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As we entered 2023, three of the threats uppermost in the minds of business leaders in the mid-market were inflation, cyber attack, and economic slowdown. According to data from the International Business Report (IBR), Grant Thornton’s global survey of mid-market companies, more than half (51%) of business leaders see inflation as an ongoing threat, while 47% cited cyber attack and 50% referenced economic slowdown as a threat at the beginning of this year.
However, as spring has emerged so has turbulence in parts of the banking sector. Though not directly reported as a concern as the year commenced, turmoil in the banking sector is a direct result of a high inflation environment and its necessary monetary response, which have added to the climate of uncertainty for many businesses.
How firms respond to these threats will be key to ensuring that their ongoing optimism is not misplaced. By delivering the basics really well and from being innovative in the face of these short term threats, firms can protect value and, more importantly, reap rewards in the long term as economic headwinds subside.
David Munton, Global leader - International capabilities and support, Grant Thornton International
“When dealing with such an array of threats, leaders of mid-market businesses have some tough decisions to make. In these conditions, it’s essential that they have the right expertise around the table helping them to think through the different scenarios. They should engage fully with their board of directors and senior management, and make sure they’re getting the most from them. But they will also need to think more expansively.
“You might need to bring in expertise from outside, from different organisations, from suppliers, from customers, from regulators, from disruptors – just to really challenge your thinking. You can’t rely on business as usual right now. Leaders need to challenge their own thinking and be constantly asking themselves: how can we innovate, who can we learn from, what can we be doing better?”
Although the global economy has shown resilience through recent challenges, businesses and consumers continue to be affected by the cost of living, increased energy bills and rising interest rates. In the US, while some overall inflation measures have eased somewhat, stubbornly firm core CPI remains elevated, continuing to challenge consumers and weigh on firms’ growth. Governments around the world are working to control inflation, with finance ministers, such as India’s Nirmala Sitharaman, acting to ‘continuously monitor prices’ and take steps to protect consumers.
Globally more than half of mid-market businesses (51%) see inflation as a real concern. Firms in ASEAN feel particularly concerned, with 60% citing it as a risk, and in LatAm three in four (77%) said inflation was a threat to their prospects.
Daniel Maranhão, Chief Executive, Grant Thornton Brazil
“Brazil’s long history of inflation has been a persistent challenge. Although inflation has been under control for a while some of the measures to protect businesses from inflation are still in place. For example, it is considered a fair business practice in Brazil to include the inflation rate as a benchmark for contract renewal. Brazilian firms that know the market and know their clients, will be able to adapt and find a way to protect value.”
Amid these prevailing inflationary pressures and continuing economic uncertainty, consumers are likely to become increasingly cost-conscious as the year progresses. While many businesses have tried to absorb some part of the rising costs, this response in isolation is clearly not a sustainable one. Just over half (51%) of mid-market businesses expect to increase selling prices over the coming year. This will clearly have a direct impact on consumers, but it is slightly down from 53% in H1 2022, showing how firms are working hard to preserve consumer loyalty and protect their customers from the worst of the price rises.
Dianne Neurauter, Principal, Grant Thornton US
“Whatever you decide on your pricing strategy, you must consider the impact on your brand.
“Firms know it’s a tough time for everyone and, while they’re finding it hard, their customers will be too. There’s a real drive to be responsible; not to seek aggressive growth but to be good corporate citizens and build long term relationships with their customers.”
Despite rising costs, 55% of businesses expect an increase in profitability in the next year. Firms will need to seek out operational efficiency, identify new markets and scenario plan carefully for how they achieve this without alienating existing customers. Globally 37% of firms say they have a pricing strategy to improve margin and 49% to protect it, increasing prices in line with costs.
The cost of cybercrime is expected to hit $8 trillion this year. By 2025 online fraud and scams will be costing firms $10.5 trillion as hackers grow more sophisticated by the day. It’s little wonder then that 47% of mid-market business leaders list cyber attack as a threat to their business in 2023
Dianne Neurauter, Principal, Grant Thornton US
“Since the pandemic, we’ve seen fraud activity increase threefold. Mid-market firms are a tempting target for fraudsters. They’re a lucrative target but often won’t have the resources and the security of larger companies. But, worryingly, a lot of firms are responding to this with their eyes closed. Cyber should be a flaming red risk on every business leaders’ risk assessment. On a scale of one to five, it’s a six on the risk register. If firms take the right steps now they can significantly reduce the risk and limit exposure.”
To manage the constantly evolving threat posed by criminal hackers and online fraud, business leaders will need to work hard to understand the risk and be innovative in how they respond, speak to experts and plan for the worst. If firms become complacent, or consider it just a challenge for the IT team which the senior leadership team don’t need to address, they risk leaving themselves open to major problems. This would be a significant unforced error. With the right planning and good cyber hygiene, 80% of all cyber attacks could potentially be avoided.
Alexandre Blanc, Strategic and Security Advisor at VARS, Raymond Chabot Grant Thornton
“It is critical for every business to develop a good cyber security culture and hygiene, integrating security into their change management process. Not only will this help reduce the risks, with better controls and a better understanding of the threat landscape, but it will also improve relationships with partners.
“Attackers are highly sophisticated. When they attack a firm they are not just aiming to make quick money, but they’re often looking to use it as an entry point for further attacks on bigger targets, such as large corporate partners, government service providers, or even critical industrial systems.”
Economic uncertainty is an ongoing concern for the mid-market, with the IMF reporting that elevated levels of uncertainty are holding back growth. The World Bank projects global growth will slow to its third-weakest pace in nearly three decades in 2023. However, the expectation is that many major markets will avoid a recession, with the World Economic Forum suggesting that the economic headwinds will be temporary.
In the spring of this year, as a result of high inflation and monetary policy response, a new threat emerged to the global economy: turbulence in the banking sector. Prior to these events, just 12% of business leaders considered interest rates or access to funding a significant threat. However, the upheaval at Silicon Valley Bank, First Republic and Credit Suisse, shows just how quickly shockwaves can travel through the market.
Amid the economic uncertainty and bailouts in the banking sector, 2023 is proving to be a nervy year for business leaders, but firms that plan ahead and are prepared will be best placed to manage change when it comes.
Kelli Knoble, National Tax Business Leader
“Companies today are evaluating the underlying health of the banks they work with in a way which we haven’t seen for some time.
“We’ve been talking to clients who are concerned about their cash flows and have been doing more of their own diligence on their banking relationships - there's a lot more information available about banks today than there was in 2008. We’ve also seen diversification of banking relationships to avert potential risk, so that businesses can quickly move money between banks if necessary.”
“Shocks in the banking sector have got business leaders asking themselves questions that probably haven’t been top of mind since 2008. They’re looking at their banking relationships and trying to understand what their exposure is.
“They’re also thinking about how they can diversify so that they’re not so dependent on one institution. But firms should also be considering the art of the possible, asking what can we do that’s different? What’s innovative? They might consider venture capital or private equity. Increasingly mid-market firms are starting to look at more creative solutions.”
In a period of economic uncertainty, with long-term threats and short-term shocks causing turbulence, mid-market firms are potentially vulnerable. But, with the right strategy and the right team in place, they can also be well-positioned to adapt.
Grant Thornton’s latest research shows how mid-market businesses are adapting in some key ways as they prepare for an expected upswing in wider economic conditions. We encourage you to read more about it here.