Hi-tech creates the leading edge

Computers play an important role in the strong growth of many companies in the Middle Market 5

MODERN technology is clearly the key to success in the Price Waterhouse Middle Market 50. For the first two years of the award, which is compiled, like the Independent 100 listing, by the accountancy firm in association with the Independent on Sunday, Elonex, the computer company, was top. Now Morse Group, another company in the field, is leading the pack.

But the connection does not stop there. Second-placed Intercapital Group is in the derivatives business but its executives insist that computers are central to its success. Third-placed Astec Group is involved in mobile telephones, another sector that did not exist a few years ago but is expanding at a similar rate.

Ten companies in the table are in the computer field, and it is a fair bet that many others make extensive use of the technology. But more traditional sectors, such as engineering and general industry, also make a showing in the ranking, designed to recognise the sustained growth shown by companies with sales of at least £5m in the first of the five years covered.

Even the lowest growth rate, media group Windsong International's 20.2 per cent, is a highly creditable performance for a company that now has turnover well in excess of £110m. The average was 31.4 per cent, compared with 34.3 per cent last year - a reflection of the fact that the early years of the five-year period take in the recession rather than the late- 1980s boom.

As reported last week, when we unveiled the latest Independent 100 rankings, Morse attributes much of its success to a determination to stick to what it knows best. Intercapital tells a similar story.

The company, which saw sales grow at 63.3 per cent a year over five years to reach £50.6m in 1994, was founded nine years ago at the beginning of this month because Michael Spencer, the chairman, saw a niche in providing a specialist and professional service in derivatives and, in particular, interest-rate derivatives. The field, which has become infamous to the public because of the Barings dbcle, was beginning to take off, but was dominated by money brokers rather than specialists.

David Gelber, who joined as managing director last year, after 20 years "on the other side of the fence" as a trader with various banks, said that in addition to a clear focus, computer technology had enabled the company to reach its current position.

Dart, the computer software system in which the company invested a good deal of money, was envisaged as a way of giving it an edge over the competition. But it has become so successful that it is now a profit centre in its own right and has begun to be bought by clients - about 20 banks throughout the world use it.

In 1990 the company employed only 32 people; now the organisation, based in the City of London, has about six times that number. Although there are offices in New York and Hong Kong and a recently acquired associate firm in Sydney, the owners have resisted the temptation to have either satellite branches or links with mainland European firms. Instead the whole of Europe is covered from Finsbury Circus - although natives of individual countries are often employed to deal specifically with those markets.

The coming years could prove interesting. With growth slowing in keeping with a sluggish market, the company has moved into other types of derivatives trading, such as commodities and Third World debt. It has also taken a controlling interest in City Index, essentially the Square Mile's bookmaker, because it was seen as a good investment and because "at the moment we're getting our toes wet in the fund management business", Mr Gelber said.

Moreover, it is having to adjust to being a large organisation. Mr Gelber himself was hired because the firm was thin on management, he said. "The senior people are all brokers, making money." Prior to his arrival the only full-time manager was Mr Spencer.

But as befits an occupation that many would regard as akin to gambling, Intercapital has been fortunate. It made healthy profits from the start so it has been able to expand the business without borrowing money - the company is still 100 per cent owned by the employees, and only about a third of the profits are distributed. In addition, its clients are generally large professional organisations that pay their debts on time. "We have not had the credit problem that has buried a lot of small companies in the recession," Mr Gelber said.

Third-placed Astec Group, which saw turnover rise 61.2 per cent a year over the period to £35.5m, has also been careful to ensure it has the cash it needs to finance growth. It has also had its share of luck.

As David Savage, the chairman and managing director, says, the dramatic growth in sales from less than £1m, when the business was formed through a management buyout in September 1986, to an expected £56m this year, is largely down to "right time, right place and right industry".

Mobile phones are now an accepted part of modern life, rather than just a yuppie fashion accessory, and as Astec was in at the start, business is booming. But it has not all been easy.

The employees involved in the buyout from Granada have hung on to their equity, but the first two or three years were "quite interesting", Mr Savage said. "We probably had our recession before others were having theirs. As a result our bankers could be more patient."

Cash problems are generally eased by the fact that in the mobile phone business, unlike, for instance, computers, suppliers do not just sell the hardware, they also sell airtime and have a regular income from calls.

Nevertheless, Cheltenham-based Astec has also benefited from Vodafone's decision last year to pay £16m for a 20 per cent stake in Astec Communications, a subsidiary. This is helping finance the company's move into retail via its Astec Buzzshops.

The rationale for the move, which is already under way, with outlets opening at key trading centres around the country, is to give the company a direct relationship with the customer rather that through third parties. "It improves customer loyalty and helps us to sell value-added service," Mr Savage said.

And just to prove that this 39-year-old son of a miner has not run out of ideas for the 165-strong company, there is a specific reason behind the name given to the shops. The company might want to use them to sell services other than telephones, he explained, suggesting that cable might provide it with new opportunities.

Like the investment in management structures and computers, this is indicative of his determination to build a substantial business that will stand the test of time.

"I wanted to own a big business," said the self-confessed life-long entrepreneur. "I could never understand the guy who got his redundancy and became a shopkeeper. You still take the same risks, for a fraction of the rewards."