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
Copyright © September 2011 Simon Bevan. All rights reserved.
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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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)
The Alchemy of Growth(Mehrdad Baghai, Stephen Coley & David White)
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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
The Alchemy of Growth(Mehrdad Baghai, Stephen Coley & David White)
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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
The Alchemy of Growth(Mehrdad Baghai, Stephen Coley & David White)
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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!
The Alchemy of Growth(Mehrdad Baghai, Stephen Coley & David White)
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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
The Alchemy of Growth(Mehrdad Baghai, Stephen Coley & David White)
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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)
The Alchemy of Growth(Mehrdad Baghai, Stephen Coley & David White)
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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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FORMATION AND DEVELOPMENT OF TEAMS IN RAPID GROWTH BUSINESSES…Research by Vyakarnam, Jacobs & Handelberg
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
Copyright © September 2011 Simon Bevan. All rights reserved.
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FORMATION AND DEVELOPMENT OF TEAMS IN RAPID GROWTH BUSINESSES…Research by Vyakarnam, Jacobs & Handelberg
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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FORMATION AND DEVELOPMENT OF TEAMS IN RAPID GROWTH BUSINESSES…Research by Vyakarnam, Jacobs & Handelberg
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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FORMATION AND DEVELOPMENT OF TEAMS IN RAPID GROWTH BUSINESSES…Research by Vyakarnam, Jacobs & Handelberg
Four distinct phases:• spontaneous starts• growth seeking• visionary• institutional
Different:• personality characteristics• knowledge• skills
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FORMATION AND DEVELOPMENT OF TEAMS IN RAPID GROWTH BUSINESSES…Research by Vyakarnam, Jacobs & Handelberg
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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FORMATION AND DEVELOPMENT OF TEAMS IN RAPID GROWTH BUSINESSES…Research by Vyakarnam, Jacobs & Handelberg
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
Copyright © September 2011 Simon Bevan. All rights reserved.
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FORMATION AND DEVELOPMENT OF TEAMS IN RAPID GROWTH BUSINESSES…Research by Vyakarnam, Jacobs & Handelberg
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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FORMATION AND DEVELOPMENT OF TEAMS IN RAPID GROWTH BUSINESSES…Research by Vyakarnam, Jacobs & Handelberg
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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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)
Copyright © September 2011 Simon Bevan. All rights reserved.
GROWTH AND ENTREPRENEURSHIP
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
Systems /management /control
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THE BALANCE OF POWER
Size
TimeDI
AM
ON
D
Energy /leadership /chaos
Systems /management /control
GROWTH AND ENTREPRENEURSHIP
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!
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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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
Copyright © September 2011 Simon Bevan. All rights reserved.
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?
Copyright © September 2011 Simon Bevan. All rights reserved.
OBSERVATIONS FOR CHINA
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CHINA BLOG
http://realbusiness.co.uk/news/simon-bevan-tales-of-china--1
Copyright © September 2011 Simon Bevan. All rights reserved.
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OBSERVATIONS FOR CHINA
• 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?
Copyright © September 2011 Simon Bevan. All rights reserved.
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OBSERVATIONS FOR CHINA
• 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?
Copyright © September 2011 Simon Bevan. All rights reserved.
61
OBSERVATIONS FOR CHINA
• 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?
Copyright © September 2011 Simon Bevan. All rights reserved.
62
OBSERVATIONS FOR CHINA
• 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?
Copyright © September 2011 Simon Bevan. All rights reserved.
63
OBSERVATIONS FOR CHINA
• 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?
Copyright © September 2011 Simon Bevan. All rights reserved.
64
OBSERVATIONS FOR CHINA
• 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?
Copyright © September 2011 Simon Bevan. All rights reserved.
65
OBSERVATIONS FOR CHINA
• 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?
Copyright © September 2011 Simon Bevan. All rights reserved.
66
OBSERVATIONS FOR CHINA
• 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?
Copyright © September 2011 Simon Bevan. All rights reserved.
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OBSERVATIONS FOR CHINA
• 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?
Copyright © September 2011 Simon Bevan. All rights reserved.
69
OBSERVATIONS FOR CHINA
• 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?
Copyright © September 2011 Simon Bevan. All rights reserved.
70
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
Copyright © September 2011 Simon Bevan. All rights reserved.
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.