Umpqua Bank, a subsidiary of Umpqua Holdings Corporation, released its annual 2022 Business Barometer, an in-depth study into the mood, mindset, and strategic priorities of leaders at small and middle market companies across the United States. This year's report finds small and middle market businesses pivoting from recent pandemic-era strategies as they face mounting pressures that now include rising inflation and interest rates, in addition to accelerating challenges associated with supply chain disruption and workforce transformation.

Introduced in 2019, Umpqua Bank's Business Barometer report provides insight into how business leaders have navigated an unprecedented period that includes the pre-COVID economy, the pandemic's onset and initial recovery, and the current environment of rising inflation and interest rates. Within that context, Umpqua Bank's 2022 Business Barometer reveals important differences from previous years. This year finds more small companies are ready than ever before to make significant changes to their business in response to inflation's growing impact. Meanwhile, after two years of making larger-scale business changes in response to the pandemic, middle market companies are now tackling the compounding impacts and higher costs of workforce transformation and cybersecurity threats.

"The past few years represent a remarkable period of disruption and resilience for U.S. businesses," said Umpqua Bank President Tory Nixon. "The pre-pandemic economic environment of low-inflation, low-cost capital, and high growth has shifted, and we find ourselves in a period of rising costs for goods, talent and capital. As this new reality sets in, small and middle market companies alike are applying lessons learned over the past couple years and adjusting their strategic focus to ensure they emerge on the other side stronger and more competitive."

Key findings and highlights from Umpqua Bank's 2022 report include:

After Two Years of Successful Pivots, Middle Market Zeros-In on Workforce Transformation

Middle market companies represent just 3 percent of all U.S. businesses but account for $6 trillion in GDP and 44 million jobs. After major strategic changes over the past two years, leaders of these businesses anticipate less need to address previous areas of focus, including: pricing models (-15 percentage points), products and services (-16), acquiring (-16) or merging (-12), financing expansion (-12), and digitizing for efficiency (-5).

Instead, middle market companies are shifting focus to address workplace transformation and its accompanying labor shortage, which continue to accelerate. Nearly three-quarters (72 percent) report difficulty finding qualified employees, a 17 percentage-point increase over last year, with an emerging impact on growth for 33 percent of businesses (+16 percentage points). More than 30 percent are also having difficulty retaining employees, up 18 points. In response, leaders plan to be even more aggressive than last year in terms of offering more flexibility with remote options (+16), giving bonuses or other incentives (+15), supporting working parents (+14), increasing pay or benefits (+11), and finding ways to automate repetitive manual tasks (+8).

"Middle market companies have done a tremendous job of pivoting their businesses to adapt to supply chain and other challenges to become even more efficient and competitive over the past couple years," said Richard Cabrera, Umpqua's Head of Middle Market Banking. "They're now looking to apply that same strategic focus and creative energy to the challenging workforce environment, which has the most immediate impact to their bottom line and is affecting growth."

Small Businesses Poised for Most Significant Changes to Business Since Pandemic

Smaller companies often have fewer levers to pull in response to disruption than larger companies, and past Business Barometer reports have indicated more hesitation to embrace major changes. This year, that trend has reversed. For the first time, small enterprises are looking to make more significant changes to their business, especially compared with a year ago. Changes small businesses anticipate include: pricing models (+18 percentage points), products and services (+12), financing expansion (+7), digitizing for efficiency (+5), and acquiring (+4) or merging (+3).

In the face of continued workforce and supply chain disruption, more small businesses than last year report planning aggressive action to hire for new skills to build capabilities (+13),) increase worker pay and benefits (+12), allow remote work options (+2), find new suppliers (+12), and identify other partners to manage supply chain impacts (+4).

"Increasingly, small businesses now feel a sense of urgency to make changes to their strategy and operations, especially in response to rising inflation, which has a more immediate impact the smaller the enterprise," said Ashley Hayslip, Umpqua's Head of Community & Business Banking, "That sense of urgency can be turned into a competitive advantage for those businesses that pivot quickly and strategically."

Economic Optimism Diminishes, but Expectations for Business Growth Remain Steady

Last year's economic optimism surged beyond pre-pandemic levels as businesses anticipated the recovery. In 2022, that optimism has diminished as concerns increase that rising inflation, which ranks as a top concern for both small (73 percent) and middle market (37 percent) businesses, and the evolving impacts of supply chain disruption and labor shortage, are here to stay. When it comes to economic conditions, businesses are split. Leaders surveyed this year are as likely to say current conditions are poor as they are excellent or good (34 percent).

Leaders' economic outlooks vary significantly based on business size and complexity. Nearly 46 percent of small businesses believe the economy will decline further, an almost 20-percentage-point increase over 2020 and 2021. However, more than eight in 10 middle market businesses believe the economy will improve (31 percent) or stay the same (50 percent), which is very similar to their pre-pandemic outlook. This expectation gap may explain a greater urgency on the part of small businesses this year to embrace significant changes.

It's important to note that although leaders report more cautious views of the overall economy, that doesn't equate to a lack of confidence in their ability to adapt and continue to grow their businesses. When asked about revenue growth and profitability, businesses expect levels of increase similar to previous years.

Cybersecurity Ranks as a Major Concern for Middle Market Companies

A noteworthy 45 percent of middle market companies report being a target of cybersecurity-related fraud in the past 12 months. Of all possible answers, cybersecurity ranks as the top area middle market businesses are most likely to invest in this year, and as the second most important area they need to address in the year ahead next to addressing workforce challenges. Middle market leaders also clearly see the need to protect working capital and financial assets. More than six in 10 are planning to invest in financial tools and infrastructure that safeguard and strengthen their payments systems.

Supply Chain Impacts Intensify for Small Businesses, Moderate for Middle Market

This year's report shows the dramatic advances middle market companies have made in aggressively dealing with supply chain disruption. Over the past year, 60 percent are implementing new inventory management techniques (+24 percentage points), 54 percent are diversifying with new products (+14), and 51 percent have found new suppliers (+9). As a result, related impacts have improved, compared with 2021. Nearly 80 percent have been able to purchase essential goods as needed (+8), and, despite inflationary pressures, associated costs have risen less dramatically than a year ago.

In contrast, supply-chain impacts are intensifying for smaller businesses compared to last year, particularly in the cost of purchased goods, with 90 percent reporting price spikes, 75 percent experiencing longer delays (+16), and 61 percent needing to source materials differently (+15). Inflation ranks as a top concern for nearly three-quarters of small businesses, which are less able to absorb the rising costs of goods.

To read and download the survey in full, visit www.umpquabank.com/business-barometer.

Survey Methodology

The Umpqua Bank 2022 Business Barometer, conducted annually, surveyed 1,210 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 percent margin of error and was fielded from April 13 to April 26, 2022.

In addition to its retail banking presence, Umpqua Bank also owns Financial Pacific Leasing, Inc., a nationally recognized commercial finance company that provides equipment leases to businesses.