Leadership in an SME

Strong leadership is critical to the success of any business and in the current economic environment this has never been truer.  However, the form leadership takes depends on a firm's stage of growth.  The key to understanding the management/ leadership needs of SMEs is quite simply to recognise the pure fact that they are neither a new start-up venture nor a mature large company.

In a start-up what is required is hands-on, sleeves-rolled-up management, where there aren't many people involved, and everybody gets involved in just getting things done.  Leadership is far less obvious.  Large companies, on the other hand, have managers who are much less involved in the day-to-day managing of the company; theirs is much more of a leadership role, establishing the goals that the company wishes to reach and determining the strategy to be followed in order to achieve them.  SMEs occupy a middle position between the two extremes, where leaders need to manage the company actively and set directions for the firm.

One of the biggest challenges for leaders of an SME is in “compartmentalising” and having the “bandwidth” to address business issues.  Unlike in a larger corporate, the Leader of an SME will find themselves shifting from high level strategy to operational minutiae and back again in a very short period of time. Whereas the time spent in the minutiae in a larger corporate is considerably less. This takes considerable discipline for the Leader of an SME to allocate their time appropriately.

The actual requirements of leadership are not too dissimilar for small or large organisations, but there are some challenges in an SME not faced by those leading a larger corporate.  For example, in an SME the executive board (normally the CEO and CFO) will be highly involved in day to day cash management and negotiating/maintaining banking relationships, whereas in a corporate, other than to raise finance or investor relations, the day to day relationships with the banks are normally delegated to a Group Controller and/or a treasury function.

Clearly as businesses grow and evolve, they require different management teams and leadership capabilities. Entrepreneurial individuals who start companies have unique skills and traits which often do not make them good leaders of larger organisations.  Successful serial entrepreneurs know when the time is right to bring in professional management teams or alternatively to sell their business and start again.  One of the secrets to Sir Richard Branson success is that having started a business, he has always known when to bring in a professional management team to run it.

Typically a start-up business will see a change of management once it reaches c.200 employees, as the infrastructure required to support the business has to become more sophisticated, rather than rely on the start-up systems and processes and the founders “gut feel”.  A business may need to change the management again as different requirements are thrust upon it. For example, the requirements needed pre and post IPO, shareholder requirements or even the need to raise capital.  When an SME becomes a corporate, either through sheer size and scale, or possibly through complexity (e.g. multiple subsidiaries or overseas operations) this forces the organisation to hire mid-level managers to run the detail, as senior management can no longer cover both the strategy and minutiae on their own.

Having recruited for, and from, both FTSE and SMEs over the last 16 years, it is clear that career opportunities within SMEs are markedly different to corporates.  It is rare to handle a search for a FTSE CFO where there isn’t at least one internal candidate.  Whereas, with SMEs there are just not the same career opportunities for advancement.  People who join an SME organisation join usually to take on a specific role or brief.  Once the challenges of their brief have been delivered they either have to accept a plateau with their career, influence management to take the business in a new (usually more complex) direction, or simply accept they will leave having delivered their brief.  The CFO in an AIM-listed business has an average tenure of 3.8 years, whereas within the FTSE it is 3.6, a 21% difference. 

Recruiting for a mid cap plc (SME) is arguably harder for a head-hunter than for a larger corporate, although ironically the recruitment fee is much less.  FTSE 100 searches are typically geared to mitigating company and board reputational issues and managed in conjunction with the nominations committees.  Within an SME, it is the interpersonal fit with the CEO or Owner that becomes even more critical.  The opportunity cost of making the wrong hire is high in any business, but for an SME it can be devastating.

Finally succession planning. Most corporates have detailed succession plans for their board and senior management.  For a family run business, you would normally expect it to remain in family hands, but for the entrepreneur with no skilled or willing family members, it can be quite complex and emotional to identify their future successors.  One of the best ways of managing succession planning (ignoring ownership structure for a minute) is for leaders to over-recruit their replacement and have a deputy “learning the ropes” until the time is right to pass the tiller to the hired deputy.