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Just four years ago, interest rates and inflation were at historic lows, company profits were strong and steady, Europe was at peace, and technology was changing with head-spinning speed, but, overall, it was a Goldilocks economy — not too hot, not too cold. Middle market companies were making the most of it, consistently growing one or two percentage points faster than big companies or small businesses.
That was then. The years since have delivered a flurry of disruptions — pandemic lockdowns, snarled supply chains, sudden and stubborn inflation, steeply rising interest rates, upended talent markets, major policy shifts, and a war — on top of ongoing disruption from technology, climate change, and other megatrends.
Disruption rains down on large, midsize, and small companies alike, but it affects them differently and they have different ways of coping with it. Since 2019, we have been tracking the causes and effects of disruption. The research demonstrates that midsize companies are in a uniquely strong position — but that many of them fail to act boldly to exploit their advantages. It also reveals several ways in which middle market companies can seize the initiative, including by leveraging relationships with big companies.
Let’s explore how this works.
What the Research Shows About Disruption
In our research at AlixPartners, we surveyed executives from 3,000 companies worldwide, asking how they were affected by technological, political, macroeconomic, and competitive issues such as AI and robotics, environmental and social concerns, tariffs, new business models, inflation, and so on. We then computed a “Disruption Index” by calculating how many disruptive forces were affecting them, and the severity of their impact. This year, the index number is 76. (Last year, it was 79; the year before, 70.) These are high numbers — so high that 85% of executives said that technology is changing so fast, they don’t know where to start to keep up.
Company size made almost no difference in the overall level of disruption. We looked at three revenue bands: $100–500 million, $500 million–$1 billion, and >$1 billion — the lower end of which includes mid-cap, middle market companies. For the three bands, the Disruption Index was 75.9, 75.2, and 76.4.
But what’s disrupted did vary — and the differences were revealing. For one, midsize companies are less affected by global disruptions, because they are generally less exposed to global markets, though supply chains affect them a lot. Compared to billion-dollar-plus companies, the $100 million–$500 million segment was 20% less likely to say they have been extremely or very affected by protectionism, tariffs, and deglobalization, and they were 16% less likely to say that changes in Asia and other emerging markets have disrupted them greatly. They are also about 20% less likely to say that environmental and social concerns have had a major disruptive impact — perhaps because most middle market companies are privately held and less exposed to public pressure.
However, middle market companies feel much more at the mercy of disruptive forces than big companies do.
How the Middle Market Experiences Disruptive Forces
In the AlixPartners survey, fully 56% of big companies said that they drive disruption in their industry always or most of the time; 24% said they always drive it. But in the $100–$500 million revenue group, only 9% said that they always drive disruption and 45% said that they usually do. This is somewhat counterintuitive; we often assume that big companies are set in their ways — clumsy Gullivers besieged by nimble Lilliputians. But scale, global reach, and the resources to conduct pilots and experiments give big companies the perception (at least) that they can bend disruptive forces to their advantage more than their smaller rivals can.
Two areas stand out as trouble spots: technology and talent. In tech, 14% of $100–500 million segment companies said that they are setting the pace in digital transformation, vs 22% for the $1 billion+ segment — a difference of more than 50%. Middle market companies are twice as likely (10% vs. 5%) to admit that they have below-average technology capabilities. The problem isn’t money. The smaller companies say they have the resources they need. The problem is knowing what to do, then doing it. Midsize companies are 25% more likely to say that they lack a comprehensive plan for digital adoption and transformation.
The talent picture is similar: companies with $100–500 million in revenue are less than half as likely as big firms to say that they lead their industries in talent management and are twice as likely to say they lag behind. It’s difficult to puzzle out the source of the problem. They’re equally likely to say they have a strategic talent plan; they don’t report significantly greater difficulty finding and keeping talent. One clue comes from our work with large multinationals; there, the most successful combatants in the war for talent have acted aggressively to recruit skilled talent anywhere in the world (including poaching from middle market companies in smaller cities) and maximize labor-substituting investments in AI and automation. Moves like these are out of reach for many in the middle market. Midsize companies also tend to underinvest in training, learning and development, and succession planning — which gives them a smaller in-house talent pool and puts them more at the mercy of heavily-disrupted talent markets.
Middle-Market Companies Are Missing Opportunities to Pursue Business-Model Change
Compared to big companies, middle market companies seem to be nibbling around the edges of solutions to disruption rather than imagining big changes. The details are revealing. Middle market executives are:
- More likely to say that new, changed business models are a significant threat to their company
- More likely to say that changing business models would be a significant opportunity for their company
- But less likely to be actively changing their business model
Again, this is counterintuitive: Aren’t smaller companies supposed to be more daring? And shouldn’t private companies feel more emboldened to take risks, without worrying about Wall Street? Instead, they see the threat, and they see the opportunity — but they are less likely to act.
That’s especially surprising because middle market companies come to this picnic with at least one huge advantage: the perceived flexibility, security, resilience, and adaptability of their leaders and employees. Take a look at these numbers:
With one exception — the executive’s personal leadership style — the leaders of smaller companies feel they are better equipped to cope with disruption. Their teams are more agile and less worried about their own jobs, they have a better handle on priorities, and their workforce is less likely to resist change.
How Should Middle Market Companies Be Approaching Change?
The key findings from this research indicate the mid-market leaders should:
Get proactive about change — and create accountability for change management.
Many middle market companies rely on their nimbleness to react to change, rather than developing proactive change management capabilities. The datum that middle market companies are 25% less likely to have a comprehensive digital plan is just one example. Our experience bears out what the numbers suggest. Mid-market companies’ executive ranks are lean. Major initiatives, such as preparing for an acquisition or digitally transforming customer experience, are staffed by people already working full time on the existing business. Executives need to be proactively working on the business, not just in the business.
Learn to exploit the ecosystem of suppliers, customers, and partners.
Middle market companies are surrounded by change agents, even if they don’t have many inside: cloud and cybersecurity providers who are eager to serve them, customers who want to establish completely digital payment and inventory-tracking systems, large companies that have pledged to reduce not only their own carbon footprint, but that of their supply base, as well. Mid-market leaders need to take advantage of these catalysts for change.
Look at the deal market for opportunities and ideas.
Disruption — its prevalence and its impact — significantly affects the deal market for middle market companies. In a tough market, deal-readiness is crucial. That imperative can also be used to create a change agenda for operations, working capital, and security, among other things.
There are also important implications for large companies and for private equity firms, most of whose acquisitions are middle market companies. Big enterprises can help themselves by helping their middle-market ecosystem partners. The supply-chain crisis provides a pointed example: Today, as large companies build resilience in their supply chains and in many cases bring work home to middle market companies from overseas, the opportunity for joint change programs is great.
Private equity firms (and corporate acquirers) should recognize that deals are different in this disrupted environment. Today, the vast majority of acquisitions are so-called “platform” or “add-on” deals, where small-to-midsize companies are put together to create a coherent, larger enterprise. Almost by definition, this involves deep transformation in addition to changes in governance, finance, and cost. In our work we see big opportunities in transforming salesforce structure and activity, improving marketing, and reimagining customer experience. There’s no reason to wait for a merger to undertake those changes.
Finally, there’s a big, underexploited opportunity for companies that are owned by private equity firms (which at least a quarter of middle market companies are). PE firm operating partners tell us they want more urgency and change leadership from their portfolio companies. But they themselves can do more to help. Talent and technology — two pain points middle market executives cite — are areas where PE firm operating partners can provide expertise, resources, and incentives for change.
Midsize companies face the same level of disruption as their larger rivals, but they are more likely to see themselves as disruption’s victim, rather than its driver. Yet they are holding back from the big changes that might put them in the driver’s seat and make change an ally, not a foe. That doesn’t need to be the case. The middle market has a secret weapon in its openness to change among leaders and employees. Today, that weapon is used mostly as a defense — to react to change. But with the right planning — and the will to act — midsize companies can turn disruption to their advantage.