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Does the speed of change blur or sharpen your focus?

EY Growth Barometer 2018
UK

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The UK middle market may be taking stock amidst uncertainty, but growth remains firmly in their sights, fueled by their focus on tech

Despite uncertainty in the domestic and global market, the UK’s dynamic middle market companies have growth on their minds. In the face of a number of challenges there is strong evidence that they are leading the way, particularly in technology, by focusing on the opportunity that digitization and AI (artificial intelligence) presents, to scale-up their business and improve customer experience.

EY Growth Barometer survey methodology

EY commissioned Euromoney Institutional Investor Thought Leadership to undertake an online survey of 2,766 C-suite (60% CEOs, founders or managing directors) in companies from 21 countries and with annual revenues of US$1m-US$3b. This included 118 respondents from the UK. The survey was conducted from 15 January-1 March 2018. EY further invited the network of EY Entrepreneur Of The Year alumni from across the globe to take the survey. The survey was available in English and six other languages. Further in-depth interviews were carried out during March-April 2018 to provide additional specific insights.

Contact

EY - Joanna Santinon

Joanna Santinon
UK Lead Partner Entrepreneur Of The Year
Ernst & Young LLP

Growth strategies

The 2018 EY UK Growth Barometer survey finds that more than two-thirds of middle-market companies in the UK expect to grow between 6% and 10% this year, far above the International Monetary Fund’s (IMF) national forecast of 1.6%.1 However, they appear to be less ambitious when compared their EU neighbors, albeit there seems to be a slightly higher level of optimism in Europe in terms of those that believe they can realize double-digit growth.

Almost a quarter (24%) of UK respondents expected to grow by more than 10%, compared to the Netherlands (38%) and France and Germany (both 31%). Still, expectations for growth by UK middle-market companies is impressive, but has notably fallen by 14 percentage points on 2017.

Revenue growth projections

This chart shows growth expectations for 2017 and 2018, ranging from negative growth to growth above 50%, including year-on-year percentage point changes.

EY - Revenue growth projections

Market share and sector convergence dominate

Improving market share domestically seems to be a top priority amongst middle-market businesses in the UK, with 21% citing it as a primary strategy, compared to 10% in Europe.

Next in line on the priority list was M&A (mergers and acquisition) activity, followed by growth into an adjacent activity or sector, as 30% of UK respondents plan for this — reflecting the rise of industry convergence. By contrast, the leading indicator in the rest of the world, was entry into a new overseas market. Industry convergence represents a fundamental growth opportunity for the middle market, and businesses are shifting focus from individual products to cross-industry value experiences.

Embracing business change

The study suggests that the UK’s middle market is an early adopter of AI, with 8% of companies already deploying it — above the US (6%), Russia (5%) and Germany (5%). What’s more, a further 89% of UK company leaders plan to adopt AI within the next five years. In 2017, almost two-thirds (64%) said they would never use cognitive technology. This is firm reflection of the fact that we are now firmly in the midst of the fourth industrial revolution — and an illustration of the speed of change.

Customer demand drives innovation

Improving the customer experience is cited as the primary objective of IT investment for the largest number of the UK’s decision-makers in the middle market (29%, compared with 26% elsewhere), ahead of the more traditional outcomes of improving financial data and process efficiencies. Almost 3 in 10 business leaders (29%) also see technology as the best means to improve productivity.

For almost one-third of the middle market (32%), customer demand drives innovation, ahead of profitability and competition. This is 20 percentage points up on 2017 and more than twice the figure elsewhere in the world (15%). Meanwhile, over one-quarter (27%) cite the use of customer data as their main way to increase innovation — 11 percentage points up on last year.

In many survey areas, including in their emphasis on customer demand and domestic growth, UK respondents’ views are nearer to their counterparts in the US than Europe. This is also true of their attitude towards regulation: the UK (and US) C-suite are far less likely to cite regulation as a driver for innovation or growth than their European peers.

This emphasis on the customer rings true for Karin Kaellman, co-founder and CEO of online women’s fashion and e-commerce platform VILLOID. She says: “Tech is there to solve problems and create great experiences. We invest heavily in the user experience, creating a product that emotionally connects with our customers and becomes a part of their daily routine, with the ambition that they will stay around even if a new shiny thing appears.”

“Finding good people is no easy feat for fast-growth leaders, with the lack of skilled talent cited as the second biggest internal challenge. A number of businesses have already created talent hubs outside the UK to help with the recruitment and retention of talent both now and post-Brexit.”

Joanna Santinon

UK Lead Partner Entrepreneur Of The Year

Challenges to growth

When asked what the greatest external risk was to the future growth of their business, 26% of middle-market leaders in the UK said the slow or flat growth of the local market, compared to 16% in the rest of the world. This was followed by concerns over supply chain disruption, with research suggesting that Brexit has prompted one in seven European companies with UK suppliers to move part or all of their business out of the country.2

Externals risks to growth

This chart illustrates company leaders’ ranking of the key macro risks to growth.

EY - Externals risks to growth

The cash flow squeeze

The biggest internal challenge for the UK, in line with the rest of the world and up 10 percentage points, is insufficient cash flow. This may reflect changing sales cycles worldwide, as industry convergence, unpredictable online buying patterns and the need to invest quickly to satisfy changing consumer demands increase demand for ready money. It also suggests the need for continuous investment to stay abreast of change.

Building stronger teams

When it comes to hiring, the UK appears to be between confidence and caution. One-third (36%) of respondents are looking to grow full-time headcount — compared to 40% in the rest of the world — while half (50%) aim to keep current staffing levels. Contractor hiring is down sharply by 21 percentage points to 5%.

Hiring plans

This chart illustrates companies’ hiring priorities and the use of artificial intelligence (AI) in 2017 and 2018, including year-on-year percentage point changes.

EY - Hiring plans

Joanna Santinon, UK Lead Partner Entrepreneur Of The Year, EY comments “Finding good people is no easy feat for fast-growth leaders, with the lack of skilled talent cited as the second biggest internal challenge. A number of businesses have already created talent hubs outside the UK to help with the recruitment and retention of talent both now and post-Brexit.”

Diversity tops talent agenda

When it comes to talent recruitment, 27% said “more diversity” was their priority (up 17 percentage points on 2017). Specialist skills are the focus for 9% of leaders, despite talent with the right skills being cited by more than one-third (37%) of as the top growth accelerator.

To help companies negotiate the fast pace of change in the world of work, particularly due to technology, business leaders are looking for diversity of thought amongst its new recruits. Simon Rogerson, CEO and co-founder of Octopus Group explains: “Making sure you get the best people is a priority for all growing businesses. You want people with creativity, who are good at problem-solving and are comfortable with uncertainty and change. People with diverse perspectives, who love disrupting and challenging the status quo, are better equipped to deal with the level of change going on in the world right now.”