Middle-market companies seizing growth by embracing AI

EY Published 06.07.2018

Middle-market companies across the globe are significantly more optimistic about business conditions and opportunities than last year, according to the findings of the annual EY Growth Barometer released at the EY World Entrepreneur Of The Year Forum. Growth prospects for all major economies are finally improving in 2018, with International Monetary Fund GDP forecasts currently at 3.9% for the year. Amid this positive background, business leaders are bullish about revenue growth.

The annual survey of 2,766 middle-market executives across 21 countries and nine key middle-market sectors reveals that global confidence in business growth has strengthened in the last 12 months. Sixty percent of companies are targeting growth between 6-10%, which compares with only 34% of companies having the same growth ambitions a year ago. A further 27% are targeting growth in excess of 10%, a marginal decrease from 2017, when 30% of companies were in this high growth band. What’s more, 0% of respondents in 2018 expect a decline in growth, compared with 5% in 2017.

Middle-market company leaders are planning higher revenues, creating more full-time jobs and implementing disruptive technologies to meet ambitious growth targets. However, despite this optimism, they remain concerned that cash flow shortages, tightening credit or slowdown in global demand could pose significant risks in the longer term.

Yves Even, Partner in charge of the Commercial & Private Sector and of the Entrepreneur of the Year (EoY) program at EY Luxembourg, says:

“We are seeing a rare synchronization of growth across all major global economies that is boosting executive confidence, particularly led by the Asia-Pacific region. For the first time, middle-market company leaders are getting ahead of change and shaping their businesses through investment, expansion and prioritization to ride the wave of opportunity.”

Growth ambitions driven from Asia-Pacific

While middle-market companies are bullish on growth on a global scale, ambition is highest in Asia-Pacific, as the much-forecasted tilt from the West becomes a reality. Four in 10 companies in China, Southeast Asia and Australia are targeting double-digit growth, significantly outpacing the global average of 6%.

The race to embrace AI

Intelligent automation and machine learning have moved center stage as vital enablers to ambitious middle-market growth. Attitudes toward new technology have evolved rapidly since last year. In 2017, 74% of global middle-market CEOs said they would never adopt robotic process automation (RPA), yet just 12 months later 73% of respondents say they are already adopting or planning to adopt artificial intelligence (AI) within two years.

Against this background, the EY Growth Barometer findings reveal that companies are recognizing the need to become more agile. However, in their eagerness to adopt revolutionary new technologies and incorporate AI into their businesses, company leaders are in danger of underestimating the scale of cyber threats, findings show. In fact, just 7% plan to invest in technology to reduce the risk of cyberattacks in the upcoming year, and only 6% see cyber threats as a challenge to growth.

Regulation driving, not stifling, innovation

This year regulation has emerged as a new force in stimulating innovation, not obstructing it. In a major shift in opinion, leaders from all sectors and regions, except in North America, regard regulation as a key driver of innovation (25%), topped only by profitability (27%). As governments use policy levers to accelerate social good (reduced sugar in carbonated drinks and less toxic pesticides, for example) company leaders are grasping these new opportunities in the market to innovate and grow, the EY Growth Barometer finds.

Sector convergence accelerates

Industry convergence has risen as another major disruptive force to growth, with almost a quarter of global business leaders (23%) seeing it as second only to demographic shifts (33%) as having the most significant impact on business. Among US leaders, convergence is the top disruptive force to growth ambitions (31%).

Yves Even says: “Successful and profitable responses to convergence favor the fast. Agile companies who can adjust their offering or business model to align with a shifting consumer environment are the ones who will thrive.”

Hiring diverse and skilled talent key to growth ambitions

In a show of confidence that growth is sustainable, 39% of companies plan to hire more full-time talent in the next 12 months. This is a significant increase from 13% in 2017. Moreover, only 1% of respondents are seeking to reduce their staff, down from 9% in 2017. In fact, attracting talent with the right skills tops the list of growth accelerators – ahead of process efficiencies and new technology.

Diversity has shot to the top of the recruitment agenda, with 41% of respondents citing it as the greatest hiring priority compared with only 11% in 2017. The report findings indicate that there is a strong correlation between CEOs prioritizing diversity as a recruitment objective and those with the least diverse executive teams.

For those companies that have already built diverse executive leadership, the focus is on talent with strong digital skills, according to the EY Growth Barometer. Fifty-six percent of company leaders are looking to build digital competencies through new hires.

However, a lack of skilled talent is a major cause for concern, especially in those areas of the world where talent shortages have been exacerbated by skills flight, such as Brazil and Mexico. Even in the US, 20% of business leaders there consider this to be the greatest risk to growth. This represents an eight percentage point increase from 2017.

Concerns over cash flow and funding remain

While access to credit continues to be an issue, this year company leaders cite insufficient cash flow as a more significant challenge, with 35% ranking it first. Cash flow and working capital challenges trump risks of both technological disruption and lack of skilled talent. The problem is most acute in Europe where it is ranked first by 37% of respondents led by French CEOs, half of whom (50%) place it as a leading concern. According to the EY Growth Barometer, there is a correlation this year between companies in higher growth bands and those that rank insufficient cash flow as a key risk to growth.

Meanwhile, women-led companies are significantly affected by a lack of funding, with 18% citing access to capital as a major barrier to growth, compared to 11% of their male-led peers. However, 30% of female-led companies are targeting growth rates of more than 15% in the next 12 months, compared with just 5% of male-led firms, even though more than half the women-led companies (52%) say they have no access to external funding.

Yves Even says: “The funding gap matters because companies with high-growth potential that do not secure early investment can have a harder time scaling-up, and much of the time, these companies are led by women. Financial support for women-led businesses represents a major challenge and only a handful of organizations around the world are focused on supporting the growth of women-led businesses.”

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