A force for resilience or destructive energy
Family businesses are owned and operated by some of the most dedicated and hardworking people in this country. In addition to providing their extraordinary drive end effort, owners often take extraordinary personal financial risk in the normal course of business.
This group is the backbone of Canadian business. The operations of this segment are also subject to a unique synthesis of management practices combined with the family dynamic. This synthesis can be a powerful, cohesive, and positive energy. Or it can be negative and destructive, a malignancy that can destroy the business.
In this article I will draw upon two real life examples from my experience. These examples are samples of the toxic environment that can be generated, and its result. It is important to note that these examples are not anomalies they are actually fairly common.
Using these two actual cases I will help our reader to:
- Begin to understand just how the family dynamic intersects with management practices.
- Develop a simple methodology that permits early detection concerning where the synthesis lies on a “family fortress or toxic mix” continuum.
- Provide a framework that reinforces and strengthens a positive synthesis.
Case Study #1
This company did embroidery and some manufacturing. It had plants in both the United States and Canada. The company was managed by the father (second generation of ownership) and was the chairman, the son (the third generation) and president, and daughter (the third generation) and Vice President.
They were all active and involved in the business on a day-to-day basis. The son and daughter were both well trained in the business and were University graduates. The father really acted in an advisory role. The daughter had no real authority and had duties well below her capabilities.
The son really made all decisions unfettered by any other manager. The company condition can be described in a few points:
- The company was losing money on operations. The secured lender had classified the company as a special or problem loan.
- Gross Margins were low or even negative for some products.
- Monthly reporting lacked accuracy. In fact, a large and sudden loss had been reported unexpectedly in recent statements.
- Production workers were paid on a piece work basis, but a production/cost study had not been done for years.
- Between plants in Canada and the United States,there was significant overcapacity. Even a cursory inspection revealed that one plant could be closed.
- The President was focused upon an inappropriate internet strategy. This starved the plants of needed resources. The two plants did not even have sufficient resources to purchase needed lubricants.
At this juncture many readers will be aghast. I have seen cases that were as bad as these many times.
In almost every case of late decline that I have seen in a family business, the owners never believed that they would reach the point that they did. And almost always there was a point where there could have been a reversal of fortune.
Case Study #2
This case involved a group of Skilled Nursing Facilities located in the United States. With more than 400 beds the group employed more than 500 people and provided acute and subacute care. This group had been established by the father(first generation) who was CEO and was now run by the son who was president. The son did have significant experience in the business.
A synopsis follows:
- For the fiscal year just ended. The group had operating losses amounting to 30% of Gross Income or several million dollars.
- As a result, liquidity was severely impaired. Meeting the weekly payroll obligation was very difficult.
- There were more than 40 lawsuits or pending lawsuits from creditors. The Secured Lender was about to demand its loan.
- There was very little useful data available as the accounting function had totally broken down, Even basic accounting reports such as monthly profit and loss were not available.
- Monthly billing was disorganized the amount billed every month was only about 70% of the norm.
- Poor quality of care impaired the ability to secure greater occupancy through marketing.
- In fact quality of care was so poor that the facility was in danger of having its license revoked by the department of health.
Prevention and Cure
These two cases are like dozens of cases I have seen for over two decades. Where denial was pervasive insidious and entrenched. The actions and decisions made by the family violated not just best practices but common sense. Consider the following.
- The father of the garment company had been approached concerning his sons ability by various stakeholders for more than twenty years
- The father/CEO of the nursing homes was fully aware of the sons weaknesses. He admitted that the son could not do the job, and then sold the facility to the son
- Dysfunction was accepted as the status quo. For example, the lack of financial information was just accepted
- Both companies had lost its best executives
Almost always dysfunction creeps into any organization in bits and pieces. This accumulation of toxicity builds up one teaspoon at a time. All families have some problems lying at the nexus of business practices and the family dynamic. But they need not become malignant.
In virtually all cases of decline or distress, there was a time or inflection point where there could have been a reversal of fortune.
Reinforcing a positive synthesis or preventing dysfunction requires the following:
- Establishing a culture of Performance Management that is rigorously and consistently applied.
- Creating a platform of family practices that intersect with, strengthen, reinforce, and complement a Performance Management Culture.
Performance Management
The singular cause of business failure is the lack of focus upon performance management. Symptoms relating to this lack most often include the following:
- A lack of rigor concerning the cash management process
- Poor to non-existent controls in the areas of manufacturing, planning, and procurement
- No linkage between financial measurements and key performance drivers
- Lack of accountability within the ranks of management
- A general lack of focus upon results
All of these factors were present in the two cases described above.
An effective culture of performance management exists when employees use particular tools to set targets, measure performance, and implement concrete action plans to meet objectives. In most distressed organizations, strategy and objectives are not linked. Action planning is likely non-existent.
In such an environment implementation of a performance management culture impossible.
An effective performance management culture is comprised of three elements:
- Leadership
Leadership generates clarity around strategy and provides focus on the critical priorities and activities that management needs to execute. Sound leadership ensures the alignment of the executive group with systems and processes that translate action into results.
2.Accountability
In a performance management culture, all employees are responsible for results. Employee accountability becomes the norm through two main activities. First, individuals set targets and objectives for their functional areas. Second, employees are empowered to take meaningful action to directly influence the targets that they have set.
3. Capability
Most workforces possess a high degree of tacit knowledge. Capability refers to the ability of the workforce to apply functional knowledge to solve issues daily. Without an adequate baseline of skills employees do not have sufficient knowledge or perspective to resolve business issues as they emerge.
Implementing Performance Management in the Family Business
Four activities are key to implementing an effective performance management culture:
- Identify Core Drivers
Typical performance drivers could include production output, sales revenue, and quality. Identifying performance drivers often exposes a lack of agreement among managers. It also becomes apparent if management in different functional issues is working at cross purposes. In many cases huge disconnects exit between what the company needs to focus on and what it is. For example the business may not be properly measuring product margins- resulting in low or even negative margins. This in fact is one of the most common characteristics of the distressed organization.
2. Set targets
In many companies’ targets are based upon historical data and devoid of any meaningful analytics. They may be derived from spread sheets that are more fantasy than fact. Target setting has three characteristics:
- Targets are attainable
- Targets are driven from the bottom up
- Targets require ownership by those who can affect their outcome.
3. Provide Timely, Relevant and Reliable Information
Performance Management happens when the right information is in the hands of the right people. It must be timely, relevant, and reliable. Visibility and transparency ensure trust and accountability.
4. Review Performance Regularly
Without regular and timely reviews, effective performance management is not possible. Business managers should be reviewing results with the appropriate individuals periodically.
A Platform for Family Practices
The Garment manufacturer and operator of skilled nursing facilities were family owned businesses that were in serious decline. This was preventable.
Families are so complex and filled with emotion that in some cases they tacitly consent to the destruction of their own companies. The following points will help to strengthen those family businesses that are already working well. They will also help to prevent problems that are occurring:
- Embrace the concept that only logic should win the arguments in the Boardroom, not emotion. This logic must be supported by data that is relevant, reliable, and timely.
- Embrace the culture of performance management as the foundation of corporate resilience, strength and a path to best practices. This will provide a whole host of rewards such as identifying and solidifying strategy, identifying gaps and conflicts and gaining a better understanding of the marketplace. It also provides essential information necessary for those boardroom discussions.
- Frankly address fissure s in the family/management team. This may simply entail a lively discussion resulting in universal understanding and commitment. It may also mean that a family member is dismissed from a position, team, or even the company.
- Rely upon a competent group of professionals as a Board or even a de facto Board. Use them to facilitate this process as a sounding board of for conflict resolution. Rely upon them and listen to them. A fresh perspective is invaluable. Pay them something even if it is nominal. Sometimes volunteer boards can lack necessary focus.
- Lastly assess the company fully at least twice a year. Look hard for signs of incipient distress. These include: liquidity issues, loss of a major client, deterioration in sales and profit margins, increasing costs and any creditor issues. If problems cannot be corrected quickly internally,seek outside assistance.
