Managing the real impact of cost cutting on succession in business

Managing the real impact of cost cutting

The recent KPMG Business Leader Survey concluded that businesses will need to make and execute tough strategic decisions on costs to survive the current global economic downturn and take their businesses into the future successfully.

Adjunct Professor of Entrepreneurship and Family Enterprise, INSEAD

KPMG contributor


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That being said, another KPMG Family Business Survey, Succeeding in a changing world (PDF 1.46 MB), that was done in February 2012, highlighted that family-owned companies generally have different strategic goals from that of non-family owned companies. As opposed to focusing on short-term cost savings for example, they tend to rather take the longer term view, to grow the family wealth and ensure succession in their businesses.Considering that, apart from how and if to cut costs, one of the first questions that businesses will therefore most probably ask, is:how will cutting costs impact on succession? And how should one manage this in the best possible way?

How to effectively cut costs in a family-owned business

This KPMG Survey (PDF 1.46 MB) revealed that almost 50% of the family businesses who were questioned felt that their successors will be reluctant to enter the businesses. This is due to what is perceived as poor economic conditions. One can therefore safely assume that cutting costs right now will have a positive impact later, as it will motivate and encourage the next generation to get involved and continue to build the business if it is already flourishing. In a discussion on the results of KPMG’s latest Business Leaders survey, Jeremy Kay, partner in the UK firm, states that considering the economic slump, it comes as no surprise that this has been the third KPMG survey in which “changing operational processes to cut costs” remained the single most popular theme. He feels that what does come as a surprise though, is the fact that companies still don’t get the basics right. Kay comments: “Cost decisions should form an integral part of the overall business strategy and the focus should rather be on optimization, than on cost cutting.” Simply put, it means that optimizing costs go hand in hand with optimizing operations. And the best way for a family business to cut costs is to approach it just like any other business should. Take a critical look at every single business process in the business operations and re-engineer them to function optimally. This will not only result in maximum business growth, but it will naturally translate into cost savings too.

Obtaining skills externally to optimize operations internally

Optimizing operations to optimize costs is perhaps easier said than done. KPMG’s aforementioned Family Business Survey also illustrates that almost 80% of businesses surveyed do not truly have the relevant skills internally to manage their operations efficiently. The reason most stated for this, is that for financial reasons, family members are often forced to forego their chances to gain external commercial experience to rather get involved in the business as soon as possible. While this might have a short-term financial benefit, it is important for family businesses to never lose sight of the long-term goal – to lay the foundation for a true family legacy that can be built on by future generations. It is thus in the family’s best interest to realize that where necessary, the business should source the applicable mercantile skill set that they lack, externally, and to acknowledge that it often implies appointing non-family executive members, or sometimes even non-executive family members. As best explained by our experts in the survey: “There are a good number of family businesses which enjoy the wisdom and counsel of external directors in helping develop their business, without seeing the presence of independently minded individuals as a disadvantage. The greater the number of commercial minds on both sides will lead to a greater likelihood of better decisions being taken and better business performance.

One of the best approaches (RC) to succession planning

In conclusion, one of the best ways to approach succession planning in a family business is to ensure that it indeed has a future. Do what is best for the business in the present. As stated by Jeremy Kay, the key topic under discussion for business presently, that will in all likelihood remain the main theme for the next four years, is for business leaders to think about how to optimize operations first…and to then execute tough strategic decisions on costs.

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