Wednesday, January 20, 2010

How efficient is the traditional Indian family-run business?

A perennial debate rages in India, about the merits of the traditional family-run business versus the knowledge of the fancy-pants consultant or MBA. A remarkable paper by a group of economists sheds new light on this question. I wrote a column in Financial Express today titled Are Indian family businesses well run? where I describe these results and interpret them. Also see this column by Nirvikar Singh in Mint on the same subject.

10 comments:

  1. Interesting article, but the link to family ownership or family -run businesses is not as well established as I would have liked to see.
    Clearly, this is a great story for consulting - both buy side and sell side need to reach out. Also a great story for better business practices in firms and for providing incentives to upgrade practices.

    At the same time, one could have used some of the data to tell another story - of the survival of Indian businesses using native/ locally available business tools. Now that is a book I would love to write!

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  2. Typical Gujarati run family business every third generation failed.
    in LONDON we can see partnership from last 10 generation but in INDIA it automatically changes in generation wise.
    every Indian joint family run business is risky for public as a investment point of view.
    but if you know closely then it is OK
    but sudden changes marked in next to next generation and always see that family run business house slam 1 personality who is more talented or smart and rest of all start living as usual and that 1 person again start new thing and joint family run business start nuclear family busimess

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  3. I'd just like to mention my dad's opinion - "All family run business are run by crooks." He has made a personal opinion from his experiences. But one thing that I find common in all family business is that the throne is passed on more for reason of love than for reasons of merit.Probably thats why we are trying to assess their competency. One more common factor is that the patriarch of the family runs the business quite successfully. The moment authority needs to be delagated to sons, there are various conflict of interests that come in. This is not only true for Indian family run business, it also holds good for foriegn enterprises which were at some point family run. So do we need to question the competency of the patriarch delegating the responsibilities inappropriatly? or for having a partial opinion? or for having favourtisim or for simply taking decisions from the heart rather than the mind?

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  4. Ajay:

    Thanks for penning on an extremely important topic.

    However, I think no actionable conclusion can be drawn (I haven't read the study, other than a quick glimpse but read what you said about how it was done).

    At best we can say that the study merits more thinking on incorporating "professionalism" into family owned businesses. Further there are too many variables to conclude that Rs 2 crores in consulting is / was worth it - to attribute growth in business to purely consulting efforts almost betrays lack of understanding of what variables affect a business.

    I have been on both sides of the table - as a professional initially and then as an entrepreneur with modest success. There are always 2 sides to the story and not just "serious deficiencies in management by traditional family-run companies in India. The wily old-school CEO is not actually doing such a great job. More openness to modern management ideas would help."

    What we need to understand is that family owned businesses have their own challenges in separating ownership from management - they certainly need help there. At the same time a professional schooled in management ideas from the West (like myself) is more bothered about pay scales, position and status than the value he / she brings in. In one of my earlier firms where we brought in a CEO at a hefty salary at the advice of our VCs, we found that he would just run reimbursement bills that would pay for 5 - 6 employees; stay at the best hotels in town and negotiate options irrespective of how the firm was doing.

    Further "Professionals" often think that a degree gives them complete knowledge better than anybody else and hence if things work it is to their credit, if it doesn't "the family simply do not understand, are not risk taking" and he / she will just move on to the next job but think about it - can a family owned business do that?

    I also take a certain umbrage in calling the owners "wily" - to their defense they provide employment to the "unqualified" because the "qualified" are not so easy to manage. And it is not clear why you call them so and that is even more unfortunate.

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  5. Folks,

    I know that this is a touchy topic and there are strong feelings on both sides. Let's try extra hard to keep the conversation pleasant. :-)

    Kimi, please do read the paper. My newspaper article has linked to it. The authors are fully specific about the nature of the assignment which was deployed into these 17 firms. I did not enumerate it because it would require going into too much detail, and these details are only pertinent for textile (weaving) companies.

    In my newspaper column, you do see me being cautious about extrapolation: How much can these results be generalised? We can now say with good confidence that consulting inputs worth Rs.2 crore from a global consulting firm are well justified for a 270-man family-run textile company. But we do not have a comparable ability to make statements about 135-man or 540-man firms, about other industries, and about other kinds of consulting inputs.

    This lack of generalisability is a key flaw of these kinds of studies.

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  6. Sorry Ajay if my comments were a little overboard, I have calmed down now :) I have the study and will certainly go through it.

    Cheers,

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  7. Kimi, I welcome your interest and involvement in this blog.

    I do not pretend to be the final authority on this (or on anything). It's a complex world out there and all of us are blind men with the elephant. The reality is surely more complex than any of us are able to understand.

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  8. Ajay - a 2 crore investment for a 1 crore increase in annual profit sounds like a good deal. But the return is not "risk-weighted". The disruption caused by management consultants can be negative often enough.

    My view - management consultants in India should look within, if they think the Indian market underuses their services. My take on the matter is here http://bit.ly/54Ik6t

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  9. There are two aspects here:

    a) Family run businesses
    b) Indian family run businesses

    Per se, family run businesses have a lot to commend about; I know that in West Germany, some excellent firms have been in existence for over 6 decades now. A very significant number of family run businesses provide very high tech solutions to industry. I know a few that do not use any convoluted, fangled ideas being spouted by any MBA or consulting firm [ I doubt if the owners even know what such a firm is]. Yet they are intuitively knowledgeable about markets, currency, risk, logistics, supply chain etc. What more can an MBA bring to the table, other than a fat bill?

    So, probably the problem is more about the Indian psyche. Specifically what, I cannot comprehend.

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  10. As the many comments on this page show, there are strong views on both sides.

    I have myself been ambivalent. I have felt that it was an issue of scale. Family businesses are fine as they are, but if you want to grow the business, you have to change the DNA of the organisation fundamentally. Or so I felt.

    This paper was interesting in that for one narrow focused problem (270-man textile companies, a Rs.2 crore assignment to Accenture) it provides a clear answer.

    There are obvious limitations to the extent to which one can generalise. But it's nice to have one strong answer. Beyond this, each of us has to make up our own minds about the kind of guesswork that's appropriate for the various complex shades-of-gray situations that we face.

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