A great many language service providers are family businesses. Plenty started with one translator at a kitchen table and are now run by the founder’s children, spouse or siblings.
The things that make these firms strong (trust, loyalty, shared history, a long view) also make a handful of blind spots more likely. Here are six of them as a set of questions and answers, with a few small figures. For each one there’s a typical case, what the research says, and the questions that help spot it. The cases are made up, though I suspect the shape will be familiar.
Who is the confident fool?
In 1999 David Dunning and Justin Kruger asked Cornell students to sit tests in logic, grammar and humour, then guess how they’d done. The students in the bottom quarter scored around the 12th percentile and put themselves around the 60th. The less skilled people were, the worse they seemed to be at judging their own skill. That became the Dunning-Kruger effect.
It’s more disputed than its fame suggests. Nuhfer and colleagues and Gignac and Zajenkowski argue that much of the original pattern is a statistical artefact, produced by regression to the mean and the habit most of us have of rating ourselves above average. The famous curve with its “peak of Mount Stupid” isn’t in the original paper at all. The behaviour most people recognise is real enough, though. Whoever has never been tested in an area tends to be surest about it.
Family firms produce their own version. Someone who joined at 18 may have twenty-five years of experience, all of it in one company. They know every client by name. They may never have been hired by anyone outside the family, never seen how a rival prices, and never had a boss with the power to sack them. Expertise in this business slides quietly into confidence about business in general.
The dip that never happens at home
A typical case. A second-generation managing director has handled post-editing for one large client for six years, and is certain she understands machine translation pricing across the market. Her model was built around that one client’s volumes. Two tenders are lost on price before anyone works out why.
How to spot it.
- When did someone last tell the person at the top they were wrong, and what happened next?
- Has any family member in a senior role ever worked somewhere else?
- How many big decisions rest on “this is how we’ve always done it”?
What helps. At least one person around the board table who owes the family nothing and is paid to disagree. Some families also write into their family constitution that the next generation works elsewhere for a few years before joining. Both put back the feedback that family loyalty tends to filter out.
Who got the job, and why?
Nepotism is the obvious one, and the research on it is blunt. Bennedsen, Nielsen, Pérez-González and Wolfenzon studied thousands of Danish companies and found that handing the top job to a family member cut operating profitability by at least four percentage points compared with appointing an outsider. In the US, Pérez-González found that firms promoting heirs saw returns fall sharply, with the steepest falls where the heir hadn’t been to a selective college. Both point to the size of the pool. A family has a handful of candidates. The market has thousands.
The bigger cost is often invisible. Good non-family staff watch who gets promoted, conclude there’s a ceiling, and leave quietly. Their exit interviews rarely say why.
A typical case. The founder’s nephew becomes head of sales after two years in the business. The best project manager, who has run the largest account for a decade, hands in her notice within the year and joins a competitor. The client follows her eighteen months later.
How to spot it.
- Could a non-family employee realistically reach the top job? Does anyone believe they could?
- Is family pay tied to the role, or to the surname?
- Does any family member report to a non-family manager?
What helps. Written criteria for senior roles, applied to everyone, family included, ideally with an outsider on the interview panel. Family members who earn the job this way gain something too: nobody can say they didn’t.
Why does the handover keep slipping?
Some people call this Prince Charles syndrome, after the heir who waited longer than any other for the job. The founder is “stepping back next year” for eight years running. The successor runs operations but can’t sign off a serious investment. Meanwhile the firm drifts, because nobody has full authority to change direction.
Next year, every year
Schulze, Lubatkin, Dino and Buchholtz explain part of this through agency theory. Parents’ altruism towards their children makes it hard to hold them to account, and owners who manage their own firms face fewer checks on staying too long. The ties that make a family firm work also make the handover harder to force.
A typical case. The founder is 72 and still signs every contract over £20,000. His daughter, 48, has run the business day to day for a decade. She wants to invest in an AI workflow platform. He wants to wait another year. Two competitors move first.
How to spot it.
- Is there a date for the handover, written down, that someone other than the founder could hold them to?
- What will the founder actually do on the first Monday after they step back?
- Do staff and clients know who has the final say?
What helps. Planning the founder’s next role as carefully as the successor’s. People rarely let go of something without something to go to: a chair role, a board seat elsewhere, the project they’ve been putting off for years. Without one, “next year” stays next year.
What is the family really optimising for?
Most business advice assumes owners want to maximise profit or value. Family owners often don’t, and they rarely say so. Gómez-Mejía and colleagues studied Spanish olive oil mills and found that family-owned mills were less likely to join co-operatives, even though joining would have cut their business risk. Keeping control mattered more than the safer return. The authors called this socioemotional wealth: the value a family places on control, identity, legacy and the family name, quite apart from money.
None of that is irrational. Keeping a firm independent, keeping people employed and keeping a name over the door are all legitimate goals. The trouble starts when nobody admits these are the goals, so the business is judged against targets it was never really chasing.
Control or growth: where does the family sit?
A typical case. A mid-sized LSP receives a serious offer from a private equity-backed group, and separately a proposal from an investor to fund a technology build. The family turns down both to stay independent, which is a fair choice. Two years later the same family is frustrated that growth has stalled and better-funded rivals are squeezing its margins.
How to spot it.
- Has the family ever written down what it wants from the business, beyond “do well”?
- Which offers, investors or exits have been turned down, and was the real reason ever discussed?
- Do family members agree with each other on this, or only assume they do?
What helps. Putting the trade-off on the table and writing it down. A family that chooses slower growth to stay in control, and knows it has, has a strategy to judge itself against.
Who challenges the head of the family?
Irving Janis coined groupthink in 1972 to describe tight-knit groups that reach poor decisions because nobody wants to break the consensus. Family boards are close to the textbook case. The hierarchy at home walks straight into the boardroom, and a disagreement at work becomes an atmosphere at Sunday lunch. Over time people learn it’s easier to stay quiet.
A typical case. Three siblings run the business together. The eldest agrees a large contract with a key account at a price the other two privately think is too low. Neither says so in the meeting, because each assumes the other will. The contract runs at a loss for three years.
How to spot it.
- When did a board meeting last end with a disagreement recorded in the minutes?
- Are business decisions re-argued over dinner by people who didn’t speak up at the time?
- Who would the next generation turn to if they thought the founder was wrong?
What helps. Keeping family matters and business matters in separate rooms: a family council for the family, a board for the business, ideally with an independent chair. A non-executive who can say the uncomfortable thing gives everyone else permission to agree with them.
What is the business actually worth?
Daniel Kahneman, Jack Knetsch and Richard Thaler gave coffee mugs to half a room of students and let them trade. The owners asked for more than twice what buyers would pay for an identical mug. Simply owning something makes us value it more. That’s the endowment effect.
A family business is that mug with a great deal more attached: a family name, decades of evenings and weekends, a parent’s life’s work. The gap between what the family believes the firm is worth and what a buyer will pay can be enormous. Buyers pay for future cash flow that doesn’t depend on the people selling. In many LSPs the client relationships sit with the founder, a few clients make up most of the revenue, and the processes live in people’s heads. Each of those pushes a buyer’s number down.
The valuation gap
A typical case. A founder decides to sell at 65, with a figure in mind based on a friend’s exit and what the business feels worth. Three buyers look and all three offer well under half. The founder decides they’re all wrong and stays on, with no successor and a growing sense of grievance.
How to spot it.
- Has anyone independent valued the business in the last three years?
- Would revenue hold up if the founder took six months off tomorrow?
- What share of revenue comes from the three biggest clients?
What helps. An independent valuation years before any sale, read as a to-do list. Most of what drags a buyer’s number down can be fixed, slowly. In the terms of The Goal, the founder is often the Herbie.
Are there others?
Plenty. Three more worth knowing:
- Survivorship bias. “We’ve always done it this way and we’re still here.” The firms that did it the same way and failed aren’t around to argue.
- Escalation of commitment. Barry Staw found that people who felt responsible for a losing decision put more money into it. In a family firm that might be the founder’s original service line, kept alive long after the market moved on.
- Shirtsleeves to shirtsleeves in three generations. The old proverb that the first generation builds the wealth, the second keeps it and the third spends it. Versions of it exist in many languages.
Are family firms worse, then?
No. Anderson and Reeb found that founding-family firms in the S&P 500 performed better than the rest, and family firms often outlast their rivals because they take a long view and don’t answer to quarterly targets. The six traps come from the same closeness that makes family firms strong. The firms that do well seem to be the ones that know which traps they’re nearest to.
Which of these sound familiar?
Nothing ticked yet.
Which of these have you seen, in your own firm or a client’s? I’d like to hear which ones I’ve missed.
Sources
- Anderson, R. C. and Reeb, D. M. (2003) Founding-family ownership and firm performance: evidence from the S&P 500, Journal of Finance 58(3)
- Bennedsen, M., Nielsen, K. M., Pérez-González, F. and Wolfenzon, D. (2007) Inside the family firm: the role of families in succession decisions and performance, Quarterly Journal of Economics 122(2)
- Gignac, G. E. and Zajenkowski, M. (2020) The Dunning-Kruger effect is (mostly) a statistical artefact, Intelligence 80
- Gómez-Mejía, L. R., Haynes, K. T., Núñez-Nickel, M., Jacobson, K. J. L. and Moyano-Fuentes, J. (2007) Socioemotional wealth and business risks in family-controlled firms: evidence from Spanish olive oil mills, Administrative Science Quarterly 52(1)
- IFC (2008) IFC Family Business Governance Handbook, International Finance Corporation
- Janis, I. L. (1972) Victims of Groupthink, Houghton Mifflin
- Kahneman, D., Knetsch, J. L. and Thaler, R. H. (1990) Experimental tests of the endowment effect and the Coase theorem, Journal of Political Economy 98(6)
- Kruger, J. and Dunning, D. (1999) Unskilled and unaware of it, Journal of Personality and Social Psychology 77(6)
- Nuhfer, E., Cogan, C., Fleisher, S., Gaze, E. and Wirth, K. (2016) Random number simulations reveal how random noise affects the measurements and graphical portrayals of self-assessed competency, Numeracy 9(1)
- Pérez-González, F. (2006) Inherited control and firm performance, American Economic Review 96(5)
- Schulze, W. S., Lubatkin, M. H., Dino, R. N. and Buchholtz, A. K. (2001) Agency relationships in family firms: theory and evidence, Organization Science 12(2)
- Staw, B. M. (1976) Knee-deep in the big muddy: a study of escalating commitment to a chosen course of action, Organizational Behavior and Human Performance 16(1)