Middle market jolted by sweeping effects of COVID-19; Now is time to look forward

By Drew Yergensen

Communities around the world have been socially and economically distressed by the COVID-19 pandemic and the business and public gathering shutdowns enacted to slow its spread. Middle market business owners and executives are not immune to its far-reaching impact. KeyBank’s quarterly sentiment survey connected directly with middle market executives to explore their outlook and how it has changed.

Each quarter, to understand what impact current macroeconomic conditions and government policies have on the business environment, KeyBank surveys 400 owners and executives of middle market businesses — defined as those in the $10 million to $2 billion range.

This March, because of the unprecedented circumstances of the public health crisis, KeyBank conducted a second survey to see how sentiment changed between early March to late March, when many states in the U.S. responded to contain community spread of the novel coronavirus.

Within just a few weeks, respondents shared a marked difference in their levels of optimism for their own businesses and the economy as a whole. As they deal with the reality of office and retail closures, remote workforces, supply chain disruption and a plummeting investment market, middle market business owners are facing an ambiguous future.

Positivity dips as coronavirus hits U.S.

As recently as the beginning of March 2020, middle market executives were still in a good place about their companies’ outlook for the next 12 months. The overwhelming majority said, at the time, that it was excellent (41percent) or very good (33 percent), similar to their responses to the same questions in December 2019. Also in early March, middle market leaders felt relatively positive about their states’ outlook and the overall U.S. economy, with more than half saying it was excellent or very good in both cases.

But as state stay-at-home orders throughout March and early April took effect, more than a quarter of the U.S. economy was taken offline and the public markets dropped by historic amounts, according to an analysis by the Wall Street Journal. During the same time period, the outlook of respondents in our second round of outreach shifted significantly. In late March, middle market executives reported feeling much less optimistic about their own companies.

And, when it comes to their overall U.S. outlook, middle market businesses are even more pessimistic since the outbreak of COVID-19.

Middle market businesses react

   Many middle market companies are taking action to rise to the challenges that the pandemic is bringing to their operations, including the economic repercussions of the pandemic. Among their responses are developing a contingency plan for the business and laying off staff, as well as seeking help from their business banking institutions. They are also seeking out capital, using business credit cards for payment, and transferring money out of savings or investment accounts to ensure liquidity during the crisis.

Challenges in the new normal – and looking forward

The pandemic has changed the way nearly all companies do business and has tested their resilience and adaptability. Respondents listed maintaining staff productivity (46 percent), adjusting to a new remote operating model (43 percent), and managing overall cash flow (42 percent) as their top challenges as a result of the COVID-19 pandemic.

In the current environment, middle market businesses do feel more positive than negative regarding their own company’s overall business health — if only slightly. However, among those with a negative view of the overall health of their business, the majority of business executives (about four-fifths) feel that a return to normalcy is still at least four months away, with a similar amount thinking it might be another seven-plus months.

The pandemic’s profound effect on the global economy has the International Monetary Fund anticipating the worst recession since the Great Depression this year, with a partial recovery in 2021 if the global pandemic fades in the second half of the year. While the effects will be particularly harrowing in the developing world, the U.S. will feel its share of the pain, already evident in skyrocketing unemployment figures and permanent business closures.

It’s no shock a potential economic recession tops the respondents’ reasons for low U.S. economic outlook, dwarfing other formerly top-of-mind issues such as healthcare costs, changes to trade agreements, increasing tariffs, and increasing labor costs.

Cybersecurity in a volatile world

Remote work during social distancing has taken in-person interactions into the digital realm of video conferences and online collaboration, making cybersecurity more visible than ever before. The survey investigated how middle market businesses are addressing their companies’ cybersecurity, which is of heightened importance as the COVID-19 outbreak poses a significant threat to enterprise resiliency, along with employees’ health.

Our survey found that most middle market businesses believe their organization’s network is somewhat or very secure, with 35 percent in each category. The majority of middle market companies are using anti-virus and anti-malware protection. Additionally, since they were last surveyed about cybersecurity topics in June 2019, companies have increased measures such as limited administrative rights, VPN for outside access and dual authorization for outgoing payments. Most report a strong awareness of cyber insurance. Yet despite this enhanced security, more middle market businesses have experienced a cybersecurity incident within the last 12 months, increasing to 34 percent from 27 percent.

In this unprecedented environment, companies have had to make compromises on the physical security of company devices, the use of unsecured Wi-Fi networks, and the use of unsecured personal devices and have had to increase their use of third-party applications such as video conferencing platforms. This has led to increased scams and threats targeting remote workers, making it important for companies to establish secure work-from-home protocols for their employees and additional monitoring and security efforts.

While much is unknown about how long shutdown measures will be in place, and how quickly parts of the economy will be able to reopen, businesses of all sizes need to address their resiliency plans, including understanding their financial picture and how they’ll move their businesses forward once the pandemic is controlled.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors

Drew Yergensen is the commercial banking sales leader with KeyBank in Utah.