Middle market companies are proving resilient in the face of economic uncertainty. While executives are optimistic about their own company's growth prospects, they are less confident in a broader economic recovery. To thrive, companies recognize the need for strategic agility and many expect to see growth through new products/services, marketing efforts, and technology. Maintaining flexibility is seen as key to adapting to changing market conditions.

1. Inspired for Growth
Lessons From Middle Market Companies
IN ASSOCIATION WITH:

3. Contents
Foreword............................................................................................................2
Key findings........................................................................................................3
Methodology......................................................................................................4
Optimism abounds.............................................................................................5
What’s driving growth?......................................................................................6
Agility is essential...............................................................................................7
How to grow when markets won’t ....................................................................8
Funding growth..................................................................................................9
Establishing priorities…………….…………………………………………………………….………10
The rise in customer focus……………………………………….…………………….……….……11
Customers are like honeybees.........................................................................14
A focus on the workforce.................................................................................15
Growing pains..................................................................................................16
Building a talent management function………………………………………….……………17
Where are the challenges?..............................................................................18
Conclusion.......................................................................................................20

4. ForEwOrd
What does it mean to be a middle market company in today’s economy? To gain some current
perspectives, we’ve partnered with BMO Harris to execute a survey supplemented by interviews
with senior business executives and consultants. And here’s what we learned.
You’re likely profitable – and that means you’re a growth engine within the U.S. economy. You’re optimistic about your
own company’s future – even if somewhat less upbeat about the broader economic picture. You’re agile – just the right
size to address the evolving needs of the marketplace. You’re also likely very close to your customers, employees and other
stakeholders. And for all of this, larger companies admire and even envy what you do.
But you can’t stand pat. The competition never sleeps. Technology is advancing and customer needs and wants are in
constant evolution. And you’re going to grow – and with that growth comes a host of new challenges.
You’re on a first-name basis with customers today. But as your customer list expands, how can you maintain such inti-
macy and focus? Your workforce is motivated, focused and entrepreneurial. But how will you sustain this culture as the
volume of work multiplies, employee ranks swell, and bureaucracy and control infiltrates? You know who does what today
– but what are you doing to anticipate future needs? Are you assessing your talent gaps? Do you have adequate training,
development and succession plans?
You’ve done very well. But continued success depends on how clearly you identify the challenges ahead and how capa-
bly you prioritize and execute your responses. To that end, please consider the following collection of statistical, anecdotal
and consultant-provided information – which we hope will prove useful.
-Bruce H. Rogers, Chief Insights Officer, Forbes Insights
2 | Lessons from middle market companies

5. Key findings
The middle market defies the broader downturn. In spite of a weak U.S. economy, three out of five survey respon-
dents experienced revenue growth over the past two years. Meanwhile, only one in eight reported revenue declines.
Executives are optimistic about their own futures… Nearly three-quarters of mid-market executives say their compa-
nies are poised for continued revenue growth.
but less so about the broader economy. Outlooks for the U.S. economy as a whole are less sanguine, with one in
…
four survey respondents not seeing broader recovery until 2013 – and just under one in five looking to 2014 or beyond.
gility is essential. Alongside optimism and plans for growth, middle market managers are also keenly aware of the
A
need for strategic flexibility. These executives view agility as one of their core competitive weapons. Two-thirds say that to
grow and thrive in today’s economy, companies have to change strategic course. Meanwhile, a third of executives say that
in order to grow, companies will need to completely change their business model.
orporate ‘to do’ lists feature two imperatives. Executives are confident they understand what drives growth and are in
C
turn prioritizing their efforts. Improving the customer experience garners the top ranking by a wide margin – both now and
in five years. Workforce issues – the need to more effectively manage talent – is the second highest ranking priority.
The customer is king. Survey results and interview anecdotes show that midsize companies view customer intimacy and
focus as the keys both past and future success. Moreover, customer issues dominate the list of potential external risks – so-
called “game changers” – that could conspire to inhibit growth. Consequently, executives aspire to building and sustaining
customer-focused cultures and operations and are backing it up with resources and initiatives.
mployees are more important than ever. Middle market executives recognize that without the right people in the
E
right roles, even the best-laid strategic plans fall short. Moreover, as a midsize company grows, it runs the risk of losing its
entrepreneurial character. Not surprisingly, the top six internal game changers – key risks to growth plans – all relate to
the workforce. Consequently, executives are recognizing their acute needs to develop more effective processes for recruit-
ing, developing and retaining essential skills.
Political headwinds don’t help. The survey shows that midsize companies view regulatory activism and uncertainty
as the greatest threat to their future growth prospects. In particular, executives are concerned about the implementation
of new healthcare regulations. At the same time, midsize companies are also aware of their constant need to watch out for
competition from peers, startups – and larger companies.
Copyright © 2012 Forbes Insights | 3

6. Methodology
The insights and commentary found in this report are derived from both a survey instrument and personal interviews.
The survey, conducted by Forbes Insights in December 2011-January 2012, was completed by 313 executives.
Key demographics include:
Executive title: VP/Director (41%), CFO (12%), CEO/President (11%)
Company size: $250 million to $499 million (21%), $100 million to $249 million (35%), $50 million to $99 million (43%)
The sample features a wide spectrum of industries with no notable concentrations beyond retail and wholesale trade (20%)
and healthcare (14%). Respondents are also relatively evenly distributed throughout the U.S.: Northeast (27%), Midwest
(27%), Southeast (21%), Southwest (17%) and Northwest (7%).
Interviews were conducted with six senior executives representing businesses chosen from the Forbes 2011 list of the 100
Best Small Companies in America (rankings in parentheses). They include:
• onald Brown, chairman, president and CEO, Interactive Intelligence Group, Inc. (8)
D
• oe Chalhoub, president and CEO, Heritage-Crystal Clean (82)
J
• Edward Evans, CEO, Inteliquent (38)
• Harry Herington, CEO and chairman, NIC Inc. (20)
• Joe Mansueto, founder and CEO, Morningstar (70)
• rian Mueller, CEO, Grand Canyon Education, Inc. (4)
B
Then, to gain further perspective on key issues uncovered by the research, additional interviews were conducted with
three external consultants:
• aniel Friedman, senior partner and managing director, the Boston Consulting Group
D
• olleen O’Neil, PhD., senior partner, Mercer
C
• on Peppers, founding partner, The Peppers Rogers Group
D
Forbes Insights extends its gratitude to these executives.
Some charts may not add up to 100% due to rounding.
4 | Lessons from middle market companies

7. Optimism abounds
U.S.-based middle market companies are proving to be an Figure 1: How did your organization’s revenue change
engine of economic growth. Though far from immune to over the past two years?
the economic downturn, both the survey and accompa-
nying interviews indicate the sector is weathering things
n rew significantly
G
well. Optimism among middle market enterprises is prev- 6%
16% (10%)
6%
alent across a wide range of industries. Consider: n rew somewhat
G
• rivate education. Arizona-based Grand Canyon
P 12%
(6% to 10%)
Education, Inc., offers postsecondary education services n Grew slightly (1% to 5%)
through its private Grand Canyon University—online as 19% n Stayed the same
well as on campus. CEO Brian Mueller says he expects n ontracted slightly
C
15% (1% to 5%)
swelling enrollments will drive his firm’s approximately
n ontracted somewhat
C
$400 million in current annual revenues to grow from (6% to 10%)
13% to 15% in each of the next three years. 26% n ontracted significantly
C
• nvironmental services. Joe Chalhoub, presi-
E (10%)
dent and CEO of Illinois-based Heritage-Crystal
Clean says the biggest challenge for his $120 mil-
lion company “is to manage growth, as we expect Figure 2: How do you expect your organization’s
our revenues to increase dramatically (by) the end revenue to change over the next two years?
of 2012.”
1%
• oftware and services. E-government-focused
S
4% n row significantly
G
NIC Inc. builds official websites, online services 14% (10%)
8%
and secure payment processing solutions for more n row somewhat
G
than 3,500 federal, state and local government 6% to 10%)
agencies. Today, says CEO Harry Herington, the 15% n row slightly
G
company works mainly with state governments. (1% to 5%)
29% n Stay the same
But over the next several years he anticipates that
n ontract slightly
C
“federal agencies will become major contributors
(1% to 5%)
to our growth.” n ontract somewhat
C
29% (6% to 10%)
Such anecdotes are well-supported by the survey n ontract significantly
C
results. Over the past two years, three out of five respon- (10%)
dents - 61% - experienced revenue growth. Only one in
eight, 12%, reported revenues had contracted over the past
two years either somewhat (6%) or significantly (6%). Figure 3: When do you expect the economy to recover?
Turning to the future, nearly three-quarters of mid-
market executives, 72%, forecast that their own revenues 5%
will continue to grow. This stands in contrast to a more 10%
guarded outlook for the economy as a whole, where 44% 26%
n 013
2
of respondents do not expect recovery until later (26%
n econd half of 2012
S
say not until 2013 and 18% say 2014 or beyond). As NIC’s n It’s already recovering
18%
Herington explains, “I have far more confidence in our n 014 or later
2
own ability to grow than I do in prospects for the over- n irst half of 2012
F
all economy.” 22% n on’t know
D
18%
Copyright © 2012 Forbes Insights | 5

8. What’s driving growth?
Executives point to a range of growth initiatives and Figure 4: Where do you expect growth to come from?
drivers including not only organic growth but also new
Organic growth
products and even MA.
35%
At Heritage-Crystal Clean, a good deal of expected
revenue growth can be attributed to a new line of busi- Launch of new product or service
ness: re-refinement of oil. A just-completed facility in 35%
Indianapolis represents tremendous potential for the Sales and marketing efforts
company, says Chalhoub, as it leverages “the branch [dis- 33%
tribution] network we have built up over the past decade.” Use of technology
Inteliquent is a Chicago-based provider of voice, IP 26%
and Ethernet telecommunications. CEO Edward Evans
Mergers, acquisitions or joint ventures
attributes past growth both to new product offerings and
16%
to moving into new U.S. markets with existing products.
However, the executive sees organic growth also “going New distribution strategies
hand in hand with acquisitions, as and when the right 10%
opportunity occurs.” International sales
A similar story comes from Indiana-based Interactive 7%
Intelligence Group, Inc., a provider of unified IP business
communications software and services. “Our expansion 0% 25% 50%
has been mainly moving upmarket, selling our [existing] Note: Executives could select multiple responses.
software and services to larger organizations,” says Donald
Brown, founder, chairman and CEO.
Such vignettes closely align with the survey findings.
Growth initiatives and drivers include organic growth
(cited by 35% of respondents), new product or service
launches (35%), sales and marketing efforts (33%) and the
use of technology (26%). Mergers and acquisitions, new
distribution strategies and international sales will also play
a role (see figure 4).
6 | Lessons from middle market companies

9. Agility is essential
Alongside optimism and plans for growth, middle market Figure 5: In order to grow and thrive in today’s economy,
managers also seem keenly aware of the need for strategic companies have to change strategic course.
flexibility. Two-thirds of executives either strongly agree
(23%) or somewhat agree (44%) that to grow and thrive
3%
in today’s economy, companies have to change strate- 9%
gic course (see figure 5). Meanwhile, a third of executives
23%
either strongly agree (4%) or somewhat agree (30%) that in n trongly agree
S
order to grow, companies will need to completely change n omewhat agree
S
their business model. 22% n Neither agree nor disagree
n omewhat disagree
S
n trongly disagree
S
44%
Figure 6: In order to grow and thrive in today’s economy,
companies have to completely change their business model.
6% 4%
n trongly agree
S
26% 30% n omewhat agree
S
n Neither agree nor disagree
n omewhat disagree
S
n trongly disagree
S
34%
Copyright © 2012 Forbes Insights | 7

10. How to grow when markets won’t
QA: Daniel Friedman, Senior Partner and Managing
Director, the Boston Consulting Group
What are you advising your clients in terms of achieving that applies. Apple is very well known for testing things and
growth in a slowing economy? We’ve identified almost adjusting as they go. I don’t think they launched necessarily
80 demographic, economic and behavioral megatrends, always the final and the best product, but tested and kept
which have the power to reshape economic opportunity refining as they went along.
and risk. They are to business growth what tailwinds are
to an airplane flight. Nearly 80% of these megatrends Do slower markets offer any opportunities? It’s a good time
continued to grow during the downturn, and 23 actually to think about mergers or acquisitions. Data shows that in
strengthened in importance. times of lower growth, the deals you make are more likely to
generate higher value, because you tend to avoid overpaying
The group that kept its momentum includes demographic for a business.
trends, such as the aging of the population, the rise in obesity
and dieting. This group also includes trends related to health We’re not in a healthy economy yet. There’s still quite a bit of
and wellness, such as organic products or nutraceuticals. uncertainty, so I would say that in terms of mergers or acquisi-
tions, there are good opportunities out there. To do nothing
The trends that strengthened and, according to our analysis, and just wait is probably the biggest risk.
will sustain their level of growth for the foreseeable future,
are: trading down, product commoditization, the dominance
of new media, the increase in wireless communications and
the rise of China, among others. Also strengthened is a group
focused around anxiety: identity theft, the rise of counterfeit
brands and loss of trust in organizations.
How can executives latch on to megatrends? The ability to
spot a megatrend and its effects on markets usually requires
mental if not physical distance from the trenches of day-to-
day business. It takes effort to spot the megatrends and to
position the business to benefit from it.
How important is changing the business model? It’s prob-
ably one of the toughest things to accomplish, because it re-
ally means fundamentally redesigning what you’re offering to
your clients. Probably the best example of all is Apple, the
way they totally redesigned the business model for how you
sell and access music. The genius of Steve Jobs was coming
up with a business model where they actually offered easy ac-
cess to music at one single price and song unbundling instead
of buying the whole CD. And they created a great device to
store and share the music, and to access it easily through the
computers and through the Internet.
Talking with executives, both at technology and non-technol-
ogy companies. I’ve heard a wide set of opinions about what’s
leverage-able for their own environments. There is one aspect
8 | Lessons from middle market companies

11. Funding growth
Growth plans are seemingly unhampered by any lack of Figure 7: From where is your organization currently
capital availability. Despite evidence of a general slow- receiving financing?
down in commercial bank lending, two out of five survey
respondents say they are able to access bank loans, and Bank loan
almost a third are able to rely on retained earnings. Hardly 41%
any are depending on new share issues for funding, reflect- Retained earnings
ing the fact that only one-quarter of respondents were 30%
from publicly traded companies. Grants
At least some mid-size companies are in the sweet spot 17%
of having cash on hand and little or no debt, with poten-
Personal sources
tial access to the equity or debt markets when they need it.
17%
Heritage-Crystal Clean launched an IPO in 2008 to
help strengthen its balance sheet and provide greater access Private placement
to capital. It later made a secondary share offering to partly 14%
finance the used oil re-refining facility in Indianapolis. Government sources
“We also have a bank line of credit if we need more capi- 13%
tal,” says Chalhoub. Investment banking firms
Chalhoub notes there are both advantages and disadvan- 10%
tages of being a publicly traded company. On the plus side
Foreign investment
the executive sees more capital for expansion and growth,
9%
a means to enable employee equity participation as well as
improved visibility and perceptions of the company. We don’t currently receive financing
But in exchange, disadvantages include expanded 8%
reporting and compliance along with associated costs Hire purchase or leasing
including external audit and directors and officers liabil- 7%
ity (DO) insurance. A public company also loses, to a Loan stock
significant degree, its ability to hide its strategies from 7%
competitors, says Chalhoub. Still, “overall, for our com-
Venture capital firms
pany, we feel strongly that the benefits exceed the costs.”
7%
Publicly traded Inteliquent was able to finance its
acquisition of Tinet with internal cash balances. “We New share issue or IPO
generated approximately $42 million of free cash flow 4%
in 2010,” says Evans, “and we don’t have any debt.” Franchising
However, he adds, “access to capital markets is impor- 3%
tant, especially for mergers and acquisitions, and we are Rights issue
well positioned to go back to those markets when we 2%
need to.”
Small Business Administration
At Interactive Intelligence the issue is what to do with
1%
surplus cash rather than how to raise more of it. As Brown
explains, “we have not paid dividends to date, but we did Other (please specify)
repurchase stock a few years ago, and we have made a few 1%
small acquisitions, all from internal cash balances.” 0% 25% 50%
Note: Executives could select multiple responses.
Copyright © 2012 Forbes Insights | 9

12. Establishing priorities
In terms of current priorities, improving the customer statistics in each instance show the percentage of executives
experience tops the list, with three out of five respondents, viewing an area as extremely important. Put another way,
60%, citing this initiative as extremely important. Five though neither strategic acquisitions nor global expansion
years hence, the objective still retains the top spot on exec- break into the top 10 ranking for today, they both remain
utive’s strategic to-do lists (see figure 8). extremely important to one out of five companies.
“We believe we already have a high standard of cus-
tomer service,” says Inteliquent’s Evans. “The challenge is
not to let that slip, making sure that people stay motivated Figure 9: Rankings
and focused on the customer as we expand.” Launch new products/services (an ext. of current offerings)
The next two most prominent issues in terms of stra- 44%
tegic priority are not only in a statistical dead heat for 50%
second place, but both involve an organization’s peo- Launch new products/services (entirely new)
ple. Optimizing sales force effectiveness edges building 40%
and retaining a qualified workforce by a single nominal 48%
percentage point. That is, 47% and 46% of executives,
respectively, regard these objectives as of today, extremely Streamline/update business model
38%
important. Five years hence, however, relative positions
44%
shift, with those viewing the broader workforce initiative
as extremely important rising to 54% versus only 49% for Develop new business models
31%
sales force effectiveness.
42%
Though viewed by fewer executives as extremely
important, a wide range of additional initiatives are by no U.S. expansion
means unimportant. For example, weighing in as the num- 29%
ber four and five priorities both today and in the next five 33%
years are the development and launch of new products Get involved in local community
and services as an extension of existing offering as well as 26%
entirely new categories (see figure 9). 29%
Again it must be emphasized that a low frequency of Improve government relationships
citation does not mean the issue is insignificant. Indeed, the 23%
26%
Strategic acquisitions
Figure 8: Strategic priorities: present, future and past 22%
30%
Improving customer experience
Establish/expand globally
60%
57% 20%
55% 31%
Optimizing sales force effectiveness Consolidation
47% 14%
49% 18%
45%
Building and retaining a qualified work force Today Five years hence
46%
54% *Numbers in parentheses are the percentages of executives
49% ranking the initiative as extremely important
Today Five years hence Five years ago
*Numbers in parentheses are the percentages of executives ranking
the initiative as extremely important
10 | Lessons from middle market companies

13. The rise in customer focus
One of the most consistent sets of findings across the whole Figure 10: What do you think have been the most critical
of the survey is that middle market companies appear to be factors contributing to your organization’s successful growth?
operating with a heightened awareness of the importance
Focus on customer experience
of a customer focus. Improving the customer experience
46%
has already been highlighted as the priority most fre-
quently cited as extremely important. But responses to Getting new products/services out in a timely manner
three additional questions show that customer awareness 33%
and focus literally pervades middle market mindsets. Investments in new technology
For example, asked to identify the factors con- 29%
tributing most to their organization’s growth, the Adequate financing
most frequently cited is a focus on customer expe- 25%
rience – mentioned by 46% of respondents. Then in
Emphasis on attracting and retaining the best talent
another question, executives were asked to evaluate
23%
the criticality of a list of potential external forces or
game changers. Here, four of the top f ive issues most Wider use of social media
frequently rated as extremely signif icant all exact an 16%
impact on customer relationships, including: pricing Ability to adapt to regulatory changes
pressures, decreased customer budgets/spending, falling 16%
customer demand and increased domestic competition. Changing business model
And in a third survey question, executives were asked 14%
where they would be focusing their resources going
Deep bench of experienced senior executives
forward. Here, three of the top four areas are again cus-
12%
tomer-related, including: customer service, new product/
service development and sales (see figures 10, 11 and 12.) Ability to adapt to changes in market pricing of inputs or
raw materials
All of the above underscores the middle market’s belief
11%
in the importance of customer relationships. It also goes
a long way towards explaining why many middle market Participating in a successful merger or joint venture
companies feel they need to devote greater resources and 11%
attention to these issues. Industry consolidation/faltering competition
8%
Return on investment in RD or product innovation
7%
Acquisition
5%
0% 25% 50%
Note: Executives could select multiple responses.
Copyright © 2012 Forbes Insights | 11

14. A good example is Heritage-Crystal Clean. Many com- Figure 11: What external forces are the likely biggest
panies rely on customer satisfaction surveys to gauge customer game changers for your company?
sentiment. However, says CEO Chaloub, “if you have a lead-
ing position in the market, customers may give you a high Pricing pressures
41%
score anyway as a matter of course – so we try to dig deeper.”
For example, the company looks for additional indicators of Decreased customer budgets / spending
customer satisfaction such as the ratio of competitive wins to 36%
competitive losses, or more simply, the rate of growth in the Regulatory and legislative pressures
customer base. And while there are no publicly reported statis- 35%
tics in this area, “it follows that if we are winning more than
Falling customer demand
we are losing, our customer retention rate is probably higher
31%
than others in our industry.”
Of course, there are many paths to customer satisfac- Increased domestic competition
30%
tion. At Interactive Intelligence, CEO Brown says “we spend
roughly 17% of revenues on RD, compared with 10% to Higher energy prices
12% for most companies of our size.” In this way, says Brown, 27%
the company is in a better position to “offer the products the Rising labor costs
[markets] need.” 27%
Emerging technologies
25%
Lack of qualified workforce
24%
Competing products/services
23%
Access and management of capital
22%
Risk management issues
22%
Volatile commodity/input prices
22%
High real estate costs
17%
Volatile export markets
17%
Increased foreign competition
16%
0% 25% 50%
12 | Lessons from middle market companies

15. Figure 12: Where are you focusing your resources within
your organization?
Customer service (adding, retaining and servicing clients)
43%
Changing or evolving our business model
35%
Developing new products and services
35%
Sales
33%
Geographic expansion
27%
Technology/IT
26%
Hiring, employee compensation, and/or employee training
25%
Expanding facilities we already have
22%
Advertising and marketing
22%
Acquisition of a business
20%
Manufacturing
15%
Procurement/purchasing
11%
Community initiatives/giving back to the community
9%
Shipping, distribution or logistics
7%
Other (please specify)
1%
0% 25% 50%
Note: Executives could select multiple responses.
Copyright © 2012 Forbes Insights | 13

16. Customers are like honeybees
QA: Don Peppers, founding partner,
Peppers Rogers Group
What do you mean when you talk about improving the cus- And this issue of metrics is especially important. Financial ac-
tomer experience? The customer experience is the sum of counting does a really poor job of capturing lifetime value of
every single interaction or interchange, whether that’s a web a customer. If a warehouse burns down, accounting registers
visit or mobile application, visiting your storefront or a dis- a loss. But if a poor experience with your company causes you
tributor, using your product or service, phoning for customer to lose a customer, even though the net present value of your
service – or increasingly, even when viewing or authoring con- relationship with that customer has just fallen to zero – there’s
tent about your company on social media. Customers don’t no accounting for that. So it’s very important for midsize com-
make distinctions – they view any interaction within the scope panies to supplement their financial metrics with a range of
of their total relationship. So businesses need to do their ut- customer-focused metrics.
most to optimize the customer experience and prevent simple
missteps that can harm these relationships. What are the most effective metrics? Some of the most uni-
versal include customer satisfaction, customer loyalty, renew-
What do midsize companies do well in this area? Being al rates, referrals – but in practice companies need to put in
smaller can have its advantages. Midsize companies are of- some time to develop what will be meaningful and effective
ten closer to their customers because they are more entre- for their specific circumstances.
preneurial. The list of key customers is often short enough to
reside in the founder’s head or in the memories of front line Is there any other aspect of managing the customer expe-
managers. Relationships are more intimate and responsive – rience you’d like to emphasize? The advent of social media
there’s no buffer between the customer and those who can is something that can’t be ignored. Think about this: when a
get things done. honeybee finds a food source, a flower, he goes back to the
hive and does a waggle dance. That dance is very sophisticat-
What should midsize companies do to improve the custom- ed and it tells others in the hive about not only the direction of
er experience? The single most important thing you can do is a food source, but also its distance and quality.
develop an employee culture where the central mission is do-
ing what’s right for the customer. You can use advertising and Let’s suppose your business is feeding honeybees. What de-
flash to tell the customer they’re getting a great value from termines whether they’ll come in or not is color and scent –
your company. But that will only drive the initial experience. that’s advertising and promotion. But what determines what
It is the quality of that initial experience, and then all the sub- they tell the rest of the hive is the total quality of the experi-
sequent experiences – product or service quality plus every ence. Is my core proposition – the nectar – worth the trip?
other aspect of the experience – that determines the degree With social media becoming more prevalent, companies will
of customer satisfaction, in turn driving trust and long-term have to do a lot more to ensure a consistently positive cus-
customer value. Every employee needs to understand and tomer experience. Otherwise, a lot fewer bees will come.
then commit to delivering on promises to customers.
Are there aspects of customer experience where mid-
size companies can learn from larger companies? Larger
companies have a lot of tools – like their customer relation-
ship management (CRM) systems – that can help institu-
tionalize essential processes and deliver data to be mined
for insight. Larger companies that “get it” are also getting
better at developing performance metrics that incentivize
a clearer customer focus.
14 | Lessons from middle market companies

17. A focus on the workforce
In terms of priorities, building and retaining a qualified Figure 13: What internal challenges are likely the biggest
workforce is in a virtual tie with optimizing sales force game changers for your company?
effectiveness for second place today—and in five years takes
sole possession (see prior figure 8). As for internal game Sustaining employee morale
43%
changers, the top six most often cited issues are also work-
force related. (See figure 13.) Combining these two sets of Need to increase employee productivity
insights elevates talent management to the forefront of stra- 37%
tegic challenges for the middle market. Attract a young or new generation of employees
The importance of paying closer attention to tal- 32%
ent management resonates clearly with interviewees. For
Ensure a steady talent pipeline
example, as Inteliquent CEO Evans explains, one of his
31%
group’s key strategic challenges is to move from depen-
dence on voice-centric revenues to a business based more Succession planning
31%
on data transfer and the provision of solutions. The right
employees are crucial to this effort. “We have to make sure Need to train employees
that we have the right people to manage this migration 30%
successfully,” says Evans. “In light of the complexities, we Shift in business strategy/plans
need new skill sets.” 28%
At NIC, Herington is emphatic that employees are the
Ensuring adequate investment in new technologies
most significant part of the company’s success. “It’s not just
28%
a question of keeping people, it’s making sure you have the
right people and motivating them so they don’t become Generate cash flow to meet investment needs
27%
stale.” Consequently the company empowers its employees,
encouraging innovation while discouraging bureaucracy. Sharply rising operation costs
Further, the culture is one, says Herington, “where people 24%
are rewarded not only in financial terms but [also] through Executive compensation issues
recognition by peers and management.” 19%
Also worth noting, Herington believes the best hires are
Reduce employee head count
those that arrive with a passion for the mission – more so
18%
than having the necessary skill sets. “You can teach certain
job skills,” says Herington. “But you can’t train someone to Corporate social responsibility
14%
have passion and be energetic.”
0% 25% 50%
Note: Executives could select multiple responses.
Copyright © 2012 Forbes Insights | 15

18. Growing pains
Maintaining employee morale as a company grows to midsize requires special care and attention. Interactive Intelligence
Group’s Brown is particularly conscious of the need to motivate a growing workforce. “That’s especially true when you
are transitioning from a start-up, where people know they really matter,” says Brown, “to midsize, where that feeling
may dissipate.”
An area of critical focus is RD, where to remain excited about their work, research team members need to have a
sense of the value of that work. In response, says Brown, “we work hard to decompose company-wide objectives into
departmental, team and individual objectives so that everyone understands how their work impacts the overall organiza-
tion.” In turn, “I personally read every RD status report every week, and ping individual employees so they know that
what they do is important, and recognized by the CEO.”
16 | Lessons from middle market companies

19. Build a talent management function
QA: Colleen O’Neil, PhD
Senior Partner, Mercer
What are the key HR challenges for midsize companies? Top information, this doesn’t have to be a huge ticket item. So
executives, whether from a large or a midsize company, worry midsize companies how have more tools available to get to
about a lot of the same things. I’ve got to build this talent the diagnostic work that can help them prioritize.
pipeline. I’ve got gaps. Am I doing the right things to prepare
me for stronger, more profitable growth? Are we retaining Do you have any other advice for midsize companies? One
and developing our talent? So the issues are similar but the thing I would mention is the advantages of collaboration with
differences are in the execution. other businesses. Midsize companies, more so than larger
companies, are in a position to develop creative ways of
What are midsize companies doing well? Smaller compa- partnering with others to share or develop what they need. It
nies tend to have more direct contact between who’s doing might be working with customers or suppliers, but you need
the hiring and who needs the talent. So there’s high-touch in to think more broadly in terms of the complementary talent
terms of what they need and who they bring in. that already exists or could be developed.
They also have something different to offer relative to larger And finally, it’s important to emphasize that whatever you
companies in terms of working environment. There’s less bureau- do, it has to make sense for your company. What happens
cracy. You can move faster with more latitude. When you think too often is we gravitate to what we heard they do at [some
about younger people in particular, that can be very appealing. other well-known company]. But what works at one com-
pany isn’t necessarily going to be a best practice at your
Another advantage is that during the downturn, midsize company. All companies have differing core cultures, cus-
businesses generally performed better than the largest com- tomers and processes. So I’d say the growth lesson is that
panies. They didn’t lay off 30,000 employees, so when they you have to develop a talent strategy that works for your
are looking to hire, they don’t have some massive downsiz- individual company.
ing to defend.
What can midsize companies do to take their talent man-
agement to the next level? They need to take a look at their
business and build a talent management function that deliv-
ers against its challenges. They’re probably already doing this
in other areas like RD, supply chain or distribution. But they
need to develop, articulate and deliver against a similar vision
for their talent management.
What does that mean in practical terms? All businesses,
large or midsize, face a range of talent issues. Do we need
to address succession planning? Recruitment? Productivity?
Training and development? Performance management? Inter-
national expertise? You realize you need to make progress in
all of these areas, but you have to be judicious.
Leveraging technology can help. When the tactical issues
take less effort, managers can then focus more on refining
and prioritizing their talent strategy. And what’s interesting is
that tools like employee engagement surveys, sophisticated
analytics – all that used to be for big companies only. But with
improvements in technology and all the ways we can gather
Copyright © 2012 Forbes Insights | 17

20. Where are the challenges?
Though midsize company executives are indeed confident, Figure 14: Where do you expect declines in growth to
they are meanwhile cognizant of the risks and challenges come from?
ahead. Of course, specific potential risks vary by industry.
But many are also universally recognizable, including: Regulatory changes
• ompetition with larger businesses. For Interactive
C 38%
Intelligence’s Brown, competition with larger compa- Falling customer demand
nies is a constant concern. “Our products and IT skills 25%
are our major strengths, but we have to compete against Pricing pressure on margins
much bigger companies with significantly greater 25%
resources.” As Brown notes, “there is always the possi-
Political gridlock
bility of being outflanked, perhaps in the shape of new
23%
technology.”
• Competition with similar businesses. Competition
Lack of access to capital
is also of some concern for Mueller at Grand Canyon 20%
Education, especially as it relates to the university’s Loss of competitiveness
online programs. “There is a growth market for work- 18%
ing adults attending online, but the competition for Technology becoming obsolete
good ones is intense,” he says. “We have to develop 13%
good curriculums, hire the best instructors and be very
Inflation
competent at delivering higher education in a way that
13%
is revenue-efficient.”
• The risks of consolidation. At Heritage-Crystal
Loss of export markets
Clean, the risk of potential competition from out- 8%
side investors is on the rise. “The high price of oil Supply chain difficulties
is stirring interest among investors with a view to 5%
consolidating the industry,” he explains. Should this Foreign competition
happen, “we believe we are strongly positioned, 5%
as we have built out a comprehensive network of
Other (please specify)
branches to ensure a good supply of oil for recycling
5%
at the right price.”
• Continued volatility. Uncertainty can harm any
0% 25% 50%
business. “Although the U.S. equity market was Note: Executives could select multiple responses.
slightly positive in 2011,” says Morningstar’s Mansueto,
“it was also volatile.” This, the executive explains,
“creates uncertainty and slows purchasing decisions
across our three key audiences: individual investors,
financial advisors and institutions.”
18 | Lessons from middle market companies

21. Regulatory fears
Continuing volatility and uncertainty in so many areas
Figure 15: Over the next two years, what do you think
of the economy, no doubt, casts a continuing pall across will pose the biggest challenge to your business growth?
virtually all of the U.S. middle market. Beyond anecdotal
findings, the survey shows that among midsize companies 5% n Healthcare legislation
5%
regulatory changes are the most frequently cited threats to 19% n olitical gridlock in
P
5%
growth plans (see figure 15). Next, asked to select a sin- Washington
gle most detrimental force from among a list of options, 7% n ncreased regulation
I
the most frequently cited concern was the implementation of my industry
of healthcare legislation – followed by gridlock in govern- 7% n Ability to attract and retain
16%
a skilled workforce
ment and then additional industry regulation.
n Access to capital
NIC Inc.’s Herington worries that an increasing num- 10%
n Foreign competition
ber of regulations emerging from Washington could mean 13% n Scarcity of resources/
13%
“that in the boardroom we have to switch our focus to supply chain disruptions
compliance issues.” Grand Canyon’s Mueller is also keep- n Obsolete business model
ing an eye on the regulatory environment, as Grand n Changing technology
Canyon is, as he puts it, an emerging model for educa- n Other
tion. “The idea of private, publicly traded education
companies will at some point be debated from a regula-
tory standpoint.”
Copyright © 2012 Forbes Insights | 19

22. Conclusion
Being midsize has its advantages, including greater agility, heightened customer intimacy and an overall more closely
aligned and entrepreneurial culture. But growth is coming. And as a business grows, it runs the risk losing many of the
attributes that enabled that growth in the first place.
The survey provides a snapshot of how middle market executives are guiding their organizations toward the next level.
What is clear is that the two most prominent challenges relate to customers and employees.
Consequently, companies are developing processes that promote, enable, incentivize and institutionalize a core com-
mitment to a customer focus. It is from this core that the business is able to better anticipate and address customer needs.
Companies are simultaneously taking a closer look at their workforce with an eye towards enhancing their talent man-
agement strategies. This begins with designing performance measures that build alignment with broader goals. But it also
means forecasting future talent needs and taking needed recruitment, training or other steps to address any gaps.
Beyond the challenges of customer relationships and talent management, executives must also address the full spectrum
of external risks. In addition to monitoring the actions of competitors or advancements in technology, executives should
also remain on high alert regarding a growing wave of government regulations.
Overall, the middle market performed remarkably well through the downturn. Now gearing for future growth, it will
be important to focus on those issues that matter most. The preceding report summarizes the views and priorities of the
broader marketplace. It is up to individual executives to assess how these findings can be harnessed to optimize opportuni-
ties for their own businesses.
20 | Lessons from middle market companies

24. About
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