AI is helping South East mid-market businesses improve margins, but growing customer expectations could make those gains harder to sustain, according to new research from FRP Advisory.

The business advisory firm surveyed 250 senior leaders and board members at UK mid-market businesses, with the findings suggesting that what begins as a competitive advantage can quickly become the minimum standard customers expect.

More than half (54%) of South East respondents said efficiencies from their use of AI had primarily shown up in improved margins, compared with 44% nationally.

However, more than seven in ten (71%) said AI had increased pressure on their organisation to deliver more for the same price. Some 54% reported increased demand for shorter delivery times, while 46% cited greater expectations of lower prices or better value.

A quarter also said AI gains had been offset by rising costs elsewhere. The findings suggest businesses may need to keep investing simply to maintain their position, making it harder to retain the value AI initially creates.

Phil Harris, Partner in FRP’s Restructuring Advisory team, said: “South East businesses are converting AI efficiencies into real margin gains, but customers are also beginning to expect their share of the dividend through faster delivery and better value.

“The risk is that what is seen as a competitive advantage today quickly becomes the minimum standard of what customers expect tomorrow. Businesses can find themselves investing again simply to keep pace, while rising costs erode the gains they have already made. Management teams need to track where the value is going and whether it is strengthening margins and cash flow. That may mean revisiting pricing, customer profitability and the wider cost base before the dividend disappears.”

FRP’s research also indicates that businesses face additional scrutiny from lenders when it comes to their approach to investing in AI. In a separate survey of 251 UK lenders and investors, almost all (95%) South East respondents said a borrower’s AI readiness or exposure was a significant or moderately important factor when assessing credit risk.

More than half (55%) said seeing AI benefits reflected in forecasts and cash flow would give them confidence that a borrower’s strategy was commercially credible.

Where readiness is weak or anticipated benefits are poorly delivered, 59% said it could affect pricing or margins on lending. Some 55% said it could also reduce confidence in financial forecasts.

Phil Harris added: “Lenders will want evidence that reported margin gains are sustainable, rather than a short-term benefit that could be absorbed by further investment or customer pressure. Where anticipated efficiencies underpin forecasts, businesses need to demonstrate the full costs, when returns should materialise and how much of the value will ultimately reach cash flow.

“They must also be prepared to explain what happens if costs rise or benefits take longer than expected. Businesses that can provide that evidence, alongside a credible plan for responding to underperformance, will be best placed to maintain lender confidence.”