Despite economic uncertainty, almost two thirds (64%) of family businesses have grown over the past year, according to a new global survey conducted by PwC, one of the world’s leading professional services firms, of over 2,800 family businesses in 50 countries.
While the region’s family businesses continue to be active and successful, the changing political and economic environment is affecting both their current performance and their growth expectations, according to PwC Middle East’s latest Family Business Survey for 2016 titled: “Keeping it in the family: Family firms in the Middle East”. Respondents to the PwC Middle East Survey said that the three most significant challenges faced by their family firms are: government policy, legislation and regulation (42%), skills shortages (35%), and market conditions (31%).
Despite the relatively steady outlook, the report warns that family businesses’ growth outlook could be curtailed by the organisation’s own lack of strategic planning rather than economic factors or other external concerns. In fact, many issues now facing family businesses in the region come back to a lack of strategic planning – the ‘missing middle’ – namely having a strategic plan that links where the business is now to the long-term and where it could be. This results in many families not being able to turn early promise into sustainable success.
While some family firms are managing strategic planning well, many are caught between the deluge of everyday issues and the weight of inter-generational expectations. PwC found that in the survey, areas such as succession, diversification, digital, cyber security, and innovation, are not being tackled by family firms in the Middle East but also globally.
While respondents in the Middle East agree with their global peers about the qualities that characterise a family firm, there are several other factors that have an added importance. For example, more respondents in the region believe that family businesses take a longer term approach to their decision-making (61% compared to 55% globally), and are prepared to take more risks (58% versus 40%). However, they also recognise the challenges family businesses face: respondents in the region feel they struggle more to attract and keep talent (65% versus 48% globally) and find it harder to access capital (42% versus 32%).
Half the respondents in the Middle East, compared to 28% globally, attach a high value to leaving a positive legacy. Charitable contributions are a big part of this, and many family businesses have their own foundations. Likewise, 16% believe that creating employment for local communities is ‘very important’ compared to a global average of only 6%. This has historically been a high priority for family businesses in the region.
An overwhelming 91% (compared with 86% globally) of Middle Eastern family businesses have no formally documented succession plans in place, the survey found. More worryingly, the Middle East figure is higher than the 86% recorded in 2014, indicating little to no progress on this issue across family firms in the region.
The ‘lower for longer’ oil price and resulting economic slowdown, combined with reductions in Government spending, changes in fiscal policy and more fragile business and consumer confidence, are all contributing to rapid change in the region. In 2014, 79% of Middle East respondents had seen an increase in revenues over the previous year, but that number is now slightly down to 74%, though it’s still ahead of the global average of 64%. The effect is more marked when you look at respondents’ expectations over the next five years: in 2014, 40% expected to grow quickly and aggressively over that period, but this year the comparable number has fallen to 27%. Likewise, 10% now expect their business to shrink in that time-frame, compared to just 2% in 2014.
“Both the survey results and our own experience lead us to conclude that greater emphasis on strategic and medium-term planning would allow family businesses to achieve greater success, and fulfill their true potential. A medium to long-term strategic plan is now unavoidable and to be successful, it needs to be clearly aligned to the family’s long-term goals, vision and values in order to result in effective decision-making and ultimately, results.” said Firas Haddad, PwC Middle East Partner and Family Business Advisory Services Leader in the Middle East.
A number of the key challenges Middle East respondents from 32 family businesses across the Middle East is identified related to their strategic planning:
- Succession: Only 14% of Middle East family firms have a plan for their succession process for all senior executives: 38% have none at all.
- Innovation: 48% identify innovation as a key challenge to keep ahead in the next five years
- Digital: 48% say keeping pace with digital and new technologies is one of their key challenges, yet only a quarter think their business is vulnerable to digital disruption
- Professionalisation: 50% say professionalising the business is a key challenge of the next five years (i.e. bringing in non-family professionals to help run the business)
- Skills: 65% say they need to work harder than non-family businesses to recruit/retain top talent
- Finance: 42% say that they find it harder to access capital than their non – family business counterparts.
- Cyber security: Only 35% believe their business is prepared for dealing with a data breach or cyber-attack
- Geopolitical concerns: The majority of family businesses identify political and economic stability as a major source of concern over the short-term
- Regulations: 43% cited changing regulatory landscape as a source of concern over the next five years
- Internationalisation: 93% of Middle Eastern respondents are already making some international sales, compared to a global average of 70%
Firas Haddad also added,: “Overall, Middle East family businesses’ performance and outlook for growth remain strong with notable progress on professionalisation, but less so on strategic planning. Having an ambition to grow, without a strategic plan of how to get there, is just an aspiration. Not only is it limiting their ambition to expand and grow, it could also expose them to additional risks that they have not effectively planned for.”
“This year’s results on succession show a recurring theme too. It’s the fault-line in the family business model. There’s no point having detailed plans for business continuity, if the single most significant risk to this is not addressed. A managed succession process can be a rallying point for the family, allowing it to reinvent itself in response to changing circumstances, but without a plan it is the most obvious ‘failure factor’ for the family business.”
Antoine Abou Mansour, PwC Middle East Partner and Deals Channel Market Leader in the Middle East said: “Middle Eastern family businesses need to grow in double digits every year, if they were to sustain their family’s wealth from one generation to the next. Growth of this magnitude can only be achieved if family businesses expand aggressively, and one way to do this is to either borrow from the debt and equity markets, which is not always palatable for family businesses, or alternatively, to extract value internally by freeing up working capital and disposing unprofitable legacy businesses. These are stark choices and can often be the difference between long term success and looming failure and the sooner families respond to these challenges, the easier it will be to ease the succession from one generation to the next.”
On digitisation, the survey finds that the new generations in the region will have to play an important role in creating their family business’ future. The great majority of family businesses both in the Middle East and around the world do not believe they are vulnerable to digital disruption, with many claiming to have a strategy fit for a digital world. By PwC’s estimates, these firms heavily underestimate the impact of digitisation.
“While half of the family businesses are engaging with digital transformation, most tend to think about digital in terms of information and communications, and yes, that is really important, but they do not view digital disruption of their business by new digital competitors as an issue. Digital is also revolutionising areas like manufacturing and logistics, with innovations like 3D printing and driverless cars. Firms in the Middle East need to explore and embrace digital in the widest possible sense, if they are to make the most profitable use of it. It (digital) is taking a more increasing role as younger digital native family members begin to take over from their older generation-X parents.” Steve Plimsoll, PwC Middle East Partner and Chief Digital and Data Officer, ended.