Jim Scott, former corporate high flyer, chief executive of Air New Zealand, senior manager at Carter Holt Harvey, senior executive with United States-owned Northwest Airlines and strategic planning consultant, thinks he has discovered the secret to successfully managing small to medium enterprises (SMEs) and unlocking the riches within. By taking the top-end of the corporate world and the bottom-end of the SME marketplace, Scott’s small businesses are delivering annual net profits of more than 20 percent. How does he do it, and what has he learnt about leadership and management along the way?
When you are CEO of the country’s only big, truly international business at age 44, your next career move is likely to be something quite different, and so it was for Jim Scott.
After leading Air New Zealand’s change of direction and then re-thinking his Asian-based management assignment with America’s Northwest Airlines, he returned to Hawkes Bay to do his own thing. Little did he know it, but his journey into the heartland of Kiwi small business would take him full circle. Ironically he’s back, brimming with enthusiasm and smiling incessantly at the prospect of running another large company. The difference is, this time it’s large company of highly profitable small companies.
Scott has consciously removed himself from Auckland and the limelight. Nevertheless, his reputation for buying lowly-valued small businesses and providing shareholders with abnormally high rates of return, has not gone unnoticed. Scott is founding shareholder and governing director of Napier-based Aquiline Holdings, private management and investment company comprising eight small businesses. By cherry-picking the best aspects of corporatism, he’s successfully unlocking the power waiting to be realised within good companies, usually employing 50 people or less.
“I am the manager of the Aquiline Holdings strategy, raising equity and debt to fund acquisitions. It’s also my job to implement strict regime of strategic planning, budgeting and reporting of network/cluster of 100 percent independently-owned SMEs,” he explains. So what are the worst characteristics of large corporates that Scott will deny Aquiline Holdings? “Large corporations are too big and cumbersome. single CEO has only superficial view of things and the group results. All other employees struggle for recognition and to ascend the pecking order.”
While individuals within corporates look after number one first – SMEs only work successfully as teams with shared duties and responsibilities. “SMEs are less structured, more multi-skilled and reward according to the individual company’s ability to pay. For SMEs the bottom line is the real world, reality is in their faces all the time,” says Scott.
Scott plans to boost aggregate sales of Aquiline Holdings from around $60 million this year to over $250 million by June 2005. He aims for 10 percent annual organic growth from all subsidiaries – with incremental growth coming through acquisition. Perennially on the acquisition trail, Scott & Co look at between 30 and 40 small businesses year.
Assuming Aquiline can achieve its targeted 10 percent EBIT (earnings before interest and tax)/sales, Scott hopes to see profit performance in 2002/03 of around $6 million EBIT and $3 million net profit after tax. If these SMEs have anything in common it’s twofold: they’re under-valued and over-capitalised. Far from resembling corporate structures, these firms operate more like small teams, and usually from single site.
Scott’s skill is his ability to transform the performance of these small units by implementing corporate disciplines. By tackling over-capitalisation, wasted stock and the debtor’s ledger through corporate governance, financial reporting and strategic planning – it’s possible to double their annual EBIT-rate.
“The businesses we own and oversee are at the very foundation of the old economy. Most of them didn’t bother with budgets, even fewer understood the cost of capital. We perform major strategic review annually, and impose strict quarterly reporting regime. As owner/operators there’s never been higher authority challenging their decisions. But under our structure, we’re onto them like tonne of bricks if they’re not abiding by the business franchise disciplines.”
Aquiline Holdings has established itself as the operator of specific business franchise, focused directly at re-engineering and optimising the performance of wide range of family-based companies. With annual revenues of between $10-$20 million, each company imports critical consumer products.
So why buy these companies in preference to starting new ones from scratch? Aquiline is paying goodwill for established company names. Mostly, Scott and his team are interested in leading players, companies recognised as reliable suppliers within their respective markets. After over-laying new business franchise structure, and hiring new general manager, Scott aims to make these businesses the number one or two market player within two years. “Many subsidiaries are operated as basic trading operations with little added value between importation and distribution. However, several of our subsidiaries have added-value operations whereby imports are further developed and customised in order to meet more exacting market requirements. These added-value operations range from re-packing and/or barcoding through to quite significant physical changes to the imported product’s appearance and characteristics,” says Scott.
Owner/operators want out
But an interesting pattern has emerged. With the next generation reluctant to take over the family business, owner/operators are forced to realise the value of their life’s work – through total exit strategy. Former owners are generally required to remain involved for up to four months while the company undergoes the business franchise transition.
In the past two years, Scott has appointed transitional managers to run the firms while new general manager is found. He adopted this tactical approach after mistakenly assuming that good corporate managers (newly hired) could successfully run the businesses. “We couldn’t have been more wrong,” says Scott. The assumption that good corporate manager can manage anything is dead wrong.
Corporate managers’ struggle
Scott now thinks that 90 percent of the managers who come out of the corporate world can’t cope in the SME environment. Very few of them have ever been responsible for “absolutely everything” and those whom Scott hired to run SMEs, found it extremely stressful. Aquiline on the other hand is “a strategic investor, not hands-on manager. So [his strategy] requires that approach, rather than the big hierarchical staff structure.”
At the outset, Scott hand-picked two young, well-qualified graduates and nurtured them as the major stakeholders in Aquiline’s master strategy. They develop and deliver the master-plan for each new company, then appoint new general manager with the responsibility to deliver the new culture and direction.
Because corporate managers are more lifetime employees than owner/operators, Aquiline Holdings now employs younger graduates with different attitude. Scott believes they can be groomed for life running an SME because they are less set in their ways. “When I think back to when I was Air New Zealand’s CEO and spent some years rising through the ranks of Carter Holt Harvey, I thought I knew and understood what was needed to fill the CEO role. I was found wanting in several critical areas. If it hadn’t been for my strong strategic appreciation and grasp of company planning, I doubt I would have lasted.
“Talking the talk as result of learning via osmosis is quite different to sitting at the top desk where the buck really stops. This helps explain why many good corporate managers find it difficult to step into an SME general manager’s role,” says Scott.
What makes managing