Digital Transformation

The 5 Fronts of Digital

Transformation in the Middle
Market
by Doug Farren and Anil K. Makhija

October 19, 2021

horstgerlach/Getty Images

Summary. The National Center for the Middle Market has been tracking the
performance and sentiments of companies between $10 million and $1 billion in
annual revenues since 2012. While average revenue growth for middle-market
companies has increased in 2021, a... more

The past 18 months have brought unprecedented challenges to

businesses of all sizes, and the U.S. middle market was not
immune.
The National Center for the Middle Market (NCMM) has been
tracking the performance and sentiments of companies between
$10 million and $1 billion in annual revenues since 2012. After
experiencing negative growth rates in 2020, average revenue
growth for the period of June 2020 to June 2021 was 8%. That’s
good news, as average annual growth dating back to 2012 has been
approximately 6.5%. However, a closer look reveals a split
recovery: 45% of companies reported revenue growth of 10% or
more, but another 34% experienced flat or declining revenue.

Employment growth also returned to positive rates, with an

average growth of 5.9% across the sector. In addition, 70% of the
middle-market workforce reported being back to their primary
work location as of June 2021. Leaders of midsize companies also
cited the two most difficult aspects of running their business in
the current environment: 51% said they are challenged by
employee communications, engagement, and productivity, and
45% reported issues with customer engagement.

The severity of these challenges varies by industry. For example,

60% of healthcare companies say they struggle with employee
engagement, and 55% of construction companies find it difficult
to engage customers in new and beneficial ways.

With an uneven recovery and ongoing challenges, how can

midsize companies continue to thrive? We know from our
research over the past decade that they’re generally resourceful in
the face of constraints such as capital, expertise, and time.
Focusing on digitizing their businesses will help address
challenges around customer and employee engagement.

The Pandemic Has Shifted Priorities

Investment in various technologies has accelerated because of the

pandemic, with the goal of addressing a number of operational
areas, such as cybersecurity, customer engagement, and
communications. But this shift to digitization does not
necessarily reflect how executives are feeling about the state of
their own businesses.
We asked leaders about the importance of digitization, and while
52% cited it as either important or extremely important, only 35%
considered themselves advanced or ahead of their peers. In
addition, only 46% of middle-market companies say they have a
digital roadmap built into their strategy, meaning the rest either
have no defined plan or are unable to address it at this time.

As with other challenges, digital maturity levels differ by

industry. Take the manufacturing industry, which is one of the
largest sectors in the middle market at approximately 17% of all
companies. Nearly 50% of these businesses say they’re concerned
with keeping pace with the right technology in order to compete.
This is concerning because it’s not just about advanced
manufacturing and artificial intelligence in the factory —
technology touches all aspects of the business.

For example, Gertrude Hawk is a chocolate manufacturer based in

Scranton, Pennsylvania. The 85-year-old company operates 40
physical locations across three states, as well as a consumer e-
commerce site and a B2B platform. While their internal processes
are excellent, the company had long ignored the importance of
strong digital platforms as a means to engage customers.
Recently, they focused investment on digital marketing tools,
such as an improved website with high-quality photography, in
addition to a customer rewards program accessible via mobile
devices for easier shopping and ordering. By acknowledging that
they were behind their peers, the company has seen increased site
traffic, longer average visit times to the site, and a growth in
rewards membership as a result of their investments.

While most of the concerns seen early in the pandemic —

uncertainty, continuity of operations, working capital — have
largely subsided, customer engagement and employee
communications remain a challenge. Nearly one-third of midsize
companies say they have moved permanently to digital
communications internally, with another 24% planning to do so
in the near future. Additionally, 31% of companies have
permanently implemented technology to engage with customers.
A great example is Twiddy and Company, a hospitality firm
located in Duck, North Carolina. The proprietor of hundreds of
rental properties in the Outer Banks, Twiddy traditionally relied
on its strong customer relationships, repeat business, and word-
of-mouth referrals. However, with the industry literally shut
down during spring 2020, CEO Clark Twiddy began leveraging
investments in CRM platforms to reach customers in new ways.
For example, they found that prospects and past renters
responded better to text updates than phone calls or emails. The
CRM also allowed the Twiddy marketing and sales teams to
collect and monitor every contact point, regardless of method, to
ensure the right mix and cadence as well as calculating
conversion rates. The results have been impressive, driving
historic growth and occupancy. Going forward, the company has
made a commitment to ongoing innovation, experimentation,
and investment in digital communication practices.

Many middle-market companies are also challenged by resource

constraints. Therefore, making similar investments is easier said
than done. When asked about obstacles, most companies
reference the costs and budget issues associated with new
technology. Middle-market IT spending is focused on daily
operations of the business and cybersecurity, both representing
approximately 11% of total budgets. In addition, firms note a lack
of time given other priorities and a lack of proper internal
resources to implement these technologies effectively.

A Framework for Digital Transformation

Investment in digital tools and processes has not suffered as

much over the past 18 months as other business functions, partly
out of necessity. Indeed, investment also accelerated as a way to
achieve the goal of a more efficient, profitable, and productive
future state of work, and the investment has paid off. Middle-
market companies with a digital vision that is clear,
comprehensive, and guides strategic decisions grow 75% faster on
average than less digitally sophisticated peers.

While impressive, nearly two-thirds of leaders also say a digital

skills gap in their workforce is holding them back from even more
aggressive pursuits. So how should executives address these
issues? The NCMM developed a framework to help guide middle-
market companies in the process of digital transformation.
Essentially, the enterprise sits in the middle of five distinct but
interconnected activities:

1. What We Sell – product and service offerings

2. How We Produce It – supply chain, manufacturing, operations
3. How We Sell It – customer experience, channels, marketing
4. Our IT Backbone – infrastructure, security
5. Our Workforce – talent, digital skills

To address two of the middle market’s biggest challenges, we will

focus on How We Sell It (customer engagement) and Our
Workforce (employee engagement).

Customer engagement. Middle-market companies say customer

experience, lead generation, and marketing tools are currently
their top three customer-facing digital priorities. Here are some
best practices for making progress in these areas:

Place greater importance on integrated multichannel

marketing and sales, finding the right mix of online and offline
marketing, sales, and service.
Develop a more functional website that connects customers
with employees and offers support for products and services.
Increase online interaction with customers (website, social
media, mobile).
Use a variety of digital customer experience and analytics tools.
Use technologies that support the sales force, such as CRM
systems and social media.
Work toward an omni-channel, end-to-end digital experience
on all platforms and channels.

Employee engagement. Accessing, attracting, and retaining the

right talent has been a challenge in the middle market for several
years. Leaders are especially challenged when it comes to finding
potential employees with the right digital skills. To address these
issues, middle-market companies should do the following:

Make a concerted effort to invest in people with specific digital

expertise and be willing to pay a premium for the right skillsets.
Adopt the latest and best technology and digital processes,
including using digital platforms for employee goal setting and
performance management and using mobile apps for talent
acquisition.
Take a strategic approach to realigning the workforce and
deciding which activities can be contracted to outside
specialists in order to combat the digital skills gap.
Provide career training and development and clear career
paths.

Insaco, started in 1947 near Philadelphia, develops and produces

high-precision machine parts (originally for the phonograph and
textile industries, but more recently for medical, defense, and
aerospace customers). Their investments in advanced
manufacturing technology have preserved their ability to meet
stringent production requirements to the millionths of an inch.
While operational investments have helped them maintain their
place as a leader in their industry, the focus on customer and
employee engagement has also been an important part of their
growth. They’ve revamped their website into a one-stop shop,
which is easy to navigate for customers and allows employees to
access product materials and make updates easily. Since the
launch of the new site, Insaco has seen significant increases in
page views, pages per session, and average session duration.
They’ve also seen a lower bounce rate, indicating the redesign has
made a meaningful impact.

By utilizing some of these best practices, middle-market

companies can kick-start or help strengthen their own digital
journeys and set themselves up for future growth in the process.

DF
Doug Farren has been the Managing Director of
the National Center for the Middle Market since
its inception in 2011. In addition to overseeing the
Center’s operations, he also teaches in the Fisher
College of Business Industry Immersion program.
He has prior industry experience in retail supply
chain management and Six Sigma
implementation.

AM
Anil K. Makhija serves as dean and John W. Berry,
Sr. Chair in Business of the Max M. Fisher College
of Business. Makhija is recognized as an expert in
the field of finance, particularly capital structure,
corporate governance, and valuation, and has
more than 20 years of experience in academic
leadership roles. He also served as the founding
Academic Director for the National Center for the
Middle Market.