COVID-19 has presented the world with a difficult situation which has place resilience at the forefront. As businesses grapple to responded to rapid changes and uncertainty around the new reality, innovation is key to ensuring survival and success. How can family businesses ensure they are nurturing a culture of innovation?
Family businesses need to ask themselves if they’re actively encouraging extraordinary thinking. Harnessing employees’ natural creativity is a proven method to lay the groundwork for growth.
Miles Davies, Managing Director, Family Enterprise Practice
A massive 96 percent of UK family business leaders recently said that becoming more innovative was of great importance to them (European Family Business Barometer 2019). This is unsurprising given that innovation enables businesses to gain and maintain competitive advantage, motivates workforces and creates a virtuous circle where everybody benefits.
However, wanting to be forward-thinking and consciously nurturing innovation are two different things. At KPMG, when we’re asked to help family businesses achieve the latter, we ask some pertinent questions.
According to our observations, often, models of innovation that devolve great ideas to small teams result in businesses missing out as they only harness the brainpower of about five percent of the workforce. To be an innovation powerhouse, you need all your people to contribute.
The methods that family businesses need to apply to achieve this, vary according to their work and workforce, but broadly fall under the umbrellas of culture and communication.
Culture, which is perhaps most important, means encouraging employees to generate ideas. It’s not enough to hope they’ll put them forward; you have to say that you want them to. Communication is about putting the channels in place for people to share their ideas. One-to-one meetings with line managers, mailboxes, intranet sites, it doesn’t matter what the channel is, as long as people know where to go.
I’ve worked with several business leaders who were surprised by how keen their employees were to share insights they’d been bottling up. They simply needed to make the invitation more obvious – and most importantly, more open to everyone.
A client truly embraced this philosophy of innovation opportunity. The company, which served the construction industry, wanted to eliminate toxic chemicals from the manufacturing process. A junior employee was inspired to use his free time to research bio-friendly alternatives to laminate coatings, and felt empowered to present his ideas to management. The idea opened a huge new market to the company, which is now experiencing unprecedented levels of growth.
When I talk with clients about laying the foundations for innovation, I remind them that too many great ideas fade out in committee. Exceptionally innovative companies use agile methodologies to ensure rapid evaluation, thereby avoiding a pile of ideas that remain in the paperwork. For example, a major global technology business I know of, allows any employee to generate ideas. They’re asked to write a paper no longer than two sides long, justifying why the idea should be taken forward, focusing on the customer and demonstrating how they’ll benefit. This process is intelligent because it allows the author to self-certify whether their idea has a strong foundation. Around 60% of ideas are culled at this stage.
The rest go to a review board who say yes or no on the spot. Those that make it through are fully supported and progress is regularly reviewed. I urge the family businesses I work with, to implement something similar. You need to have enough bureaucracy to control costs whilst being flexible enough to enable strong ideas to flourish.
In order to take flight, new ideas need a solid grounding. Businesses must instil confidence and encourage endeavour for its own sake to provide a foundation for experimentation. If they don’t allow people to pursue unconventional avenues, they risk advocating only the most obvious, and therefore mainstream, ideas.
Encouraging failure is even more vital. If employees see a failed idea as a step closer to a good one, there will always be forward movement. Leaders should try to demonstrate receptivity and share examples of previously ineffective ideas – including their own.
When it comes to money, family businesses have an inherent advantage that they’re not bound to investors like their publicly owned counterparts. This allows them to set aside a greater proportion of profits to fund R&D. At KPMG, we’ve heard so many times of family business founders reinvesting profits back in the business. It’s this discipline that allows them to stay ahead of the competition and create a strong platform for growth.
We’ve also held many conversations about how to fund innovation. Often, this led to helping family businesses re-write their constitution to better secure the future of their business.
Happily, the UK tax system embraces innovative companies with generous incentives. Did you know that, as an SME, you can claim an extra deduction of 130% of qualifying costs against your profits – a material reduction in the corporation tax you pay? Or, as a larger company, you can receive a 13% tax credit on your expenditure? One of my clients didn’t. Subsequent to a brief chat, they now have a lot more money to reinvest in the business.
Bear in mind, too, that innovation doesn’t just come from within. It can be acquired. There’s a proliferation of highly innovative businesses starting every day – and failing every day – because of difficulties accessing finance. We help family businesses think about making tactical acquisitions, either through their private wealth, family office or, of course, the family business.
Clearly, you stand to gain from the intellectual property that a business acquisition brings. But what many people need help with, is harnessing the learning from a culture that drives the innovation.
Talented employees are naturally curious and hungry for new experiences. They need to be free to move around the company because each new role will teach them something new. If they keep doing the same things repetitively, the learning curve starts flattening. The more skills your people develop, the more innovative they’ll be.
Innovation can only be unlocked when employees have the right skills, and therefore, an ethos of investing in people is also essential. This goes beyond technical knowledge; it’s about developing soft skills too. Although technical training based on role or function is important, but I have witnessed my most successful clients give employees both time and financial support to be curious and do something different. This may be totally removed from their day job, but you never know what may come from it.
The STEP 2019 Global Family Business Survey shows that family businesses led by Generation X or Millennial CEOs have shown high degrees of performance.
Think about the role that different family members can play in the business. It’s my job to help my clients consider their governance and succession arrangements. Together, we explore questions around the roles that family members will have in the business, and whether they’re well organised and fully prepared.
As much as innovation is broad, so are the ways in which we support our clients. We can help you to optimise working capital and be tax-efficient in order to release cash to reinvest in the business. We can discuss how to make the most of technology to manage risk, drive efficiency and introduce resilience. And we can advise you about how to attract the best talent, help your people grow, or bring in the diverse skills and perspectives your family has to offer.
Successful family businesses are different in many ways but what they have in common is a clear sense of purpose and a great capacity for innovation. It is this innovation that will set them up for growth for the next 100 years and beyond.