July/August 2016 Openers: Research Alert

By Barbara Spector

PwC's next-gen study: Confidence abounds

Next-generation family business members are feeling confident about their readiness to take over the business, a PwC survey of rising-generation members from around the globe has found. But the investigation also revealed that the next-generation respondents are somewhat less sanguine about their readiness to lead the family.

PwC interviewed 268 "leaders-in-waiting" from 31 countries. The companies represented reported revenues ranging from less than $10 million (21%) to more than $500 million (12%).

Nearly eight in 10 respondents (79%) said they have lots of ideas about how to take the business forward, and 88% said they want to leave their own stamp and do something special with the business. In 2014, the last time PwC surveyed next-generation members, 86% reported a desire to make a unique mark on the family firm.

"This survey saw what we really thought to be an increase in confidence," comments Jonathan Flack, U.S. Family Business Services co-leader at PwC. "And then when you get into some of the data underneath that, when you really kind of dig into what these next gens want to accomplish in the business, it's pretty dramatic."

Not surprisingly, revamping the family company's digital strategy is among many respondents' goals. Only about four in ten (41%) said they believe their company has a strategy fit for the digital world.

This finding seems to indicate "the next gens believe that digital is either currently impacting their business or is going to impact their business," Flack says. "But I think a lot of them feel as though they're struggling with the current generation in being able to implement and move their firms forward and really [address] some of those digital challenges." The 41% finding, Flack says, "shows that there's probably an expectation gap or a strategy gap between the current generation and the next generation in recognizing the impact of digital on their business."

Lauren Tracy, 35, business development manager at Dot Foods Inc., is a third-generation family member. "Depending on the generation at the helm, technology may not be an area of comfort or priority" for the current leaders, says Tracy, who was not one of the next-generation members surveyed by PwC.

"I think that typically the next gen is much more tech savvy, and so they likely see that as an area of opportunity for them to make an impact on the business," Tracy says.

The rising-generation members seem to recognize the benefits of adding outsiders to the management team. More than two-thirds (69%) said they would bring in experienced non-family managers to help modernize or professionalize the business.

"That's not a surprise to me," says Tracy. "I think this number will actually grow." Tracy says the advantages of bringing non-family members into the business in a variety of executive roles and as independent board directors is a topic that comes up often in the conversations she's had at family business conferences.

"I think as you get past the second generation, family members start recognizing that they don't have to be the CEO," Tracy says. "There are lots of roles that they can play, whether it's in the business, in the family council [or] the family foundation. So there's a lot of ways to keep family members engaged. They don't necessarily have to be the ones running the show all the time."

The 'sticky baton'

To most people, the term "next-generation members" connotes people in their 20s and 30s. The PwC study defined this population differently; those in their 40s, and even some in their 50s, were included in the survey. Flack explains that for the purposes of the study, his firm defined "next-generation members" as "individuals considered to be in the next rung of leadership." So if a senior-generation member is still holding on (consider Robert Wegman, who remained chairman of Wegmans Food Markets until he died in 2006 at age 87), the "next generation" at that leader's company will be "older and a bit more seasoned," Flack says.

Nonetheless, Flack notes, many of the survey results are consistent with characteristics attributed to "millennials" (born between 1980 and 2000). The responses indicate that most survey participants are highly confident and very ambitious, Flack says. "They're very focused on digital and transformation of the business, and they really want to leave a mark on the business," he says. "These are all common traits that you would see in millennials."

The respondents apparently perceive that what PwC refers to as "sticky baton syndrome" is present in their companies. Six in ten (61%) said they think it will be hard for the current generation to fully let go when they retire, and 80% said the current generation will want to stay involved after handing over the reins.

However, the next-generation members seem to think that continued involvement of their elders would not be a bad thing. A vast majority (91%) said they would value continued support from the current generation when their generation takes over. "I think they want them to get out of the way, but I don't think they want them to leave the room," Flack says. "They want to take a lead, but I think they still want a little bit of that support network."

Flack notes that the desire for support from the senior generation may offer evidence of another trait often attributed to millennials—that many were raised by "helicopter parents" who hovered over their kids, sometimes to the point of over-protection. The survey responses, Flack says, indicate that the next-generation members "want to be out there on their own, but they'd like the safety net of the parent there next to them."

Perhaps the rising generation wants a safety net because they feel pressure to keep the family business healthy. Most respondents (92%) said they feel a responsibility to hand over a sound business to the generation after them. In PwC's 2014 study, 90% said they felt this way.

Dot Foods' Lauren Tracy says the senior generation can help their successors smoothly guide the ship. "As family members retire, quote-unquote, they may still have an appetite to be a part of the business, but maybe not in a full-time role," Tracy says. "Are there opportunities to utilize that great intellectual capital without totally pushing them out, giving them the opportunity to stay involved with the business?"

Slightly more than half (52%) of the respondents said they will need to spend time managing family politics when they take over. "I'm surprised it's not higher than 52%," Tracy says. Based on what she's gleaned from networking at conferences, she says, "It seems typically this is the greatest concern, how to maintain family harmony, and I think managing family politics is a big part of that."

Lauren Tracy's father, Pat Tracy, who stepped down last year as Dot Foods' chairman, is one of 12 siblings. Including Lauren, there are 47 members of the family's third generation; the G3s range in age from 37 to 8.

Family councils can be an effective forum for managing family issues, Lauren Tracy says. "If the family has not gone to great lengths to create structure and policies, then I think there's a high likelihood that family politics will interfere," says Tracy, whose family has a family council.

She notes that as a family transitions from one generation to the next, not only are there more family members and family branches, but also the business likely has grown and is making more money, "so finances get typically tangled into a lot of emotional situations. So yes, I think that it is a huge topic within family business as to how to manage all these family dynamics as the business grows and changes."

Looking toward the future

One perplexing finding from the PwC study involved respondents' predictions about their companies' near future. More than two-thirds (68%) forecast that in five to 10 years, their family business would still be earning most of its revenues from the same products and services as it does now. On the other hand, 58% of the survey participants said their company will have established new entrepreneurial ventures in five to 10 years.

"What that's telling me is that there's an appetite for the next gen to really expand what the business is doing, and innovate," Tracy says. "Keep the core focus of what has been so successful for so many years, yet challenge the management team to innovate." It's likely that although the next-generation members plan to develop new ventures, she says, "they don't anticipate that they're going to provide a huge return immediately."

The data could also reflect the rising generation's realization that it might take five to 10 years for them to move into leadership and have the power to implement their innovative plans, Tracy says.

The survey respondents foresee a near-term geographic expansion of their family firms. Two-thirds (67%) predicted that their business will have entered new geographic markets in five to 10 years.

Tracy interprets that finding as an indication that the next generation sees great opportunity in geographic expansion of the core business. "Maybe the first step is to take what they're currently doing and have been successful at, and just [expand] it to a larger geography while trying to figure out what the next innovation will be," she says.

Her family's business, founded in 1960, has innovated through geographic expansion and by talking with customers about how Dot can help them tackle their challenges. "That takes us into different areas, but it's different areas that complement what we're currently doing, our core business," she says. "We think that it's innovative, and it's allowed us to grow and change over the years, but it's not something that is so entirely different that we have to learn something from scratch."

Tracy says she views the survey results as indicative of next-generation members' desire to pursue an innovative path in the context of the family firm, "because they want to put that stamp on the business." On the other hand, she says, innovation "is a little more challenging when the core business has been around for so long, and it's just a well-oiled machine. It makes more sense to figure out how you can be entrepreneurial within your current business model than to go entirely outside of it."

Advice for the elders

PwC's Jonathan Flack says the survey results reinforce two key pieces of advice he gives clients about how to prepare the next generation.

First, he notes, "The business environment is dramatically different than it was when the current generation entered the business. What was traditional training, what was the traditional path to leadership for a family member up through the ranks, likely will not prepare the next generation for leadership of the business." In today's environment, Flack says, "Businesses are far more complex, they're far more systems-oriented." In addition, Flack says, the economy is now more global, and there are many markets and competitors that were not a factor when the current generation of family business leaders was coming up.

"The second piece," Flack says, "is the dramatic difference in generational traits." Mentoring of the successor-in-waiting can be significantly hindered by an intergenerational communication gap, Flack says. "I think they have to find common ground of communication first," he says.

"You've got to think about those two things before you go and develop a plan to prepare the next generation, and you've got to constantly think about those two pieces as you continue to build out their training," Flack says. The traditional family business apprenticeship, in which a next-generation member starts out by working in the warehouse, "may not be very relevant to how they build their knowledge of the business today," he says.

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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