The Business Magazine March 2024

Herrington Carmichael March24 Leaderboard

BDO reports mid-market positivity despite uncertainty

Expansion and innovation focus

In general, companies that performed well during the Covid-19 pandemic and in the uncertain times that have followed had the nerve to continue to invest in their core activities.

We see two main drivers of growth: international expansion and innovation. A quarter of companies surveyed said international expansion was a priority. An appetite for international growth has always been at the forefront of the Central South economy, especially the post-Brexit search for new markets. Fareham-based Just Develop It’s subsidiary Protected.net is a good example, having expanded in the US with a New York Stock Exchange listing. Companies are also driving expansion through continued investment in research and development.

Navigating a perfect storm

In many ways, the Covid-19 pandemic is hopefully disappearing in the rear-view mirror. The question we now ask is ‘What is normal?’. We face huge global economic upheaval – a perfect storm of uncertainty. Our survey identified the main challenges mid-market businesses say they are facing.

Supply chain issues

Nearly half of the respondents cited supply chain disruption as their biggest challenge for this autumn and winter, particularly raw material shortages and logistics bottlenecks. Entering new markets requires robust supply chains.

Many businesses that hung on during the pandemic must now tackle the knock-on effect of prolonged supply chain disruption and inflation by re-assessing their cost base and capacity for future growth. Supply chain disruptions from the Far East, particularly China, mean we are seeing alternative markets, like India, gaining in popularity. A trade deal between the UK and India could have a very positive impact on inward investment in the Central South region and the rest of the UK.

While ensuring supply chain resilience and managing overseas workforces were important, only 16% of survey participants thought geopolitical instability was their biggest challenge.

Green priorities

The survey found that some 42% of companies are looking to invest in greener technologies, with 68% speeding up their investment in this area to manage costs and address climate change issues.

The focus on environmental, social and governance (ESG) reporting by large organisations is filtering down to mid-market companies, especially those with large-sized customers who are scrutinising green credentials across their entire supply chains.

Funding concerns

The availability of capital to fund growth is another headache for mid-market companies. Over 80% of those who responded to the survey said they have changed their approach to funding in the last three to six months. Nearly one quarter are looking for funding earlier than planned to ease inflationary and other pressures. In contrast, a similar proportion are delaying funding because they are failing to hit their growth targets.

"The survey found that some 42% of companies are looking to invest in greener technologies, with 68% speeding up their investment in this area to manage costs and address climate change issues"

With rising interest rates, traditional borrowing from banks may no longer be economical. Instead, we are seeing different forms of lending, including Venture Capital Trusts and private equity investment. That said, banks are also becoming more innovative in what they offer, such as funding against future R&D tax credit claims.

Labour market squeeze

It’s not just financial capital that is in short supply – human capital is also lacking. Asked what priorities they’d like to see in terms of Government intervention, around one-third of businesses in the survey put access to labour at the top of their list. A similar proportion were looking for a reduction in business rates. But what businesses want right now is stable government. As things stand, we expect the labour market situation will probably worsen. Changes in post-pandemic working and difficulties in attracting skilled staff have left their mark. The Central South must also deal with the perennial problem of the brain drain to London.

All of the companies surveyed said they would consider candidates working remotely outside of countries where they are located, although 40% would only consider this if they had a strong client base there.

One area that could make a positive difference to the current labour shortage is apprenticeships, but we see a disconnect here. Local colleges are looking for placements but local employers say they can’t afford them. It’s an area where more Government support is needed.

Stronger voice needed

A conduit between central Government and business at a regional level is through Local Enterprise Partnerships (LEP) and Chambers of Commerce. But can they do more to support the growth ambitions of Central South companies, particularly internationally?

Businesses need to lobby their LEPs and Chambers of Commerce and challenge them to do more. However, one of the problems the region faces is that it tends to be disjointed and disparate in terms of attracting government support. It lacks the strong focus and coordinated approach you see in regions like the Northern Powerhouse.

Resilient outlook

Despite current economic uncertainty, mid-market businesses in the Central South region remain broadly positive, with 51% believing that inflationary pressures will ease in the first half of 2023. For now, it is definitely a glass-half-full view in Central South but with so much volatility who knows how long this will last.