Sunday, February 22, 2009

Managing Family-Entrepreneur Companies : Challenges of a Professional CEO

With the increasing emphasis on corporate governance and an enlightened interest in business development, many family and entrepreneur led firms are hiring professional Chief Executive Officers (CEOs) to run their businesses. This is opening up new exciting career opportunities for capable professional managers. However, pitfalls are as many as the opportunities are. This paper summarizes four critical facets of this transition.

Coping with the family / entrepreneur

Typically, a family tends to be conservative while an entrepreneur tends to overreach. A family member or an entrepreneur, continuing as an executive head of the board, could therefore be a major constraint on a professional CEO’s style. The answer to this from a CEO does not lie in attempting to change the family member’s or entrepreneur’s business DNA. It lies in the CEO’s ability to offer a framework by which unreasonable aspirations and reasonable resources are harmonized to develop a workable blue-print for the future.

An organization in transition (from family-promoter control to professional management) needs intensive and structured interfaces at all levels, more so at the top to smoothen the transition. An entrepreneur-CEO and a professional CEO would most likely have dissimilar aspirations, managerial styles and personalities. The professional CEO would need to constantly evaluate how his relationship develops with the family / entrepreneur on one hand and the organization on the other hand. Only frequent and direct communication with the family and entrepreneur can help usher in the transition smoothly.

In an organization controlled or co-promoted by more than one family member or entrepreneur, the inter-se dynamics between the family members or co-promoters are not always visible. The apparently passive member(s) may have invisible influencing power, which needs to be understood. Similarly, an existing organization may have persons of influence who do not operate in the open. Molding all these relations in his favor is a challenge for the professional CEO.

A family or entrepreneur run organization is likely to have many informal channels of communication between various employees and the family member or entrepreneur,
which operate as a result of the micro-management of the company by the family or the entrepreneur. The informal channels could often distort information and even use the
information for ends which are not necessarily aligned to business goals. The CEO would need to establish structured strategic planning and budgeting processes, visible performance management systems and open communication channels as a formal means that renders the informal operations increasingly irrelevant.

Keeping up the growth momentum

As one moves into a CEO’s position of a hitherto family run or entrepreneur driven company, the challenges would be significant in the areas of project execution, operations management, strategic planning, business development, peer-relationships and communication with investors and employees. The focus and spirit of the role would need to be on managing for the future with the speed of an entrepreneur and the caution of a family. The CEO would need to innovate constantly on business, technical and operational models to achieve this. The knowledge, assets and execution capabilities of the past and present, though belonging to different businesses and products, often serve as the levers for new business development. These must be exploited on a proactive basis. At the same time, old business models and past experiences of established companies need not necessarily succeed in a family / entrepreneur company. The CEO has to be, therefore, dynamic, contextual and differentiated in respect of strategy as well as execution.

While the very reason for bringing in a CEO in a family firm is to do things differently, yet when it comes to systemic changes, the entrepreneur or the family would more likely baulk rather than support the changes ostensibly for fear of losing business momentum or stability as the case may be. Yet, as a CEO, one has to live with apparent contradictions; closing down manufacturing lines while investing in new facilities, slashing jobs while creating new knowledge positions, phasing out products while innovating new ones, eliminating today’s expenses while adding costs for the future and so on. Building long term value, without compromise to current revenue and profit growth is the essence of the CEO task.

Fusion of strategic intuition with operational excellence and balancing of the short term with the long term are the ultimate challenges for a CEO. A family or entrepreneur-led company would have achieved growth due to an opportunistic mix of operational and business strategies. This may not meet a professional CEO’s litmus test in all cases. Practically viewed, neither time nor resources will be on the CEO’s side to attempt a total structural, systemic and value-chain upgrade of a hitherto family or promoter run firm. The CEO is likely to succeed if he keeps the degree of revamp to a minimum even as he judiciously pursues newer options that comply with professional norms, both in technical and business arenas.

The responsibilities of a CEO would typically follow a normal distribution. About seventy percent of the focus would need to be on the core aspects of driving revenue and profitability. There would be two outlying areas of say, fifteen percent each, related to turnaround (extreme cost and efficiency management) and family or promoter inspired value-gaming (extreme futuristic investment bets). A focus on the outlying areas beyond the limits indicated could expose a CEO to the threat of weakened performance on the core.

In today’s competitive world, investors (including the promoters) have a relentless focus on continued growth in revenues and profits. Unless there is a need for a radical restructuring, ways and means have to be found by the CEO to keep growing, even while rectifying errant operations. If any part of the business requires radical restructuring with organizational implications or large investments with long lead times, the plan must be clearly articulated to the stakeholders so that there are no misunderstandings.

The domain of business development is almost always imprecise. As strategic business development is a key responsibility of a CEO, he would need an organizational infrastructure for a structured yet entrepreneurial business development. In business development, by definition and practice, the entrepreneur tends to over-commit. The family member, on the other hand, tends to be conservative and cash-conscious. The professional CEO, however, has to balance these trends by arranging resources and ensuring execution.

Reshaping the organization

The effectiveness of a CEO lies in the smartness of delegation, notwithstanding the possibility that the informal or unstructured nature of the organization requires his close attention. The CEO cannot afford to have all “pupils” and no “masters”, if he wishes to succeed fast. A CEO has also to make sure that the persons to whom responsibilities are being delegated are good enough for the job. For delegation to be effective, the overall level of competence (both individually and collectively) has to meet stringent standards. Effective delegation also requires that various departments at all levels interact meaningfully without ‘upward delegation’ which is characteristic of organizations functioning as vertical silos requiring sanctions from the top for everything. Cross-functional teams will need to be encouraged at all levels to enable executives broaden their horizons, without the day-to-day involvement of the CEO or even the next tier. While speed of execution is important, issues have to be prioritized. A smart CEO would use multiple levers differently, to blend delegation with accountability.

When a new chief takes over a family or entrepreneur run firm, people who have been wayward or powerful hitherto in the organization tend to be defensive or manipulative. There can be no implicit belief in anyone until his or her professional competencies and managerial approaches are established. Setting uniformly clear goals would be one way to isolate performers from non-performers. The concept of a long grace period could be as detrimental as bundling all the old guard as being irrelevant. An objective judgement on each executive and checking out with the entrepreneur or family would be a quick and effective route to aligning the organization to the CEO’s thoughts.

While the board deliberations in general tend to be a matter of form than substance, the boards of some family or promoter companies may have an even greater issue with regard to the independence. With Clause 49 coming into force, one has to hope that such boards will reflect objective and strategic oversight on corporate matters. The professional CEO will need to add his inputs specifically to enliven and spark the discussions, even though he may be constrained by what the family member or entrepreneur has been disclosing so far to the board.

Though in an organization the buck certainly stops at the CEO, all onus cannot be on the CEO alone. For the organization to really reap the value from a professional CEO, the family member or the entrepreneur would also need to fulfill certain responsibilities. For example, he has to respect the mandate given to the CEO, explain the past and integrate his experience with the new CEO’s perspective, follow the CEO’s advice in matters of strategic plan and operational execution, eliminate invisible or whimsical checks on the CEO’s style and create forums for free flow of information.

Dealing with oneself

A CEO who is new to the job would need to ensure that his time gets channeled to activities which are most productive for his physical and financial performance. Even though teaching and coaching are an integral part of a good CEO’s profile, the CEO cannot allow them to erode his ability to focus on other key factors relevant to his new position. Consolidation of his own position should be as important as coaching others at least until he gets a solid grip on the company affairs.

The hallmark of a true CEO is that he outgrows his functional core competence. In several respects, he demonstrates that he is “equi-distant” with all functions and all professionals. Similarly he “owns” all the functions, whether or not they work for him, against him or with him. This is easier said than done. It requires a constant work-out on oneself to achieve this state of mind. A CEO, in the event he is from a technical background, will definitely need to become financially savvy as well. Similarly, a non-technical CEO has to demonstrate certain grasp of the technical nuances of the business to gain an overall organizational command. In addition, any CEO would benefit from tracking the successes and failures of other CEOs. Such readings would help him raise the bar of performance on one hand and develop a sense of equanimity about the limits of performance on the other.

Ultimately, all stakeholders, the family or the entrepreneur and the board need assurance that things are moving fine. Regardless of the past track record of the CEO and his current level of confidence in the new job, the CEO needs to periodically assure his stakeholders regarding corporate performance and investor returns. The longer the gestation period of a project or the more traumatic the nature of a change, the greater would be the need for such assurance. Often written reports, value-added by face-to-face discussions reinforce such confidence all-round. The CEO will also need to significantly work on his presentation skills as well as his diplomatic approaches which are as important as the raw results of operations. The CEO is also a dependent member of the organization, in some respects. He cannot be a silent sufferer for the corporate mission when resources are not available. He has as much responsibility for demanding (or generating / deploying) capital as he has for delivering on achievements. It is not infra dig for a CEO to demand the due resource inputs for the business from the board, the family or the promoters.

The CEO’s role in creating a positive organizational culture, conceptualizing a growth-oriented business model, developing a new corporate plan and driving a tight execution program would be vital in determining his impact on the hitherto family or entrepreneur run organization. If a CEO desires to make a lasting impact beyond the level of his past achievements, he would also need to do something that rivets attention. Given India’s niche in the knowledge-led activities and the several business opportunities waiting to be tapped in these areas, fundamental innovation would be a key driver. It certainly calls for resources, skills and equally importantly, time. However, unless the seed is sown one day and carefully nourished every day, the professional CEO and his company (in transition from the hitherto family or promoter led status) will not have the comfort of lasting shade in the future.

Posted by Dr CB Rao on February 22, 2009

Wednesday, February 18, 2009

Indian IT/ITES:Reducing Windows or Expanding Vistas?

Over the last two decades, the information technology (IT) and information technology enabled services (ITES) industry has contributed significantly to the Indian economic growth. The industry contributes to over 5% of India’s GDP, earns over US$ 40 billion in foreign exchange and provides direct employment to over 2 million professionals. No less significant has been the ripple effect of prosperity that it has created in various sectors of the economy. Nearly 50% of its revenue of US$ 40 billion is spent in the domestic economy in a host /of sectors and services, covering infrastructure to consumption goods. This spend of about US$ 16 million is estimated in turn to generate US$ 32 billion as output impact across the economy.

In more ways than one, the IT/ITES industry has been the icon of India’s foray into the global economic league, with major growth aspirations. The industry hoped to double its turnover to US$ 80 billion in 5 years and contribute further to the shaping of India as a truly global economic powerhouse. Against this background, the unprecedented global economic meltdown has raised concerns of adverse impact on this vital industry. Although the IT/ITES industry continues to be cautiously optimistic, the industry requires now, more than ever, a new vision and strategy to address the deteriorating economic environment.

Globally, all affected industries have begun to respond to the recessionary trends in certain classic, established ways; cutting down output, reducing inventories, controlling costs, postponing payables, advancing receivables and freezing investments. Though the IT/ITES industry may be tempted to follow this route, the industry has to look also for certain strategic approaches to weather the storm and in the process emerge in a fundamentally stronger frame.

Product Innovation

Typically, several Indian IT majors have comfortable cash positions and, in addition, enjoy good balance sheets to raise additional debt financing. They also have surplus operational capacity in terms of physical infrastructure, be it campus or office space and computing or connectivity capabilities. Such firms should respond to the slowdown by creating a much-needed focus for development of original software products. Redeploying its experienced professionals, inducting fresh manpower and releasing the purse strings, IT majors should aggressively create new product innovation laboratories that are dedicated to different domains and industries.

Success of the Indian IT products has been largely in the banking and retail space. Similar product success stories can be created in the domains of design and development, project engineering and erection, procurement and manufacture, sales and distribution and customer service and relationship management. The domain practice however varies with each industry vertical. For example, the design and development needs of an automobile maker would be quite different from those of a pharmaceutical producer. Customer management in hospitality sector would be vastly different from that in hospitals sector. Each of these five fundamental domain groups combined with industry specific needs would lead to a matrix of several IT products customized for industry-domain combinations. Product development opportunities for the Indian IT majors could be endless, if only they choose to focus on such innovation goals. Conservatively, the IT industry can dedicate a significant share of its current manpower on such innovation laboratories over the next two years.

Indian ERP

Platform software is for the IT industry what steel and automobiles are for the engineering industry. Indian has captured global attention with the highly ambitious yet famously successful attempt by Tata Motors to design and manufacture, on a commercial scale, a Rs 1 lakh Nano small car. Indian IT industry has to also stretch and reinvent itself to design and develop at least one software platform which can serve as the global symbol of India’s true software capabilities. An Indian Enterprise Resource Planning (Indian ERP) system could be one such flag bearer for the Indian IT industry.

Indian firms, and even global firms, are often forced to deploy certain ERP systems which are built around programming robustness rather than process flexibility. From structural nomenclature to business processes, these ERP systems represent a different nativity, when compared to either the US or Indian management structures and processes. On top of it, the need for additional user interfaces and/or the requirement to install additional analytical solutions for management information makes the available ERP solutions less than optimal.

Top-rung Indian IT majors could collaborate to form a special purpose vehicle (SPV) which can be entrusted with a national mission of designing, validating and commercializing an Indian ERP which is practical, flexible and robust and is customized to the Indian and US business processes and tax regulations. In contrast to a model of modular or “foundation now-superstructure later” ERP solution, the proposed Indian ERP solution could be developed as a cost-effective integrated suite that provides a comprehensive coverage from transactions to analytics. Also, instead of aggregating all industrial sectors into one straightjacket model of ERP, the Indian ERP could be developed as a set of customized solutions for individual or groups of industries which have unique or similar business processes as the case may be. Such an Indian ERP could do for the Indian IT industry what a Nano car did for the Indian automobile industry, in terms of global visibility and achievement.

Application software

It is not that only the larger IT majors can survive and grow in the downturn. Small and medium enterprises as well as individual IT entrepreneurs also have their respective niches.

A marvelous development of the recent years has been the proliferation of opportunities for writing application software for new electronic devices and services. This being a highly individualized and creative endeavor, small / medium IT enterprises and IT entrepreneurs are ideally positioned to participate in this space. The Linux Ecosystem has demonstrated how a global community of individual, motivated programmers could create a whole new software architecture that could compete with a massive, monolithic and established software organization. There is therefore tremendous scope for initiating and organizing mini-communities of application developers who could innovate to upgrade existing hardware and software as well as to add new dimensions to emerging products and services. In addition, applications which have significant consumer interface offer additional opportunities for continuous creativity. Mobile telephone applications, gaming applications and various web based internet applications lend themselves ideally to device-specific and consumer-centric application development by individual entrepreneurs.

Web Portals

The World Wide Web has converted the globe into a community of internet connectivity. Firms such as Google have re-defined the Net as the new ‘store, plug and play’ platform for a host of applications. Portal-based initiatives, such as Amazon, Wikipedia, Facebook, Netscape, Yahoo and YouTube, to name just a very few, have created a multi-billion dollar web-based industry. Though India has taken its initiatives in portal technology through web-based sites such as Sify, Rediff and Naukri (again to quote a very few), these have been India-centric than pan-global. India’s much acclaimed IT leadership and manpower pool needs to put its strengths to work to create truly innovative, world-class, pan-global Internet business, economic and social sites that appeal to all global citizens.

From arts to science and from engineering to management, Indian professionals have capabilities that can cater to universal needs and multifarious tastes. These, combined with contemporary telecommunication and information technologies can create sites which are pioneering and unique in their and service offerings. For example, there could be sites where amateurs and professionals can collaborate to learn, teach or experience a wide range of socially positive avocations and hobbies or utilitarian activities like music, education, yoga, self-help and alternative healing and so on.

Domestic Services

IT/ITES industry has grown phenomenally thanks to the international orientation and outsourcing advantage. The services that the IT/ITES industry has offered to its international consumers are equally relevant and required in the Indian setting too. Medium sized IT/ITES companies could have a major role in expanding the Indian market for IT/ITES offerings.

Indian ITES industry in particular can play a pioneering role in bringing industries and their consumers significantly closer. Although banking and telecommunication sectors have been quick to utilize call centres as a tool to stay connected with the customers on a 24X7 basis, a whole range of industries, including consumer oriented retail chains are yet to explore, even partially, the potential of 24X7 connectivity. ITES companies which may be experiencing a bit of downturn due to international recession could diversify into domestic services and even expand their business through vernacular offerings.

In a similar vein, there is an immense scope for the BPO and KPO industries to provide outsourcing services to the Indian industries. Product management, sales and distribution management, intellectual property management, human resources management and legal services management as well as development of knowledge repositories are some of the areas where Indian firms require more extensive and incisive BPO and KPO services.


The global economic meltdown could be an opportunity for the Indian IT/ITES industry to redefine its global business model in terms of certain new fundamentals of product innovation, platform software, application software, web portals and domestic focus. By redeploying some of its large talent pool, tapping into the streams of bright graduating professionals and allocating some of its financial resources for creative, even if experimental, initiatives, the Indian IT/ITES industry can emerge stronger with diversified capabilities encompassing innovative products as well as generic services. The NASSCOM leadership and the several visionaries that lead the IT/ITES industry today should actively collaborate to define such a new paradigm for the industry at the earliest.

Posted by Dr CB Rao on February 18, 2009