Three cheers for being in the middle!

Traditionally being in the middle is not desperately exciting.  Mid-table obscurity is a phenomena experienced by most sports fans.  Middle management is a byword for those comfy suburbanites who have found their level.  And so as to prevent this article turning into a cod-psychology blog, don’t get me started on the trials and tribulations of being a middle child.

But, there is much to be praised about being in the middle.  Recent research commissioned by GE Capital shows that while the mid-market makes up a small percentage of the number of businesses in the UK, it contributes a huge amount to the UK economy.  And so, to the often overlooked middle, I give hearty congratulations and pass on some of the surprising results of the research.

From a structural standpoint, the UK mid-market closely resembles that of Germany, consisting of firms with revenue between £15 million to £800 million (€20 million to €1,000 million). The average UK mid-market firm has revenues of £78 million (€98 million) and employs 500 people, similar in size to its German counterpart.

Mid-market companies in the UK employ 10.9 million people, more than in any other EU-4 market and, in fact, almost as many as the French and Italian mid-market combined (11.7m).  If the UK mid-market had, from its base in 2009, grown at the same rate as the equivalent group of firms in Germany (with its highly respected ‘Mittelstand’), the result would have been more than 240,000 additional jobs – of which 200,000 would have been outside of London and the South East – and more than £35bn of increased revenues, boosting UK exports by almost 5%.

The UK mid-market is a significant driver of both output and employment. While the mid-market consists of roughly 21,500 firms, or only about 1.4% of total companies in the country, it contributes 31.8%, of private sector GDP.  Its role in employment is just as significant, if not more so; mid-market firms employ 10.9 million people, or 36.4% of the workforce.  On top of that, it generates annual sales of £1.7 trillion (€2.1 trillion), representing 32.3% of total private sector revenues.

Despite being only the third largest economy in Europe, the UK mid-market is the second largest in GDP terms after Germany and, interestingly, employs more people than any of the equivalent mid-markets across Germany, France and Italy.

This significance is particularly relevant because of the way UK midmarket companies behave. Mid-market companies have the scale and appetite to export and operate globally (41% of UK mid-market companies operate globally), but also remain closely knit to their local communities. In the UK mid-market, almost 70% of suppliers come from the domestic economy whilst more than 50% of companies don’t outsource – more than in all other EU-4 markets.

This behaviour owes a lot to the management structure of midmarket firms, as does their approach to their employees. Mid-market companies are primarily privately owned and, as such, operate with longer-term growth in mind. In fact, between 2007 and 2010, as large companies cut hundreds of thousands of jobs, mid-market companies actually grew employment, ensuring that the surge in unemployment seen since the start of the credit-crunch was far less severe than many commentators first expected.

Some startling figures put this into perspective.

Between 2007 and 2010 large firms cut headcount by 692,000 – an average of 950 jobs per company.  During the same period, mid-market firms created about 260,000 positions.  Given that the mid-market employs more than one-third – or 10.9 million – of the UK’s workforce, it’s easy to see how much worse the labour market would have fared if mid-market firms responded to the economic pressure as large corporations did.

In fact, if mid-market firms had acted in a similar manner to large companies over this period, UK unemployment would have surpassed the three million figure in the second half of 2009.

Mid-market companies delivered an even better performance than smaller firms on a business-by-business basis. While small firms created approximately 29,800 jobs over the time period studied, on an average basis, each surviving mid-market firm in the UK created 2.8 times more jobs than a surviving small business.

When micro firms (those with less than 10 employees) are included in the comparison mid-market firms on average created 36.5 times as many jobs.

The results are perhaps more impressive given the severity of the economic contraction in the UK.  Between 2007 and 2010 the UK economy saw the number of people unemployed rise by 874,000 in absolute terms. That is more than 50% higher than the increase in unemployment in France and Italy whilst the German economy actually added jobs over the same period. Despite that, roughly the same number of German mid-market firms created 84,000 jobs over the same period, at a time when that nation’s economy was growing at a much faster rate than in the UK.

Germany’s large companies reduced their employment by only 120,000, less than a fifth of the jobs slashed by UK corporations.  This suggests that UK mid-market firms were under far greater pressure to reduce headcount than their German counterparts.  The fact that surviving mid-market firms in the UK added any jobs at all during the recession is, in itself, a major accomplishment.

Even more remarkably, despite employing more than one million fewer people than large companies in the UK, mid-market firms actually employ more people in absolute terms in the North of England (1.56m) than both large firms (1.54m) and small and micro firms (1.01m). Between 2007 and 2010, the unemployment rate in the North East rose from 5.7% to 10.1%, almost double the 2.5% increase seen across the country as a whole. That makes the mid-market’s ability to grow jobs during this period even more distinct.

There are plenty more eyebrow-raising statistics in the report and I urge you not only to read it (The Mid Market) but also to say a little thank you to the much maligned middle.

Tom McCarthy advises on Mergers & Acquisitions for www.odysseycf.com and is Chairman of the Bristol Institute of Directors www.iod.com