Businesses of all sizes are feeling the pain of the global coronavirus outbreak. But the middle market might be uniquely vulnerable to its effects. Companies in that category are too large to adjust quickly to change, but too small to have the resources to cope with disruption. In this conversation with SupplyChainBrain Editor-in-Chief Bob Bowman, Richard Cabrera, head of commercial and corporate banking with Umpqua Bank, discusses the bank’s recent survey of the state of the middle market, and how the picture has changed in a time of sudden pandemic.
SCB: What is Umpqua Bank's definition of the middle market?
Cabrera: The middle market is defined by the revenue size of the enterprise. Typically it starts on the lower end, at $10 million in annual revenue, and goes up to $500 million.
SCB: You conducted a study on the state of the middle market last October, and released it in December. How do you think the results of that survey might be different if it were taken today?
Cabrera: At the time we released the survey, there was a lot of concern over tariffs. The impact pointed to China, and that was top of mind for a lot of our clients. So when the coronavirus broke out in Wuhan, it was serendipitous from the standpoint that we were already talking about the need to diversify supply chains and become less dependent on China. That trend has been developing for the last five to 10 years, with a lot of supporting industries being stood up in Cambodia, Vietnam and Thailand. But when the coronavirus hit, a lot of us didn't realize the the magnitude and the ferocity of it. Many thought it would be limited to mainland China, or maybe spread within Asia to some degree. That was eye-opening for us.
SCB: It’s hard to think of diversifying sourcing as a solution when the reason for wanting to get out of China is happening everywhere. Where do you go?
Cabrera: That's a conundrum right now. Supply chains are being interrupted all over the world as a result of this. It started with the tariff situation, so we could have a discussion about diversifying supply chains. Nobody had a framework for thinking about this. Other economies in Thailand, Vietnam and Cambodia have grown, but they've been affected by COVID-19 as well.
SCB: What type of financial strategies should the middle market be considering in light of the coronavirus, and any other type of disruptive change affecting global supply chains?
Cabrera: In situations of disruption and pandemic, your eye needs to be soundly on fraud prevention. We’re seeing it happen right now —fraudsters take advantage of a separated workforce that’s working remotely, not communicating, and doing everything through e-mail, instant messaging and phones that create an easy access point. A lot of spam and phishing takes place.
SCB: What steps should companies be taking to guard against that?
Cabrera: Regarding fraud prevention and means of payment, you shouldn't be paying by cash anymore. You should use a commercial card, with an integrated payment system that allows you choices on how you pay other than cash or check. The most important thing is to have a backup plan related to the people who manage the money for your company. Many times it’s not clearly defined as to who’s responsibility it is in the event of crisis, or if that person becomes ill with something like COVID-19. The system needs a backup plan, because you might be away from your main location and have to access it remotely.
SCB: One would hope the current crisis would motivate companies to take more action in the direction that you described. Are you seeing that?
Cabrera: It's still very early to tell, but we are seeing it. People want to figure out what the government's involvement is, but there's a lot of communication going on with banks, and because of the situation there might be no more than one banking representative there. We've never seen anything like this — we’re asking, "What do we do? What are the rules?" We talk about disaster planning in the context of a fire, an earthquake, a power outage. While there are some similar elements, this is different in the sense that it's touching humanity.
SCB: Do you consider the middle market to be especially vulnerable to such trends? Not small enough to be really flexible, and not big enough to have a lot of resources at their command?
Cabrera: You don't necessarily need a lot of people for a company to be defined as middle market. Those with under $50 million in revenue might be kind of a middle of the middle market by the definition I gave you. You might employ as few as half a dozen people; it’s more akin to a small business. With so few people running an enterprise, you wear a lot of hats. Certainly there’s a lot of vulnerability and limited expertise, especially if banking or finance isn’t your forte.
SCB: Going forward, what permanent changes in the middle market might we see as a result of this crisis, in the form of lessons learned, changes in sourcing patterns or payment terms, and financial strategies in general?
Cabrera: That's a very big question to answer. One thing that’s come out of this is a realization of your dependency on your employees and key positions in banking and finance. Also, there's going to be a lot more attention paid toward employee welfare, health and safety. First and foremost, what everyone’s talking about right now is, how do we keep our employees safe — physically, health-wise and emotionally? How do we manage the fear of what’s unknown? That’s the overarching thing at this moment.
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