Business leaders continue to note that talent issues, supply chain and inflation concerns are challenges across all industries. We offer perspective into the business landscape over the last 12 months and expectations for the new year, specifically focusing on the changing business environment, performance and strategies, as well as key business topics for the coming year.
The Rapidly Changing Business Environment
While many businesses saw significant growth over the past two years, in 2022 U.S. businesses overall have returned to a strong year-over-year growth following stagnant or declining growth during the pandemic. Recovery is well underway across all industry segments. The economic outlook has risen above pre-pandemic levels and for some businesses, expansionary activity has resumed.
Top Business Challenges
According to the National Center for the Middle Market, top challenges include supply chain, finding and retaining talent, and customer engagement. The way we work now with more of a hybrid workforce has redefined what the employee experience looks like. Customer engagement and how we interact with our customers has evolved. Growth opportunities are dependent on how we solve these challenges, and digital transformation will likely be one solution. We’ve seen rapid change during the pandemic, and new challenges are necessitating optimization within companies.
“Companies with employees working from their homes in states across the country need to be aware of how this impacts their state tax filings. If you have a team member working remotely in a state where you don’t already have employees working, you could be required to start withholding payroll tax on that employee’s wages in the state where the employee lives and works. Also, this payroll may require you to begin filing income and/or sales tax returns in the state where you did not previously have nexus and a filing requirement.”
BEN CARVER, CPA, SHAREHOLDER, TAX
Supply Chain
The worldwide interdependence of the supply chain was illustrated during the pandemic and has become a top challenge for businesses. Supply chain disruptions have negatively impacted growth due to strong demand coupled with COVID-related supply disruptions. When people were stuck at home, they slowed spending on discretionary items, such as restaurants, entertainment, and other services, and more money was spent on food and consumer goods.
On the supply side, China, the manufacturing capital of the world, temporarily shut down regions and ports. We expect the demand to return to more normal levels in 2022, and supplies should improve as COVID recedes. However, the semiconductor shortage is believed to be harder to resolve and will likely continue through 2022. Demand for goods that use computer chips will remain high, and the prolonged shortage has driven up prices of goods and made some items nearly impossible to buy. At this stage, Intel, Samsung and TSMC have announced plans to build chip plants in the U.S.; however, these kinds of facilities can take years to open and will not likely change the situation anytime soon.
As companies move from efficient to resilient supply chains, this will depress growth over time. While deglobalization has been occurring for several years, the pandemic increased the speed. Nations are setting up industrial policies to protect the supply chains of companies headquartered in their domain, and policies are meant to ensure that key inputs, such as semiconductor chips or rare earth metals, for example, are not being held hostage by the nations that control those inputs.
These policies are accelerating the trend for Western companies to re-shore and diversify their supply base. Diversification won’t occur overnight, and China has the greatest advantage in terms of infrastructure, skilled labor base and manufacturing know-how.
Finding and Retaining Talent
Labor shortages are impacting company growth, making finding and retaining talent a top challenge in 2022. According to world economists, this trend is largely the result of a more selective workforce. In a survey conducted by SHRM (Society for Human Resource Management), nearly 90% of 1,200 employers said they were struggling to fill open positions in 2021, and 73% said they’re seeing a decrease in applications for those hard to fill positions. Three million U.S. workers retired during the pandemic, noting COVID-19 and health concerns as a primary reason. For younger workers, financial payments from the government allowed them to delay their return to the workforce and be more selective in what jobs they would take. We expect that these younger workers will return to the workforce at a more normal level in 2022.
During the pandemic, training for skilled trades came to a halt due to the hands-on nature of learning. These vocational schools are back in session, and the need for these types of workers will be high in 2022.
As businesses are still seeing fewer candidates with the skills they seek, on-the-job training will be a stronger focus moving forward. Some companies are no longer requiring college degrees for applicants and are instead hiring for soft skills, supplemented by enhanced onboarding training programs to get employees where they need them to be.
Wage inflation is all but certain. To attract the talent needed, companies are paying higher wages, offering bonuses and providing more benefits to current employees. As the younger workforce goes back to work, the need for talent may decrease, but increased wage inflation will not. Payroll costs will continues to increase as existing workers receive raises.
“The fact that a company’s greatest asset is people rings true today more than ever before. This is especially evident in not only recruiting but retaining the skilled, experienced professionals. While many are focused on recruiting new talent and winning that competition, they should not take their eye off the ball when it comes to ensuring their culture is shored up to retain the top talent they have.”
SHERRIE WHATTON, PRESIDENT/CEO, STAFFING SOLUTIONS
Customer Engagement
Businesses must focus their efforts on building better digital-first interactions with customers. The pandemic drastically accelerated the digitization of customer engagement. Businesses were pushed to embrace and expand their digital routes to connect with their customers, as social distancing policies required them to pivot. Even with these needed changes, customers still expect a tailored experience that makes them feel special and continue to expect brands to understand and respond to their individual needs.
Customers are craving more meaningful connections with company brands. Today’s buyers desire an experience that’s unique to them and not a mass marketing strategy that may have worked in the past. Customers have limited time and are constantly bombarded with content, so they expect quick solutions. The challenge, or maybe opportunity, is to pinpoint those exact moments where customers are looking for a specific thing and be able to provide that to them quickly. The window to give customers what they’re looking for may only be a few seconds. Google refers to that as the micro-moment.
Today’s consumers increasingly prioritize experiences over material goods, referred to as immersive experiences. Extended reality technologies are more desirable, and brands can impress their customers by engaging immersive experiences to remain relevant and create memorable customer journeys.
“Today’s customers are smart, tech savvy and results oriented. To reach them you must ensure you are meeting them where they are, with the rich client experience they are now expecting. The best media/brand campaigns today are human-centered, connecting your brand values with your target audience in an authentic, relatable way. Digital relationships are vital to reach the audiences with genuine messaging, rising above the noise.”
LISA NAMM, DIRECTOR OF BRAND, LBMC
Growth Opportunities and Optimism
Business optimism is positive, in that companies are looking for ways to continue to do new things, go into new markets and get back to some normalcy. CEOs have increased confidence heading into 2022, but growth will be dependent on finding and retaining talent and on whether there are still disruptions in the supply chain. According to a Gartner survey, growth was the number one business priority with investment into new markets as a key strategy. It makes sense that technology-related priorities also increased greatly to potentially optimize and automate employee functions, helping the reduced workforce be more efficient.
Technology will play a big role in growth for 2022, as companies look for ways to expand to new markets and continue to maintain a hybrid workforce.
Leaders will have to be innovative and invest in their people. Taking what we’ve learned from the pandemic to chart the path forward will be crucial for growth. The graph reveals that the CEOs’ priority on their workforce had the greatest jump from the prior year, and that aligns with what we are seeing as a top challenge.
CEOs’ Top Strategic Business Priorities for 2021-2022
Business Performance/ Strategies
Business performance and strategies for 2022 are primarily focused on sales and profitability, capital spending and mergers and acquisitions (M&A). A hot topic for the coming year will likely be around M&A. We continue to see much activity in the M&A space across industries, especially with our clients in the technology and healthcare sectors.
Sales & Profitability Strategies
The top strategy for profitability revealed in our survey was improving productivity and efficiency, followed closely by decreasing operating expenses and technology improvements. It’s common to see business leaders focus on the things they can control and offer less risk. Therefore, it’s no surprise these are at the top of the list.
At the beginning of 2021, executives were more interested in selling existing products to existing markets, confirming a lower risk strategy. With increased confidence in 2022, this could present a great opportunity for companies should they want to shift the risk from low to high and get into those new markets or offer new services to existing markets.
Many of our clients are learning to do the same thing in new ways, bringing increased focus to existing markets and customers, whether that’s by location, how they connect or how they deliver their services. Some of these shifts were out of necessity, such as new telehealth services that many of our healthcare clients have implemented. Telehealth allows physicians to serve patients through voice or video calls instead of the traditional in office face-to-face visits. This strategy focuses on existing markets and customers with the same outcomes, but with a different way to connect and deliver services.
Sales Strategies During 2021
Capital Spending
The largest driver of business capital spending is economic growth, with additional impacts from high labor costs and low interest rates. Companies are being pushed into expanding their investments in 2022 due to supply chain demands and labor shortages. Companies are looking to spend, with many of them having plenty of cash on hand resulting from Payment Protection Program (PPP) funds or CARES Act advances and forgiveness.
Many of our clients were being conservative with funds through the pandemic. Supply chain demands and long lead times potentially restrained spending. However, as we enter 2022 with these funds being forgiven, businesses are looking to spend their cash in more effective and efficient ways. Many of them have labor shortages which are driving them to invest in more computers, technology and machinery to automate processes and enhance efficiencies.
We’ve also seen more companies purchasing equipment in an effort to repatriate manufacturing and supply chain demands. One example could be that the business has a product that’s 98% complete, but they are missing one piece, such as a computer chip. We see businesses proactively regaining some control by bringing that last piece onshore to navigate the supply chain issues making shortages, transportation issues, or shutdowns from other countries irrelevant.
High Growth versus No Growth
It’s not a surprise that high growth companies are leading the way in capital spending. What is surprising is that in these difficult times, marketing is top of list just ahead of acquiring new locations and/or new facilities. While marketing was more likely to be cut from the budget in the past, brand awareness has become very important for high growth businesses today. By cutting marketing and public relations, these companies run the risk of potentially damaging the demand for their products and services.
We have seen this firsthand as a high growth accounting and consulting firm. In the last few years, we have been very intentional about enhancing our marketing spend to elevate our specific marketing technology efforts as well as go to market segment needs. We’ve also been purposeful with a keen focus on building brand trust with both clients/prospects and talent needs with the expansion of our Corporate Brand and Employer Brand initiatives.
Areas in Which Increased Capital Spend is Anticipated
Mergers & Acquisitions
Stock prices have been strong, financing has been cheap, and corporate balance sheets have ample cash from PPPs and CARES Acts funding. These factors have set the stage for profitability strategies and capital spending to be highly focused on expanding business. This has mostly come by way of merging with or acquiring a company or a portion of a company.
Many businesses are making strategic moves, whether it’s merging, selling, acquiring, or listing as an IPO. It should not come as a surprise that private equity groups have capitalized on this trend in 2021. Private equity exit activity in the U.S. has already notched record annual deal value through Q3 2021.
Private Equity Exit Activity
The total exit value hit $638 billion through Q3 of 2021, setting an all-time annual record. A comparison of Q1 2021 versus Q1 2018 represented a spike of 50% in the exit values, which is a substantial increase considering 2018 had been the strongest year-to-date. It’s interesting to see that 2018 had more exits than 2021 with 1,300, compared to 1,100 in 2021, and yet they had a lower exit value. The large exit figures of 2021 are being driven disproportionately by larger exits.
Private equity firms are becoming more active in taking minority stakes in high growth tech companies, many of which are publicly traded. The valuation of these companies is enormous, and the enterprise value balloons as when considering these minority stakes.
* As of September 30, 2021
Source: Pitchbook
Whether it’s due to firms seeking to capitalize on the spread between public and private multiples, the record setting dry powder that sponsors are sitting on, or the trillions of dollars in cash on corporate balance sheets, exit activity, especially with large portfolio companies, is perhaps the hottest it’s ever been.
The current environment deal pace is high, and valuations are following the same path. In addition to valuation, we also see increased risk factors, oftentimes overlooked in favor of a speedy close. With that, it’s increasing an emphasis on getting the deal done, regardless of challenges that may show up. That doesn’t impact every deal but in an environment like this, the risk is ever present. Another underrated risk relates to indirect taxes. We’re seeing that after the U.S. Supreme Court’s decision in the Wayfair case, it’s now easier than ever for state and local taxing jurisdictions to impose tax on entities and transactions. In summation, the pipelines are full, with valuations and deal pace at an all-time high. It is recommended to consult with your advisor and potentially attack risks upfront and save headaches on the back end. We’ve seen a lack of attention to these issues, resulting in deal failures, leading to large penalties.
Private Equity Public Listing Exit Activity
Median Private Equity Buyout vs. S&P 500 Multiples
* As of September 30, 2021 | Note: S&P 500 data is as of June 30, 2021.
Geography: US | Sources: Morningstar, iShares, Pitchbook
Key Business Topics
Acquiring/Retaining Talent
Staffing challenges and solutions are top of mind in 2022, because relying on our old habits and techniques aren’t working anymore. LBMC has made enhancements and implemented multiple changes to how we approach staffing and sourcing talent. We brought in a Chief People Officer a few years ago, expanded our talent team with targeted recruiters, enhanced our technology so our process is more talent friendly, improved the interview to hire process to ensure we acquire top talent prospects, and revamped our Learning and Development offerings with a keen focus on personal and professional growth opportunities.
The talent war has never been greater within our clients and our own business, and the demand for
top performers has never been higher. Good, strong, contributing employees are hard to find. There is a long list of good opportunities, both for contract and full-time positions. LBMC is making sure we’ve got the right people in the right seats at the right time.
Strategies for Acquiring and Retaining Talent
“Flexibility in the workplace opens another exciting opportunity for companies worldwide—hiring employees who do not live within driving distance. Now that employees can more easily work from wherever they choose, companies can hire top talent without having location restrictions, while also saving on possible relocation costs. This change also opens the opportunity for your current employees to relocate without leaving your company, reducing turnover, and allowing you to continue nurturing the talented people already on your team.”
SHARON POWLUS, PRESIDENT/CEO, EMPLOYMENT PARTNERS
Technology Usage
Top strategies for managing technology include improving existing systems and adding existing systems. At LBMC, we are closely examining our existing technologies, looking at the functions we are not using and implementing those new functions to improve efficiencies. If we need a function not offered in existing technology, we explore adding new systems that have that capability or we innovate to create them. That’s been our approach for some time and is shared by many of our clients, so the results of our survey showing higher priorities in these areas was expected. At LBMC, these investments are already paying off with our latest onboarding class of 60 new hires in January 2022.
It’s interesting to note that no growth companies focused more on replacing existing systems than high growth companies as they entered 2021. When the pandemic hit, the traditional methods of working 9 to 5 on-site drastically changed with shut down mandates and forced social distancing. During this time, businesses that didn’t have their technology up-to-date were forced to spend to get where they needed to be in order to do business. The pandemic really narrowed the technology gap between companies that made regular upgrades and those with outdated systems.
“The pandemic has shed light on businesses’ technology infrastructure shortcomings. No growth companies appear to be behind the technology curve, and their outdated systems are no longer cutting it. On the other hand, businesses that have kept pace with new technology are racing ahead, adding new systems to their technology stack and harnessing the added efficiency and power to generate higher growth and revenue.”
STACY SCHUETTLER, PRESIDENT, TECHNOLOGY SOLUTIONS
Technologies That Businesses Plan to Invest in During the Upcoming Year
Technology allows businesses to pull together data and build dashboards to quickly provide a picture of their organization. In addition, technology helps businesses increase profitability and keep the talent they have.
Another hot trend in the technology space as we enter 2022 is digital transformation. Supporting the technical and digital side of business rests largely on the shoulders of IT leaders. These leaders have an opportunity to embrace force multiplying innovations to accelerate growth and strategically drive organizations forward. These innovations will deliver trusted digital connections for teams, solutions to rapidly scale digital creativity, and innovation capabilities to accelerate business growth beyond today.
Technologies That Businesses Plan to Invest
Cyber & Data Security
Cybersecurity continues to be a hot topic in 2022. The need for cybersecurity was already high and has increased this year. Certainly, most organizations have their own regulatory guidance on what they must do for cybersecurity, but it’s not enough just to be compliant. Our clients want to make sure that everything is buttoned down and they are protected as much as possible.
“More than ever before, customers are concerned with how an organization secures their data and have expectations that they address these concerns. The primary way companies have addressed these concerns outside of regulatory compliance and/or contractual obligations includes working with CPA firms to obtain an opinion on the effectiveness of their security and control environment through a SOC 2 or with an external HITRUST Assessor organization to work with them on HITRUST certification, naturally driving up cybersecurity on the priority list.”
DREW HENDRICKSON, CPA, CIPP, CCSFP, SHAREHOLDER, INFORMATION SECURITY
Worldwide IT spending is projected to total $4.5 trillion in 2022, an increase of 5.5% from 2021.
Cybersecurity Strategies
Outlook
Regardless of industry, most of our clients fared well throughout the pandemic and beyond meanwhile some even experienced higher growth as a result. Those companies who profited, reimagined how they did business to meet the change in consumer habits and buying patterns. As 2022 unfolds, we continue to see strong potential for growth, high optimism, and improving economic outlook.