This article was produced by (E) BrandConnect, a commercial division of The Economist Group.
The UK’s mid-market companies have historically not performed as well as their equivalents in Germany, where the sector is famously robust. But, says KPMG’s Chris Hearld, advances in technology, new ways in which companies are financed and a greater focus on regional strengths could change that over the next five to ten years.
With their roots in manufacturing, the UK’s mid-market companies have traditionally relied on the capital markets for funding. But today, companies of this size can also raise money from other sources, including venture capital, cross-border investments and corporate ventures—funds run by bigger entities that have an interest in supporting the research and development of smaller companies and helping them grow. What makes mid-market companies more attractive now is the rise of technology.
“Thanks to a new focus on technology, companies of this sort are now much more knowledge-based and less asset-heavy than they have been in the past and can be more agile than before,” says Chris Hearld, head of regions for KPMG in the UK. “They can raise money more easily, and grow and exit more quickly than has been the case in the past.”
That agility will be fundamental to company success, says Martin Sorrell, who for 32 years was CEO of WPP, the world’s largest advertising group, and now runs S4 Capital, a digital marketing agency established in 2018 with pro-forma revenues he says of about US$400m per year.
“The average life of a company on the FTSE 100 or S&P 500 is 17 years. The volatility is huge and the legacy companies are having to move faster and faster. So agility will be key.” – Martin Sorrell, executive chairman of S4 Capital.
Finance and retail are well-attested examples of businesses that have been revolutionised by technology, and sectors such as advertising and healthcare are now going through similar transformations. But, says Mr Hearld, these will soon be joined by many others. “Every company that wants to be successful is going to be a technology company,” he says. The question is whether building on a digital platform will be the key to creating a UK mid-market as successful as Germany’s.
Two fast-growth examples
Hayden Wood, CEO of Bulb, a technology-based energy startup that was founded in 2015, feels it will. The company supplies electricity to about 1.6m customers in the UK, France, Spain and the US and is already experiencing rapid growth, with revenues rising from £183m in 2018 to £823m last year. “The internet, machine learning, datasets and so on make this a very exciting time to be in business,” he says. “So far, the big technology companies have done a lot of groundwork, but now it is time for us to apply the platforms they have developed to many problems in our lives. We are taking the macro and applying it to the micro.”
Mr Wood sees technology as the key for creating a new role for energy-supply companies, beyond simply supplying electricity and gas to homes and businesses. Bulb’s strategy is to use algorithms to become what he calls an “energy manager” for its customers, helping them navigate the complexity of energy tariffs and gain greater control over their energy use. And, he says, technology helps keep costs down.
“Bulb employs about 600 people,” he says, “compared to 5,000 in some of the more established companies.” About a third of those 500 come from a technology background. He adds: “They are working on software and tools that customers can use, and on automation, machine learning and AI. That brings down the headcount and helps us towards our goal of 5m customers in the not-too-distant future.”
Technology is also revolutionising the world of advertising. By 2030, says Mr Sorrell, “digital will have enveloped everything” and growth in all sectors will be driven by intelligent use of “first-party data”—key information about prospects and customers that companies gather directly from users. This, he says, will lead to marketing becoming hyper-personalised. “Customers love personalised messages, and the technology now exists that enables us to deliver personalisation at scale,” he says.
Mr Sorrell identifies three areas that will come together in the advertising sector in the future—marketing, sales and technology—and argues that all companies, not only those engaged directly in marketing, will have to develop a better understanding of the online world. “At the moment, the digital ecosystem is dominated by a handful of companies: Google, Facebook, Amazon, Tencent, Alibaba, Adobe, Salesforce and so on. It will be essential to grasp how all those platforms and hardware and software companies are engaging with consumers, clients and enterprises,” he says.
Keeping the momentum
Across sectors, one challenge that mid-market companies looking to accelerate growth will have to overcome is a shortage of staff at senior level with backgrounds in digital-based business. “Getting the right mix of experience among board-level executives is always a challenge,” says Mr Hearld. “We’re still at a stage where there aren’t a lot of non-execs in the world who have come out of a high-tech/fast-growth environment. So companies will have to source the right advice and the right support around their own board table.”
One solution, he says, is for companies to expand their search for board members away from traditional sources and consider candidates from, for example, universities, overseas companies or those who are younger than the normal boardroom non-exec. “This would have the added bonus of helping with diversity around the boardroom table,” he says.
Mr Sorrell agrees. “There are plenty of younger, digitally experienced people who are looking for good board experience but don’t fit the ‘normal’, traditional, analogue criteria. Companies need to change the way the search is done,” he says.
Companies will also have to face up to concerns about the intrusiveness of digital businesses, which by their very nature rely on owning large amounts of data about their customers—something that Mr Wood at Bulb is conscious of. “We will need to know second-by-second what people’s energy use is,” he says, “and we will need to earn their trust about how we use that data.”
That trust, he says, will come from Bulb’s being transparent about its data usage and from the fact that the company is accredited as a B Corp, which means that it is committed to certain societal and environmental standards. “B Corp certification is a hard thing to achieve,” he says, “but it helps us demonstrate that we can be trusted.”
There is no doubt that mid-sized companies in almost every sector will have to evolve to meet the demands of the next decade. “Companies will have to become faster, better and cheaper,” says Mr Sorrell. And Mr Hearld agrees. “Standing still is not an option,” he says. “You need to change if you want to stay relevant.” But he is confident that good businesses will rise to the challenge.
“In one sense we have been here before,” he says. “Not long ago the challenge for mid-market UK companies was globalisation, and we got that right. Now it’s technology, making every stage of the customer journey as seamless as it can possibly be and using all these tools to improve the traditional service offering.”
While digital technology is and will continue to be a key accelerator of mid-market companies in the UK, Mr Hearld, taking inspiration from those German mid-market success stories, points out that regionalisation may be another catalyst for growth.
“Germany is much more federated than the UK,” he says, “so the focus on rebalancing the UK economy will be an opportunity for our mid-market regional businesses.”
A recent KPMG report outlines macro strategies that the government could adopt to boost the UK’s regional economy, among them greater physical and digital connectivity across the country, investment in housing and in cultural and recreational facilities to attract human capital, and stronger cooperation between national and local governments and local communities. This, it argues, would build on the success of regional hotspots such as Manchester, Reading, Cambridge and Liverpool, enabling jobs and prosperity to be spread more widely.
On top of this, regions could benefit from developing clear areas of speciality, says Mr Hearld. He believes that many local enterprise partnerships (LEPs), whereby local authorities work with local businesses to boost economic growth in their area, are too generic in their vision.
“If you look at many of the LEPs’ strategic economic plans they are similar, with everyone wanting to focus on technology, data analytics and so on,” he says. “But we are moving on from that. Technology and data will very soon be at the heart of all businesses, so the key for regions will be to focus on their individual strengths and use tech to build on what they are already good at.”
Produced by (E) BrandConnect, a commercial division of The Economist Group, which operates separately from the editorial staffs of The Economist and The Economist Intelligence Unit. Neither (E) BrandConnect nor its affiliates accept any responsibility or liability for reliance by any party on this content.