The mid-market’s growing pains

Meaningful mid-size business growth means solving ‘the people problem’

What prevents mid-size businesses (MSBs) from growing their revenues and profit margins, and even becoming large businesses? One factor is how daunting growth can be: choosing how and where to grow; stepping out of a secure position into a more precarious one; a fear of overreaching and putting the whole business at risk. Even though the reward can be a bigger, more solid and long-lived company, a lot of MSB owners are up against some significant challenges.

How Kiwi MSBs get stuck

The New Zealand market is small compared to other economies, and when you target a particular niche, like government for example, you can rapidly saturate it; so expanding your market becomes an obvious solution. 

Grant Thornton’s 2019 mid-market report, The power and potential of the mid-size business reveals that 27% of Kiwi MSBs exported in 2018, and only 1.9% have international operations, which is relatively low compared to approximately one third of UK and Australian MSBs and nearly half of those in Germany.

However, setting up operations overseas and exporting poses several challenges.

New Zealand is still a long way from the rest of the world in geographical terms and this presents extra costs and logistical headaches. It feels like that shouldn’t be a problem considering the advances in technology and globalisation, which has broken geographical barriers. However, most products do have geographical challenges when it comes to export. Take technology itself for example; to get your tech into other countries, you need to be there, in person, talking to people and setting up partnerships, offices or distribution. The travel alone is onerous and expensive, and takes owners away from their families and their core businesses operations back home (Rod Drury, for example, has said how stressful he found it to be travelling while he grew Xero.)

Additionally, exporting may not be a realistic expansion option for certain industries.  In New Zealand, the majority of our mid-size businesses operate in sectors that make opportunities for export problematic – wholesale, retail and construction.

In other cases, if an MSB is in a sunset industry, expansion and export might require an enormous pivot – which could be both risky and expensive. Does a successful owner, already enjoying the Boat, Bach and Beamer lifestyle, want to start pivoting in a whole new direction? Do they want the challenge of bigger contracts and the bigger risks that come with them? Do they have the energy and enthusiasm to turn the sunset into a sunrise? Maybe not. At the same time, we need to respect that each business and owner is different and has different goals.

I believe developing and/or accessing specific skillsets is one factor preventing MSBs from growing.

The skills solution

One of the trickiest areas, particularly in a small economy like ours, is having the right skills. Our research demonstrates that MSBs know that to grow, they need people; employment growth in the midmarket was 24% over the five years to 2018 compared to 8.9% and 13.9% for small and large businesses respectively. However, MSB’s low productivity (measured by income per employee) is a barrier to growth and could indicate that the right skills aren’t being utilised.

Adding new employees is a major commitment. It’s challenging if you don’t have quite enough work for them at the time, and they’re not adding enough value to the business; it’s a serious cash investment that can take time to get a real payback. The calculations aren’t simple, either. Working out whether a new full-time role will pay for itself always involves an element of guesswork. It’s so much easier to do a cost-benefit analysis on new plant or a company car.

But there are some tried-and-true ways to grow in a measured, balanced way when it comes to your workforce, and these can help MSBs to grow or even transition into large businesses. And by doing so, owners and other stakeholders get to experience all the longevity and profitability that comes with that.

There’s a laundry list of skills that your MSB might lack, but which don’t yet call for a full-time employee. It includes industry-specific expertise, as well as HR, finance, IT, legal, sales or marketing.

Take marketing for example. When you run a small business, you might begin by doing all of the company’s promotion yourself. Then as you grow, you start to outsource parts of your marketing activity to someone else who spends a few hours a week on branding, maintaining your website and working on other areas of your online presence, and charges you an hourly rate. Eventually, you’re going to need someone to spend a bit more time on maintaining a presence in your market to remain competitive – eventually implementing regular advertising or blogs, and certain campaigns to keep your business visible and aligned with your business’s strategic objectives. That work might go to an external provider, although you could employ someone part time or a freelancer. The difficulty with part-timers is that good part-time and freelance workers can be tough to find, which is where consultants and agencies can come in handy.

I often see this with our clients: they recognise that they aren’t yet ready to commit to a full-time staff member, but they can still use specialist resources to help them as they transition towards growth. You can turn the tap on and off, as you need it – often on a project basis – to help you get to that next stage, and in the meantime you tend to gain a clearer picture of the skills and expertise required to keep moving the business forward.

Once you’re at that stage, the cost for external consultants and agencies will begin to exceed a full-time salary. That’s often a signal that you can start to think about bringing some of those skills in-house. Typically, that would mean a full-time marketing person for example, but as your company grows it will mean a marketing team led by a senior marketing person. The gap between paying a part-timer and needing a Chief Marketing Officer (or any other C-suite expertise) seems like a chasm, but it doesn’t happen overnight and it’s a journey that several of New Zealand’s large businesses have made successfully.

A future-focused talent pool   

To have the right people – and keep them – you need a roadmap for long-term workforce planning. A strategy to create a future-focused talent pool, all the way from senior management to the shop floor. That roadmap needs to take into account customers’ needs now and in the future, and the changing way that employees want to work: how will the business move and keep up with the use of technology, flexible working and home-life balance?

Long-term strategic workforce planning will help any business to thrive, retain skills and reduce staff turnover. The business will change and flex, the mix of people will vary over the years, and technology will continue to disrupt your model. But your business can flow into its next life cycle – if not growing into a large business, then maintaining or improving its current profitability for less work, making its owner and its employees all better off.