Ken McCracken works with families in business and family offices to improve their overall family and business governance and helps them to plan for effective transitions in ownership and leadership. Here, he provides expert insights on innovative thinking in the family business environment.
“The most pressing priorities for family businesses across Europe over the next two years are improving profitability and increasing turnover.”
This information is taken from the 2018 Family Business Barometer, an annual survey of European family businesses conducted by KPMG. In order to improve profitability and increase turnover, business families in Ireland need to focus on becoming more innovative and attracting new talent. However, family businesses will approach these challenges differently to other types of business.
Family businesses are not often celebrated for being innovative.
The dominant image is of a conservative business that is steadfast to tradition and slow to change.This is a lazy stereotype that must be laid to rest in order to have a better-informed discussion about innovation in family businesses. For example, a report from Forbes magazine in 2015 claimed that more than 50 per cent of the most innovative firms in Europe are controlled by families. Also, successful family businesses, and especially those which have been around for many generations, must be doing something innovative in order to stay in business.Many of them have a long-term investment horizon that acts as a natural catalyst for innovation. If you want your family business to be around for future generations, you need to be thinking constantly about what type of business you’ll be in decades from now.
If a family wants to remain in their current industry or sector, they will innovate in relation to the systems and processes they use in business, while never departing far from their core activity. Other families will innovate by diversifying into new types of business, while for some continuity will involve selling their existing business and starting again, with something new.
Research into how family businesses innovate has discovered that they tend to invest less in R&D but get better returns. In other words, they innovate more by spending less money. This sounds like a good approach, especially when a family is risking their own capital on innovation rather than spending money provided by external investors.
The research also explains that while family firms usually take longer than other businesses to commit to innovative change, once they do it they implement it quicker. The speed of implementation is probably due to the lack of bureaucracy in many family businesses, so once they decide to go for it, they go for it.
But what about the sense of tradition and legacy that is so important to many family businesses? If you think innovation always means disrupting the past to make way for the future, family traditions that are tied to the past could easily be seen as getting in the way.
The alternative view, however, is that family businesses are good at leveraging their past in order to create something new. They often make sure that their history and sense of tradition is promoted to customers as a competitive advantage; their branding is “you can trust us because we’re a family too”, which none of their non-family competitors can match.
Talent could come from either inside or outside the family.
Since the possibility of family members joining their business is predictable, a family who want to be in business together and still enjoy family life should have a policy on employing family members. This will create a clear pathway for family members who want to join the business and mitigate the risk of conflict.
Any family who want some of the family to be in charge of their business would adopt a ‘family first’ policy to encourage family members to join. On the other hand, a family who wish to hire the best talent they can afford would state that their policy is ‘business first’ and hire family only when they are the best candidate for a job.
Another key decision is who constitutes family for the purpose of the policy. Are spouses and partners included as a potential source of talent, or will the policy apply only to bloodline family members?
It is helpful to distinguish between different jobs because talent can be managed in different ways. For example:
The policy could state that certain jobs require a degree or equivalent qualification, or require family members to work outside before returning to the family business. This could include specific targets, like achieving a promotion in an outside job.
The interview and appraisal processes and grievance and disciplinary procedures should be considered carefully. Should a direct relative of a family member participate in these decisions or should responsibility be given to someone who is not a family member?
Sometimes, discussions about pay between the senior and younger generations (if they ever take place) become confused by the notion that “one day this will all be yours”, which is mixed with the message from the seniors that “we made sacrifices in our day”.
The result can be a lower current salary for the younger generation, with vague promises about riches to follow.
This is often a source of aggravation between the generations, and so it is better to approach the subject on the grounds that either remuneration is the rate for the job, or family get paid a bit more, since more is expected of them.
The policy might say that next generation will only be promoted if they are the best person for the job concerned. This meritocratic approach might have instinctive appeal, but the family needs to guard against gaps between rhetoric and reality. If, in practice, there is a discernible ‘family fast-track’ in operation, it is counter-productive to pretend otherwise.
A family needs to be level-headed about the talent in their gene pool compared to hiring externally. If a family wants to hire outsiders, they need to promote their strengths in order to win in the war for talent: strengths such as stable and sustainable business growth and low levels of staff turnover.
They also need to offer attractive packages often without giving non-family employees any share of ownership. This can be done through arrangements that pay bonuses based on performance that is carefully focused on achieving the overall return on investment that the family seek through being in business together.
Family businesses have many advantages when it comes to facing the challenges of innovating and recruiting talent. However, these strengths need to be orchestrated very carefully in order to achieve the best overall result for the family and the business.
Ken McCracken is Head of Family Business Consulting for KPMG in the UK
This article first appeared in The Sunday Business Post, as part of the KPMG Family Business supplement. It is reproduced here with their kind permission. The KPMG Family Business supplement can be downloaded at the link below.