How Digital Are U.S. Companies? A look at the Middle Market
Nextrade co-authors "How Digital Are You? Middle Market Digitization Trends and How Your Firm Measures Up," a report sponsored by Magento and co-authored by the National Center for the Middle Market.
Technology and advanced digital tools are essential to sustainable growth among firms of all sizes. Middle market companies, a key engine of growth and jobs in the U.S. economy, can leverage digitization to streamline operations, cut costs, connect to new markets, manage customer relations, and make real-time improvements. This report advances our understanding of how middle market companies view digitization, of the success drivers for digitization in the middle market, and of best practices for middle market executives looking to gain an edge. The main findings include:
The fastest-growing middle market companies are digitally savvier than their peers
While the majority of middle market companies recognize the importance of digitization, some firms place greater emphasis on digital tools and techniques than their counterparts. Companies experiencing rapid growth (10%+ annual revenue growth), along with companies in the business services and healthcare industries, are the most likely to consider digitization extremely important to their success. These businesses are also the most likely to rate themselves as digitally advanced. They enjoy a faster pace of digitization and achieve a greater ROI from their digitization efforts.
Digitization spending is moving from the back office to the front line
Today, most digitization projects pertain to keeping the lights on—how a business manages information (accounting, finance, and HR)—and to operating the current business (logistics, operations, marketing, service, and sales including B2B and B2C e-commerce). However, middle market businesses allocate a significant 19% of digitization dollars to innovation and strategy development projects, which more directly affect a company’s future revenue streams and growth. Looking forward, 42% of companies anticipate increasing or significantly increasing digitization spending on business analytics and strategy development, while 39% expect to up the digitization budget for innovation projects, representing some of the greatest expected future increases in digitization spending.
Companies enjoy nearly a 28% ROI on their digitization projects
Close to 90% of middle market companies rate their latest digitization project as a success, measured in part in terms of ROI. Companies expect a high return on these projects—30%—and apparently manage them well, since the actual mean rate of return is 27.5%. The fastest-growing middle market firms and those experiencing a rapid rate of digitization earn even more on their investments, enjoying mean returns of 38% and 37% respectively. Companies that spend the most on digitization (10% or more of annual revenues) do better yet: they expect an ROI of 44% and achieve a return of 39%. These bigger spenders tend to be the best-performing middle market firms, perhaps, in part, because they are digitizing and the resulting operational efficiencies drive higher profits and ROIs.
Companies don’t always connect individual digitization successes to an overall business transformaion
Despite individual digitization project success, firms are only marginally satisfied with digitization practices within their organizations. Indeed, their self-assessed “Digital Grade Point Average” is 2.8 on a scale of 0-4, the equivalent of a C+. The slow pace of large-scale business change resulting from digitization projects—even successful digitization projects—coupled with the length of time it takes to see a payoff are serious causes of concern and frustration for middle market leaders, blurring the connection between project success and overall progress for the company.
Most firms handle digitization in-house; but talent can become an obstacle
Middle market companies evince a strong desire to manage digitization projects in-house rather than rely on outside consultants—70% of spending is directed internally. At the same time, however, a large majority of executives (65%) site a lack of talent as an obstacle to their digitization efforts. Investing in more training for employees and/or shifting more of the digitization spend to consultants, software companies, and technology providers may lead to a greater overall satisfaction rate with digitization practices.