The business performance of midmarket organizations shows signs of slowing, but overall health remains very strong.
One of the most-often asked questions we receive about the midmarket is how healthy it is compared to the rest of the economy. For the past several years, the answer has been that the midmarket has outperformed large and small businesses when it comes to revenue growth and employment gains, among other financial metrics.
But coming out of Q4 2018, it looks like the midmarket is cooling down. However, the overall health of the sector remains incredibly robust. Based on the fourth-quarter stats we examined from the National Center for the Middle Market, revenue and growth rates fell from the 2018 third quarter, especially in the services and financial services industries. The center also noted that short-term expectations among midmarket CEOs diminished significantly.
This represents a mixed bag for IT and tech suppliers to midmarket companies. There are, no doubt, some negative trends mixed in with the fact that, in 2018, a record number of midmarket companies reported year-over-year improved performance.
The outlook for this year remains good, with a record number of companies expecting to grow revenue. The average growth rate midmarket leaders expect for their organizations is just about 6 percent, but that compares with nearly 9 percent in the third quarter.
Sure, anyone would say that is a healthy gain, but things are cooling down—at least for the moment. This could make the first quarter a challenging one because of this executive pessimism that has crept into the market. That means the C-suite will more carefully monitor expenses, prompting IT managers and their suppliers to document cost savings or efficiency gains from any investment.
Here’s the best way to characterize the market: Growth rates for revenue and employment are slowing, the number of CEOs who are expecting continued improvement in business climate is falling, but the overall outlook is positive.
Let’s call it a mixed bag as the midmarket comes off record highs. The good news for those who manage tech for midmarket organizations is it remains the largest budget item in terms of capital expenditures. This leaves CIOs and senior IT leaders in very influential roles. Top management expects to invest more in IT if additional dollars free up or become available during the year, with security getting the largest infusion.
This may sound strange to some readers, but this scenario actually favors the tech sector for a number of reasons. If top leaders are pulling back on spending because they see macro-economic conditions cooling, they will look for productivity gains from tech or ways to cut costs by deploying IT. When markets turn negative, CEOs need friends with a business-savvy IT leader their bestie if they can take the pressure off a downturn.
Overall, everyone should feel good about midmarket IT spending.
IDC released its worldwide semiannual SMB spending guide that found midmarket firms accounting for the largest share of total IT spending. IDC expects companies in the 100-1,000 employee range to spend $411 billion of the total $602 billion spent on hardware, software and services. IDC pegs IT spending growth of 4.8 percent for companies with 100-499 employees just slightly outpacing growth for the 500-999 group. With both segments planning to boost spending by 5 percent, that is a healthy scenario, given that some sectors will outpace the average by a large margin.
One final note, MES conducted a recent webinar featuring CIOs John Regula of health management company Woods Inc. and Vennard Wright of the Washington Suburban Sanitary Commission. Both thought leaders said they are planning to grow their IT budgets in line with the past few years and are continuing to invest in technology and partners. Their comments were upbeat and both said they remain confident in the business environment.
During the webinar, Gartner analyst Mike Cisek said midmarket IT leaders are aligning their spend to their organization’s top business priorities, led by gaining market share, digital transformation and profit improvement. By his estimates, Cisek said midsize organizations will spend the bulk of their budgets on IT services in 2019 to the tune of $128 billion, followed by $67.4 billion on software, the second-largest category. Both segments, he projected, will post healthy gains over 2018 with a strong march to 2020.
Many business executives and economists interviewed in recent months by business and trade publications see the economy cooling down a bit. But keep in mind that as the market cools, companies most often turn to technology to navigate challenging times.