More than wealthDecember 2 2020

Percheron Advisory: Embracing resilient, digital operational and family governance frameworks

6 mins read

With experience in advising family business owners, entrepreneurs and family offices, Percheron Advisory brings a unique skill-set to bear by focusing upon the source of wealth – the family business: integrating operations and governance for both the business and the family. Within this article Percheron offer Sandaire their views on the ‘new normal’ and how digitalisation has impacted family businesses and their governance frameworks.

A new term has been coined in recent times: “The New Normal”.  It has something of an apocalyptic undertone to it. Closely linked to this and mentioned in the same breath are another two popular terms: digitalisation and social distancing. They have almost become synonyms for each other. Where one is referenced, you are guaranteed to see the other two. 

Will This “New Normal” of digitalisation and social distancing be the Brave New World or will life, like a river that has temporarily broken its banks, slip back into place, albeit with new and, hopefully improved interpersonal relations and new ways of working and operating for business? Time will tell.

COVID-19 has had an instant effect across the social, economic, business and political spectra and while some of the changes we have been living with throughout 2020, such as social distancing, are likely to be temporary, it’s impact on businesses will be permanent and long lasting. In this regard, digitalisation has taken centre stage and is being lauded as the potential saviour of businesses regardless of the business size and industry. 

This is a far cry from where the business world was 25 years ago. In 1995 Amazon was just a year old. What was launched as an online platform for books has grown into “one of the most influential economic and cultural forces in the world”. Expanding across industries, this technology platform is the largest internet company by revenue in the world and its founder Jeff Bezos the world’s richest man. It has also grown to be, in many cases, the supply-chain of first resort.

On March 16th Amazon’s share price was USD 1,689  On September 2nd, it peaked at over USD 3,500 – one of the COVID winners, although it has corrected mildly since then. 

Amazon’s rise is one example of how digital firms have developed these past 25 years and affirmed their dominance these past few months.

Similarly, a number of firms relatively new to the market have seen a rapid maturity in a very difficult trading period. Zoom is ubiquitous: rising from 10 million participants in December 2019 to 300 million by April 2020 end.

At the moment of writing we still face huge threats to existing businesses, with industries that seemed buoyant like travel, luxury, hotels: predominantly the experiential, facing huge changes, disruption and possible extinction – Virgin or EasyJet. Conversely the Walton family or the Roche family have seen their enterprises and assets grow.   

Asset area is important, but so is how integrated technology and how deep digitalisation have been embedded – are businesses and family businesses specifically technology-enabled or are they digital businesses? Bolt-on versus built-in. Only truly digital firms can build agile risk and resilience planning. COVID-19 has not only put the spotlight on this but is accelerating in some and forcing in others, the speed at which businesses make this fundamental change and their leaders are having to learn at the same time as they are implementing.    

According to a McKinsey survey of 1,500 executives published on 7th May, “before the crisis, the best-performing companies—those in the top decile for organic growth—had already been moving faster across a range of activities to help them learn faster.” 

For family-owned businesses, the generational divide is something more that they need to contend with. How active a role the family business plays in embracing digitalisation will depend on a number of factors, among them, where the business was in the conversion trajectory when the pandemic hit and which generation(s) are running the business and how closely do they work with the senior management of the company.      

Looking ahead, the following trends are emerging, in which digitalisation will play an active role. It will be important for families and their senior management to take these into account when revising the business strategic plans and redefining their operational governance as these will help to propel the business forward post COVID-19, picking-up from McKinsey again:

  • Distancing – our relationships will be affected by the need for continued social – or rather to term it correctly – physical – distancing in the short- and mid-term – meaning industries based on large numbers – travel, hotels, restaurants, live entertainment, will be negatively impacted until they adapt.
  • Resilience, efficiency and agility in the face of risk – we have seen the lockdowns put an incredible amount of pressure on supply chains across all industries. No one has been spared. However, how well these are coping is closely tied to how robust and agile the operational framework supporting the business is. Where the supply chains have adopted and integrated Supply Chain as a Service (SCaaS) and Software as a Service (SaaS), into their operating models, businesses are faring better. Digitalising one’s supply chain, making it nimbler, yet resilient, and doing so now in preparation for when we emerge from the pandemic, will make businesses more resilient to future black swan events on the one hand and improve their cost/profit ratio and accelerate their growth on the other.   
  • Onshoring vs offshoring – the pandemic has also exposed the world’s risky dependence on vulnerable clusters in global supply chains. China, for example, accounts for about 50 to 70 percent of global demand for copper, iron ore, metallurgical coal, and nickel. We could see a massive restructuring as production and sourcing move closer to end-users and companies localise or regionalise their supply chains. Senator Marsha Blackburn in the US has already introduced bipartisan legislation to on-shore manufacturing, particularly pharma.
  • Contact-free economy – in the UK, we are seeing all stores taking e-money of one form or another. This could help create a boon for crypto and alternative e-money providers.
  • More government intervention – are we seeing the end of the liberal economic order and the consolidation of the move to economic nationalism which started with the economic collapse of 2008?  With the government extending loans the likes of which we haven’t seen since the late 1940s, is current government intervention a temporary affair, or will it have longer term repercussions? At least publicly, in the UK and in the US, the heads of government express a weariness of it. Time will show.
  • Redefining the future of work and consumption – the crisis has propelled new technology affecting all aspects of life, from e-commerce to remote-working and e-learning tools, including Alibaba’s DingTalk, WeChat Work, and Tencent Meeting. New working and shopping practices will probably become a permanent fixture of the next normal. COVID has changed technology but also how we consume, work and live because we have become aware and sensitive to global risks to health.

Fundamentally what we are pricing-in is the next pandemic for whilst COVID has a high death toll for vulnerable groups the fatality rate in other viruses– Middle East Respiratory Syndrome (MERS) has a 35% fatality rate, SARs 11%.  Whether these are real threats or not, it is this fear of further, repeated spikes in COVID as well as other viruses that will impact our planning.

What does all of this mean for family businesses?

Paradoxically, for family businesses this lockdown period has allowed for reflection and a review of strategy, operations scenario-planning as well as a review of family governance: the first few weeks of the lockdown saw many family offices and family governance advisors look at succession planning and wills for example. Having all the family members in one place has also allowed them to address issues of family constitutions, business operations and corporate governance.

What will be important moving forward through COVID is integration: how family purpose, investment, planning and the structures established need to be integrated for maximum efficiency and resilience. An alignment trend that we have seen in families and which will be accelerated will be how all assets – family businesses, investments and philanthropy – are harmonised through integrated operational governance frameworks.   

This is particularly relevant with regard to the next generation who are more focused on technology as integral to their businesses (by our definition then, digital being built-in) and also put values first: sustainability is increasingly a central value, crossing through the family constitution, governance, the modus operandi of family business and the investment strategy for the family office or family investment professionals.

Effective frameworks of operational governance will encourage this COVID evolution of technology being central and integral to business and will thus place digitalisation central in strategy, operations, marketing, supply-chain management, expansion and risk management.

Family governance is responding also: we spoke recently with a family who are looking at how they deal with succession – the children are interested in tech, sustainability and alternative investments such as art; the premature death of the patriarch left this open to change and his son is moving rapidly to move away from oil and gas towards fin tech, entertainment and health-tech.

If 25 years ago, digitalisation was a new and misunderstood option, today it is being thrust upon businesses and private lives alike, with a force not experienced before. How much will it impact our personal and business relationships?

In a recent article, Sonia Livingstone (London School of Economics) discussed the potential consequences of families’ reliance on technology during the COVID-19 crisis. She concluded that life under lockdown has the potential to either hasten a digital future in which our lives are tracked and monetised in unprecedented ways, or make the public more aware of such risks and thus resistant to all things digital.

If there is a hesitation as to its impact on our social interactions, when it comes to the business arena, there is little doubt that businesses who hadn’t embraced a built-in digitalisation, will be working at full speed to catch up.  That’s the extent to which integrated digitalisation is tied to robust operational and family governance and ultimately, business survival.