Rising optimism among mid-market executives may be attributed to the potential for tax cuts and increased government spending on infrastructure.
A recent survey of mid-market and private company executives found that sixty-three percent of executives surveyed after the November election are “very” or “extremely” confident that the U.S. economy will improve over the next two years–nearly double last year’s expectations. FEI Daily spoke with Roger Nanney, vice chairman and national managing partner at Deloitte, about technology investment priorities, increased regulatory compliance, and the IPO market.
FEI Daily: 63 percent of executives Deloitte surveyed believe the new administration will have a positive impact on their company’s operations. What are executives hearing from this administration that inspires such confidence?
Roger Nanney: Our survey, which was conducted in early December, has identified that across the board middle market executives are hopeful about their respective company’s growth in the year ahead.
In the six years that Deloitte Growth Enterprise Services has been conducting the America’s economic engine survey, private and mid-market companies have identified the obstacles to U.S. economic growth. This year, 45 percent of respondents ranked high taxes as an obstacle to U.S. growth, in addition to rising health care costs and increased regulatory compliance. Rising optimism among mid-market executives may be attributed to the potential for tax cuts and increased government spending on infrastructure.
On the contrary, the percentage of private and mid-market companies that expect more robust economic growth over the next two years nearly doubled from last year’s report. Nine in ten respondents are confident in their company’s success in the next two years, compared to 79 percent a year ago.
Interesting, however, is that renewed confidence has also been tempered with increased uncertainty, according to the survey results. With business policies in flux, mid-market companies should be agile in the months ahead and evaluate the strategies and risks that could enable growth during uncertain times.
FEI Daily: Why are so many more companies planning to go public this year versus last?
Nanney: After a lackluster year for IPOs, more and more investors are contemplating the prospect of highly valued companies hitting the public markets in 2017. According to our survey, pursuing an IPO is an increasingly attractive growth strategy among privately-held and mid-market companies. Though most companies prefer to stay private over the next 12 months, 28 percent of them say they would likely go public in 2017, nearly doubling the number from last year.
The biggest factors influencing companies’ decisions to go public are broadening the exposure of their brand and products, cost-effectiveness of equity capital, and the need for additional capital to fuel growth. Other factors such as cashing out and investment banking relationships saw a significant increase in response rates from last year, up 23 and 13 percentage points respectively. Companies are looking to the stock market’s performance and believe they can achieve higher multiples by going public.
Valuations and access to capital across multiple sectors are strong, particularly in technology. Tech companies typically drive the IPO market, and we need only look to Snap Inc.’s recent IPO debut to see that the industry will likely continue to dominate the market this year, as well. As these and other emerging growth companies look to test the public waters, they need to give significant consideration to timing, putting the right team in place, and building the proper business infrastructure that withstands the rigors of the IPO process.
FEI Daily: While there is a lot of confidence, there is also a lot of uncertainty. What are the biggest challenges facing private and mid-size companies this year?
Nanney: Despite a renewed sense of optimism, executives point to rising health care costs, costs of keeping up with the rapid pace of technological advancement, and increased regulatory compliance as obstacles to growth. Sixty-three percent of executives said their company is holding off on making major investments due to uncertainty in the business environment. Uncertainty may persist as the business community awaits specific plans around tax reform, rolling back health care costs, and government infrastructure initiatives.
FEI Daily: How are they planning to face those challenges? Are companies prepared?
Nanney: With so much in flux, companies should be nimble in the coming months to address these challenges. Middle market executives could consider how potential changes in taxation and regulation will affect their business or result in an adjustment in strategies. We see that companies are also starting to reevaluate their strategies for attracting talent their organization needs to keep growing. This includes thinking about how an organization can create a culture that helps them retain their people as well as make priority investments in new talent. Twenty-seven percent of respondents listed skills shortages as a challenge impeding the growth of their business, so it’s no surprise that training tops the respondents’ planned investments for 2017. Companies also plan to increase full-time employees and increase compensation.
Furthermore, as technology continues to disrupt business, cloud computing, data analytics, and customer relationship management technologies top the list as key investment priorities for surveyed executives.
It will be critical for middle market companies to implement this type of proactive, forward-looking thinking mindset in order to address challenges and magnify their impact on the economy.
FEI Daily: Where will executives focus their technology investments?
Nanney: According to our survey, 85 percent of companies say they are using digital technologies to transform their organization. However, for nearly a third of these companies, the cost of keeping up with technological advances proves to be a main obstacle to growth. For this reason, technology is a top business priority among privately-held and mid-market companies.
In particular, upgrading existing systems and implementing new ones are the top two investment priorities for companies in 2017. Additionally, IT spend will continue to focus on cloud computing/software-as-a-service, and data analytics/business intelligence over the next 12 months. More than a quarter of the respondents expect technology investments to improve business processes, while a fifth say new technologies will help workers be more efficient and increase customer engagement.
Emerging technologies such as robotics, augmented and virtual reality, and blockchain are primed to capture more investment dollars as well, and are being deployed across a wide spectrum of applications including customer service, marketing, and social media. In Deloitte’s 2017 Tech Trends Report, machine intelligence, mixed reality, and blockchain technology are highlighted as forces that are set to disrupt the enterprise over the next 18 to 24 months. Business and technology leaders who harness these technologies would have a competitive advantage and be better positioned to shape the future of their business.•