Unlocking the full potential of family businesses: The power of professionalization

ILLUSTRATION BY RUTHMACAPAGAL

I was having a private meeting with family members in the boardroom of one of the largest family business conglomerates in Asia that is now in its fifth generation. The question the family asked me is the same that family business conglomerates ask me that are only in the first, second or third generation, “We need to professionalize more. How can you help us?”

You would think that a multibillion-dollar family business conglomerate is already professionalized enough given its success and size; otherwise, they would not be where they are. But that is not true. With over 83 percent of our clients globally and in the region being family businesses, we see every day how already extremely successful conglomerates can still unlock hidden growth potentials by filling in the missing gaps of professionalization.

What does it mean to professionalize?

As family businesses grow and mature, they always need to adopt more professional practices and processes to remain competitive. To survive, succeed and remain competitive over generations, professionalization is fundamental. This empowers family businesses to enhance their operations, attract talent, and position themselves for future growth and sustainability by implementing more formal and organized practices and processes.

Professionalization is especially important for large family conglomerates because they often operate across multiple industries and geographies, and have more complex organizational structures than smaller family businesses. As family conglomerates grow, they may face a range of challenges, such as managing diverse business units, coordinating operations across different regions and ensuring effective communication and decision-making.

Professionalization can be a challenging process for family businesses, particularly ones that have operated informally for a long time. Family members may be resistant to change, or feel that professionalization undermines their sense of autonomy and control over the business.

How a family business can keep its ‘soul’

A lot of family businesses struggle to achieve the right balance between professionalization and maintaining the company’s values, culture and “soul,” which are usually rooted in the family. However, we have found again and again in our many years of experience in helping family businesses professionalize, both in the region and globally, that “keeping the soul” and “professionalizing” are not mutually exclusive. On the contrary, if family businesses do not professionalize enough, their soul is at risk. Why? Because they will lose high potential in their organization, they will not manage to establish a culture where high performers gravitate. They will fail to attract the best and keep the best. They will descend into a culture of mediocrity where average performance is tolerated. And this means they will miss out on many business opportunities and ultimately forsake revenues and profits.

The best-run family businesses around the world, no matter what country they are in, realize that they can only keep their “soul” and continue to reap the many benefits family businesses have by becoming 100-percent professional. They hire external experts and advisors to make sure they uncover their blind spots and then make whatever changes are necessary to become 100-percent professionalized.

Why do a lot of family businesses struggle with professionalization?

It is especially common for family businesses to lack professionalization because they often started with a “mom-and-pop” store mentality. Even if they manage to grow to an enormous size or become billion-dollar businesses, we often see remains of that mom-and-pop mannerism hidden in plain sight in various parts of the conglomerates. These are usually blind spots for the owners and for the management. Everyone is used to operating in such a way that no one realizes the many hidden growth potentials the business can unlock easily by professionalizing 100 percent across all areas of the business.

Take the profit potential of synergies, for example. A very large family business conglomerate in Europe approached me and my team because they suspected they had not been using the synergies among all businesses of the conglomerate properly. They were in their third generation. When we started our deep investigation, it became clear to us very quickly that they were missing out on huge profit potentials because they were only using a minute portion of the synergies among all their different businesses in the conglomerate. They had never taken any conscious and focused approach to synergies at all. We estimated that they could realize up to 15 percent more profits over the next two to three years with no added investments, just by correctly exploiting the synergies within and between the businesses they already had.

Key benefits of professionalization

Professionalization can involve adopting a wide range of practices, from areas such as corporate governance, financial management and risk management to more formal organizational structures and processes.

Here are some practical examples of how even some of the world’s largest family business conglomerates can still apply professionalization to further unlock profit potential:

• Tata Group: This is a family business conglomerate based in India that made revenues of $128 billion in 2022. It operates across a range of industries, including steel, automotive, information technology and hospitality. The Tata Group has implemented several professionalization initiatives in recent years. For example, the group has established a formal board of directors and has implemented a corporate governance framework that includes independent directors and board committees. The group has also established formal risk management processes and has implemented sustainability reporting practices.
• Koch Industries: With $125 billion in revenues in 2021, this is a family business conglomerate based in the United States that operates across a range of industries, including energy, chemicals and manufacturing. Koch Industries has also implemented more professionalization initiatives in recent years. For example, the company has established formal performance management processes and has implemented an enterprise resource planning (ERP) system to improve financial reporting and analysis. The company has also established formal innovation processes, including an innovation center and a venture capital fund.
• Walmart: This well-known American multinational retail corporation is a family business conglomerate that made over $600 billion in revenues in 2022. The company has implemented a range of professionalization initiatives over the years, including the establishment of a formal board of directors and the implementation of a formal ethics and compliance program. The company has also implemented formal sustainability reporting practices and established a formal talent management framework.

If a giant like Walmart still sees the need to professionalize even further, so should you! INQ

Tom Oliver, a “global management guru” (Bloomberg), is the chair of The Tom Oliver Group, the trusted advisor and counselor to many of the world’s most influential family businesses, medium-sized enterprises, market leaders and global conglomerates. For more information and inquiries: www.TomOliverGroup.com or email
[email protected].