Why Innovation is Critical for Midmarket Businesses

In the last 30 years, we have seen innovation (i.e., the introduction of new ideas, methods, or products) transition from a practice reserved for academic campuses, government labs, and global corporations to one that drives an entire wing of our economy (startups) while also infiltrating the halls of many established businesses. Moreover, the dialogue around innovation has conceptually changed from purely technology-driven to the much more complex and challenging notion of reorganizing the business model.¹²

Forrester’s former VP of Digital Transformation & Business Strategy, Nigel Fenwick, made a series of predictions in 2020 to ring in a new decade, shortly before a very unpredictable event impacted all of us. He made the astute observation that digital transformation is no longer the horizon but the past and that many firms missed the need to change their operating model to become a software-driven business rather than simply enabling old products in a new channel.³ The future of business is not about providing a digital avenue for some buyers – it’s about reorganizing your company around software that delivers value for all customers.

In this vein, tech is no longer a sector; software and its ensuing technologies are now inherent in every industry. This shift was made all the clearer by the rapid rise in technology demands during COVID lockdowns, with McKinsey estimating that the share of digital or digitally enabled products in company portfolios is accelerating by seven years.⁴

What remains to be seen is how well companies manage to digest the digitization of customer interactions while also accounting for internal operations, supply-chain issues, inflationary pressures, and the like. Success will require businesses to realign across their value chain and reconsider the way in which they deliver value to the customer.

Midmarket Poised for Innovation

Fortunately, the US Middle Market sits in a goldilocks zone for innovation. While the Silicon Valleys, Alleys, and Hills may get a lot of attention, the US Middle Market, which employs nearly 50 million people and represents roughly one-third of private sector GDP, is both the most in need and capable of harnessing the power of innovation.⁵

1. Maturity to build beyond the next ‘pivot’

Unlike startups, midmarket companies have an operational business with customers who provide both a revenue base and a market to test new software products and models. This same base allows midmarket actors to invest in sustaining and disruptive innovations without needing to raise money externally – but they certainly have caught the eye of private equity investors in recent years.⁶ Their maturity also allows them more opportunities to creatively partner with suppliers and competitors while also considering R&D tax credits.

2. Latitude to try something new

Conversely, while their size is a barrier against entrants, it also affords flexibility when compared to larger players who are often burned with bureaucratic red tape. While innovative projects can get lost in larger organizations that lack the financial incentive, midmarket players often have leadership, if not ownership, closely involved as sponsors, allowing them to make faster decisions and ensure the importance is messaged through the company. The larger an organization gets, the better it becomes at efficient execution in pursuit of customer value. This is an excellent attribute for delivering on the current model, but it also means innovation, unless carefully protected, can be quickly stifled like a virus surrounded by antibodies.⁷

3. Knowledge to leverage for digital investments

The average age of a midmarket business is 31 years which means they are both operationally resilient and experienced.⁸ With this comes a deep understanding of their markets which can be turned into actionable investments in solutions that will impact consumers. With this focus on who their customer is, they spend less time guessing what to put out into market or weighing their alternatives.

Forging a New Path

The midmarket, for its part, appears to be aware that new products and services are the way forward; the introduction of new products dipped in 2020 and 2021 but saw a resurgence through 2022, with roughly half of all participants polled rolling out new offerings.⁹ Our own research shows product or service innovations take the second most critical spot for business investment at 63.5%, lagging only behind customer experience at 77%. What’s more, these digital investments focus on creating better decisions, increasing revenue, and improving productivity as opposed to cost reductions and risk reduction.¹⁰ There is a clear indication that despite economic headwinds impacting overall confidence, leaders in the sector are taking advantage of the moment while others look to catch their breath.¹¹

With the above said, there are challenges associated with navigating digital product development and reorienting a business model, especially in the shifting sands of our current macroeconomic environment. Funding, staffing, management, and adoption are just a few hurdles we help our clients tackle every day. It’s why we rally around risk reduction and relationships that go beyond the contract to help companies transform into the software-driven businesses they need to be. We know that if we can make that happen, then there will be growth for both our organizations for a long time to come.

1. https://hbr.org/1995/01/disruptive-technologies-catching-the-wave[↩]
2. https://sloanreview.mit.edu/article/the-hard-truth-about-business-model-innovation/[↩]
3. https://www.forrester.com/blogs/2020-the-year-of-digital-products/[↩]
4. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/how-covid-19-has-pushed-companies-over-the-technology-tipping-point-and-transformed-business-forever[↩]
5. https://www.middlemarketcenter.org/middle-market-indicator-overview[↩]
6. https://www.rothschildandco.com/en/newsroom/insights/2022/09/en-wm-why-the-us-middle-market-is-attractive-for-private-equity-investors[↩]
7. https://hbr.org/2012/05/get-the-corporate-antibodies-o[↩]
8. https://hbr.org/2021/03/the-middle-market-is-stressed-but-resilient[↩]
9. https://www.middlemarketcenter.org/performance-data-on-the-middle-market[↩]
10. https://frogslayer.com/downloads/digital-development-and-implementation-decisions-research-report/[↩]
11. https://rsmus.com/middle-market/mmbi.html[↩]

• 
  Alexander Tapper Innovation Contributor

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• Mid-Market