Pitcher Partners Business Radar 2023

RADAR

Pitcher Partners Business Radar canvasses the trends, challenges and opportunities experienced by Australia’s mid-market businesses. Independently commissioned, our regular snapshots survey 140 business owners and leaders.

Here you’ll read how respondents felt about their current and future success, as well as key challenges, complemented with actionable insights from our business and financial experts.

KEY FINDINGS

Mid-market businesses remain resiliently confident despite the gloomy economic outlook, with a sharp jump in confidence from the Feb 2023 survey

While uptake of generative AI tools by mid-market businesses has been swift, the risks and challenges of GenAI may leave them exposed

While concerned about the potential of a cyber attack, many mid-market businesses appear overconfident about their cybersecurity resilience

Read on to learn how you can proactively address these challenges and ensure your business continues to thrive.

BUSINESS CONFIDENCE

Sunny outlook under gloomy skies

WHAT’S BEHIND THE UNEXPECTEDLY POSITIVE BUSINESS CONFIDENCE?

Year-on-year, our research into the confidence of Australia’s mid-market businesses has shown surprising resilience, despite the disruption of COVID-19 and more recently gloomy financial reports. Last year, our surveyed mid-market business leaders were quietly confident about their future, a marked increase from the year before.

While the February 2023 snapshot showed confidence was down, it was still higher than pre-pandemic levels – a positive result given the current economic pressures.

None of that prepared us for the leap we saw in business confidence in our most recent survey, taken in late May 2023.

THINGS ARE LOOKING UP?

While we’re facing all the same gloomy economic markers as in February 2023, May showed a sharp jump in business confidence.

Respondents gave an average score for confidence in their future success of 8.12 out of 10, compared to only 7.65 in February 2023 and 7.43 in 2022. We also saw large jumps in confidence in the Australian and global economies between February and May. Even averaging our two business confidence scores for 2023, all figures still showed an upward trend compared to 2022.

This positivity was broad based including across a wide range of industries.

“Larger mid-market businesses are more confident in their current success than their smaller counterparts – perhaps their size may cushion them somewhat from the potential downturn.”

RADAR JULY REPORT

MID-MARKET BUSINESS CONFIDENCE OVER TIME (12 MONTH GROWTH PROSPECTS)

While these results feel counterintuitive, all Business Radar surveys, first taken in 2019, have pointed to a resilient and growth mindset in mid-market businesses. This could go some way to explaining these higher confidence scores.

Segmenting the data further, we see that larger mid-market businesses are more confident in their current success than their smaller counterparts. This could signal that relative size may provide a cushion against a potential downturn.

REASONS FOR INCREASED MID-MARKET CONFIDENCE

The buoyant response could be from a range of factors:

• Many businesses may still be booming from a backlog of work

• Resilience of the services sector

• An awareness that the Australian economy is generally stronger than global peers

• Survivor's bias – businesses who’ve overcome the ongoing challenges of COVID feel more resilient to future issues

• Reinvestment in business post-COVID

• Economic factors affecting households are less impactful to businesses, or yet to be fully felt

COVID’S INFLUENCE GIVES WAY TO COMPETITION

Asked about the external positive or negative factors impacting business, mid-market businesses gave us a slight reshuffle of previous years – competition takes the lead, COVID takes one step back, while a new challenger, inflation, enters the field.

Competition, it seems, comes in all shapes and sizes, with both positive and negative impacts. Respondents see increased consumer demand (positively driving competition for their products and services), but are still struggling to find skilled labour in a competitive employment market. Many are also seeing an increase in the rate and intensity of competition within their sector.

Similarly, COVID continues to deliver good and bad impacts, whereas technological advancement is seen as having an almost entirely positive effect, with a 30% net-positive sentiment score. This is supported by 32% of the mid-market putting a lack of technology as a top barrier to success.

We’re encouraged to see ESG initiatives take the third spot in net positivity of 12%. While it didn’t rank in the top-five most impactful factors, the results show that ESG has grown in importance with 40% of respondents naming it a factor.

TOP EXTERNAL FACTORS INFLUENCING BUSINESS CONFIDENCE

CAN BUSINESS BASICS BEAT INFLATION?

As in our April 2023 report, the basics of cashflow, people and process efficiency are considered the core drivers of success amongst mid-market businesses. That’s countered by the challenge of inflation, 37% call it their biggest barrier, while another 26% name increasing interest rates – two factors that can severely impact business profitability or even viability. 27% call out unforeseeable events as a barrier to success – an ominously vague factor, likely driven by wave after wave of unprecedented events over the last three years.

With wage pressures and other input costs continuing to increase, future Business Radar surveys will track how this plays out over the rest of 2023 and how – or if – business confidence starts to trend back down.

CAN THE POSITIVITY LAST?

These business confidence results are surprisingly positive despite the economic doom and gloom seen daily in the news media. Yet again the mid-market demonstrates its adaptability in the face of significant external factors and remains the engine room of the Australian economy. It will be interesting to see if this confidence lasts through a potential sustained period of suppressed economic growth.

RISK, REWARDS AND CHALLENGES OF BUILDING GEN AI INTO BUSINESS AS USUAL

The arrival of ChatGPT and its trailing competitors in late 2022 pushed generative AI (GenAI) into mainstream consciousness, democratising AI tools in unprecedented ways.

For the first time, GenAI is accessible to anyone with an internet connection. ChatGPT’s 3.5 model is currently free and intuitively usable to even the least technical people. As with any new and potentially disruptive technology, business leaders are still trying to navigate the possible applications, benefits and risks of building it into business-as-usual operations. However, its users and the world are moving at pace – ChatGPT reached 100 million users in just two months – an extraordinary uptake speed. One thing’s for certain: GenAI is here. Is Australia’s mid-market ready for it?

GEN AI? YEAH, THEY KNOW IT.

Almost all business leaders we surveyed claimed at least some knowledge of GenAI – with 98% saying they’re aware of the technology and 83% saying they’re familiar with it (either a little or a lot).

Unsurprisingly, over a third of respondents say they’re already using GenAI in their business, with another 4 in 10 preparing to do so. Segment the responses to just those businesses with high confidence in their future success, and the figure shifts, with over half – 51% –saying they’re already using GenAI.

This indicates mid-market owners and decision-makers are dialled into new and disruptive technology and are wellpracticed at pivoting operations to make better use of it. Using GenAI to improve efficiency and output could soon become not just a competitive advantage but an existential requirement.

WHAT IS GEN AI?

GenAI creates new content – text, video, audio and more – by drawing from learned patterns of understanding and reassembling it to suit the human-issued prompt. GenAI was used in software before the launch of ChatGPT. It was this tool, however, that brought GenAI into the mainstream and has become the most famous and accessible of these tools. Its responses are often only as good as the person providing the prompts and can be poorly worded or even plain wrong, but it represents a huge leap forward in both usability and possible uses.

We asked: How do Australian mid-market business leaders feel about generative AI? Tell me in 20 words.

ChatGPT: Australian mid-market business leaders generally have positive attitudes towards generative AI, seeing its potential for innovation and productivity improvement.

A SMALL START TO SOMETHING BIG

Despite the wide-reaching potential of these technologies, when asked about existing or potential uses, our business leaders generally limited their thinking to back-office support – admin, analysis and content creation.

SPECIFIC USE CASES FOR GENERATIVE AI IN THE BUSINESS

Customer service and support

Market and customer research

Marketing content creation

Performance management

Financial planning and analysis

Internal email communication

Sales and lead generation

Training and development

Innovation and product development

Business advice and guidance

Knowledge management

Bookkeeping and accounting

None of these – I don’t want to use it

This suggests that most businesses have not fully operationalised the technology into business-as-usual. They are using it –or think they could – to help write reports, communications and marketing materials, as a research alternative to Google or for nonspecific ‘admin’ work.

Business advice and guidance, training, knowledge management, innovation, bookkeeping and accounting are among the lowest uses named by respondents. This perhaps can be attributed to the risk around data security and the complexity of these functions.

These responses show us that despite the buzz, the mid-market’s use of GenAI is still very much in its infancy. This makes sense. While the barrier to entry is almost nil for the ad hoc use of ‘public’ GenAI tools, fully operationalising them into business processes can be a long and expensive undertaking. Significant investment is often required to adapt and apply the tools to your business’s environment and to recruit people with the skills to both develop and maintain them.

A ROSE-TINTED OUTLOOK

On average, 77% of our business leaders feel GenAI will have a positive overall impact on their business, with high net positive scores for impact on products and services (82%) and industry (83%). The impact on employees (68%) and personal life (68%) was seen as being less positive driven by a larger portion of leaders who felt it would have no impact.

FUTURE IMPACT OF GENERATIVE AI ON BUSINESS

“As a recruitment agency, we utilise ChatGPT to support us in basic recruitment coordination support, writing compelling job adverts, creating interview questions and candidate preparation for unique roles and support in writing documents such as job descriptions and progression pathways. Whilst these language models can be extremely useful in taking time out of writing bulk text, we utilise the recruitment coordinators in our team to use critical thinking and proofing skills to ensure every finished product is to the standard we expect, and has our considerable input into the content.”

SINEAD CONNOLLY, LOTUS PEOPLE, PITCHER PARTNERS CLIENT

Most respondents see positive applications for business, agreeing or strongly agreeing that “It will lead to new products and services” (84%), “It will streamline operations and processes” (82%) and “It will free up more time to focus on business strategy” (79%).

The impact on the types of jobs that are available (78%) and the reduced need for human labour (75%) – could be seen as either positive or negative, depending on your perspective.

The negatives were predominantly around adding complexity for management (60%) and the corresponding need to upskill (80%).

Unsurprisingly, positivity scores jumped even higher for those already using (87%) or planning to use (84%) the tools and those businesses that scored themselves confident in their future success (84%) against an average of 77% across all respondents.

IMPACT AREAS FOR GENERATIVE AI IN BUSINESS

Lead to new products or services

Streamline operations and processes

Require me to upskill / change skills in the future

Free up more time to focus on the business strategy

Change the types of jobs that are available

Create new business opportunities

Help my business better adapt to the market

Reduce the need for human labour

Create more work for me to do / manage

Make work more challenging and complex

SURVEY RESPONDENT

“We use GenAI for a chat Zendesk-style customer service operation, it has a few kinks here and there but is allowing us to save money and time and maintain happy customer relations.”

CHALLENGES, RISKS AND PREPAREDNESS

Business leaders know that GenAI comes with challenges. Those who plan to, but aren’t yet, using the tools name data security and accuracy as the biggest of these – 39% have yet to fully trust either. Those using GenAI see things differently, with 37% saying cost is their biggest challenge. This cost is often incurred as businesses move away from ‘public’ GenAI tools to develop their own applications, and therefore sidestepping issues of data security and privacy.

36% of all respondents named data privacy concerns as their biggest challenge, and 19% named putting safeguards in place. However, the survey also suggests many leaders are underestimating risks to their business, as we saw in our last Business Radar survey on cybersecurity. Only 12% agree there is a risk with implementing GenAI and that they’re concerned about it. Almost half said they weren’t worried about the risk (33%) or that there was no risk at all (16%). The biggest group, 39%, agreed there was risk, but couldn’t yet define it.

A quarter of those already using GenAI say they haven’t put in any safeguards, and a further 25% are only thinking about it.

These statistics are worrying, especially when you consider the probability that most businesses will have staff already using GenAI on their own initiative. And that’s a problem –confidential customer or business information could be entered into tools, making it available in the public domain. Even businesses that aren’t or won’t ever use GenAI need to address and mitigate the risks it poses.

“We are absolutely aware that this is new technology that we don’t fully understand yet. We don’t feed ChatGPT confidential client information and use it mostly to bulk out content that we then tailor ourselves. Internally, the entire team are aware that nothing that Chat GPT produces is a finished product and we use our expertise and experience to ensure that everything aligns with our brand and to our standards.”

SINEAD CONNOLLY, LOTUS PEOPLE, PITCHER PARTNERS CLIENT

“While there's a significant potential upside for businesses that successfully embed Generative AI into their business systems and operations, it does come with a certain level of risk. It's important that it's tried and tested before being fully implemented, and there are safeguards in place to ensure appropriate and safe use of the tools.”

MATTHEW BASHAM, CLIENT DIRECTOR, PITCHER PARTNERS SYDNEY

INSIGHTS FOR BUSINESS

EMBRACE – AND RING-FENCE – GEN AI

Even if you could avoid GenAI, it’s unwise to do so. It’s time to be proactive and ask what processes, systems and training is needed to extract the huge benefits from these tools, while safeguarding your business, data and clients against the risk.

As more businesses build the tools into their businessas-usual, they’ll set new standards for customisation, delivery and cost.

This is an inevitable paradigm shift. What you do now could be a matter of survival.

8 ACTIONS YOU CAN TAKE:

1

Familiarise yourself with the many and growing number of GenAI tools available and regularly assess which are the best fit for your business.

2 Identify use cases to help your business achieve its goals.

3 Build policy and limitations around GenAI use, create approval processes for platforms you want to use, and consider blocking access to the rest.

4 Explore private GenAI solutions to minimise security and privacy concerns.

5 Include GenAI in your risk management framework and controls.

6 Train your people on the strengths, limitations and risks of GenAI tools, in particular on data privacy and security.

7 Implement a review and vetting process for any GenAI outputs to ensure relevancy and accuracy.

8 Prepare your business for the inevitable impact GenAI will have on your organisation and culture.

CYBER SECURITY

“Unfortunately, cyber awareness in Australia still remains low amongst organisations, and threat actors will strike when we are least prepared. The best defence is stay resilient by implementing key prevention initiatives such as strong passwords, multifactor authentication, regular back ups, staff awareness training, and implementing the latest security fixes”

Cyber INsecurity in mid-market business

STUDY SHOWS BUSINESSES COULD BE MORE AT RISK THAN THEY THINK

Cyberattacks are low-risk, high reward crimes requiring nothing but basic tech skills and a lot of persistence. As more major attacks hit the news and Australian regulators hold C-Suite executives responsible for data security, cyber security has become a more urgent topic for discussion

It’s more likely a question of when an attack will happen, rather than if, but has this translated to action among Australia’s mid-market business owners and leaders?

TESH PATEL, DELTA INSURANCE AUSTRALIA, PITCHER PARTNERS’ CLIENT

DATA – WORRYING BUT STILL WORTH IT

A whopping 84% of our respondents are concerned about the chance of their business experiencing a cyberattack, with 48% saying they’re very or extremely concerned.

And they’re right to be concerned. Last year the Australian Cyber Security Centre reported a 13% increase in cyber incidents on the previous financial year, with mid-market businesses suffering the highest loss per attack at $88,407

Understandably, just over half (53%) of surveyed business leaders agree or strongly agree that how they capture and store data is increasingly becoming a liability.

Split these results between those businesses who feel confident in their current success and those who don’t, and an interesting picture emerges. Higher confidence businesses are much more likely to see data storage as a liability (65%) than lower confidence ones (38%), potentially highlighting a greater awareness of the risks of storing endless amounts of data, much of which may not be required for day-today operations.

Nevertheless, 76% of high-confidence businesses still agree or strongly agree that the benefits of capturing and storing customer data outweigh the risks. That’s compared to the 68% of all respondents who agree or strongly agree and the 58% of lower confidence businesses.

CONCERNED BUT MAYBE NOT CONCERNED ENOUGH

While 81% of businesses are allocating budget to cybersecurity and 80% are considering it at a strategic business level, only 55% have it as a regular agenda item at management meetings. Almost half of businesses agree or strongly agree that their business, “isn’t an attractive target for a cyber-attack, so the risk of an attack is low.” This suggests that many businesses see cybersecurity as a risk in general, but one that doesn’t much apply to them.

After recent high profile cyber incidents, mid-market businesses may feel that larger organisations are more attractive for cyber criminals, but the reality is much different. Many mid-market businesses are not direct targets, but simply the victims of random phishing attacks, meaning they’re still vulnerable and may not realise it.

Even so, the number of businesses insured against an attack (65%) is encouraging, but less confident businesses are less likely to be insured (58%) versus those who are confident (71%).

Those who don’t have insurance say it’s because they didn’t have the funds, didn’t know about insurance options or didn’t think they were at risk.

While it is pleasing to see mid-market businesses taking the right steps to protect themselves in the event of an incident, if businesses don’t have cyber as a regular agenda item for discussion, they need to ask themselves, why not?

A WORRYING OVERCONFIDENCE

While respondents are generally confident in their protection against cyberattacks, the results show a potential disconnect between perception and reality.

60% say they have a strong cybersecurity culture, with security ingrained in every aspect of the workplace. However, this culture may only be theoretical. When asked who has some level of responsibility for cyber security, 54% name their IT team and 40% their managers and supervisors.

Those in the company who should also bear responsibility in a strong cybersecurity culture were named by very few respondents: board of directors (16%), executive leadership (31%), all employees (31%) and owners (19%).

Additionally, 41% of businesses are also working without a response plan in place and 45% aren’t confident that they could recover from a significant attack.

WHO HAS SOME LEVEL OF RESPONSIBILITY FOR CYBER SECURITY?

I’M CONFIDENT OUR BUSINESS COULD RECOVER WELL FROM A SIGNIFICANT CYBER ATTACK

I’M CONFIDENT OUR BUSINESS COULD RECOVER WELL FROM A SIGNIFICANT CYBER ATTACK (% of respondents who agree or strongly agree)

(% of respondents who agree or strongly agree)

OUR BUSINESS HAS A CYBER INCIDENT RESPONSE PLAN IN-PLACE IF WE WERE THE VICTIM OF CYBER ATTACK (%

OUR BUSINESS HAS A CYBER INCIDENT RESPONSE PLAN IN-PLACE IF WE WERE THE VICTIM OF CYBER ATTACK (%

agree or strongly agree)

OUTSOURCING YOUR IT DOESN’T OUTSOURCE YOUR RISK

Worryingly 45% of mid-market leaders believe outsourcing the IT function removes the risk for their business. While making use of experts can reduce your risk through improved prevention tactics, it doesn’t remove it entirely. It is still your brand and bottom line that will be damaged if any attacks successfully get through the measures put in place by your providers.

For any outsourced services utilised it’s important to ensure they apply as rigorous cyber security protocols as you do.

OUTSOURCING OUR IT SERVICES REMOVES THE RISK FOR OUR BUSINESS

(% of respondents who agree or strongly agree)

INSIGHTS FOR BUSINESS

While it’s pleasing to see cybersecurity high on the radar for most business leaders, the results show worrying inconsistencies that may indicate that some businesses are less prepared than they think they are, and underestimate the risks they face.

Perhaps most interesting and more concerning, is the high number of businesses who see outsourcing IT as a way to remove risk (not just decrease or limit it). This isn’t true both legally and practically and could show a contradiction to respondents’ confidence in their management’s expertise and awareness.

It’s worth remembering that even small and medium sized businesses can be targets –potentially representing an easy access point to much larger fish in their supply chain or holding volumes of highly sensitive data themselves. Business leaders would do well to look at their business as usual approach to cybersecurity to ensure people at all levels of the organisation understand their role and their responsibilities.

LESS WORRY, MORE ACTION

While it’s clear Australian leaders of mid-market businesses know they should be considering cybersecurity risks, in many cases this has not translated into practical defences or planning. Their responses suggest that a lack of understanding may be causing businesses to feel they’re better prepared than they are.

As cyberattacks continue to increase and businesses become more and more reliant on connected networks and data, it’s time for businesses to take a clear eyed, informed look at how they’re preparing for and protecting against the inevitable.

“It is logical to leverage the expertise of people outside your business, but it is important to critically analyse what they are telling you and also what they are doing for you. While you need to place your trust in an expert, it is important to remain vigilant – keep circling back and making sure that trust is warranted.”

ADAM IRWIN, MANAGING PARTNER, PITCHER PARTNERS SYDNEY

8 ACTIONS YOU CAN TAKE

1 Create a documented incident response plan.

2

Ensure you have clear processes in place to contain the breach and remediate the damage.

3 Address the million-dollar question – to pay or not to pay for a ransom? Discuss with management and boards, scenario plan and workshop possible threat situations. Determine whether it is legal to pay a ransomware demand.

4

Be aware of your processes and obligations for reporting an incident internally and to any relevant regulatory authorities.

5 Develop a communications plan that covers:

• Communication to clients/ customers – draft holding and pre-prepared statements.

• Limiting brand damage – identify a communications specialist to work with, ensure they understand your business and they have the experience you need to respond in high-pressure situations.

• Communication to staff – how are you going to communicate, who is going to communicate and what are you going to communicate.

6 Identify external consultants, like IT providers, communications specialists and cybersecurity lawyers with a strong understanding of your business.

7 Rehearse, rehearse and rehearse your response plan.

8 Conduct vendor assessments to evaluate the cybersecurity posture of suppliers against industry standards, security policies and established security practices.

MEET OUR MID -MARKET BUSINESSES

This report defines mid -market businesses as employing 20–200 people with annual revenue of $2–$500 million. While their operating models, sizes and industries vary widely, these businesses can be categorised into four lifecycle stages.

A RANGE OF BUSINESS STRUCTURES

PUBLIC PRIVATE

NOT-FOR-PROFIT

A RANGE OF BUSINESS LIFECYCLE STAGES

SEED

GROWTH

MATURE

TRANSITION

Operating for less than two years. Focus on establishing business model and reinvestment of profits.

Gaining traction in market with recent, consistent growth. Reinvest profits to support expansion.

Focused on evolving the business model, or selling / winding down the business

AUSTRALIA'S MIDDLE-MARKET BUSINESSES …

Consistent and stable revenue. Working on a business-asusual basis. BUSINESS PROFILE

CONTRIBUTE APPROXIMATELY 25% OF AUSTRALIA’S TOTAL REVENUE

TYPICALLY EMPLOY STAFF

HAVE AN ANNUAL RE VENUE OF $2M TO $500M WITH A

AND THE ABILIT Y TO ADAPT QUICKLY

MAKING BUSINESS PERSONAL

That’s why Pitcher Partners takes the time to understand our clients’ needs, with personalised service and advice to help them achieve their goals.

It’s part of what has made us the leading accounting and advisory firm for the mid-market in Australia, across privatelyowned, government-owned and not-for-profit organisations. With access to the resources and depth of expertise of a major firm, and the highest level of personal service and attention, our clients get the best of both.

140+ PARTNERS

1400+ PEOPLE

6

INDEPENDENT MEMBER FIRMS

Business is personal –it’s run by people, after all.

COMMERCIAL SERVICES

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• Accounting and business advisory services

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• Estate planning

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PLANNING AND GROWTH

• Business consulting and commercial advice

• Business performance improvement

• Business structuring

• Corporate finance

• Digital and data

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• Succession planning

• Superannuation services

• Tax advisory

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INDUSTRY SPECIALISATIONS

• Agriculture

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• Financial Services

• Funds Management

• Government and public sector

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• Manufacturing and production

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• Not-for-profit

• Professional services

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• Renewable energy and utilities

• Retail and trade

• Technology, media and telecommunications

• Transport and logistics

Making business personal

Gavin Debono Melbourne

Partner

p. +61 3 8610 5331

e. gavin.debono@pitcher.com.au

Jyotika Rangel Sydney

Partner

p. +61 2 8236 7811

e. jyotika.rangel@pitcher.com.au

Kylie Lamprecht Brisbane

Partner

p. +61 7 3222 8437

e. klamprecht@pitcherpartners.com.au

Robert Prince Perth

Executive Director

p. +61 8 9322 2022

e. princer@pitcher-wa.com.au

Peter Lawrence Newcastle

Partner

p. +61 2 4923 4000

e. peter.lawrence@pitchernewcastle.com.au

Chris Hanna Adelaide

Principal

p. +61 8 8179 2800

e. chris.hanna@pitcher-sa.com.au