Tips for Owner Manager CEO Succession

Whether it’s for an exit or simply because you the Founder want to return to what you enjoy – When it comes a time to bring in a CEO or COO into the business, there are many ways to fail. Many Founders out there have stories of failure and frustration, sometimes with multiple failed attempts.

Owner Manager businesses operate in a unique manner.  The tenacity and behaviour of the Founder which created success is generally not going to scale well. Most of these businesses have a major key person risk issue, with an over dependence on the Founder.

Generally strong Founders create teams of followers under them, rather than leaders. Decisions and processes are easy, “just do it my way”. It is not uncommon for high growth companies to have 30+ staff working under a Founder with no other leadership talent in the business. This means that there is no natural successor already in the business. As a result of this the new CEO will often need to bring in new leadership talent to build up the management team capability to enable the company to grow.

Are you ready to bring in a COO or CEO for your business? 

Look for your first CEO

Some common triggers for owner managers to hire there first CEO or COO:

  1. Founder can add more value to the business in technical role – and you (the Founder) hate the boring operational stuff
  2. Founder’s time availability is restricting growth – you are living on less the 5 hrs sleep a night
  3. Founder stressed and not having fun – your staff hide when you are in that grumpy mood
  4. Founder is looking to exit / sell – and investors/purchasers will quickly realise business will not work without you
  5. Founder doesn’t have the skills or passion for managing the business
  6. Business cannot operate without the Founder there – when was the last holiday you had and enjoyed?
  7. Business will be more successful without the Founder at the helm

Tips to successful succession:

  1. Try before you buy – bring your potential successor into the business on contract, as a GM or COO role, limiting the initial mandate. Getting the prospective CEO to come in and develop a business plan is often a way they can infiltrate the business and both parties can perform due diligence on each other. Founders often just live and breathe their vision and get frustrated when people go off track, yet it is not clearly communicated or understood. So take the time to share the business’s WHY (see Simon Sinek Why? blog) and vision on paper.
  2. Travel together – International travel and meetings with customers is a great way to learn a lot about people in a short time and from the appointee’s perspective they can learn a lot about the business and its products.
  3. Recognise CEO’s are different from Founders. You are not recruiting another you. Founders are supermen, whereas growth phase businesses will need effective leadership teams. The CEO’s first significant task will often be establishing and building an effective senior leadership team or get the current one functioning as a team. As such growth businesses need to strong leaders rather than visionaries and technical experts. They need to be highly skilled in getting work done through others, whilst having empathy and understanding of the core value generating technology.
  4. Prenuptial – organised exit – Given the high-risk factor in the appointment of a new CEO, build a tidy exit plan in for both of you. Include the basic out clause “due to substantial incompatibility and/or irreconcilable differences”. If equity deals are involved in the compensation plan ensure shares are not issued until post a decent period eg one year.
  5. Acknowledge the ongoing influence of the owner: In many cases the Founder owner will stay either in the business perhaps as CTO or at least have a strong influence. This is no corporate CEO reporting structure. Founder personalities, opinions and yes ego will be a large factor in the ongoing success of the business. The CEO/COO capable of managing through the arduous transition in the change of guard needs to be aware this will not be a traditional Chairman to CEO relationship – despite what the paper work says.
  6. Clear mandate and communication model: Communication between Founders and CEOs often fall into two fatal camps of over or under communication. I have witnessed cases of abdication of control vs delegation of control i.e the owner completely walked away from the management of the company only to find the business near in ruin before they acted.
  7. Monitoring mode & KPIs – spend the time to agree what success looks like and how you will regularly report against it. Equally so what it doesn’t look like. A pre-mortem is a worthwhile activity (see other blog post). I would always recommend having an effective board with a third party Chairman or at least other board members to help with circular reporting structures (Owner as chairman – CEO reports to Chairman – owner as CTO who reports to CEO)
  8. Staying in business is OK. Unlike traditional corporate structures, its common place for the Founder to stay on. Be clear about your new role and have established & regular communications with the new CEO.
  9. Incentives earnt not given – I am a great fan of incentivising senior executives, but I would warn any owner of issuing equity on day one. I recommend a stand down period of at least 6 months, ideally one year to bridge the honeymoon period. When it comes time to issue equity it should be purchased or at least sacrificed for bonus payments. In the first-year profit share or some other form of bonus may be more appropriate.

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Mark Robotham (Growth Management Consulting Ltd) – works with owner managers bridging the succession gap. For more information on this topic contain him direct via his web site growthmanagement.co.nz

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Avoiding Quality Fade with Chinese Manufacturers

10 Tips on avoiding “Quality Fade”

The China manufacturing machine is a force that can not be ignored. They have it as far as rapid and low cost tooling, volume production and quality output. But like any tool, used incorrectly the results can be disastrous.

For product developers and importers alike using a good Chinese manufacturer can give you great results at great prices, but be warned “Quality Fade” is built into the Chinese manufacturing ethos.

shanghai night 2015-05-09 18.54.20Chinese manufacturers will continually find new ways to lower their costs, they do not appear to do so with malicious intent – rather than, “that is the way it is”. My advice is that you should just treat this as a sport, albeit a extreme sport, you need to master the game to avoid major consequences of losing eg – excessive warranty claims and recalls etc wasting your time, money and eroding your company and product brand value.

10 Tips on Chinese Manufacturing:

  1. Get your own Chinese speaking staff: Everything is lost in translation, particularly in times of crisis. You need both Chinese speaking staff on the ground in china and in your local office. Its amazing what ground you can cover quickly when you hear “the real conversation”.
  2. Have your own people in China: One thing never changes – personal relationships are king. Video conferences, skype calls and email will not replace being there. By all means start with regular visits, but as soon as you can, get your own person resident in market or close by eg Hong Kong.
  3. Proactively monitor for systemic product failure. With out fail every product issue will be meet by your supplier with a comment “you are the only customer with that fault’. If you are getting quality failures, then act. Anything over 1% of product failure from customer returns needs to be treated as urgent, and greater than 3% is a crisis and definitely systemic product fauilure.
  4. QC every shipment: No matter what track record the factory has, QC both in market and at receipt in your market.
  5. Contract with factories not brokers: In market brokers are great at helping you source product, manage relationships and get things done. However, when the shit hits the fan, they typically do not have the reserves to bank roll failure. Yes, include them in the commercial deal, but also have a contract with the factory direct.
  6. Don’t stray from manufacturers specialty: When asked most manufacturers say “yes” we can build that. In reality, most if not all, Chinese manufacturers all specialise in one thing and they seem to congregate in a region. Eg all vacuum cleaner manufactures appear to be within a 100km radius, like wise all blender manufacturers.

china factory DSCN3501

Once you go high volume with any product line the impact of failure increases. At that stage you should step up your QA processes:

  1. Make Notification of ECN’s and factory change mandatory: Make sure you are getting copies of all ECN’s (engineering changes notices) for your supplier. Particularly look for changes in quality of components that may effect EMC compliance or reliability of the product.
  2. Do regular full break down tests: Continually randomly check all aspects of your product build.Check that the  manufacturer has not swapped our a key ingredient or component, particularly ones that you mention in your marketing or affect safety and compliance
  3. Get Compliance Approvals retested in AUS/NZ : By all means use Chinese test lab reports to get you going in market with compliance certification, but if you want to eliminate risk of running foul of in market regulators, retest with Australian or NZ test labs
  4. Do full technical due diligence on all high volume product – be aware in many cases Chinese manufacturers cut corners in product development avoiding some important steps of new product introduction including HALT (Highly accelerated life time testing) and tight supply chain management of critical high risk components eg lithium Ion battery assemblies.

Whether you are a product development company using China for contract manufacturing or just an importer distributing goods made in China, do not skimp on investing in appropriate Product Quality systems to protect yourself and mitigate against product failure risk.

poorly made in china images

A must read for any one contemplating or using China as a tool is “Poorly Made in China” by Paul Midler – the horror stories in this book are all true.

This is the part of a new series of blog posts on “Product Recalls” and “Managing Chinese Suppliers” and other key topics aimed at medium to larger organisations. The content of this new series is based on experiences learned managing: multiple major home appliance recalls inside 12 months, involving hundreds of thousands of consumer products manufactured in China and sold in Australia and NZ.

PS: Mark is currently (Dec 2015) looking for his next full time role or a consulting assignment in NZ or Australia.   You can contact him at: Mark@growthmanagement.co.nz