When bosses don't know the sources of money

What do small enterprises excel in; what are the strengths of corporate groups? A study has shown: The big ones are champions in savings. The small ones are especially innovative – and they also don't complain about a lack of qualified, specialized personnel.

by Christian Litz and Michael Prellberg

Money? Sure, it's important. Paying wages and salaries, paying off loans, and then, well, there are investments to be made. But where that money comes from seems less interesting to the executives of German corporate groups. A total of 18 percent has no idea what sources their employers are using to draw their necessary capital from. That's one of the surprising findings in a current study by the Institut für Demoskopie (Institute for Public Opinion Polls and Research) in Allensbach on behalf of the consultancy Kerkhoff Consulting. For this study, 501 top decision makers were interviewed to be able to compare the strengths and weaknesses of medium-sized and larger companies. "Large" are considered those enterprises having more than 1,000 employees and 50 million euros in sales.

The larger the size of the company, the greater the division of work. That provides not only for more structured processes but also more bureaucracy. "When the size of a company increases, its administrative efficiency tends to decrease", the study states. That were "the curse of bureaucratization". Fitting into that pattern is the fact that 38 percent of the small companies praise their administration as being "very efficient". For large companies, that rate is only about 23 percent – but it will increase. More than two thirds of the large companies have started projects to improve administrative processes; another 17 percent are just beginning.

Technology versus red tape
In doing that, they will rely on technology: "Transparency is to be increased with IT and ERP systems; information is to be transmitted faster so that decisions can be made faster", says Erik Hofmann, Project Manager at the Kerkhoff Competence Center of Supply Chain Management at the University of St. Gallen. His team is responsible for the scientific analysis of the study. "A greater division of labor within a company would definitely result in higher coordination expenditures", says Hofmann. That would be inevitable, according to him. But Hofmann also addresses one disadvantage of the apparent flexibility in smaller enterprises: If everything is going via the general manager, he can certainly make decisions faster; "however, there is also the risk of getting sidetracked by little things and wasting time".

My pal at the bank
To avoid that risk, many general managers are using only one track in financing. "They will trust their personal acquaintance at their house bank and thus miss out on a lot of potential", says Hofmann. What's missing in small and medium-sized businesses would be specialized financial departments where people are also thinking about other sources of money. Currently, at 84 percent of the small and medium-sized businesses, loans are their first choice. "And that will probably go unchanged for a long time yet", says Hofmann. At least until more professional structures are introduced. "The study shows that small and medium businesses are almost never ahead of the others", says Gerd Kerkhoff, managing shareholder of Kerkhoff Consulting. "Especially with modern tools, such as a clearly defined risk management or in product cost analysis, it's evident that large companies are setting the standards and smaller companies will then slowly follow suit."

Aside from higher sales, especially cost reduction is a very promising approach to become more independent from money lenders (i.e. the banks). "Companies working on cost reductions are doing so on a broad front", as the Allensbach institute established. Almost all of the executives interviewed are trying to cut down on inventory levels and get their money faster. Not from their bank, but from their customers. However, these are especially topics at the larger companies. The consultant Gerd Kerkhoff is riled about the carelessness of the smaller businesses: "Large companies are able to get more reasonable refinancing and are thus set up much more professionally", he says. "Small and medium-sized companies should wake up!"

That doesn't mean that there is still management by feeling at the smaller companies (more than 50 employees and sales of 10 million euros). That shows, for example, in questions of personnel development, process optimization, accounts receivable management or dealing with suppliers. In this respect, the differences are rather more gradual.

Open for new ideas
There is a distinct difference in terms of dealing with innovations. Actually, larger companies should really be up front here – already for the simple reason that they can pump more money into new developments. The larger a company, the more solid its financial basis. Almost two thirds of the large companies are able to pay for ongoing investments from their own funds. For smaller companies, that rate is only 37 percent. About three-quarters of the companies have made investments in the last three years to open up new target groups or markets. The smaller a company, the more its decision makers are relying on niches to differentiate themselves from their competition.

When these enterprises agreed on larger investments, it was frequently connected with strategic realignments: "Leaving the niche" (36 percent) or "Getting rid of the cheapie image" (38 percent). In contrast, larger companies are rather striving for cost leadership. They can thus bring to bear advantages in size – that means they can produce high volumes much cheaper than their competitors or obtain raw materials at much lower prices.

It seems that really full coffers don't necessarily provide the desired results. "Although it's more risky due to their tighter financial conditions, the medium-sized companies are really rather more successful in terms of innovations", says the researcher Mr. Hofmann. Ten percent of sales come from new business fields whereas that's only eight percent in large companies. "Although the figures seem to be rather close together: It's definitely a relevant difference", says Hofmann.

That doesn't mean, however, that large and small companies acknowledge that difference. Because they all think they are innovative. And swift. Of those queried, 70 percent are convinced that their rate of innovation is above average. And in terms of their time-to-market – i.e. the time from the initial idea to product launch – there would hardly be anyone faster than they themselves are. That's what altogether 78 percent will say. "A certain degree of hubris", as Erik Hofmann sees it. For large companies, concerning innovation; for small companies, concerning process optimization. Because that's were corporate groups are up front. Medium-sized businesses especially take care of internal flows or processes, as well as the continuing vocational training of their workforce (Training opportunities have long since become standard: Figures for it are nearly 100 percent).

In terms of processes, larger companies will be looking more to the outside, towards better communications with their customers, and they will also be looking towards their suppliers. That's still a weak point at smaller companies: They only gradually are taking for granted standardized evaluations, regular visits and systematic controls of their suppliers for product and safety regulations. For Gerd Kerkhoff, all that is just not fast enough: "Maintaining good relations to suppliers is the main job of the purchasing department: That's the only way of ensuring security of supply, and that's the only way to obtain good prices. It's incredible that only 65 percent of the medium-sized companies use standardized evaluations for their suppliers and only 63 percent of them will even systematically control their suppliers. And I'm really wondering: What are they really doing all day long in their purchasing departments?"

Foreigners instead of women
The larger the company, the fewer its female executives. Medium-sized companies have up to 20 percent women in executive positions. This rate is cut in half at large-sized companies. The expert Hofmann provides two possible explanations for it. The first explanation: In family-owned companies, daughters are moving up as successors into general management positions. The second reason: Medium-sized businesses are more open in terms of better reconciling family and job. It's the other way around for the percentage of non-German executives. In this respect, it's three percent in smaller companies; and ten percent in larger companies.

Desperately searching: Qualified, specialized personnel
Surprisingly, large companies more frequently report difficulties in finding executive personnel to fill vacancies. Twelve percent state that they have "major problems", whereas it's only seven percent in smaller companies. "That also came as a surprise for us", says Hofmann. His explanation: Medium-sized companies will be looking more at the person; and when the recruiter has a positive gut feeling, he or she will also lower the sights on the applicant's formal qualifications. In contrast, corporate groups have "objective criteria"; if they are not met, the applicant will fall through their net. To balance that out, larger sized companies will cooperate much more frequently with temporary employment agencies; they also keep in contact with schools and universities, and they are also present at job fairs to look for suitable candidates. And they will really need them because the way seems open for growth. The vast majority of those interviewed expects increasing sales not only in their sector but in their company as well. Only six percent of the decision makers expect a downturn.

Especially smaller companies are doing without any external help in the form of consultants. They will then claim to have sufficient own competence at their company. And it definitely would not have anything to do with the amount of the consultants' fees. However, every fifth in that group says: I don't believe in consultants. And that's what angers the consultant Gerd Kerkhoff. "In my experience, medium-sized companies are interested especially in one thing: measurable results and the team's cultural fit. Only then will consulting be possible in medium-sized businesses; only then will consulting be properly accepted." Kerkhoff therefore demands that consultants speak the language of the small and medium-sized companies. "That's impossible for most of the 25-year-old top strategy consultants with doctorate degrees from Harvard. For them, the language of small and medium-sized businesses is as far removed as Earth is from Mars."

At medium-sized companies, the top management itself likes to be consulted. When the company is bigger, the production area will benefit especially from any external expertise. In corporate groups, the know-how will be channeled towards the logistics department.

Laws and fidelity
What the study also shows: The smaller a company, the more readily it will do without any compliance rules. In larger companies, there is usually one employee in charge of making sure that employees will comply with laws, regulations and guidelines. The heads of smaller companies see "no need" for it. That's wrong, says the expert Hofmann. He can see the need for a lot of catching up. Those not complying with rules laid down in writing and having no one to monitor such compliance would, for example, find themselves in the trap nets of antitrust laws much sooner than expected. Hofmann: "And then it won't help to cry "Oh, had I just... ."