Umpqua Bank released its annual 2021 Business Barometer, a study into the mood, mindset and strategic priorities of nearly 1,200 leaders at small and middle-market companies across the United States. According to the study, despite the heavy toll businesses faced last year, optimism has now surged past pre-COVID-19-pandemic levels and many companies report being well positioned for growth in the year ahead.

In addition to reporting transformational shifts in operations and strategy over the last year, middle-market companies, in particular, are embracing the expectation of continued challenges and the need for ongoing adaptation. And while growth is expected among both small and middle-market companies, intense disruptions related to supply chains and competition for workplace talent pose considerable challenges.

“Businesses of all sizes made significant changes over the past year in response to the pandemic. As a result of increased efficiencies and diversification, many have emerged more optimistic and poised for growth as the economic recovery continues,” Richard Cabrera, executive vice president and head of middle-market banking at Umpqua Bank, said. “Leaders have realized their organizations’ capacity to pivot and adapt, and the pandemic has challenged them to think more strategically and in greater detail about their larger purpose and value to the marketplace. This bodes well for the immediate future and will also make them better prepared to adapt to the next disruption.”

Together, small and middle-market companies serve as bellwethers for the economy. Middle-market businesses alone account for $6 trillion of U.S. private sector GDP and provide 44 million jobs.

“Significant Changes” Made in 2020 Represent Transformational Shifts 

Not surprisingly, most businesses have made major strategic adjustments in response to the pandemic. Nearly all middle-market companies (96%) and most small businesses (65%) said they’ve made “significant changes” to multiple areas, including supply chains, staffing models, company culture and vision, brick-and-mortar operations and products and services. These changes, however, reflect more than temporary pivots to survive. According to the report, about half of those surveyed, including 71% of middle-market companies, expect to keep most or all of the changes made.

Surging Optimism Paves Way for Growth 

Positivity around the current state of the economy has roughly doubled since last year, with expectations for overall economic improvement and business growth accelerating past levels recorded in previous Umpqua middle-market research. A majority of middle-market (55%) and small (52%) businesses expect economic conditions to improve and for revenue to increase (62% of middle-market businesses and 53% of small businesses).

A renewed sense of optimism — and most likely delayed plans from 2020 — have middle-market companies thinking about growth and expansion in the year ahead. More than half (52%) are considering acquiring another business, which is up from the roughly one-third of businesses reporting such interest in 2019 and 2020. Another 56% expect to finance expansion plans.

The state of the commercial real estate sector may also be less dire than commonly assumed, as 47% of middle-market companies are looking to expand their real estate footprint. That figure is most pronounced within the manufacturing and finance and insurance industries.

Leaders Embrace a Mindset of Continuous Change and Evolution

Despite reporting massive strategic shifts in response to the pandemic a year ago, more changes are coming. Roughly three-quarters of middle-market businesses expect to continue making significant changes to products and services (75%). They also anticipate substantial changes to their pricing models (75%), while another 81% are likely to digitize new areas of their business to become more efficient and 79% will continue automating repetitive manual tasks.

“Over the past several years, disruptions — whether macroeconomic, geopolitical or technological — have become a constant reality, and none has been more impactful than the pandemic,” Cabrera said. “The data mirrors what we see on the ground with our customers —businesses are starting to accept this reality. While the last year has been difficult, many businesses have tapped into strategic and creative energy that’s changing their mindset from one of resistance to embracing the need for continual change.”

Despite accelerating optimism and plans for growth, businesses are facing economic headwinds that will continue to challenge their capabilities and need for strategic support from various partners. These include:

Talent Dislocation and Lack of Skilled Workers  

Most middle-market businesses (55%) and 41% of small businesses are having trouble finding qualified employees. Companies cite the inability to engage qualified talent and a shortage of skilled candidates as the top staffing challenges. Respondents from construction, retail and manufacturing businesses are most likely to have trouble finding qualified employees.

While businesses are offering enhanced incentives, including finding creative ways to support working parents (71% of middle-market companies), operating short-handed has had a ripple effect across their bottom lines and the economy. Higher labor costs, increased delays with goods and costly workforce inefficiencies are cited as the most significant impacts. The inability to pursue new opportunities also ranks exceptionally high for small businesses.

Supply Chain Disruptions 

As companies are working to adapt and grow to meet increasing consumer demand for goods, many are still feeling the effects of the pandemic on the global supply chain, with 88% of businesses citing difficulty sourcing goods in the past 12 months. The most common supply chain difficulties companies have faced include:

• Being unable to purchase goods in a timely manner needed to run their business (23% of small businesses and 29% of middle-market companies)
• Facing longer delays to receive goods (59%)
• Experiencing an increase in the price of goods (76%)

The Umpqua Bank 2021 Business Barometer, conducted annually, surveyed 1,196 owners, executives and financial decision-makers from U.S. small and middle-market companies. The online survey was conducted in partnership with DHM Research, a public policy and business research firm, and targeted leaders at companies with $500,000 to $500 million in annual revenue. The survey has a 2.8% margin of error and was fielded from May 24 to June 4, 2021.