In a tight labor market, technology can provide support

Middle market companies remain reticent about business-level decisions on capital expenditures, according to a recent RSM US Middle Market Business Index survey. While second-quarter survey results indicated that business leaders plan to spend more on attracting and retaining talent, they should also consider channeling resources toward technology to improve efficiency and productivity within their existing workforce.

Nine of 10 survey participants believed their organization’s capital investments and expenditures to be sufficient to meet demand. These executives expressed a range of priorities regarding the focus of their investments, including shoring up balance sheets, boosting investor returns, and increasing hiring and wages. Nevertheless, an arguably more prudent investment in technology may be the best approach to ensure long-term viability and combat an increasingly competitive marketplace.

Attitudes about capex were largely unchanged in the third quarter of 2019, as middle market executives polled in the MMBI survey retained significant reservations about substantial investments in software, equipment and intellectual property. Less than half of executives polled (44%) in the latest MMBI survey indicated increasing aggregate capital expenditures or investments in that quarter.

The lack of qualified workers remains the greatest staffing hurdle for the middle market, second-quarter MMBI results show. In particular, positions in line production, manufacturing and assembly were the most challenging to staff, followed by information and communications technology. These roles appear to be particularly well suited for the enhancements and support that technology could provide, yet middle market executives are hesitant to deploy capital, despite expressing optimism about the economy and their own prospects.

“Anecdotally, we see that the tightening labor market, as well as policy and financial market uncertainty, tend to be the significant barriers to increased capital investments for middle market businesses,” says RSM US LLP Chief Economist Joe Brusuelas.

The economic advantages of reporting spending on technology as an operational expense rather than a capital expenditure make it attractive to senior management. This might explain, at least in part, low capex spending in the middle market. Nevertheless, strategic investments in technology could be the bridge that unites a company’s workforce with growth.

From a financial perspective, things are looking up for the middle market. The MMBI survey[i] found that 42% of the middle market executives perceive the general economy to have improved, a drop from 47% in the second quarter but a significant improvement over the first quarter (32%); gross earnings and net earnings increased for more than half (58% and 53%, respectively; on a par with the first quarter). Looking ahead, nearly two-thirds of these companies (64%) expect improvement in net earnings in the remainder of the year.

Nevertheless, this optimism is at odds with the reluctance to invest in the programs and equipment that would attract and retain a qualified workforce. Combined with a tight labor market and increases in the amount paid for goods and services, some companies may be hampering their ability to meet customer demand for their products or services, and remain competitive.

But things may be changing. The most recent MMBI survey found that 44% of the middle market companies increased aggregate capex in the third quarter, and just under half (49%) plan to increase capital spending in the second half of the year.

Notably, most investments in automation or information technology were intended to increase efficiency rather than act as a substitute for labor, according to Ron Beck, an RSM technology services principal.

Leading companies know that it is no longer enough to simply maintain the technological status quo. As technology advances, many solutions are becoming more affordable for businesses of all sizes. Cloud computing, for example, has greatly reduced the upfront costs for implementing several applications that can significantly enhance key business processes. Even if technology is not a primary concern, it should be a part of any strategic business plan.

“The time will come when companies realize they need to retool their personnel—in IT, data governance, risk management and throughout the workforce—if they are to remain competitive,” says Beck. A pragmatic approach to technology should identify transformational opportunities with a manageable financial commitment, a strategy that may be more attractive and workable for middle market companies.  

Organizations can start with initiatives to increase innovation and enhance processes in a practical manner, in some cases, even without investing in new technology. “In many cases, organizations already own technologies that are not being used to their full potential,” says Brusuelas.

[i] The MMBI survey was conducted in April 2019 and gathered the perspectives of more than 400 senior executives in nonfinancial companies and nonprofits with revenues ranging from $10 million to $1 billion, and financial companies with assets under management of $250 million to $10 billion.