Improve family business performance by taking smart risks

Family businesses confront risks all the time. There are smart - and not-so-smart - ways to handle them.

There are several types of risk-takers - and some perform significantly better than others.

By David Harland CPA

Data shows that family businesses that create an innovative, smart, and risk-taking culture outperform other businesses according to the 2015 Family Business Survey of 1700 Australian family business by KPMG and Family Business Australia (FBA).

It is one of the latest in a long line of research that stresses the importance of strategic risk-taking among businesses.

Eighty-four per cent of survey respondents were small or medium-sized family businesses (annual revenues between $10 million and $20 million). Nearly 60 per cent were owned and operated by a second or later generation.

The Family Business Survey categorised each business according to business strategy and sorted them into four tiers: Defender, Prospector, Analyser and Reactor.

Among the strategic types, those identified as Prospectors were “significantly more likely to outperform other family businesses.” The hallmark of Prospector businesses, according to FBA, is an emphasis on “the development of new products and services through innovation,” and a willingness “to take the necessary risks to do so.”

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Family businesses confront risks all of the time. Our natural reaction is to mitigate or avoid risk exposure. Prospectors think differently: They take smart risks to increase their competitiveness. They understand that businesses are always either falling behind or moving ahead of their industry peers, and staying pat is rarely the right answer.

Here are 4 smart risks each enterprising family can take:

1.    Reinvent or throw out what can’t be explained quickly

Family businesses are more prone to take a long-term perspective. This is a strength, but it can be a liability when the “long-term” becomes an excuse for stasis or preserving tradition.

The survey found that while first generation owners tended to be very innovative, second-generation family businesses move away from Prospector status and into Defender status, defined by a “stick to what we know” attitude.

Innovative families review their entire process, from workflow to communication to distribution. They will especially scrutinise succession planning and family governance. They will ask “why” and “how” and readdress anything that doesn’t have an easy, simple answer. 

2.    Create a safe-to-fail culture

Innovative family businesses trust each other and trust their non-family employees, even when the results aren’t known. Employees feel empowered to make recommendations or take calculated chances when they are trusted by management. A business will stagnate when mistakes are intolerable.

This means a safe-to-fail culture where employees are more excited about the reward of a job well done than the repercussions of making a mistake. It might seem a risky approach, but it’s a smart risk when you consider that the alternative is relying on management to have the right answer for every single problem.

Another under-appreciated aspect of safe-to-fail is you can very quickly find out what doesn’t work and avoid that in the future.

3.    Let employees take creative risks to fix local issues

Empowered employees, especially low-level employees — make surprisingly excellent agents for innovative change. This is because such employees are the closest source to most problems and business inefficiencies, and are most likely to immediately know which solutions have merit and which are too burdensome.

An innovative enterprising family will share their values and vision, but leave some decision-making power in the hands of an empowered workforce.

Employees should be encouraged to come up with ideas, try new things, and implement their ideas. This not only maximises the use of knowledge in a company — it also creates buy-in from workers who have a sense of ownership over the operation.

4.    Bring in fresh management blood

Successful family businesses are outside-looking as much as inside-looking. Many however, are very reluctant to hire upper-level help from outside sources, even though such hires are likely to bring in new ideas and management styles.

According to survey, the presence of a non-family non-executive director (NED) “was significantly associated with superior family business performance.” Commonly cited benefits included objectivity and a broader perspective.

Just as important, the non-family manager or non-family NED should feel comfortable in their independence, ability to dissent, and the value placed on his/her ideas.

Outside voices are crucial for business development, although there are obvious risks (both legitimate and selfish) for the enterprising family to consider. Trust is a large issue, but so is a sense of control or unity. Still, these are intelligent risks to assume over the long term, and the payouts are usually well worth it.

In sum: smart risks are as much about humility and learning how to fail productively as they are about making transformative changes. The families that embrace these risks are more likely to create a dynamic, innovative business with the durability to survive to the next generation.

David Harland CPA is managing director of FINH, an organisation that specialises in the provision of advice to family groups in business across the Asia-Pacific region.

The opinions expressed in this article are those of the author.

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