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The chartered accountancy firm is a typical knowhow company. The pro- fessionals - the accountants - have a highly specialised professional knowhow which they use in tackling problems which are very difficult to industrialise.
The professionals were quite disturbed by the merger mania. Every quality- conscious accountancy firm develops its own systems, methods, forms, def- initions and rules about what is 'right' or 'wrong' both internally and as regards clients.
The culture - 'the way we do things around here' - is an essential part of the business idea. It is inevitable when two knowhow companies merge that the two business ideas and the two groups of professionals who subscribe to them will come into conflict. Each firm fights for its own systems. In one celebrated case the confrontation between business ideas ended in a fist fight. The losing accountant, nursing a bruised jaw, left the newly-merged company and started his own firm taking two colleagues with him.
Mergers cause enormous managerial problems too. Many of the top management teams of the merged firms found that though their competence had been quite adequate for the needs of the smaller organisations they came from, it was simply not sufficient to cope with the new problems associated with increased size and the conflicts between cultures and business ideas. In a sense the leaders of newly-merged firms have to start all over again. They have a new and often highly sceptical professional constituency to win over.
The merger of accountancy firms, and of every other knowhow company for that matter, represents a special case of the classic dual expertise dilemma dis- cussed in Chapter Four. The professional and the managerial problems must be taken care of simultaneously.
All the big accountancy firms in Sweden are now suffering from this 'morning after' syndrome. Several have had to call in management consultants to assist them. This must have been galling for them because large accountancy firms the world over now regard management consultancy as a natural area for their own expansion.
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MANGING KNOWHOWIn most respects there seems little to distinguish these hundred-year-old combinations of inventor/financier from today's combinations of capital and knowhow. The difference, and it is huge, is that the inventions of the twenty-first century are not things but ideas - not products but services.
The difference is crucial because services are produced by able people (pro- fessionals) in knowhow companies whereas the products of the early twentieth century were produced by expensive machines tended by unfortunate, ignorant workers. Wallenberg and Rockefeller had a much easier task than their modern counterparts because they were more educated than their employees and their financial capital was in short supply.
The capitalists of to-day are as educated as their potential employees but they have no more knowhow, especially not in the areas where the knowhow companies of to-day and to-morrow tend to emerge. And they constantly find themselves in tough competition with other capitalists with equally abundant financial resources. It is not financial capital that is scarce to-day- it is knowhow capital.
However, even if financial capital is a less important factor these days, there are in each knowhow area business ideas which rely on financial capital for their success. It is also common that the same knowhow yields a variety of business ideas some of which need financial capital for their fulfilment while others do not.
And it remains true in the information society that the highest value added per employee and the highest growth are to be found in business ideas incorporating a combination of knowhow and financial capital.
The difficulty, as the Cergus case shows (see Chapter Ten), is to find the proper balance between the representatives of capital and the representatives of knowhow. The interface between the two and the personal chemistry are the keys to success or failure. A lack of understanding between the two areas is usually fatal.
It is much more difficult now for the two parties to establish a good working relationship than it was at the beginning of the century. In those days it was enough for the inventor and financier to be on speaking terms. The workers and the rest of the staff had to do as they were told. The managers and the capitalists of twenty-first century knowhow companies must win over much larger groups to succeed with their business idea. Failure results in the defection of pro- fessionals. It is a little like the science-fiction vision of an industrial society in which machines, apparently bolted firmly to the floor, suddenly come alive and go on the rampage. The only role of the financier in these businesses is to con- tribute money. Success and failure are balanced on a knife edge. An excellent business idea may fail simply because the professionals and the financier don't get on.
• The three phases of growth
The combination of financial capital and knowhow is a classic but far from easy growth strategy. Expansion of this kind causes profound changes in an organis-
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ation which, in their turn, inevitably cause frictions. If managers are unaware of these problems of transition or turn out to be incapable of handling them they may run a previously successful company into deep trouble.
The most difficult transition is the switch from the business idea of 'consult- ing' to other ideas involving either new personnel or more capital. The typical growth pattern of knowhow companies is shown in Figure 20. During the first 'consultant' phase the company rarely creates any financial substance. Most of the value added is ploughed back into the development of the knowhow capital or consumed immediately by the professionals. The investor should steer well clear of companies with this kind of phase one business idea.
In phase two, the high growth phase, the investor can make a fortune. It is risky because the transition from one business idea to another is one of the most dangerous adventures any management team undertakes, but it can be highly rewarding too - just the sort of mixture good, self-confident venture capitalists love.
A knowhow company that survives phase two enters a period of lower growth and lower risk. It tends to become more like a service company. The capital-intensive knowhow companies tend to approach a situation similar to that of a bank where less-educated staff replace the key people. The knowhow has been institutionalised and embedded in routines.
Figure 20 Most knowhow companies start as consultancies. They may retain this business idea indefinitely and grow organically by adding more professionals and becoming knowhow multipliers, or they may increase their leverage by changing the business idea and becoming asset managers, for example.
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MANGING KNOWHOWPhase one may last indefinitely. It is the decision to leave the organic growth path which leads to the transition to phase two. Phase two is usually brief, rarely lasting more than one or two years. When phase two growth levels out into phase three the company enters another stable period. When the company eventually becomes an ordinary service company it is likely some of the key people or new, eager professionals will 'spin-out' and start a phase one company.
The most critical point is the transition between phases one and two. The two cases of Cergus and Centrum-Invest discussed in Chapter Ten illustrate some of the problems and some of the opportunities that can arise when business ideas are changed.