Defying Gravity report: Part 3 - Reaching innovation velocity

Defying Gravity How ambitious businesses can achieve growth in the age of uncertainty

part 3: reaching innovation velocity

contents 3 About this research 4 An introduction from our managing partner 5 Key stats: how prepared are businesses to adapt to disruption in their industry?

6 Fearless growth in a disruptive world 9 Facing a disruptive environment head-on 11 Finance to fuel the future 13 Finding a way forward

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about the research Our Defying Gravity report series research is based on: • Interviews with 500 CEO, CFOs and board directors • In UK medium sized businesses with a turnover of between £10 and £300 million • Across 11 sectors For this report, we compared the answers of two groups of leaders: • 257 or 52% believe their company has the technical knowledge to keep pace with disruptive innovation • 236 or 48% believe their company lacks the technical knowledge to keep pace with disruptive innovation

about Foresight

about Mills & Reeve

Foresight is forward looking and insightful content produced by Mills & Reeve. Designed to help our clients better understand the key issues they face, it offers broader commercial acumen in addition to legal expertise.

Mills & Reeve is a national law firm with more than 500 lawyers and 900 staff across six UK offices.

We’re one of the most successful law firms in the UK as a result of our highly commercial approach, the deep relationships we develop with our clients, and the quality of our people and culture.

We’re the only firm to have been named in the Sunday Times 100 Best Companies to Work For 14 years running, and 97% of our staff would recommend Mills & Reeve as a good place to work. You can find out more at: www.mills-reeve.com/whoweare

You can find out more at: www.wearedefyinggravity.co.uk

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an introduction from our managing partner After more than a decade of disruption, you might expect UK businesses to be primed and ready to react to the next big thing changing the face of their industry.

But are they?

We asked leaders in medium sized businesses (MSBs) about disruption to find out about the innovation situation in the all-important mid-market. And we were shocked at the results: nearly half – 48% – believe their business doesn’t have the technical knowledge to keep pace with disruptive innovation.

But mid-market businesses should be in a uniquely strong position to adapt to disruption. Unlike smaller businesses, they have often navigated upheaval successfully before. Equally, they don’t have the strict operational structures of corporates, giving them greater room to manoeuvre.

So, what is worrying such a large proportion of midmarket businesses, potentially preventing them from capitalising on their experience and flexibility?

“...mid-market businesses should be in a uniquely strong position to adapt to disruption.

Unlike smaller businesses, they have often navigated upheaval successfully before.”

This third and final report in our Defying Gravity campaign reveals what sets disruption-ready mid-market businesses apart from the disruptiondiscouraged. We found that businesses with the knowledge to react to disruption are different in three critical ways.

Growth: They are fearless of fast growth and certain of meeting expectations.

Environment: When technological, political and societal changes take place, they don’t pause to see how the land lies in a few years, or even months.

Finance: They are positive that the options available will help supercharge their growth, but are not reliant on finance.

By looking deeper into these areas, we reveal how businesses can transform themselves and become disruption-ready. Drawing on our experience working with fast-growth, mid-market businesses, we then go on to outline the steps leaders can take to achieve their ideal disruption velocity.

I hope the insights within this report help you spot where you can adapt and innovate, in order to defy gravity in these fast-changing times.

Claire Clarke Managing Partner Mills & Reeve

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how prepared are businesses to adapt to disruption in their industry?

Disruption-ready Disruption-discouraged

52% of mid-market leaders believe their company has the knowledge to react successfully and keep pace with disruptive innovation. 48% believe they don’t.

We compared the responses of these two groups, finding clear attitudinal differences - as well as divergent approaches...

When it comes to their growth outlook …

72%

72%

64%

37%

27% lack the talent and skills to supercharge their growth

33%

are not investing enough to generate significant growth

are confident they will meet investor / owner growth expectations

When it comes to the current business environment …

70%

69%

47%

34%

52%

13%

state that after the recent economic woes, they lack the energy and ambition to supercharge their growth

48%

are reducing their growth targets in preparation for Brexit

have downsized operations to cope in an uncertain environment

When it comes to their financial situation …

73%

69% 33%

lack the finance to supercharge their growth

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25%

44%

plan to raise external finance in the next 12 months

54%

69%

are holding cash reserves rather than investing in growth

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fearless growth in a disruptive world Disruption-ready mid-market business leaders are excited by growth and the idea of scaling up at speed. They’re confident they have the skills, experience and leadership in place to achieve their view of what the future holds.

This clarity and commitment has a commercial impact: they’re twice as likely as disruptiondiscouraged leaders to believe they will meet growth expectations.

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fearless growth in a disruptive world Ready and able Our disruption-ready leaders are incredibly confident in their ability to achieve growth, being nearly three times more likely to believe their leadership has the capabilities to supercharge growth (71% vs. 23%).

“I see this every day: having strong leaders and a breadth of talent in the management team builds a more able and more confident business overall,” says James Hunter, partner at Mills & Reeve. But it’s also how they enable their people, he adds: “Employees are often the ones with the best, most unexpected ideas.”

Indeed, disruption-ready leaders are confident in the abilities of their whole workforce. Three quarters (72%) of them think their business has the talent and skills to supercharge

growth. Demonstrating the stark difference between these two groups, three quarters (72%) of disruptiondiscouraged business leaders believe they lack these competencies.

“... it’s a mistake to think that you won’t be innovated away if you don’t take action.”

On target?

Growth will come with its challenges, especially fast growth, but the confidence of disruption-ready leaders is evident in their current financial projections. They’re twice as likely as disruption-discouraged leaders to believe they will meet investor or owner growth expectations (64% vs. 33%).

% of business leaders who believe they will meet investor or owner growth expectations

64% 33% www.wearedefyinggravity.co.uk

Disruption-ready Disruption-discouraged

case study:

Sublime Science Driven by a clear purpose, and by taking on investment at the right time, Sublime Science has achieved an average growth rate of more than 50% per annum and become the most popular kids’ party in the UK. The business has identified a clear gap in the market and has made a major impact on children across the UK at a time when engaging them in STEM subjects is a key focus.

Founder, Marc Wileman, told us this growth is down to a combination of factors:

It’s not all talk. They are investing in this growth, whereas three quarters (72%) of the disruption-discouraged are concerned that their business is not investing enough to generate significant growth.

“In all honesty, the most effective thing we’ve done is to obsess about doing an awesome job. When one child has a Sublime Science party, they have a bunch of friends who will be having a party of their own too. Word of mouth starts to spread and we all know how powerful that can be.

“If I had to offer any advice to other fast-growth businesses, it might not be all that profound-sounding. Just to see the facts for what they are. Recognise that the world is changing at an everincreasing pace and that innovation is now an absolute necessity.”

and it prevents them from taking action – and from growing,” says James Hunter.

“It depends on your sector how long it will take, but it’s a mistake to think that you won’t be innovated away if you don’t take action.”

“It’s a self-fulfilling prophecy, isn’t it? These less confident businesses struggle to address their innovation issues, so they become more and more daunted by them 7

fearless growth in a disruptive world International growth Disruption-ready business leaders are more likely to plan on growing their business every year (58% vs. 45%).

Half (53%) are looking to grow their exports to Germany (compared to 31% for the disruption-discouraged). Two fifths (42%) are planning to trade more with France (compared to 22%).

James Hunter recommends taking an international approach to fuel growth: “I see most businesses growing

Key takeaways • Your employees are often the ones with the best, most unexpected, ideas.

• Build innovation into your everyday rather than waiting for that eureka moment. successfully internationally not by reinventing the wheel, but by focusing on a product or service with relevance beyond their current target market. It doesn’t always have to be about creating an innovative new service or changing your production lines, but growing who you sell to and how.

“Not only does this open more doors, but it triggers greater innovation across the board – forcing you to think in new ways about everything from how to cost, price and sell overseas, to how to manage your day.”

The second report in our Defying Gravity series focuses on where and how to expand internationally.

Read it here www.wearedefyinggravity.co.uk

“Innovation is not just about the big bang disruptions, which are few and far between. It should be a constant process and a part of the everyday.

Because even if you aren’t moving forward, your competitors are.”

case study:

HORIBA MIRA Vehicle engineering consultancy MIRA was bought by Japanese firm HORIBA in 2015 and continues to grow and innovate. It now has a turnover of £43 million a year, is introducing a new skills centre, and planning on building a driverless cars test track.

We spoke to Dr Anthony Baxendale, manager of future transport technologies and research at HORIBA MIRA about what fuels the company’s success: How have you grown during disruptive times?

“Our growth has certainly been a balance of innovation and financial factors, but I think the other key factor is leadership. Disruptive innovation is difficult. It involves taking risks and therefore places longer term innovation in tension with shorter term financial performance. It needs strong and talented leadership to manage this tension. Without it, short term priorities tend to win.

“The type of leadership I mean starts with the CEO but doesn’t end there. It has to be the whole leadership team as it’s not just tough decisions that have to be taken but tough projects that have to be delivered. These projects are the instrument for releasing the latent innovative capacity in the business to make the breakthroughs that lead to growth. Without effective leadership, attempts to innovate can destroy rather than create value.”

What is your biggest tip for midmarket businesses looking to innovation to stay relevant in their industry?

“Take technical risks in order to innovate but balance these risks so you can manage them financially. Don’t get too bogged down with the innovation business case – do some exploration.

Develop your organisational abilities to be agile and fail fast in innovation so that you can quickly learn from mistakes along the way.”

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facing a disruptive environment head-on From technological advancements that are changing the very nature of work, to ongoing political uncertainty, the business environment faced by mid-market leaders has never been so complex. Disruption-ready businesses continue to invest and grow, taking these hurdles in their stride, running on where others hold back.

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facing a disruptive environment head-on

Brexit business In preparation for Brexit, seven in ten (70%) disruption-discouraged leaders are reducing their growth targets, three in five (62%) are reducing their investments and two thirds (67%) are postponing acquisition plans. In each of these areas,

“Uncertainty surrounding Brexit will pass, but technology is changing everything.” disruption-ready leaders are much more positive, suggesting they are not holding back while waiting for the results of Brexit negotiations.

Paul Knight, partner and innovation champion at Mills & Reeve, thinks other forms of disruption should also be at the forefront of mid-market leaders’ minds: “It’s sector-dependent, but for many, technological disruption is the real issue of the day. Uncertainty surrounding Brexit will pass, but technology is changing what we can do and when we can do it.

Automation, AI, and other technologies, present opportunities that leaders need to explore today as their competitors will realise their value.

£

“With the UK leaving the EU in 2019, successful businesses have been forging ahead with plans but making sure that they can still adapt if they need to, for instance by future-proofing contracts.

70%

In preparation for Brexit, seven in ten disruption-discouraged leaders are reducing their growth targets...

Key takeaways

“Experienced mid-market business leaders are likely to see Brexit as a blip in comparison to the global financial crisis – which they survived. The world has continued to turn.”

Overcoming a downturn Disruption-ready leaders’ top lessons to tackle future downturns balance cost-saving activities with investments in product and business model innovation: 1.

2.

3.

4. =

Look after your cash flow Focus on your people Invest in innovation Cut costs quickly Re-evaluate your business model to take advantage of the new conditions

• Future proof contracts so you can forge ahead regardless of Brexit.

• Use AI and automation to free up more time to focus on strategic issues.

£

(42%) (38%) (31%) (27%) (27%)

£

£

62%

...while three in five are reducing their investment.

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downturn. Cost cutting alone isn’t enough to springboard the type of change that’s needed during difficult times.

Paul Knight thinks innovation has to be a part of the answer: “Over a quarter of disruption-ready leaders suggest considering a fundamental change – reevaluating your business model. This shows the impressive extent to which they are willing to adapt in order to succeed.

“But even in the disruption-discouraged group, leaders recognise that innovation is one of the key ways to overcome a

“To invest in innovation you may need to allow for a pot of money to be spent with no guarantee of an immediate tangible return.

“But innovation isn’t just about eureka moments; you can be more strategic in your investment. Having the right culture and processes in place to support innovation can help you tackle downturns and deal with disruption.

“More mid-market businesses are looking to encourage innovation across their workforce. In the legal sector for instance, we’re investigating how to use AI and automation to enable people to focus their attention on more strategic work, and to help with critical workplace issues, such as maintaining a work-life balance and addressing the gender pay gap.”

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finance to fuel the future Disruption-discouraged businesses are more likely to have had their fingers burnt by finance, struggling to find the right type, picking the wrong option or taking action at the wrong time. As a result, they are more negative about the finance available today. The disruption-ready on the other hand are confident they have, or can find, the finance to enable their growth.

ÂŁ www.wearedefyinggravity.co.uk

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69%

finance to fuel the future Fear of not finding finance Despite, on average, not being older businesses, the disruption-discouraged are more than twice as likely to have experienced difficulties in raising long term finance (73% vs. 35% for the disruption-ready). Perhaps it should come as no surprise then that they are far less confident in their ability to find the finance to supercharge their growth (33% vs. 69% for the disruption-ready).

54%

Shubhu Patil, principal associate at Mills & Reeve, says it can be tricky for mid-market businesses to find the right financing options: “Relatively speaking, there is plenty of funding available for startups. disruption-ready disruption-discouraged

Typically, it’s when businesses begin to scale up that they struggle, largely because their need for cash suddenly increases exponentially.

“The more entrepreneurial leaders just get on with doing what they’re doing, and the rest follows. It’s a different mindset.”

69%

“When this happens, many businesses think their options are limited to dilutive equity financing from VCs or angel investors. But when you scale up, it’s often better to use multiple sources of finance: think about using a combination of equity and debt and draw on cash

% of businesse leaders who are confident they can find the finance to support their growth

69

%

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33%

£

33%

% of businesses planning to raise external finance in the next 12 months

73%

Key takeaways • Be imaginative and flexible about your financing options.

• Don’t just plough cash into operations without a clear plan.

44%

£ substitutes, such as offering employees share options in lieu of cash.

“Be imaginative and flexible about your financing options and keep a rigorous eye on cash flow. This is how growth financing typically works in reality.

It’s about knowing which options are available and getting the right advice at each stage of growth.”

Fine without finance?

Disruption-ready businesses are less likely to be planning to raise external finance in the short term (44% vs. 73%).

This may be counterintuitive, but Shubhu Patil has seen this in action:

“In the face of daunting change, some leaders are looking sideways at their competitors and are overwhelmed by how well and how quickly they’re innovating. One way they’re tackling this is by injecting more cash into operations, but without necessarily having a clear plan for what to do with it.

“The more entrepreneurial leaders we spoke to are more confident and optimistic, believing that ultimately they will get to a point where their proposition is attractive to financiers, so they aren’t really worrying about that right now.

They just get on with doing what they’re doing, and the rest follows. It’s a different mindset.”

In part 1 of our Defying Gravity campaign, we called for a finance revolution Read it here

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finding a finding a way forward way forward

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finding a way forward Based on our own work to innovate, our research and our experience in the market, here are our five key recommendations on how MSBs can keep pace with disruptive innovation.

1.

Ask for feedback often, from clients and your workforce. Use this information to look at your products and processes in new ways, as well as re-evaluating your business model.

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2.

Keep your customers happy.

Be sensitive to the pain everyone is feeling in an uncertain time. Hiking prices may solve your cost issues but is unlikely to be the best option to keep customers happy.

3.

Disruptive innovation is diffcult.

It places longer term innovation in tension with shorter term financial performance so it needs strong and talented leadership at all levels to manage this pressure.

4.

Take care of your people and enable them to innovate.

Break down silos, collaborate more and create a climate that encourages and rewards innovation – both big and small.

5.

Get financial and business advice at each stage of your lifecycle. Take action at the right times to make the most of opportunities, and make sure you don’t miss your moment.

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find a way forward for your business Get in touch to discuss the right innovation strategy for your business. Call us on 0344 326 0000 or email letsdefygravity@mills-reeve.com You can also find out more about the research and case studies referenced in this report and sign up to receive forthcoming insights by visiting our website: www.wearedefyinggravity.co.uk Follow us @rocketfuel4MSBs