Navigating the owner’s agenda Kenya Private Company Survey
62 interviews conducted with private company leaders in Kenya 48% agreed that professionalising the business is a key challenge over the next five years See page 24 23% have a discussed and documented succession plan in place See page 31
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Contents
2 Foreword by PwC Kenya Country Senior Partner
4 A view from the PwC Kenya Private Company Services Leader
6 The new economy: More competitive, more opportunities for private companies A taste for growth: Keroche Breweries Limited
10 Different pressures, different priorities: ‘Head’ is winning over ‘heart’ Private expansion in a public sphere: Mount Kenya University
16 New products, new sectors, new markets
20 Keeping pace with change: The innovation imperative Digital transformation: Seven Seas Technologies Group
24 Professionalising the business: Moving to the next level Performance and professionalism: Bidco Oil Refineries Limited
28 The heart of the matter: Professionalising the family
31 Bridging the gap: Making a success of succession Professionalise to optimise: Nakumatt Holdings Limited
35 From managers to owners: A new model for the family firm?
37 Conclusion
38 Methodology
PwC Kenya 2014 Private Company Survey 1 Welcome to our first-ever Private Company Survey in Kenya
Foreword by PwC Kenya Country Senior Partner
Private companies make a unique ground-breaking effort. From this contribution to our country’s economy, survey, we have learned how economic as employers and generators of wealth, and social change is affecting private prosperity and national revenue. They companies from the impact of changes are key drivers of economic development in demographics, urbanisation, digital and innovation. revolution and globalisation. And we have explored the specific issues unique Considering private companies’ to the private company business model contributions, we wanted to underline like succession planning and resolving PwC’s commitment to private conflict. companies, and improve the services that we offer them by gaining a better These are issues that affect all private understanding of their needs. We also companies though the survey has wanted to collect better data about a brought us some significant and sector that has not been studied in a instructive distinctions. But as well as systematic way until now. the big picture, we have also been able to talk in-depth to individual businesses. No one in Kenya has ever surveyed I have found these stories fascinating as private companies on the range of issues I’ve personally been involved in some of that we are exploring so again this is a the in-depth interviews.
2 PwC Kenya 2014 Private Company Survey The vitality, stability and dynamism of These are the questions that we have private companies in Kenya reinforce explored deeply in this survey. I trust my faith in the economy. At PwC, our that you will find this report insightful work with these companies goes and challenging. Please do not hesitate beyond providing tax or audit services, to contact me or any of our PwC team technology implementations or members if you would like to discuss assisting with mergers and these or other issues in detail. acquisitions. As trusted advisors, we understand the concerns that family businesses share, regardless of size or industry. How can your company compete and grow? How can you manage more effectively? How can you Anne Eriksson ensure that your company will survive [email protected] more than one generation? (20) 285 5000
PwC Kenya 2014 Private Company Survey 3 Competition is more intense, price pressure is growing, and the speed of change continues to accelerate.
A view from the PwC Kenya Private Company Services Leader
This is our first survey of private Most private company and family companies in Kenya and our seventh business owners in Kenya are confident survey globally. We spoke to 62 private of their company’s growth prospects. company owners, from entrepreneurial A combination of economic growth, start-ups to companies that have local know-how and business agility survived for four generations or more. give these companies the upper hand, We spoke to family members who even with more competition emerging in manage their firms, and CEOs who had the market. been brought in from outside. And we spoke to those who plan to pass the Businesses operating in Kenya can running of the firm to the next expand into other markets in the East generation, and to those who see their African Community (EAC) with relative companies being managed by others in ease. A growing middle class of the future. consumers demands more goods and services as well as more choices. Without question, private companies Technological advances fuel their remain a dynamic and resilient sector, demand and companies’ ability to meet even though there are continuing it and urbanisation means that more pressures in relation to market consumers are located in more densely conditions, skills shortages, political populated areas. Oil exploration and uncertainties, innovation and the need production, significant infrastructure to professionalise their operations. This investments including broadband and is the big picture but when you look more reliable energy all contribute to more closely at the details it is clear that growth potential. These and other there are significant shifts underway factors contribute to confidence in in the private company sector. There growth among private companies in are many new opportunities and Kenya. challenges that these firms will need to seize and address if they are to remain Over the next five years, their as successful in the future as they have performance will be influenced by even been in the past. more change. Competition is getting more intense, price pressure is growing and the speed of change
4 PwC Kenya 2014 Private Company Survey Competition is getting more intense, price pressure is growing and the speed of change continues to accelerate.
continues to accelerate. This is over. Too many firms are either not We hope you find this report both challenging for all businesses and planning for succession at all, or are insightful and challenging. Each of the especially for those which are more risk managing it as a personal issue between PwC contributors to this report are averse, including many private two individuals, rather than as a process subject matter experts and available to companies. They benefit from the ability which requires the same rigour and you for consultation or advice. Please to take a long view, and strong client objectivity as any other aspect of reach out to any of them or myself if you relationships founded on trust. But in business decision-making. The result, all would like to discuss these issues in today’s marketplace in Kenya, they will too often, is escalating tension and more detail. have to adapt faster, innovate earlier conflict that can precipitate the demise and become far more professional in of the whole company. the way they run their operations. This covers everything from basic Succession is only the most obvious systems and processes in areas like manifestation of a much more deep- finance and HR to risk management and seated trend: private companies in Michael Mugasa Kenya are professionalising their corporate governance. [email protected] businesses. This is about accountabilities (20) 285 5688 One of the biggest red flags is the issue and responsibilities, about of succession. Only 23% of Kenyan communications and family private companies have a succession constitutions; it’s about learning to be plan that has been discussed and good owners and shareholders as well as documented. The moment of transition – or even instead of – good managers. has always had the potential to sink private companies and a number of Efforts to reorganise and professionalise factors are now coming together to will require a willingness to make bold make the succession process more moves and take some new risks. This hazardous than it has ever been may take some private company owners before. Private company leaders tend to outside their comfort zones and they stay in their positions longer, identify may feel that they are losing control of successors later or not at all and in many the business. However, the sector as a cases there is a significant whole is built on entrepreneurial energy communications gap between those and determination, and they wouldn’t running the business now and those have survived (or thrived) this long if who expect—or are expected—to take they did not have the qualities that they need now to succeed.
Across over 40 countries/regions Australia India Nigeria Austria Indonesia Peru Belgium Ireland Romania Brazil Italy Russia Canada Kenya Singapore CEE Malaysia South Africa Slovakia Malta Spain Poland Mexico Sweden Kenya Bulgaria Middle East Switzerland Hungary Jordan Taiwan 62 Latvia Saudi Arabia Turkey interviews conducted with private China Oman UK company owners with a sales turnover from Denmark UAE US Germany Netherlands >USD$5m to $500m Hong Kong New Zealand
PwC Kenya 2014 Private Company Survey 5 The new economy More competitive, more opportunities for private companies
Most privately owned businesses in However, the respondents are Kenya are confident of the businesses apprehensive about their ability to growth prospects in the future. Over 69% recruit skilled staff in the next 12 two thirds of these businesses grew in of privately owned businesses report months and a majority cite general the last 12 months and 70% expect to growth in the last 12 months market conditions and government grow steadily over the next five years. A policy/regulations as their prime third of them are aiming to grow quickly external challenge for the next year. and aggressively in the next 5 years, as Market conditions will remain a real compared to 15% globally. These results worry as customers demand more and are consistent with our recent Africa 32% margins get tighter as a result of CEO survey which showed that 67% of competitive options in most sectors. This are aiming to grow aggressively over Kenya CEOs are very confident of is partly a reflection of the new the next five years growth this year. economic reality in Kenya, but also symptomatic of the more profound shifts Factors contributing to growth that are underway as a result of global confidence include the growing youthful megatrends like demographic change, population that is demanding more globalisation, urbanisation and the goods and services, as well as more 56% digital revolution. choices. Increasing urbanisation and cite market conditions as a key technological advances continue to fuel external concern Business is becoming more fluid and consumption demand, while easing more disruptive than ever before. The businesses’ ability to reach customers. winners will be those companies with Over the next five years, businesses the agility and flexibility to adapt. They should expect significant boost to will make the investments required consumption of goods and services from (often very large ones) to keep pace with expansion of oil, gas and mining sectors, new technologies and implement combined with the multiplier effect of innovation. These companies will infrastructure investments. The East anticipate change and act as disruptive African community continues to offer forces either in their approach to relatively easy routes to new markets. market, in their products and service offerings or in their willingness to change strategy or even sector, if that is where the opportunities are emerging.
6 Navigating the owner’s agenda More disruptive change
This is hard enough for public companies, It is impossible to exercise complete but harder still for privately owned control over all internal and external businesses. They typically do not have challenges. Meanwhile, efforts to the same access to bank or capital market reorganise and professionalise funding, it is often more difficult to internally will be new to many private attract top talent and family issues can companies. Among those who have not absorb time and attention, or lead to the done so before, some will not pass the appointment of family members in senior test. For the most part, however, private positions who may not always be the best company owners in Kenya are confident people for the job. about growing their businesses for all of the right reasons.
Moses Nyabanda Kennedy Gatheru Director, Assurance Services Senior Manager, Assurance Services [email protected] [email protected] (20) 285 5394 (20) 285 5396
Growth aims (next five years) Kenya Global Grow quickly and 32% 15% aggressively
70% 56% Grow steadily
10% 13% Consolidate 2% 1% Shrink 2014 2014
95% of Kenyan family businesses predicting growth are confident of achieving it
PwC Kenya 2014 Private Company Survey 7 A taste for growth Keroche Breweries Limited
Tabitha Karanja Chief Executive Officer themselves as Keroche employees, Tabitha has also worked to open up ‘they’re not just doing their jobs for me; channels of dialogue with government Tabitha Karanja believes that private they’re also growing themselves and so that public policy better supports company owners succeed because they their capabilities. Our people want to private companies. She says that leaders believe in themselves and bring a add their names to the wall of Keroche in government need to understand how passionate, personal commitment to the Breweries, and that makes me very businesses are run and the value of local business. ‘It’s not just a job,’ she says. ‘I happy.’ The business is starting to attract investment to Kenya’s economy. Keroche would give up my car if we needed a good talent to drive its growth agenda. Breweries has shown that it can be done, generator for the business, for example.” and government can provide the right For Tabitha, success brings a greater a incentives for other private companies to This passionate spirit and drive is partly responsibility to others in the grow similarly. what makes private companies like community. Amongst her many Keroche Breweries succeed and become contributions to the community is Private companies that are also family distinctive. Tabitha Karanja is the helping young entrepreneurs to build businesses face some special challenges, founder and CEO of Keroche Breweries their businesses and believe in she says. ‘The worst thing you can do is Limited, the first woman-owned themselves, with an expectation that think that only family members can run brewery in Kenya. She started the they will then affect others in the same your business.’ If family members show business with her husband, Joseph way. This type of mentality builds job an interest, ‘that’s well and good. But Karanja, in 1998. creators, not job seekers. Tabitha these companies need a clear plan and a believes that contributing to commitment to execute so that as the The company is currently growing its communities through education organisation expands, the plan is rolled production capacity from 100 hectolitres initiatives is worthwhile, but Keroche’s out.’ to 1 million hectolitres with the 16 years of experience as a growing intention of growing its market share in private company is equally valuable. Finally, Tabitha believes that private Kenya and expanding distribution into ‘Everybody is doing education,’ she says. company leaders can make decisions the East African region. This effort ‘So we are trying to transform job more readily. Other types of companies requires significant investment in seekers into entrepreneurs and help often have extensive teams that seek a production assets, distribution channels them unlock opportunities.’ variety of input before leadership will and human resources. 'We have a good make a decision. Particularly when range of quality products that are Mentorship, skills training and private companies are just starting out, successful in the Kenyan market' says shadowing a CEO as well as seed capital she says, there are often just one or two Tabitha. 'We just have to keep on help to grow the entrepreneurs of decision-makers ‘and your character growing our market share and tomorrow, according to Tabitha. really comes through. People must expanding into new markets.' Financial literacy is another area where understand you and take you seriously. entrepreneurs need help. ‘We are You must believe in yourself and drive With the rapid growth in the business, teaching them that to grow your the company forward.’ employees now feel a sense of ownership business, you need a bank to finance of the success story of Keroche Breweries your business. The problem is that many and she believes that by branding entrepreneurs fear loans.’
8 PwC Kenya 2014 Private Company Survey Government and private companies
Over the next 12 months, market Looking ahead, concerns about the conditions/uncertainty is a worrisome general economic situation and external issue for 56% of private government policymaking may fade in company and family business leaders light of steady economic growth. Big in our Kenya survey, followed by infrastructure investments will have a government policy/regulation among multiplier effect on the economy, not 48% of respondents. In the next five only because of their long-term impact years, they are most concerned about on productivity but also because they the general economic situation, are capital-intensive in the short-term. political instability and complying with Every incremental improvement in regulations. Their alignment on these electrification will impact the economy Kuria Muchiru risk areas indicates a general sense of significantly and lower power costs Advisory Partner discomfort with the external will make Kenya a more competitive [email protected] environment, not specific policies. place to do business. Access to affordable, reliable energy will also aid (20) 285 - 5263 Since Kenya is a very open society with Kenya’s shift towards manufacturing active print and social media, there is a and technology-intensive great deal of discussion about the role industrialisation, where there are of government. Many private company many opportunities for private owners want government to improve companies already. the overall environment for investment. They would like At a regional level, the East African government to focus on improving Community and its common market national security and reducing the cost protocols and customs union contribute of borrowing—areas that would to a general sense that it makes sense directly affect their sustainability and to invest here. Successful private growth. companies know that they have to go big, diversify and look at consumption Their concerns tend to be rooted in patterns in order to succeed at a patterns, like whether the rains will be regional level. sufficient and if the climate is changing. Energy prices have been Kenya’s government is trying to high. For many private company reassure the business community that owners, political noises of any kind nothing is changing and it is investing tend to raise the temperature and in the country’s future. But it will take cause concern. Private company time to overcome a pervasive sense owners wonder if uncertainty could that companies do business well in impede growth and dismantle hard- spite of government. earned gains.
There tends to be more faith in central government than county governments, which are still a relatively new concept. Devolution has been disruptive. As the counties mature, they will become revenue-collecting entities and impact private companies that way. Business owners worry that this will increase the cost of doing business.
PwC Kenya 2014 Private Company Survey 9 Different pressures, different priorities ‘Head’ is winning over ‘heart’
The survey suggests that the new one hand, and business objectives on economic pressures are forcing many the other: what you might call ‘heart’ privately owned businesses to re-think and ‘head.’ their strategies and take some tough decisions. This is sharpening the tension The survey shows clearly that privately already inherent in the family business owned businesses are much more model between family concerns on the focused on business growth and success.
Relative importance of personal and business goals over the next 5 years
Ensure company's long term future 15.3%
Improve profitability 12.7%
Run business more professionally 10.6%
Ensure sta are rewarded fairly 9.6%
Attract high quality skills 9.0%
More innovative 8.3%
Diversify into new products/sectors 6.4%
Enjoy work and stay interested 6.1%
Contribute to the community / positive legacy 5.4%
Move into new regional markets in home country 4.6%
Grow as quickly as possible 4.4%
Dierent export markets 3.6%
Ensure business stays in the family 3.3%
Create employment for other family members 0.8% 0510 15 20
10 PwC Kenya 2014 Private Company Survey Business growth ambitions are challenged by uncertainties over the general economic environment, attracting the right skills in the business and the need to continually innovate.
Key challenges in five years’ time
General economic situation 61%
Attracting the right skills/talent 56%
Political instability 55%
Need to continually innovate 52%
Need to professionalise 48%
Containing costs 40%
Price competition 39%
Need for new technology 39%
Complying with regulations 39%
Increasingly international environment 37%
Market instability 35%
Number of businesses competing 34%
Retaining key sta 31%
Company succession planning 31%
Suppliers/supply chain 23%
Conflict between family members 5% 01020304050607080
PwC Kenya 2014 Private Company Survey 11 How are privately owned businesses different?
The phrase ‘family business’ connotes Family and community-related goals a small or midsized company with a such as enjoying work, contributing to local focus and a familiar set of a positive legacy or ensuring the problems, such as squabbles over business stays in the family tend to be succession. It does not reflect the less important. Family business powerful and dynamic role that owners’ focus is squarely on family-controlled businesses play in profitability and long term the Kenyan and, indeed, the world sustainability. Even so, a majority of economy. They play an important role them have a stronger sense of in job creation and the stabilisation of responsibility to support employment Anthony Murage a balanced economy. and community initiatives and more Director, Assurance Services cohesive values and corporate Family businesses have some cultures. [email protected] advantages over public corporations +27 (0) 11 797 4876 entities such as their focus on the long Another area where family businesses term, commitment to quality (which is are distinctive involves brand often associated with the family name) management. Conventional public and their care and concern for companies invest significantly in employees. But the most distinctive marketing. Family businesses have aspect of family-controlled businesses more flexibility to pursue a vision and is that they focus on resilience more they look for opportunities and than performance. They might forgo execute, but they may not view brand 71% the excess returns available during enhancement as a major contributor to believe they play an important role good times in order to increase their the bottom line. For other private in job creation odds of survival during bad times. companies, the family brand helps They also tend to manage their them to diversify when they want to downside more than their upside, in try something else. In general, contrast to many managers of public conventional companies are under companies who try to make their mark much more pressure to demonstrate a 65% through outperformance. return on investment and they defend believe decision making is more their brands rigorously. streamlined/faster Because of the ease of strategic decision making within family The personal dynamics within family businesses, they tend to be more businesses also tend to be different. entrepreneurial and willing to take Relationships can generate greater risks with clear exit strategies. trust and commitment but also lead to Whereas they react to opportunities in tension, resentment and conflict. Even 69% a faster and more flexible manner; when they have employed professional believe they add stability to a they are always driven by the sense managers, dominant founders can still balanced economy that the company’s money is the have a very strong hold on the family’s money. As a result they do a business. Younger generations may better job of keeping their costs under feel that they have no choice but to control, staying lean through all work for the family business. To attract business cycles and consequently they the right calibre of staff, private are less likely to have major staff companies and family businesses must layoffs in bad times. ensure that policies are in place to manage the hiring process and evaluate performance—and that these
12 PwC Kenya 2014 Private Company Survey How are privately owned businesses different?
policies apply to everyone, whether they are family members, founders or otherwise.
Most family businesses grow according to predictable patterns that create challenges and require transitions. They benefit from the value of experience, both their own and others’ and specifically when it comes to the process of professionalisation. Their values and corporate culture influence performance, far more so than any other single factor. Finally, their companies’ unique capabilities exert a strong influence on strategic direction and decision-making.
But family businesses also face a unique set of management challenges stemming from the overlap of family and business issues. A family business can be described as an interaction between two separate but connected systems – with uncertain boundaries and different rules. Family businesses may include numerous combinations of family members in various business roles, including husbands and wives, parents and children, extended families, and multiple generations playing the roles of shareholders, board members, working partners, advisors and employees. Conflicts often arise due to the overlap of these roles. The ways in which individuals typically communicate within a family, for example, may be inappropriate in business situations. Likewise, personal concerns or rivalries may carry over into the workplace to the detriment of the business. In order to succeed, a family business must keep lines of communication open, make use of strategic planning tools and engage the assistance of competent outside advisors as needed.
PwC Kenya 2014 Private Company Survey 13 Private expansion in a public sphere Mount Kenya University
Simon Gicharu Chairman to be more market-oriented, so that ‘We can execute quickly and save money employers could choose from a deeper and time.’ The construction of a ‘It could have taken us ten years to build pool of skilled graduates. And he 10-storey building on MKU’s Thika a medical school,’ says Simon Gicharu, wondered if institutions like MKU could campus has required decisions about the Chairman of Mount Kenya University partner with the private sector to adjust contractor, materials purchases and (MKU). But a seemingly small decision curricula and produce more qualified price negotiations, as well as labour to establish an anatomy programme people. contracts. In situations like this, as the paved the way for MKU to enter health leader of a private institution, ‘you are in sciences education and compete with Now, he is focused on building a more control of the decisions that you make,’ government to train the next generation entrepreneurial mind-set among says Gicharu. of Kenya’s health professionals. Now, students ‘so that they can pursue their MKU has an accredited medical school dreams’ rather than waiting for a job Gicharu’s future planning involves and a public-private partnership with after graduation. ‘This is a big making MKU more corporate. This Thika District Hospital to operate as the opportunity in the higher education includes adequate succession planning university’s training hospital. sector but we need a reality change,’ he and an ownership stake among says. These are the kinds of ideas that employees, particularly executive MKU has dozens of other programmes have shaped MKU’s growth as a private management. Gicharu talks about and campuses in Kenya, Rwanda and university over the last decade. opening up the management structure Somalia. But the university has had to ‘to generate more ideas, raise money and work very hard to earn this place in Technology features prominently in bring in new players.’ Education is a higher education. For many years, the Gicharu’s future plans for MKU. He business and should be profit-making, sector was dominated by public believes that universities should he says. ‘Education should have a price universities and churches. ‘We’ve had to encourage more specialisation in tag. It’s worth something.’ do a lot of lobbying in terms of computer science, for example. Gicharu regulation to create a fair playing field,’ is working to establish different centres Gicharu also plans to expand MKU’s he says. ‘Our students can pay for their of excellence on different campuses. Enterprise Academy in Kenya and studies at MKU with HELB loans, This requires aggressive investment and Rwanda. The academy’s three-month whereas previously they could only do support from government. ‘If I was the programme trains up-and-coming so at public universities. We were government, and I was able to influence entrepreneurs in business planning. The involved in lobbying for that. We are higher education, I would want to programme is rigorous and very much guided in what we do and support technology education and entrepreneurs’ plans are subjected to how we do it by government health sciences,’ he says. appraisal by banks. Successful graduates regulations.’ of the programme are awarded seed As a private university, MKU and leaders money to help bring their plans to life. ‘I Gicharu noticed early on that research like Gicharu can make decisions much looked at our graduates and I thought to was the preserve of government easier based on what the market myself, “There could be another James institutions. He thought that an requires. ‘We can find out whether a Mwangi or Vimal Shah or Simon institution like MKU could also create a programme is effective and if it’s not, we Gicharu among them.”’ In all likelihood, division of research and staff it with can do away with it.’ Making decisions there is. qualified Kenyans. He wanted education slowly can be more expensive, he says.
14 PwC Kenya 2014 Private Company Survey PwC Kenya 2014 Private Company Survey 15 New products, new sectors, new markets
Our Private Company Survey shows rise to 35% of sales over the next five that a rising portion of sales will occur years. Around three-quarters of those internationally for private companies surveyed expect to be exporting by the in Kenya. Currently, 25% of current end of the next five years. The target sales of privately owned businesses markets for their exports will primarily are export sales and this is expected to be the East African region.
The new countries for exports will primarily be Sub-Saharan East Africa
Avg. % of sales = International(based on all Avg. % of sales = International(based on all i.e. all exporting i.e. all exporting and non-exporting and non-exporting businesses) businesses)
Current In 5 years Sub-Saharan East: 72% Africa 81% Sub-Saharan West: 13% Sub-Saharan Southern: 11%
Europe 13% Kenya 25% 35% Asia Pacific 13%
Americas 11% USA: 11%
Middle East/Gulf 2%
No new countries 0%
16 PwC Kenya 2014 Private Company Survey Fuelling growth through regional expansion
Private companies and family an agent in another country who is businesses that successfully expand willing to sell their products. Once that internationally have a clear and relationship is established, the parent tailored strategic plan informed by a company may provide more support to keen understanding of local factors. the agent in the form of advertising, marketing, displays, product Companies expand into new markets placement, etc. Finally, it will make for many reasons but customer demand sense to set up a company and exercise and ease of market entry are the two more control to grow the business. Very main signals that expansion could be often the parent company will shoulder sustainable and profitable. However, the costs associated rather than load Titus Mukora many companies lack a clear strategy, costs on a loss-making/start-up governance or operating structures to Director, Tax Services – Transfer operation, but at a certain point issues facilitate efficient, successful Pricing around costs and procurement as well expansion. Others lack access to the [email protected] as structural issues will become more capital or skills that they need. These (20) 285 – 5395 apparent. Good planning is essential weaknesses can be particularly from the outset. pronounced for private companies and family businesses—which may not Some of the challenges to international have expanded into new markets expansion are tax-related. If a Kenyan before. company manufactures its goods and thereafter exports and sells those Above all, any effort to expand goods in Uganda, there should be no internationally must contribute to a customs or VAT levied in Kenya company’s longevity and sustainability because these goods are not consumed as well as profitability. Private in Kenya and are shielded from companies and family businesses may customs duties under the EAC Customs be able to take a longer-term view, but union. But the legislation is such that they may also be more constrained by companies must document that every the capital requirements of last bottle or bar of soap exited Kenya, Jeff Aludo international expansion. Many have the product was manufactured in found that the decision to expand Kenya and that it meets certain Director, Advisory - Strategy & internationally was quick but the thresholds in respect of origination in Operations planning and execution took a long Kenya of the product. While the [email protected] time. Or they may have suffered losses (20) 285 5406 legislation may generally be clear on and had to rethink their strategies. these issues, the burden of documentation is significant and may In general, a company’s approach to result in tasking tax audits. international expansion is largely determined by its overarching group The key for any company expanding structure and operating model. Some internationally is to have a unique companies begin by establishing product or marketing approach stand-alone businesses in new markets because local companies will often and providing ‘service centre’ support understand the market and manage to them, financing international complexity more efficiently. Private investment through debt or equity and companies and family businesses in very often through offshore entities. Kenya are expanding within East Africa and many of them expect an But many companies in Kenya enter increase in regional sales. But that’s not into regional markets through a more to say it’s easy. evolutionary process. They begin with
PwC Kenya 2014 Private Company Survey 17 Financing growth in new ways
Private companies and family among private companies. But businesses are under pressure to adapt financial literacy cuts both ways: faster, innovate earlier and become financial institutions also may not more professional in the way they run fully understand how these businesses their operations. The pace of change is operate and the risks they face, accelerating and yet many of them although many are now hiring staff apply financing approaches rooted in with relevant skills to communicate past experience or the belief that the value of products and services change is incremental. In fact, the available to private companies. But a forces driving change for private lack of a convincing value Sneha Shah companies in Kenya are often highly proposition—or a lack of suitable disruptive. This new reality requires a products generally—may explain why Manager, Transaction Advisory Services new approach to financing the just 11% of our Private Company [email protected] (20) 285 5112 business. Survey respondents identify ‘availability of finance’ as a key Cash is one of the most common external issue for their company in the vehicles for financing growth among next 12 months. It is not an issue private companies in Kenya. A because they have adequate cash to business’s cash flow can indicate how invest and other sources of finance are well it is performing and how healthy unsuitable, too expensive or it is financially. The majority of private unavailable to them. companies in our survey are growing either steadily or aggressively and so For example, a bank may have may feel little need for additional difficulty evaluating a private financing because their cash flow is company’s greenfield investment, its adequate. expansion plans or asset investments. Traditionally, the bank has had a Working with private companies, we conservative position because of 23% look at how they use cash and how information quality, security and identify availability of finance as key efficiently it is being used. Looking levels of personal guarantees. The issue over next five years ahead, we help companies to think bank applies one standard model to about the cash flow needed for future everyone: an automated system opportunities. But for most private dictating credit control and risk. companies, cash-driven growth is not Borrowing will be assessed based on going to be adequate in the long an existing balance sheet. Security term—no matter how carefully or requirements and capital requirements strategically it is employed. are high. Furthermore, a strong cash position can obscure strategic weaknesses. Finance is expensive; pricing is Sometimes we find that too much cash expensive. Kenya may be perceived as is being taken out of the business, a a risky market. To borrow dollars, the potential point of conflict. These and company must earn dollars. If the other issues can complicate a reliance company borrows Kenya Shillings, the on cash to finance growth. interest rate is higher. Acquisitions can be easier, if the bank can assess the The benefits of other financial track record of the target company, but products may not be well understood ‘due diligence’ is often very partial.
18 PwC Kenya 2014 Private Company Survey Financing growth in new ways
These issues are not confined to banks. particularly individuals who may have Development Fund Institutions may led the company for a long time, may have long lists of criteria to satisfy, resist these kinds of changes and although they can offer longer loan worry about dilution of wealth or tenors and lower interest rates. Private power. equity houses offer another option but some private companies shy away at At the end of the day, the availability having to give up a share of ownership and structuring of finance is a complex as well as the due diligence required. issue for many private companies and Private equity houses will want high family businesses in Kenya. Although visibility with regard to how their there have been some positive money is used. movements to recognise and address the challenges facing private These and other challenges mean that companies, there is still significant many private companies in Kenya room for improvement to reduce the reach a point when they start to overall ‘financing gap.’ consider professionalising and restructuring the company. Even very large companies can have very simple corporate structures like ownership by a single individual. Group or holding company structures would allow them to leverage many efficiencies, not least among them tax, purchasing and cash efficiencies. Good corporate governance, like independent members of the company’s Board of Directors, lends credibility to a private company wishing to finance growth. A thorough operational review can identify any concerns like cash leakages and allow the company to remediate them before they go to the market for finance.
It can take a very long time to unravel complex, outdated corporate structures within private companies. Many times, a younger generation of owner-managers will drive this kind of change. They will understand that the expense of setting up new companies, injecting capital and restructuring will enhance wealth protection for generations to come by helping to grow the company sustainably and profitably. Older generations,
PwC Kenya 2014 Private Company Survey 19 Keeping pace with change The innovation imperative
Privately owned businesses recognise overtaken by more advanced the growing transformative impact of competitors. 61% accept that they will digital technologies. They recognise that need to attract the right talent to do they will have to adapt the way they this, which raises a question about operate externally and organise whether the remainder are fully aware themselves internally to exploit the full of the extent of this change. potential of digital and avoid being
% agreeing with statements about the digital world
81% Moving to digital will help raise organisational awareness 64%
79% Need to adapt organisation to an increasingly digital world 72%
Understand the tangible business 69% benefits of moving to digital and have a realistic plan for measuring them 57%
Attracting talent to undertake 61% the conversion to digital is at the top of our agenda 43%
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20 PwC Kenya 2014 Private Company Survey Businesses and consumers in emerging high priority, anecdotal evidence—and businesses risk becoming complacent markets are ‘leapfrogging’ old the experience of our teams around the and uncompetitive. However it is easy to technology and moving immediately to world—suggests that family businesses see how the psychological factors that new digital alternatives. In Kenya, we are still reluctant to change. As one of come into play as the business matures now have broadband internet and our interviewees said, ‘Family firms could make those running them more mobile penetration creating digital either don’t want to reinvent themselves, risk averse and less entrepreneurial: capabilities for both producers and or can’t. In practice they find it hard to later generations don’t want to be the consumers. Social media can enable divest legacy businesses, and only ones who ‘lose the farm’ and the number start-ups to cast a much wider marketing expand or diversify within a narrow of family members dependent on net at low cost and allow them to range.’ dividends can be very large for a compete effectively and cost-efficiently business that has been in existence for with much bigger players. There is also evidence that both growth 50 or 60 years. and innovation are a lower priority for Innovation is a key concern for privately businesses in their third or later owned businesses, particularly those generations, who place more emphasis pressing for aggressive growth. And yet on ensuring that the business remains in even though innovation is listed as a the family. This could suggest that these
PwC Kenya 2014 Private Company Survey 21 Disciplined innovation, digital disruption and technology advances
E-commerce is thriving, which helps to is on meeting demand and not explain why 81% of our survey efficiencies provided by systems and respondents say that moving to digital technologies. But the competitive will help them raise organisational landscape is changing very fast. Smart awareness. Many of their customers companies will professionalise their expect digital capabilities. operations sooner rather than later and many times this process includes A challenge to digital commerce is a lack investing in technology, digitisation and of physical address signs on buildings a disciplined approach to innovation. In and residences, which impedes efficient our experience, planning is essential to Muchemi Wambugu distribution. An efficient addressing deriving value from these investments. system would further ensure that goods Partner, Advisory – Technology purchased online and paid for Private companies in Kenya are shifting [email protected] electronically would actually arrive as in a digital direction but this shift hinges (20) 285 – 5622 promised. on a stable operating environment, economy and political situation. When Furthermore, consumer protection the environment becomes less stable, legislation should be actively pursued to people and companies return to the Investment in innovation can protect those who trade online, ensuring safety of what they know: paper trails, demonstrate the strength of a private that consumers have recourse against not innovation. But although innovation, company’s future planning and fraudulent activities online. digitisation and technology adoption sustainability. A simple way to evaluate require a stable environment in order for Private companies and family business a company’s commitment to investing in companies to earn a return on their owners know that they must hire the innovation is to count the number of investment, they are also themselves right people to manage innovation. But innovative projects underway. highly disruptive forces of change. In it can be difficult to identify and attract response, wise companies plan well and the right people if a company has a They could involve specific initiatives to maintain their agility at the same time. increase the rate of sales growth, win brick-and-mortar, paper trail legacy of more market share or improve managing growth, or if opportunities for profitability. A new product or service, advancement are limited. system, distribution network, supply Kenya now has a large population of line, raw or finished material, talented highly innovative people who are well person or team could all count as trained and hard working. They want a innovations leading to growth. Most digital environment to make innovations simply allow an connections and test new concepts, and organisation to do things in a new way. they tend to distrust strict management When we see multiple projects of an hierarchies. So it is important for private innovative nature under way at any companies to design their business given time, we are more confident of strategies in such a way as to allow that company’s growth prospects. innovation—and innovative people—to In Kenya, innovations enabling digital flourish. transactions have improved the ease and Technology can be a catalyst for reduced the cost of connecting with innovation, it can facilitate innovation customers. Mobile financial transactions and technology itself can provide have opened up new ways of doing innovative solutions. Perhaps, at the business for companies of all sizes. moment, the focus for many companies
22 PwC Kenya 2014 Private Company Survey Digital transformation Seven Seas Technologies Group
Michael Macharia Founder and Group CEO
Michael Macharia calls himself an drives up salaries and retention is a This is especially true of younger ‘accidental entrepreneur.’ He wanted to challenge. Seven Seas outsources employees. ‘They have to believe that they work on Wall Street and studied finance expertise by tapping into talent pools of are part of a project that is changing lives and strategic management before freelance workers and also retrains and and making a difference,’ he says. ‘So we venturing into business for himself in hires teams with specific skills. The build a connection between the idea or Kenya and Rwanda at age 25. Fourteen company sponsors a talent acceleration project and the employee. They also need years later, he says that he has no regrets programme for university students and to feel that there is a personal gain and because ‘when you are driven by a cause offers management development that collaboratively within their teams, and passionate about changing lives and opportunities for employees. they are having fun and energised.’ transforming communities, you have to But he finds that a freelance mentality is He is passionate about entrepreneurship move forward. It’s about what you’re still scarce in Kenya, where the technology and believes that small and medium-sized obligated to do.’ industry is not yet mature enough to build enterprises (SMEs) are the key to This sense of obligation informs a joint and common skill pool. He says growth—and not just in the technology Macharia’s approach to both talent and that a ‘change of mind-set’ will allow sector. ‘We need to nurture the next technology. Seven Seas Technologies people to forego formal employment and generation of companies in emerging Group is a leading provider of integrated instead view themselves as individual sectors like ICT, oil and gas, health and business and technology solutions in assets available for sub-contracted work. agriculture,’ he says. Entrepreneurs also Africa. The company delivers healthcare, These freelance entrepreneurs can also need to have a voice in society and in homeland security, citizen and central help build up the next generation of Seven government, and Kenya’s education sector government solution services and works Seas Technology Group companies. could do more to teach entrepreneurial in partnership with global companies like Macharia believes that Kenya needs at skills. General Electric – Healthcare, SAP, least ‘sixty or seventy of these companies For Macharia himself, ‘it’s never been Oracle, EMC, Hitachi and Cisco, among in the next three years’ to meet the about money.’ Instead, the decisions he others. country’s demand for technology services. makes as CEO help to change lives and Seven Seas is a market leader and One of the best tools for inspiring talented transform communities. ‘I try to make Macharia is conscious that in this position, people is to appeal to their sense of social sure that every decision I make is towards the company becomes a ‘hunting ground obligation—the same source of motivation making a difference and when I hire for talent’. The war for talent is real, he that has propelled Macharia’s career someone, I try to ensure that they also says. Demand for highly qualified people forward. have the mind-set of making a difference.’
PwC Kenya 2014 Private Company Survey 23 Professionalising the business Moving to the next level
The need to professionalise the business So what does ‘professionalising the is gaining ground as a key concern for business’ mean for private companies? private companies, driven by an almost 40% Which areas does it cover, and what are perfect storm of competitive pressure, agreed that formalising and private companies doing to address it? rising costs, and global megatrends. In modernising the business is a key Professionalising the business is not our Private Company Survey, 48% of the challenge over the next five years about process for its own sake, or about respondents agreed that this is a key weighing down the entrepreneurial flair challenge over the next five years, and a that launched the private company in fascinating picture emerges when that the first place. It is about giving figures is broken down. structure and discipline to that vision younger and energy so that private companies It is the younger and more ambitious will be able to innovate better, diversify and more ambitious businesses are businesses which are more likely to cite more effectively, export more and grow more likely to cite professionalising as professionalising the business as a goal, faster. In short, achieve their twin goals a business goal and are more aware of the risks and of ensuring the company’s long term opportunities for the move to digital future and improving profitability. technology. They are also more likely to think of the private company model as slow to accept new ideas. They are more likely to be looking at a possible Private Equity exit strategy and they know that these investors will look for a well- managed and disciplined operation. This applies equally to those looking to undertake an Initial Public Offer (IPO).
24 PwC Kenya 2014 Private Company Survey Professionalism in practice Processes, governance, skills
Processes Governance There are three distinct Though there are some private The corporate governance of private areas where family companies that manage without formal companies in Kenya is also earning more businesses are feeling the business processes – especially first- attention, albeit slowly. More private generation entrepreneurial start-ups – companies are seeing the value of need to professionalise their most larger firms now have documented appointing experienced non-executive operations. Some of this is procedures and policies, if only to comply directors although it can be hard to find fairly basic work around with external regulations in areas like and recruit people with the right health and safety and employment law. expertise because their Boards are often systems and processes, There are still private companies with perceived to be more problematic than but progress is also thousands of employees and no HR those of conventional companies. being made on corporate manager, but these companies are now the exception, not the rule. Likewise “We have to make the transition from a governance and on people many are automating their operations family organisational structure to a management. and increasing their use of IT as a way to professional corporate management improve productivity and efficiency and structure” to counter cost pressures. They are also 3rd generation being more systematic and structured in their approach to sourcing, again as a “We need to convert the organisation and result of rising costs. communication structure from informal to formal” “It can be incredibly difficult to make any 1st generation change within the company or control expenditure. With multi-national “When I was younger the family was the corporations they have a set approach company’s strength; when the second and which we need to adopt – our profits will third generations come in they are being increase with better governance” fed with a silver spoon” 2nd generation 3rd generation “We need to upgrade and formalise our “The board has to find a balance between processes. As the business grows we need autonomy while keeping its to be sure that the right structures are in responsibilities: finding the right balance place” between running the business more formally and sustaining 2nd generation entrepreneurship” “We need to improve processes, systems 3rd generation and controls to achieve seamless growth” 2nd generation
PwC Kenya 2014 Private Company Survey 25 Skills Attracting and retaining skills and talent When it comes to skills, continues to be a concern and a ‘professionalising the business’ challenge, as family businesses can frequently translates to ‘bringing in struggle to compete with the share outside talent to run it.’ This is often the options and structured career paths right decision, especially when the offered by major multinationals. As one business reaches a certain critical scale, interviewee put it, ‘Recruiting senior staff but it can still be a challenging moment is difficult because they don’t see a career for private companies. When they bring with a family business.’ in outside managers – especially at the The issue of skills is also fundamental to executive level – the dynamics of the other key areas of concern: if family firms business inevitably change. A different are to expand internationally, diversify set of stakeholder interests come into into new markets, manage risk better, or play and the business becomes less like a innovate effectively, many of them will private entrepreneurial venture and need to bring in the people to do it. And more like a public company. The there is no point in hiring those people challenge for private company managers unless you have professionalised systems is to understand that transition and and processes that will make it possible recognise that they themselves have to for them to do their job. change if it is to be a success. They have to accept a loss of control and an “We need to get in the right leadership increase in discipline, both which can be talent, we need to have a well-trained difficult, especially when there are workforce” strong personalities involved, as is often the case. 2nd generation “Retaining people is a challenge. We have “Key positions in the organisation are to restructure our reward packages to held by professionals but top positions are keep employees interested in our next held by family members. Family members phase of growth” are giving up their roles to professionals. This transition needs to happen properly” 1st generation
26 PwC Kenya 2014 Private Company Survey Performance and professionalism Bidco Oil Refineries Limited
Vimal Shah ‘We run our company like a public company Board of Directors, they keep it in terms of professionalism and visibility,’ professional. ‘It’s about issue-based decision Director, Chief Executive Officer says Vimal Shah, CEO of Bidco Oil making,’ he says. ‘The rule is simple: if you Refineries Limited, Kenya’s largest think you have a good idea, justify it to the manufacturer of edible and hygiene Board. If we’re all convinced, then we do it.’ products. Shah says that this model helps them to make decisions quickly. ‘In twenty minutes whether they are creating new leaders. The The company has manufacturing events in I can assemble the Board at Bidco company is growing, so there is no fear that three countries and exports to over 16 headquarters,’ he says. (Indeed he did, in they will lose their jobs and as a result, ‘we countries in Africa with plans to expand much less than twenty minutes, when PwC find that they act more like leaders’. This into several more, with the goal of covering interviewed him for this article.) policy has improved retention. When a key all of Africa by 2030. It markets products to person does leave, ‘we look at what consumers as part of a lifestyle. Shah says Bidco employees are organised into teams, happened but there are already two or that Bidco wants to earn their loyalty ‘from such as the company’s edible value three people under them who can the time they wake up until the time they stream—not rigid silos. Team leaders have seamlessly take over,’ says Shah. sleep.’ From family bathing soaps, to visibility of the whole value stream, from detergent and laundry soaps, cooking oils the raw materials suppliers all the way to Although Shah can point to many aspects in different ranges—including vegetable oil customers. Shah himself has information in of Bidco management that are similar to and fats as well as premium olive oil blends real time about customers and sales on his that of a public company, he acknowledges and sunflower seed oil—margarine, iPad. Even the company’s operations and that there are some differences as well. ‘At baking soda, scouring powder and toilet support services are aligned to value public companies it’s about paperwork and cleaners, all of these daily items (and more streams. ‘The guy who runs our boiler will it’s not efficient. The ‘i’ is dotted and the ‘t’ to come) could be Bidco products in a know how much power he’s using and he is crossed, and it kills innovation. Private consumer’s life. has information to support his companies have easier growth plans and management of the boiler,’ says Shah. they can just do it and they can attract Shah says that Bidco has a number of ‘There’s no hair-pulling and there’s no people who are more agile and innovative. strategies to make this happen. First, the struggling for information.’ company invests in greenfield operations ‘But the downside is that I’ve also seen and starts new product lines itself. Second, The company’s practice of Kaizen has private companies that are so private that it looks for companies that want to grow or yielded manifold dividends with team even different divisions of the same that have succession problems. Bidco can spirit being the guiding force. A number of company won’t know what the others are professionalise them by bringing the entire quality ISO certifications and awards in doing.’ company onto the Bidco platform. This is various categories have only reinforced the Shah believes that a family-focus at work attractive to owners because ‘you become a company’s commitment to excellence. can mask a lot of inefficiencies. He points to shareholder, you’re part of a bigger ship, Recently the company was nominated as a other family-owned companies where a you become an owner of other Bidco Global Growth Company by the World dominant personality makes most of the companies,’ says Shah. Economic Forum—the only nominee from decisions. ‘It can hide a lot of inadequacies. Kenya. Bidco is managed by Vimal, his brother Instead, if you’re professional, you’ll be Tarun Shah and his father, BD Shah, and Bidco’s policy is to build leaders at all levels. judged by what you do and what you are one external director, Dipak Shah. Vimal Everyone is required to train three people capable of doing.’ That is the Bidco way. Shah insists that when they meet as a and they are assessed on the basis of
PwC Kenya 2014 Private Company Survey 27 Working with your relations can generate much higher levels of trust and commitment, but it can also lead to tensions, festering resentments, and open conflicts.
The heart of the matter Professionalising the family
The strengths and weaknesses of the eventually arise at some point. This family business model is right there in potential for conflict is one of the main the name: the family. Working with your reasons why so few family firms survive relations can generate much higher beyond two or three generations. levels of trust and commitment but it can also lead to tensions, festering “It can be incredibly difficult to make any resentments and open conflicts, as the change within the company or control individuals concerned struggle to keep expenditure. With multi-national ‘head’ and ‘heart’ separate, and make a corporations they have a set approach success of both their work and family which we need to adopt – our profits will lives. increase with better governance”
Because it involves ‘heart’ as well as 2nd generation ‘head,’ professionalising the family is “We need to upgrade and formalise our much harder than professionalising the processes. As the business grows we need business, and often gets postponed to be sure that the right structures are in simply because it raises too many place” intractable issues. But it cannot be put off forever, and the risks of not facing up 2nd generation to the challenge will increase with time. “We need to improve processes, systems It is only a matter of time. It may not and controls to achieve seamless growth” happen in the second generation, or the third generation, but conflict will 2nd generation
28 PwC Kenya 2014 Private Company Survey Even in a large and successful business, More family businesses are setting up there is a very real risk that family issues family offices as well, either dedicated will eventually precipitate a crisis for the or shared. These offices, in their turn, firm as well as the family, and both may 23% are also becoming more professional, fail as a result. As with so much else, of Kenyan family businesses have a moving beyond ‘concierge’ services to these issues need to be addressed in the succession plan in place that is robust relationships advice, family counselling good times, because kneejerk decisions and documented and, where necessary, mediation. made during a crisis rarely result in the ideal outcome. However, the all-important issue of succession has still not been fully Professionalising the family means grasped or effectively addressed by far putting processes in place to govern how too many; 53% say they have a the family interacts with the business. succession plan in place for some if not This includes establishing an all senior roles, but when questioned infrastructure for decision making and further, only 23% of those plans are formal channels for communications properly documented. that can supplement the informal ones and will come into their own during A plan that is not written down is not a times of tension or difficulty. It is about plan, it is just an idea, and this is an protecting the family’s interests and issue family firms must address with the safeguarding the company’s survival. In same commitment and energy as they other words, it is the vital family devote to professionalising other aspects governance piece which must sit of the business. Without it, the entire alongside the equally important enterprise is at stake. corporate governance structure.
Our Private Company Survey shows that 73% of Kenyan family businesses have mechanisms in place to deal with potential conflict. The procedures in question include shareholder agreements, family councils, provisions for third party mediation and family constitutions.
PwC Kenya 2014 Private Company Survey 29 Managing conflict Conflict arises at some point among Even where the business has colleagues in every organisation. Among documented conflict resolution private companies and family businesses, mechanisms, it is important to reflect sources of conflict often arise as a result upon these policies and their of efforts to professionalise the company. appropriateness and to ask if they are There is natural tension between the still fit for purpose as the business entrepreneurial spirit that made the expands. Many times, conflict resolution business successful and the increased is reactive and only implemented in discipline necessary to take it to the next response to a crisis. level. Furthermore, informality and close relationships—which may be familial— An informal approach to conflict add a layer of complexity to professional resolution may undermine its disagreements. Documented effectiveness and fairness. Very often, Muniu Thoithi frameworks, agreements, policies and private companies and family businesses Director, Advisory –Business procedures that are cascaded to key rely upon individuals rather than Recovery Services stakeholders can help companies to structures to manage conflict. Third parties can provide valuable mediation [email protected] manage disagreement before it roles but perception matters: third (20) 285 - 5684 degenerates into value-destroying conflict. They also help to resolve parties who are associates or relations of expectation gaps, misunderstandings, interested parties may not have the same ambiguity and a lack of clarity. impartiality—perceived or otherwise— as someone who is truly independent. Conflict often occurs because there is a lack of communication or transparency In our experience, there is no one-size- with regard to information-sharing. fits-all approach to conflict resolution but Making data available and putting affairs the company’s values should permeate on the table can help to minimise the the entire process. A family or private likelihood of conflict. Conflict tends to company may value unity, privacy, arise when different members of the discretion and/or reputation above all company’s leadership team have else and may not tolerate conflict different views about where they want resolution mechanisms that are not the business to go, such as when the aligned to the company’s values. Instead Malvi Shah company is engaged in deals and of solutions that are prescriptive or an inflexible framework, they may prefer Manager, Advisory – Business extraordinary transactions. Conflicts guiding principles to help resolve Recovery Services about performance management are also conflict. But these principles must be [email protected] common. People who have worked for the company for a long time and closely clear and agreeable to everyone. (20) 285 - 5057 associated with the sponsors may not be Another way to approach conflict willing to embrace the rigours of resolution is by managing the company performance management. Operating in in such a way as to minimise conflict. a dynamic environment makes it Planning ahead, communicating clearly, necessary to constantly assess the providing information in a transparent company’s strategic positioning to manner and managing change can build remain competitive and relevant, but this alignment and reduce sources of conflict. can also lead to conflict about direction. Succession planning (or a lack thereof), competitive pressure, risk tolerance, cost increases and the process of professionalising an organisation are also sources of conflict.
30 PwC Kenya 2014 Private Company Survey In many cases, even the word ‘succession’ itself can provoke a reaction.
Bridging the gap Making a success of succession
The passage of the baton has always As the business gets older, more been a hazardous moment for the family potential successors come into play, the business, and never more so than now. numbers in the wider family grow and The world has changed out of all the potential for conflict rises. As one of recognition since the current generation our interviewes pointed out, ‘The first went into business 30 or 40 years transition from the first to the second ago. The ‘generation gap’ is widening generation is the easiest. After that it literally as well, as people have children gets progressively harder. The bigger the later. This means that the periods family gets, the more likely it is that between each transition are there will be people who have never lengthening, which puts even more worked in the business and don’t strain on a rite of passage which is understand it or it’s issues, but are still already fraught with potential problems. expecting to receive their dividends. That’s bound to cause tension, especially when people react emotionally rather than rationally.’
Succession plan in place for key senior roles
% with a succession plan in place for at least some senior roles All senior roles 26%
Most senior roles 13% 55% 53%
Small number Kenya Global 16% of senior roles
23% of Kenyan family businesses have a None 45% succession plan in place that is robust and documented (16% worldwide) 0 10 20 30 40 50
PwC Kenya 2014 Private Company Survey 31 In many cases the word ‘succession’ Succession will always be an emotive “There has been no discussion of itself can provoke a reaction, especially issue which is all the more reason why it succession, it’s not something that gets in the founder or current CEO. It is an needs to be managed on a professional talked about with my father” unwelcome reminder of age and rather than a personal basis. Too many mortality and threatens loss of influence Next Gen survey interviewee family businesses are still approaching it and redundancy, in the widest sense of as a one-off event rather than a long- “I wasn’t sure how the whole succession the word. term process. thing would work out, because at that No surprise, then, that so many family stage my uncle and my father owned the An increasing number of family businesses exhibit ‘sticky baton’ business and there was no agreement businesses ensure – or even insist – that syndrome, where the older generation tabled or even discussed in the early younger family members go through a hands over management of the business years” proper development programme before in theory, but in practice retains Next Gen survey interviewee entering the firm, and in many cases complete control over everything that this includes a spell working outside the really matters. No surprise, either, that “My biggest challenge is to find a business. so many incumbent CEOs either evade successor – someone to take my role in the or block any discussions about business” This ‘professionalising’ of the next generation is helping to close the third succession with those who expect to 3rd generation take over. This creates uncertainty, of the three gaps, the credibility gap. which is unhelpful for the individuals “It’s still my father’s business and 59% of participants in our global PwC and the business, and in extreme cases everything is absolutely his decision. He Next Gen survey said that winning the can lead to complete disconnect will judge when the time [for succession] respect of their co-workers was one of between what the incumbent is privately is right and no one else will say when that their biggest challenges, and many of planning, and what the next generation will be. It is not up for discussion so that the other issues they cited are closely is expecting. will be a challenge” related to this including understanding the complexity of the business (44%), Next Gen survey interviewee being asked to take on a job they feel unable to do (18%), or taking on responsibility too early (9%). In the same survey, 88% of the next generation said they have to work even harder than others in the business to ‘prove themselves’ not only to their colleagues and employees but also with customers.
32 PwC Kenya 2014 Private Company Survey Professionalise to optimise Nakumatt Holdings Limited
Atul Shah Nakumatt—or ‘Nakuru Mattress’ as it was Some of Nakumatt’s more recent recruits once known—got its start in 1987 and include young people with technical Managing Director opened its first branch in 1992. Now the backgrounds to help Nakumatt modernise brand is ubiquitous across East Africa but its retail footprint. ‘We need to be online; Atul Shah, the founder and Managing we need to be in touch by the minute,’ he Director of Nakumatt Holdings Limited, says. The company is also developing a did not initially set out to grow a regional system of electronic invoicing for suppliers. are busy and our basket value is higher at brand. ‘Our vision was always to be a ‘We embrace technology,’ he says. ‘At the night than it is during the day,’ he says. The Kenyan supermarket, but opportunities end of the day, if you get it right, you see the company’s expansion plans have not came up so we made it an East African value. But it can take a while before you get included a convenience store format, brand.’ In the years ahead, Shah sees it right.’ however. This is in line with market additional opportunities ‘further afield in demand, according to Shah. ‘We are not in the wider sub-Saharan region’ including The right people make all the difference, smaller formats, not totally metro. We’re Central Africa. according to family business owners like going for a minimum size, but disposable Shah. Nakumatt is cultivating talent from incomes cannot sustain a convenience store Getting to this point has required a deep within the company but regional expansion today.’ commitment from several members of his has posed a special challenge. ‘We need family. Shah worked for his father in the regional heads and management at Nakumatt does face some challenges to its retail sector before starting Nakumatt with regional levels, and it’s a challenge to get growth ambitions. The company suffered his father and late brother. Today, his two the right people and then not having them losses as a result of the Westgate terrorist sons and a nephew have joined the here all the time.’ He says that the company attack in September 2013 and Shah company. He describes his family’s is recruiting local talent in-market but this, believes that an ‘enhanced uniformed involvement in the business as ‘part of too, can take a while. security presence’ would provide additional Nakumatt’s growth story’. consumer confidence. He is also concerned Nakumatt distinguishes itself from other about shoplifting, which he says has grown Over the course of his career, Shah has seen retailers through its commitment to into a ‘complex crime.’ The culprits are a marked shift in the number of young quality, service, variety and lifestyle getting bolder but ‘the current legal and people returning to Kenya to work. ‘When choices, according to Shah. ‘Service is the justice system never foresaw such you look at the last seven or eight years, most important for us, it differentiates us. challenges and thus remains relatively lax Kenya has really opened up—such as in the Customers have choices, and we have 190 for the perpetrators.’ way technology is used.’ This has made nationalities amongst our customers in East Kenya a more attractive place to live and Africa.’ His objective is for every employee Shah projects that the company will work, and young people are making a of Nakumatt to ask themselves, ‘How can I achieve US$ 1 billion in turnover by 2018 distinct contribution. ‘They are bringing in satisfy a shopper, how do I make that and before then will issue an IPO and new ideas and they want to do things a customer come back?’ employee share options. Shah himself little differently.’ At Nakumatt, Shah says plans to stay put in the job he loves. that they are encouraged to take on new Market research revealed that Nakumatt’s ‘Everybody is happy and busy working at challenges, whether they succeed or fail, busy customers appreciate the convenience the moment,’ he says. ‘But if tomorrow I because this is part of the learning process. of 24-hour shopping. ‘People are under was to walk out, the team is in place and pressure and at Nakumatt, they can shop at they all know what they’re doing.’ any time. At 2 o’clock in the morning we
PwC Kenya 2014 Private Company Survey 33 Planning for the passing of the baton
generation of leaders must not simply Complementary strategies include replicate previous management rational salary structures and practices and experiences. They also performance evaluation processes, know that a certain amount of promotions and job descriptions based competitive tension among potential on company requirements, a code of leaders can be healthy for a business but conduct governing everyone’s behaviour that there are risks, particularly when and the participation of independent family members or other long-standing directors or advisors. For senior people, relationships are involved. we often recommend that the horizon for performance review must align with Michael Holzmann Effective succession plans address these the horizon of the business strategy that and other issues while ensuring that the Director, Advisory – People & Change they are tasked with delivering. It may business’s core values remain intact. In take two years to build an opportunity, [email protected] fact, these values may be the best anchor for example, so performance should be (20) 285 - 5308 for a good succession plan because they assessed on the same basis. lend a sense of cohesiveness to a potentially divisive process. Good succession plans also have a time element. People who are giving up or Leadership transitions can have Whatever their future plans, most taking on new responsibilities need to significant implications for private companies will want to position have space to think it through and, more companies and family businesses. These themselves as attractive investment importantly, plan for and test new organisations often retain their leaders destinations now. Investors may be behaviours that they are expected to for longer periods of time and they have family members, close friends, banks, display. For succession to occur, this more influence on business strategy, private equity houses or development process needs to be communicated management style, motivation and fund institutions but as a company clearly and cohesively across the company values than leaders at other grows, investors of all kinds will share organisation. Sustaining behavioural kinds of companies. Given their an interest in the company’s changes can be a challenge; too often, it influence, the moment of transition has management structure and governance. is too easy to slip back into long- the power and potential to destroy value established patterns. Various strategies will contribute to their and even sink a company unless it is confidence. In general, it helps to build managed with the same rigour and Succession planning is not a mechanistic lateral capabilities, so that leadership objectivity as any other aspect of process, it is not clinical and it is not a development is competency-based and business decision-making. Companies matter of tick-the-box, quick responsibilities are shared and allocated. that manage transition well understand compliance. Succession planning is Looking across an organisation, there that succession planning is a process— essential for companies’ internal should be more than one obvious not an event. capacity to grow in a dynamic successor possibility. To operationalise environment and a non-negotiable for Issues surrounding leadership transition this structure, current leaders can most serious investors. Many of our and succession planning are particularly allocate certain responsibilities over survey respondents (48%) believe that relevant now because so many private time and allow people to operate private companies and family businesses companies in Kenya are entering the independently. This can require are distinctly capable of re-inventing next stage of professionalisation. As behaviour changes and undoing themselves with each generation but their companies grow and change, long-established patterns, particularly if this potential can be compromised company leaders are evaluating various certain hierarchies or relationships are without a clearly communicated, robust senior-level responsibilities and reinforced outside of the workplace. and documented succession plan. anticipating how those responsibilities Some organisations employ executive will evolve. They know that a realistic coaches to help leaders modify, monitor development plan for the next and change established behaviour patterns.
34 PwC Kenya 2014 Private Company Survey From managers to owners A new model for the family firm?
Just under half of Kenyan family A strong feeling of human motivation businesses are planning to pass on and ego comes through with thoughts of ownership and management to the next legacy. Family business respondents generation and 37% are planning to sell want to be remembered for something or float the company. There are many positive which encompasses both brand forward-thinking family business CEOs and community. who are open minded about the next generation’s involvement because they “Generally we work to the betterment of see the family business as meritocratic, all. So we want something sustainable for not dynastic. At 13%, however, that the community to operate” percentage is worrisomely low. 3rd generation “The support of the local community in Future plans for management and ownership of family businesses general terms of employment and development of the area and the whole
47% community spirit” Pass on management to next generation 3rd generation 40% “To establish a very successful, profitable business for the next generation” 37% Sell/float 2nd generation 20% Breakdown in “For the continuity of what our brand Kenya stands for and that is quality and Pass on ownership but bring 13% • Sell to private innovation” professional management in equity investors: 32% 24% 1st generation • Sell to another 3% company: 13% Don't know • Sell to 8% management team: 10% • Flotation / IPO: 0% 8% Other 1%
01020304050
Kenya Global
PwC Kenya 2014 Private Company Survey 35 Dynamism is the story of family businesses
It can be hard to tell at the outset growing economy. There may be whether a company will become a family disputes between family members that business. An entrepreneur may choose make joining the family firm his spouse as his first co-director, unattractive. followed by trusted siblings, cousins or other family members whom he knows These and many other societal factors well. In time, the factors that distinguish help to explain why, in our Private a family business are its ownership Company Survey, 100% of respondents structure and a corporate culture that say that family members work as senior transcends generations. executives at their companies but far fewer—32%—say that family members Kaajal Raichura Family businesses often require different work within the business but not in Manager, Tax Services strategies, different financing concepts senior management. [email protected] and different governance structures than Choices about ownership and (20) 285 – 5377 other types of companies. These special qualities give rise to many benefits and management tend to be influenced by opportunities as well as some the growth objectives of a small number disadvantages. They may lack the same of owner/founders. Some of them are access to bank or capital market funding; more or less risk averse; others have the they may find it difficult to attract top ability to take the long view and benefit talent and family issues can absorb time from strong relationships with family and attention. But although there are members founded on trust. ‘Horizontal many powerful ‘family factors’ in play, expansion’ is increasingly common, with few family businesses would characterise many family businesses growing into themselves as such. successful, diversified conglomerates. This model helps to spread risk when Ownership structure influences this times are tough but also increases the complex view of family businesses by risk of the company losing strategic business leaders themselves. Increasingly focus. Furthermore, it can be difficult to we see family businesses diversifying divest legacy businesses within a Shreya Shah ownership and management away from conglomerate when family members are Consultant, Tax Services the family. involved. Good planning can preserve [email protected] the value that family business founders Partly this shift is attributable to societal worked so hard to achieve. (20) 285 - 5389 changes. Younger family members may be encouraged to move back from abroad Many family businesses do not survive and participate in the family business past the second or third generation because they are needed or because this because it is difficult to transmit is the family’s expectation. But families corporate culture and the family’s values are getting smaller; fewer siblings, across generations. Our advice to family cousins and offspring reduce the genetic firms is to start the planning process talent pool for family businesses. Others early and communicate values clearly. It may return from training or work can take decades to grow a successful overseas to find that opportunities company and relatively little time to within family firms are less attractive destroy it. Good planning can make all than other opportunities in Kenya’s the difference.
36 PwC Kenya 2014 Private Company Survey Conclusion
Professionalising the business will allow The rewards will be significant for those private companies in Kenya to innovate who do seize this challenge, while the better, diversify more effectively, export risks of not doing so will increase with more, grow faster and be more time especially as it is likely that the profitable. It will open up new failure rate of the private company commercial opportunities and more sector will rise as the pace of change in options for a possible sale in the long the wider economy accelerates. term by making them more attractive to PE buyers and multinational buyers. Professionalising the family will ensure that family members become effective But these benefits will only be realised if owners, whether or not they are actively private companies have the courage to involved in managing the firm. It will professionalise the family as well as the make it possible to re-invent the business. Doing one and not the other business, by taking the objective will only create tension and possible perspective of the informed investor, conflict, especially if outside managers rather than falling prey to decisions are brought in at executive level. dictated by emotion or history. In our Professionalising the family is much experience, we have seen how liberating harder, and will take longer, and it is this approach can be. By understandable that many companies professionalising the family, the sector are shying away from tackling an issue as a whole could re-invent itself and so fraught with potential conflict. But it evolve from a model based on ‘family cannot be postponed indefinitely. business’ to one driven by a new vision of the ‘business family.’
Michael Mugasa Partner and Private Company Services Leader
PwC Kenya 2014 Private Company Survey 37 Methodology
Globally, 2,484 semi-structured companies in over 40 countries telephone and online interviews were worldwide between 29 April 2014 and conducted by Kudos Research in London 29 August 2014. These included 62 with key decision makers in private interviews in Kenya.
Kenya sample profile: Business
Turnover (US$s) Company age
37%
47% 44% 38% 38% 22% 20% 16% 16% 15% 16% 14% 13% 18% 11% 15% 6% 4% 5% 5%
<$5m $5- $11- $21- $51- $101- >$500m Under 20 years 20-49 years 50+ years 10m 20m 50m 100m 500m
Turnover (US$s) Number of generations
42% Mix of sectors: Kenya 39% 40% Manufacturing: 29% (30%) 30% Retail: 16% (11%) Transport: 11% (6%) 19% 15% Business activities:10% (7%) 11% Mining and utilities: 8% (4%) 3% Agriculture: 8% (5%) Hotels/restaurants: 6% (3%) 1 generation 2 generations 3 generations 4+ generations Others: 5% or less
Kenya Global
38 PwC Kenya 2014 Private Company Survey Kenya sample profile: Respondents
Role Family member?
85% 66% 64% 49%
36% 24% 23% 19% 15% 8% 3% 6%
CEO/MD Owner/ Finance Other Board Family Non-family Partner Director member
Family role in business Age
39% 100% 34% 90% 31% 25% 22% 15% 10% 10% 8% 10% 5% 0%
Own and manage Just own – don’t manage Under 35 35-44 45-54 55-64 65 or older
Kenya Global
PwC Kenya 2014 Private Company Survey 39 The PwC Family The PwC Family Business Survey: What have we learned about the Business Survey: Looking back to 2002, looking sector in that time? forward to 2020 Looking back to As the survey has grown, our 2002, looking Paul Hennessy is a partner in PwC Ireland, understanding of family firms has also forward to 2020 and set up the very first PwC Family grown. We’ve seen how economic and Business Survey, in Ireland in 2002. Since social change is affecting family firms, from then it’s grown tenfold from 227 Irish firms, the impact of the recession to the digital to the nearly 2,400 businesses across the revolution and globalisation, and we’ve world we surveyed this year. We asked him explored the specific issues unique to the to reflect on how the survey has evolved in family business model, like succession the last twelve years, what conclusions he planning and resolving conflict. These are draws from this year’s results, and what the issues that affect all family firms, though future holds for the family firm worldwide. the survey has brought out some significant and instructive distinctions between markets and cultures across the world. The You’ve been involved with the way family firms operate in the Middle survey since the very beginning, and East, for example, is quite different from you’ve worked with family most other regions. But as well as the big businesses for even longer than that picture, we’ve also been able to talk in – how do you see the sector now? depth to individual businesses. I always find these stories fascinating – for example, the When I look at this year’s results, I can see Nuqul Group case study in this year’s report evidence that the sector has really ‘grown has some important points to make about up’ – there’s a much greater recognition the difference between owning and now that family businesses have to manage managing a business, and the International the family, as well as the business, if they’re Group story shows what value there can be to achieve long-term stability and in defining the family firm in terms of the sustainability. There’s still work to be done skills in deploys, not the businesses it owns. to formalise family governance, in addition to corporate governance, but far more family businesses understand that now, and And finally, what does the future are starting to do something about it. That’s hold? an enormous and positive change in the last ten years. Looking towards 2020, I think the family business sector has a great opportunity to move ahead more decisively. It’s much What was the motivation for the more sophisticated now, and if family firms very first survey – how did it all can earnestly tackle the ‘family factors’, start? they will be better placed than ever before to make tough decisions and take full When the team in PwC Ireland first came up control of the issues they face. Being able to with the idea for a Family Business Survey learn from each other is really important the motivation behind it was simple: we here, and the Family Business Survey is one wanted to underline PwC’s commitment to way they can do that – family firms all family firms, and improve the services we across the world tell us how much they were offering them by gaining a better value the richness of the information the understanding of their needs. We also survey is now providing, so it’s making a wanted to collect better data about a sector real contribution towards the development that hadn’t been studied in a systematic way of the sector. It’s tremendously satisfying, up till then, and looking back, that’s for me, to have helped make that possible. probably why the survey attracted so much interest when the results were published. We were inundated by enquires from the media, academics and family firms themselves, all asking for more detail about what the survey had revealed. We knew straightaway that this had to be a regular event, and that we’d be able to offer even more value by tracking trends over time. By 2006 we were running the survey across Europe, with over 500 family firms taking part in 12 countries. No-one had ever surveyed family firms on the range of issues we were exploring on a Europe-wide basis before, so again this was ground-breaking. And the rest, as they say, is history. By 2008 the survey was international, covering 28 countries worldwide, and now it’s genuinely global, with around 40 countries involved this year.
40 PwC Kenya 2014 Private Company Survey PwC Kenya 2014 Private Company Survey 41 www.pwc.com/ke
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