business growth: observations from a united kingdom auditor and adviser simon bevan fca, ba (hons)...

BUSINESS GROWTH: OBSERVATIONS FROM A UNITED KINGDOM AUDITOR AND ADVISER

Simon Bevan FCA, BA (Hons)

Former Senior Partner and Managing Partner of BDO LLP, UK

Copyright © September 2011 Simon Bevan. All rights reserved.

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BUSINESS GROWTH

Business growth in a professional services firm• Personal introduction and BDO UK – the last 30 yearsBusiness growth and entrepreneurship • Characteristics of entrepreneurs• The Alchemy of Growth• Entrepreneurial teams• The BDO Growth Model – DIAMONDThe challenges of growth - for business people and auditorsObservations for China


BUSINESS GROWTH IN A PROFESSIONAL SERVICES FIRM

Personal introduction and BDO UK 1981-2011

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SIMON BEVANBrief background

• Audit and Advisory Partner in BDO LLP, UK (joined the firm in 1981 and was a partner from 1988-2011)• Clients included multinational listed and private equity backed groups,

partnerships and family-owned businesses• Involved in advising entrepreneurial clients in a range of sectors from

manufacturing to retail, from property to professional services• Developed and ran advisory training courses for BDO partners on

“Growth and Entrepreneurship” • Involved in management and governance of BDO since 1997,

including time as Senior Partner, Managing Partner, Audit Committee Chairman and member of Partnership Council and Management Executive

• Former Chairman of the Association of Partnership Practitioners (400 members)

• Visiting Professor at Xiamen University


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BDO UKThe last 30 years – in 1981

• London firm, 30 partners• Audit and Tax• Corporate Finance• Insolvency• Hotel & Leisure Consultancy

• An affiliate firm in Manchester • Member of Horwath International network (about 4,000)• 15th largest in UK


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BDO UKThe last 30 years – 1981 and 2011

London firm, 30 partners• Audit and Tax• Corporate Finance• Insolvency• Hotel & Leisure Consultancy

An affiliate firm in Manchester Member of Horwath International network (about 4,000)15th largest in UK

National firm, 200 partners• Audit • Tax • Corporate Finance• Business Restructuring• Forensics / Consultancy15 offices, 3,000 peopleMember of BDO International network (about 40,000)5th largest internationally


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BDO UKThe last 30 years – the big changes

Scale (UK and Internationally)Breadth of services, especially • Tax• Forensics“Merger” activity – UK and overseasUK M&A and lateral hires BDO InternationalIndia, UAE, ChinaNational “association” to single firm

Complexity • External regulation• Licensing• Matrix management• Professional managers in

support roles• Governance


GROWTH AND ENTREPRENEURSHIP

Characteristics of entrepreneurs

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EXERCISE

• In pairs…• Spend a few minutes agreeing between you on the

three most important characteristics displayed by an entrepreneur


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CHARACTERISTICS OF ENTREPRENEURS

• They all appear different• Contrast Mary Kay and Anita Roddick


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“I don’t know anything about it [the product] except how to sell it; I don’t even know what’s in it and I don’t even care.”

Mary Kay of Mary Kay Cosmetics


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“I would be Minister of Peace. I’d outlaw the arms industry within seconds and inject aromatherapy smells into any war to make people loving and peaceful rather than aggressive and tense.”

Anita Roddick of The Body Shop


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CHARACTERISTICS OF ENTREPRENEURS…Research by David Storey

Strong or some linkage:- marketing skills- motivation- education- more than one, i.e. “a partnership”- management experience- age


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CHARACTERISTICS OF ENTREPRENEURS…Research by David Storey

No, or even negative, linkage:- family history in business- social marginality- training- prior self-employment- prior firm size experience- gender- unemployment push- prior sector experience


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CHARACTERISTICS OF ENTREPRENEURS…Research by Peter Leach (BDO)

• Need for achievement (and recognition)

• Need for independence• Risk takers (measured)• Rule-breaking• Tolerant (of risks that go wrong)• Self-confident (or delusional?)• Adventurous & innovative• Ideas people• Controlling - poor delegators• Perceptive (of the opportunity)

• Restless• Proactive• Good image-creators• Distrusting• Unstructured• Opportunistic• Impatient• Instinctive• Individualistic• Desire for ownership


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CHARACTERISTICS OF ENTREPRENEURSBDO / Real Business survey

• 50% have formal business qualifications (diploma, MBA etc) 80% - in businesses with turnover greater than £50m

(c RMB 500m) 25% - in businesses with turnover less than £5m

(c RMB 50m)• 63% read no business books at all in the previous year!

10/98Copyright © September 2011 Simon Bevan. All rights reserved.

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CHARACTERISTICS OF ENTREPRENEURSBDO Partners’ Top 10

• Risk-bearer• Innovator• Manager, organiser• Self-confident• Ambitious

• Commitment, high motivation• Perseverance, determination• Judgement• Knowledgeable• Financial skills


BUSINESS GROWTH

The Alchemy of Growth – Mehrdad Baghai, Stephen Coley & David White

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GROWTH CREATES…

• New jobs• Opportunity• Stimulating environments• A sense of purpose for employees• A surge of personal and collective energy

The Alchemy of Growth(Mehrdad Baghai, Stephen Coley & David White)

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The Three Horizons

Horizon 1 - Extend & defend core business

Horizon 2 - Build emerging businesses

Horizon 3 - Create viable optionss

Profit

Time (years)


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Horizon 1 - Summary

Characteristics• core business, usually identified with name• critical to short term performance• provide resources for growth• will eventually flatten out

Activities• restructure• enhance productivity• cost reduction • shore up competitive positions


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Horizon 2 - Summary

Characteristics• emerging stars• businesses on the rise• profits may be 4-5 years away• have customers and revenue

Activities• continuing investment needed to roll out• building new revenue streams• demands new skills• need several of these emerging businesses on the boil

working to convert promising ideas into future major earnings streams


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Horizon 3 - Summary

Seeds of tomorrow’s businesses• more than ideas• real activities and investments, however small• research projects, pilots, alliances, minority stakes

But• most will never grow to be successful• need lots of activity to cover the multitude of possible futures• deliberate initiatives needed not just a whiteboard list!


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Staircases and horizons

Horizon 1

Horizon 2

Horizon 3 Create viable options

Build emerging businesses

Extend and defend core businesses

Seed growth options

Test business model

Replicate proven business model

Manage for profitability


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Gaps in capability

The newer the business, the greater the gap between current capabilities and those required in the new venture

Each step is a decision to build, borrow or buy the required capability• training internally (build)• joint venture, alliance, partnership (borrow)• hire or acquire (buy)


BUSINESS GROWTH

Entrepreneurial teams

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FORMATION AND DEVELOPMENT OF TEAMS IN RAPID GROWTH BUSINESSES…Research by Vyakarnam, Jacobs & Handelberg

Of the youngest 306 “Inc. 500” companies almost two thirds were started by teams

Almost 60% of USA’s fastest growing private companies started with two or more partners

Only 30% of the individually founded firms studied reached an annual sales volume of $6m, whereas nearly 70% of team-founded firms reached this level


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“When two people in business always agree, one of them is unnecessary.”

William Wrigley


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“When two people in business always agree, one of them is unnecessary.”

William Wrigley

“If two men on the same job agree all the time, then one [of them] is useless. If they disagree all the time, then both are useless.”

Darryl F Zanuck


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The forces that bring people together:• likeability• proximity• enjoyment of each other’s company• alikeness and complimentarity of characteristics

In entrepreneurial context, also:• possession of money to invest• experience and expertise needed for venture


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Problems:o Teams often consist of friends, relatives, and/or

associates from former employers or educational institutions

o Often without consideration of members’ relevant capabilities


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Problems (continued):• start-up experience• team-size• heterogeneity• balance of expertise• management skills• decision-making styles and experience• previous joint work experience• distribution of ownership


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Four distinct phases:• spontaneous starts• growth seeking• visionary• institutional

Different:• personality characteristics• knowledge• skills


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Phase 1 - Spontaneous startso the “Dreaming” phaseo often a lack of prior entrepreneurial behaviour between

team memberso much trust, but much testing and assessing of each

other


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Phase 2 - Growth seekingo collective motivation for growtho but may be lack of clear business directiono inner team (founders?) who share experience in the

“exciting nightmare”o joiners remain on the outside until events, decisions and

experience allow them to be accepted in the inner teamo many stay at this phase for a long time


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Phase 3 - Visionary• top team formed• clear business vision• tangible goals to achieve it• tasks and roles clarified• awareness of “softer” elements and effective team

behaviour


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Phase 4 - Institutionalo loyalty shifts from the founders to “the flag”o more concern about business and its direction than

founders’ ambitions or valueso team behaves more formally (not necessarily

bureaucratic if rapid growth business)o decisions may be more politicisedo still behave more entrepreneurially than big businesses


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“Without me the business wouldn’t be there, and without him it wouldn’t work.”

Julian Metcalfe of Pret a Manger (on his colleague, Sinclair Beecham)



The BDO Growth Model - DIAMOND

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THE BDO GROWTH MODEL …the seven stages - DIAMOND

DI

AM

ON

DSize

Time

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THE BDO GROWTH MODEL …duration of stages

Size

Time

X

• Businesses spend different periods of time in different stages, achieving different rates of growth

• Characteristics will overlap (point X)

• Different parts of a business can be in different stages

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Size

Time

Energy /leadership / chaos

Systems /management /control

ENTREPRENEURIAL ENERGY … the creative spark

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SYSTEMS, MANAGEMENT AND CONTROL … order out of chaos

Size

Time

Energy /leadership /chaos


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THE BALANCE OF POWER

Size

TimeDI

AM

ON

D

Energy /leadership /chaos



The typical board – governance and the roles of board members

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GOVERNANCE…is it all about rules?

Rules provide a framework

The Roles are important too; and

The People who fill those roles and follow those rules are even more important!


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DIRECTORS…act in the interests of “the company”

A director must act in the interests of ALL shareholders

The interests of the company take priority over a director’s own interests

Potential conflicts of interest Should be avoidedMust be disclosedNormally require a director to be absent from debate on a matter, and from voting on it


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BOARD BALANCE AND COMPOSITION …from the FRC’s 2009 Review of Combined Code

Members collectively to have the necessary skills, experience and objectivity Refresh the board’s membership while ensuring continuity

Without the board becoming too large

Recruit from a broad talent pool, [so that board diversity goes beyond race and gender to encompass] different experiences:

FunctionalGeographicSectoralSize


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THE ROLES ON A UK BOARD…typical roles will be:

ChairmanMay be Executive Or – more normally – Non executive

Chief Executive Officer (sometimes still called Managing Director)Chief Operating Officer (sometimes now called Managing Director)Chief Financial Officer (sometimes still called Finance Director)Other Executive Directors (eg Marketing, Strategy, International, etc)Non executive Directors


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EXECUTIVES AND NON EXECUTIVES…imagine a sliding scale

ExecutiveHands-onNot independentFull-timeEmployedStrategistInternal knowledge

Rupert Merson: “Rules are not enough – the art of Governance in the real world”, 2010

Non executiveHands-offIndependentPart-timeSelf-employedPolicemanExternal knowledge

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THE NON EXECUTIVE ROLES ON A UK BOARD…Strategist or Policeman?

BDO’s submission to the Higgs Report, 2002

High “The Strategist” “The Best of Both Worlds”

Low “Waste of Space” “The Inspector”

Low High Compliance

Strategy


THE CHALLENGES OF GROWTH

For business people and auditors

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THE CHALLENGES OF GROWTH…for business people and auditors

• Vision, strategic plan and operational execution• Market dynamics, including technology and innovation• People• Finance and funding• Where does growth come from?• Can it be sustained?


OBSERVATIONS FOR CHINA

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CHINA BLOG

http://realbusiness.co.uk/news/simon-bevan-tales-of-china--1


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• Five Year Plan 2011-1015• The country’s physical infrastructure• Demographics

• One Child Policy• Age• Gender

• Education• Legal system, transparency and intellectual property• Growth and inflation• Capital markets

• Banks, private equity, bonds and debt• The public markets (China and overseas)

• Perceptions of professional advisers and auditors• Short term thinking in business?


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BUSINESS GROWTH

Business growth in a professional services firm• Personal introduction and BDO UK – the last 30 yearsBusiness growth and entrepreneurship • Characteristics of entrepreneurs• The Alchemy of Growth• Entrepreneurial teams• The BDO Growth Model – DIAMONDThe challenges of growth - for business people and auditorsObservations for China


BUSINESS GROWTH: OBSERVATIONS FROM A UNITED KINGDOM AUDITOR AND ADVISER

Simon Bevan FCA, BA (Hons)

Former Senior Partner and Managing Partner of BDO LLP, UK


business growth: observations from a united kingdom auditor and adviser simon bevan fca, ba (hons)...

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