partly finance the used oil re-refining facility in Indianapolis. “We also have a bank line of credit if we need more capi-tal,” says Chalhoub.

Chalhoub notes there are both advantages and disadvan-tages of being a publicly traded company. On the plus side the executive sees more capital for expansion and growth, a means to enable employee equity participation as well as improved visibility and perceptions of the company.

But in exchange, disadvantages include expanded reporting and compliance along with associated costs including external audit and directors and officers liabil-ity (D&O) insurance. A public company also loses, to a significant degree, its ability to hide its strategies from competitors, says Chalhoub. Still, “overall, for our com-pany, we feel strongly that the benefits exceed the costs.”

Publicly traded Inteliquent was able to finance its acquisition of Tinet with internal cash balances. “We generated approximately $42 million of free cash flow in 2010,” says Evans, “and we don’t have any debt.” However, he adds, “access to capital markets is impor-tant, especially for mergers and acquisitions, and we are well positioned to go back to those markets when we need to.”

At Interactive Intelligence the issue is what to do with surplus cash rather than how to raise more of it. As Brown explains, “we have not paid dividends to date, but we did repurchase stock a few years ago, and we have made a few small acquisitions, all from internal cash balances.”

FIgure 7: From where is your organization currently receiving financing?

Bank loan

Retained earnings

Grants

Personal sources

Private placement

Government sources

Investment banking firms

Foreign investment

New share issue or IPO

We don’t currently receive financing

Franchising

Hire purchase or leasing

Rights issue

Loan stock

Small Business Administration

Venture capital firms

Other (please specify)

41%

30%

17%

17%

14%

13%

10%

9%

4%

8%

3%

7%

2%

7%

1%

7%

1%

0% 25% 50%



estabLIshInG prIorItIes In terms of current priorities, improving the customer experience tops the list, with three out of five respondents, 60%, citing this initiative as extremely important. Five years hence, the objective still retains the top spot on exec-utive’s strategic to-do lists (see figure 8).

“We believe we already have a high standard of cus-tomer service,” says Inteliquent’s Evans. “The challenge is not to let that slip, making sure that people stay motivated and focused on the customer as we expand.”

The next two most prominent issues in terms of stra-tegic priority are not only in a statistical dead heat for second place, but both involve an organization’s peo-ple. Optimizing sales force effectiveness edges building and retaining a qualified workforce by a single nominal percentage point. That is, 47% and 46% of executives, respectively, regard these objectives as of today, extremely important. Five years hence, however, relative positions shift, with those viewing the broader workforce initiative as extremely important rising to 54% versus only 49% for sales force effectiveness.

Though viewed by fewer executives as extremely important, a wide range of additional initiatives are by no means unimportant. For example, weighing in as the num-ber four and five priorities both today and in the next five years are the development and launch of new products and services as an extension of existing offering as well as entirely new categories (see figure 9).

Again it must be emphasized that a low frequency of citation does not mean the issue is insignificant. Indeed, the

statistics in each instance show the percentage of executives viewing an area as extremely important. Put another way, though neither strategic acquisitions nor global expansion break into the top 10 ranking for today, they both remain extremely important to one out of five companies.

49%

57%

54%

45%

55%

49%

* numbers in parentheses are the percentages of executives ranking the initiative as extremely important

today five years hence five years ago

FIgure 8: strategic priorities: present, future and past

Improving customer experience

Optimizing sales force effectiveness

Building and retaining a qualified work force

47%

60%

46%

48%

44%

42%

33%

29%

26%

30%

31%

18%

50%

today five years hence

* numbers in parentheses are the percentages of executives ranking the initiative as extremely important

FIgure 9: Rankings

Launch new products/services (an ext. of current offerings)

Launch new products/services (entirely new)

Streamline/update business model

Develop new business models

U.S. expansion

Get involved in local community

Improve government relationships

Strategic acquisitions

Establish/expand globally

Consolidation

44%

40%

38%

31%

29%

26%

23%

22%

20%

14%


the rIse In Customer foCus One of the most consistent sets of findings across the whole of the survey is that middle market companies appear to be operating with a heightened awareness of the importance of a customer focus. Improving the customer experience has already been highlighted as the priority most fre-quently cited as extremely important. But responses to three additional questions show that customer awareness and focus literally pervades middle market mindsets.

For example, asked to identify the factors con-tributing most to their organization’s growth, the most frequently cited is a focus on customer expe-rience – mentioned by 46% of respondents. Then in another question, executives were asked to evaluate the criticality of a list of potential external forces or game changers. Here, four of the top f ive issues most frequently rated as extremely signif icant all exact an impact on customer relationships, including: pricing pressures, decreased customer budgets/spending, falling customer demand and increased domestic competition.

And in a third survey question, executives were asked where they would be focusing their resources going forward. Here, three of the top four areas are again cus-tomer-related, including: customer service, new product/service development and sales (see figures 10, 11 and 12.)

All of the above underscores the middle market’s belief in the importance of customer relationships. It also goes a long way towards explaining why many middle market companies feel they need to devote greater resources and attention to these issues.

0% 25% 50%

FIgure 10: What do you think have been the most critical factors contributing to your organization’s successful growth?

Focus on customer experience

Getting new products/services out in a timely manner

Investments in new technology

Adequate financing

Emphasis on attracting and retaining the best talent

Wider use of social media

Ability to adapt to regulatory changes

Changing business model

Deep bench of experienced senior executives

Ability to adapt to changes in market pricing of inputs or raw materials

Participating in a successful merger or joint venture

Industry consolidation/faltering competition

Return on investment in R&D or product innovation

Acquisition

46%

33%

29%

25%

23%

16%

16%

14%

12%

11%

11%

8%

7%

5%



FIgure 11: What external forces are the likely biggest game changers for your company?

Pricing pressures

Decreased customer budgets / spending

Regulatory and legislative pressures

Falling customer demand

Increased domestic competition

Emerging technologies

Volatile commodity/input prices

Higher energy prices

Access and management of capital

Lack of qualified workforce

High real estate costs

Rising labor costs

Risk management issues

Competing products/services

Volatile export markets

Increased foreign competition

41%

36%

35%

31%

30%

25%

22%

27%

22%

24%

17%

27%

22%

23%

17%

16%

0% 25% 50%

A good example is Heritage-Crystal Clean. Many com-panies rely on customer satisfaction surveys to gauge customer sentiment. However, says CEO Chaloub, “if you have a lead-ing position in the market, customers may give you a high score anyway as a matter of course – so we try to dig deeper.” For example, the company looks for additional indicators of customer satisfaction such as the ratio of competitive wins to competitive losses, or more simply, the rate of growth in the customer base. And while there are no publicly reported statis-tics in this area, “it follows that if we are winning more than we are losing, our customer retention rate is probably higher than others in our industry.”

Of course, there are many paths to customer satisfac-tion. At Interactive Intelligence, CEO Brown says “we spend roughly 17% of revenues on R&D, compared with 10% to 12% for most companies of our size.” In this way, says Brown, the company is in a better position to “offer the products the [markets] need.”


FIgure 12: Where are you focusing your resources within your organization?

Customer service (adding, retaining and servicing clients)

Changing or evolving our business model

Developing new products and services

Sales

Geographic expansion

Expanding facilities we already have

Community initiatives/giving back to the community

Technology/IT

Manufacturing

Advertising and marketing

Shipping, distribution or logistics

Hiring, employee compensation, and/or employee training

Procurement/purchasing

Acquisition of a business


43%

35%

35%

33%

27%

22%

9%

26%

15%

22%

7%

25%

11%

20%

1%

0% 25% 50%


41%

36%

35%

31%

30%

25%

22%

27%

22%

24%

17%

27%

22%

23%


customers are Like HoneyBees

What do you mean when you talk about improving the cus-tomer experience? the customer experience is the sum of every single interaction or interchange, whether that’s a web visit or mobile application, visiting your storefront or a dis-tributor, using your product or service, phoning for customer service – or increasingly, even when viewing or authoring con-tent about your company on social media. customers don’t make distinctions – they view any interaction within the scope of their total relationship. so businesses need to do their ut-most to optimize the customer experience and prevent simple missteps that can harm these relationships.

What do midsize companies do well in this area? Being smaller can have its advantages. midsize companies are of-ten closer to their customers because they are more entre-preneurial. the list of key customers is often short enough to reside in the founder’s head or in the memories of front line managers. relationships are more intimate and responsive – there’s no buffer between the customer and those who can get things done.

What should midsize companies do to improve the custom-er experience? the single most important thing you can do is develop an employee culture where the central mission is do-ing what’s right for the customer. you can use advertising and flash to tell the customer they’re getting a great value from your company. But that will only drive the initial experience. it is the quality of that initial experience, and then all the sub-sequent experiences – product or service quality plus every other aspect of the experience – that determines the degree of customer satisfaction, in turn driving trust and long-term customer value. every employee needs to understand and then commit to delivering on promises to customers.

Are there aspects of customer experience where mid-size companies can learn from larger companies? Larger companies have a lot of tools – like their customer relation-ship management (crm) systems – that can help institu-tionalize essential processes and deliver data to be mined for insight. Larger companies that “get it” are also getting better at developing performance metrics that incentivize a clearer customer focus.

and this issue of metrics is especially important. financial ac-counting does a really poor job of capturing lifetime value of a customer. if a warehouse burns down, accounting registers a loss. But if a poor experience with your company causes you to lose a customer, even though the net present value of your relationship with that customer has just fallen to zero – there’s no accounting for that. so it’s very important for midsize com-panies to supplement their financial metrics with a range of customer-focused metrics.

What are the most effective metrics? some of the most uni-versal include customer satisfaction, customer loyalty, renew-al rates, referrals – but in practice companies need to put in some time to develop what will be meaningful and effective for their specific circumstances.

Is there any other aspect of managing the customer expe-rience you’d like to emphasize? the advent of social media is something that can’t be ignored. think about this: when a honeybee finds a food source, a flower, he goes back to the hive and does a waggle dance. that dance is very sophisticat-ed and it tells others in the hive about not only the direction of a food source, but also its distance and quality.

Let’s suppose your business is feeding honeybees. What de-termines whether they’ll come in or not is color and scent – that’s advertising and promotion. But what determines what they tell the rest of the hive is the total quality of the experi-ence. is my core proposition – the nectar – worth the trip? With social media becoming more prevalent, companies will have to do a lot more to ensure a consistently positive cus-tomer experience. otherwise, a lot fewer bees will come.

Q&a: don peppers, founding partner, peppers & rogers group


a foCus on the workforCe In terms of priorities, building and retaining a qualified workforce is in a virtual tie with optimizing sales force effectiveness for second place today—and in five years takes sole possession (see prior figure 8). As for internal game changers, the top six most often cited issues are also work-force related. (See figure 13.) Combining these two sets of insights elevates talent management to the forefront of stra-tegic challenges for the middle market.

The importance of paying closer attention to tal-ent management resonates clearly with interviewees. For example, as Inteliquent CEO Evans explains, one of his group’s key strategic challenges is to move from depen-dence on voice-centric revenues to a business based more on data transfer and the provision of solutions. The right employees are crucial to this effort. “We have to make sure that we have the right people to manage this migration successfully,” says Evans. “In light of the complexities, we need new skill sets.”

At NIC, Herington is emphatic that employees are the most significant part of the company’s success. “It’s not just a question of keeping people, it’s making sure you have the right people and motivating them so they don’t become stale.” Consequently the company empowers its employees, encouraging innovation while discouraging bureaucracy. Further, the culture is one, says Herington, “where people are rewarded not only in financial terms but [also] through recognition by peers and management.”

Also worth noting, Herington believes the best hires are those that arrive with a passion for the mission – more so than having the necessary skill sets. “You can teach certain job skills,” says Herington. “But you can’t train someone to have passion and be energetic.”

FIgure 13: What internal challenges are likely the biggest game changers for your company?

Sustaining employee morale

Need to increase employee productivity

Attract a young or new generation of employees

Ensure a steady talent pipeline

Succession planning

Ensuring adequate investment in new technologies

Corporate social responsibility

Need to train employees

Executive compensation issues

Generate cash flow to meet investment needs

Shift in business strategy/plans

Reduce employee head count

Sharply rising operation costs

43%

37%

32%

31%

31%

28%

14%

30%

19%

27%

28%

18%

24%

0% 25% 50%



GrowInG paInsMaintaining employee morale as a company grows to midsize requires special care and attention. Interactive Intelligence Group’s Brown is particularly conscious of the need to motivate a growing workforce. “That’s especially true when you are transitioning from a start-up, where people know they really matter,” says Brown, “to midsize, where that feeling may dissipate.”

An area of critical focus is R&D, where to remain excited about their work, research team members need to have a sense of the value of that work. In response, says Brown, “we work hard to decompose company-wide objectives into departmental, team and individual objectives so that everyone understands how their work impacts the overall organiza-tion.” In turn, “I personally read every R&D status report every week, and ping individual employees so they know that what they do is important, and recognized by the CEO.”


BuiLd a taLent management function

What are the key hr challenges for midsize companies? top executives, whether from a large or a midsize company, worry about a lot of the same things. i’ve got to build this talent pipeline. i’ve got gaps. am i doing the right things to prepare me for stronger, more profitable growth? are we retaining and developing our talent? so the issues are similar but the differences are in the execution.

What are midsize companies doing well? smaller compa-nies tend to have more direct contact between who’s doing the hiring and who needs the talent. so there’s high-touch in terms of what they need and who they bring in.

they also have something different to offer relative to larger companies in terms of working environment. there’s less bureau-cracy. you can move faster with more latitude. When you think about younger people in particular, that can be very appealing.

another advantage is that during the downturn, midsize businesses generally performed better than the largest com-panies. they didn’t lay off 30,000 employees, so when they are looking to hire, they don’t have some massive downsiz-ing to defend.

What can midsize companies do to take their talent man-agement to the next level? they need to take a look at their business and build a talent management function that deliv-ers against its challenges. they’re probably already doing this in other areas like r&d, supply chain or distribution. But they need to develop, articulate and deliver against a similar vision for their talent management.

What does that mean in practical terms? all businesses, large or midsize, face a range of talent issues. do we need to address succession planning? recruitment? productivity? training and development? performance management? inter-national expertise? you realize you need to make progress in all of these areas, but you have to be judicious.

Leveraging technology can help. When the tactical issues take less effort, managers can then focus more on refining and prioritizing their talent strategy. and what’s interesting is that tools like employee engagement surveys, sophisticated analytics – all that used to be for big companies only. But with improvements in technology and all the ways we can gather

information, this doesn’t have to be a huge ticket item. so midsize companies how have more tools available to get to the diagnostic work that can help them prioritize.

Do you have any other advice for midsize companies? one thing i would mention is the advantages of collaboration with other businesses. midsize companies, more so than larger companies, are in a position to develop creative ways of partnering with others to share or develop what they need. it might be working with customers or suppliers, but you need to think more broadly in terms of the complementary talent that already exists or could be developed.

and finally, it’s important to emphasize that whatever you do, it has to make sense for your company. What happens too often is we gravitate to what we heard they do at [some other well-known company]. But what works at one com-pany isn’t necessarily going to be a best practice at your company. all companies have differing core cultures, cus-tomers and processes. so i’d say the growth lesson is that you have to develop a talent strategy that works for your individual company.

Q&a: colleen o’neil, phd senior partner, mercer


where are the ChaLLenGes?Though midsize company executives are indeed confident, they are meanwhile cognizant of the risks and challenges ahead. Of course, specific potential risks vary by industry. But many are also universally recognizable, including:

• Competition with larger businesses. For Interactive Intelligence’s Brown, competition with larger compa-nies is a constant concern. “Our products and IT skills are our major strengths, but we have to compete against much bigger companies with significantly greater resources.” As Brown notes, “there is always the possi-bility of being outflanked, perhaps in the shape of new technology.”

• Competition with similar businesses. Competition is also of some concern for Mueller at Grand Canyon Education, especially as it relates to the university’s online programs. “There is a growth market for work-ing adults attending online, but the competition for good ones is intense,” he says. “We have to develop good curriculums, hire the best instructors and be very competent at delivering higher education in a way that is revenue-efficient.”

• The risks of consolidation. At Heritage-Crystal Clean, the risk of potential competition from out-side investors is on the rise. “The high price of oil is stirring interest among investors with a view to consolidating the industry,” he explains. Should this happen, “we believe we are strongly positioned, as we have built out a comprehensive network of branches to ensure a good supply of oil for recycling at the right price.”

• Continued volatility. Uncertainty can harm any business. “Although the U.S. equity market was slightly positive in 2011,” says Morningstar’s Mansueto, “it was also volatile.” This, the executive explains, “creates uncertainty and slows purchasing decisions across our three key audiences: individual investors, financial advisors and institutions.”

FIgure 14: Where do you expect declines in growth to come from?

Regulatory changes

Falling customer demand

Pricing pressure on margins

Political gridlock

Lack of access to capital

Loss of competitiveness

Technology becoming obsolete

Inflation

Loss of export markets

Supply chain difficulties

Foreign competition


38%

25%

25%

23%

20%

18%

13%

13%

8%

5%

5%

5%

0% 25% 50%



reGuLatory fears Continuing volatility and uncertainty in so many areas of the economy, no doubt, casts a continuing pall across virtually all of the U.S. middle market. Beyond anecdotal findings, the survey shows that among midsize companies regulatory changes are the most frequently cited threats to growth plans (see figure 15). Next, asked to select a sin-gle most detrimental force from among a list of options, the most frequently cited concern was the implementation of healthcare legislation – followed by gridlock in govern-ment and then additional industry regulation.

NIC Inc.’s Herington worries that an increasing num-ber of regulations emerging from Washington could mean “that in the boardroom we have to switch our focus to compliance issues.” Grand Canyon’s Mueller is also keep-ing an eye on the regulatory environment, as Grand Canyon is, as he puts it, an emerging model for educa-tion. “The idea of private, publicly traded education companies will at some point be debated from a regula-tory standpoint.”

FIgure 15: Over the next two years, what do you think will pose the biggest challenge to your business growth?

16%

13%13%

10%

19%

7%

7%

5%5%5%

n Healthcare legislation

n political gridlock in Washington

n increased regulation of my industry

n ability to attract and retain a skilled workforce

n access to capital

n foreign competition

n scarcity of resources/supply chain disruptions

n obsolete business model

n changing technology

n other


ConCLusIon Being midsize has its advantages, including greater agility, heightened customer intimacy and an overall more closely aligned and entrepreneurial culture. But growth is coming. And as a business grows, it runs the risk losing many of the attributes that enabled that growth in the first place.

The survey provides a snapshot of how middle market executives are guiding their organizations toward the next level. What is clear is that the two most prominent challenges relate to customers and employees.

Consequently, companies are developing processes that promote, enable, incentivize and institutionalize a core com-mitment to a customer focus. It is from this core that the business is able to better anticipate and address customer needs.

Companies are simultaneously taking a closer look at their workforce with an eye towards enhancing their talent man-agement strategies. This begins with designing performance measures that build alignment with broader goals. But it also means forecasting future talent needs and taking needed recruitment, training or other steps to address any gaps.

Beyond the challenges of customer relationships and talent management, executives must also address the full spectrum of external risks. In addition to monitoring the actions of competitors or advancements in technology, executives should also remain on high alert regarding a growing wave of government regulations.

Overall, the middle market performed remarkably well through the downturn. Now gearing for future growth, it will be important to focus on those issues that matter most. The preceding report summarizes the views and priorities of the broader marketplace. It is up to individual executives to assess how these findings can be harnessed to optimize opportuni-ties for their own businesses.

about forbes InsIGhts

Forbes Insights is the strategic research practice of Forbes Media, publisher of Forbes magazine and Forbes.com. Taking advantage of a proprietary database of senior-level executives in the Forbes community, Forbes Insights’ research covers a wide range of vital business issues, including: talent management; marketing; financial benchmarking; risk and regulation; small/midsize

business; and more.

Bruce H. Rogers ChIef InsIGhts offICer

Brenna Sniderman senIor dIreCtor

Christiaan Rizy dIreCtor

Kasia Moreno edItorIaL dIreCtor

Nigel Adam & William Millar report authors

Robert Azcuy desIGner

60 fifth avenue, new york, ny 10011 | 212.367.2662 | www.forbes.com/forbesinsights

Forbes Insights – Inspired for Growth

Business

Transcript of Forbes Insights – Inspired for Growth