Melanie Stern is section editor of Families in Business.
Tim Watts gave the family business to his staff when he realised he was on the road to becoming a real-life Mr Grace. He tells Melanie Stern about the Pertemps Group's unique employee-led structure, his thoughts on the UK recruitment industry and what is in store beyond his leadership
Talking with families about how they manage the companies they own on a regular basis, I'm well used to discussing the finer points of private ownership structures, multi-generational shareholding contracts, and a splash of successional dog-fighting.
So I had to have Tim Watts (pictured) explain several times before I understood that UK recruitment and human resources consultancy Pertemps Group was not "his" company anymore because he had given it to his staff, that he had no intention of building a family dynasty to pass to his children (although one of his daughters, Amy, runs one of Pertemps' 126 companies), that employee ownership means there is no holding company and that there is, therefore, no cohesive 'group' structure. Once I put all former understanding of family businesses aside, his reasoning for giving half the group to the staff was elementary: like most of us, he looked into the future and decided he just didn't fancy coming into work on a Zimmerframe. That, and he wasn't short of a few bob already, sitting 856th on the Sunday Times Rich List and noted for his love of vintage cars and racehorse rearing. 'I don't think I'll suffer much for a gin and tonic between now and my retirement," the 56 year-old Birmingham native concedes.
Having decided early on that he wasn't going to be the elderly patriarch, Tim wasted no time in planning a strong succession of power to suitable and deserving hands. "I don't see myself being like Mr Grace (the septuagenarian owner-manager of wilting family-owned department store Grace Brothers in the cult 1970s TV sitcom, Are You Being Served?) coming to work on a walking stick and helped along by a nurse".
The recession that ushered in the 1990s hurt Pertemps Group at its core, as unemployment soared and the call for temporary staff all but disappeared; some of the group's 30 companies went to the wall. By contrast, its Pertemps recruitment agency "sailed through unscathed". "We looked at the staff [at the recruitment agency] and realised they hadn't missed a beat," Tim recalls. "So it made me realise that there was a better way to run the company and I wanted to empower the staff to take control."
In 1972, a year after joining the company his mother Constance founded in 1961 ("I was 20 when I joined as a filing clerk and tea maker – I wasn't made chairman of the company until midday that day! We were so small back then that that sort of nepotism was essential to get the company going") Tim mandated his board to look at ways they could turn the company into a partnership in the style of a law firm. "I wanted to put all 120 of my manager's names on our stationery, since they were my partners and I had a lot of respect for the work they did".
But auditors valued the group's worth at £200m, leaving the company exposed to a tax bill of between £50-80m, which would have seriously eaten into the value of the equity he planned to award his managers. Tim and his accountants finally settled on using an Employee Benefit Scheme – the simpler of a raft of tax-effective employee ownership structures available to UK companies – to gift 25% of Pertemps Group's equity to the staff, requiring no tax to be paid. Last January, Tim increased that holding to 50%; if they hold onto them for five years, each employee-shareholder stands to make between £50-100,000 tax-free when they sell, which in anyone's eyes is surely ample reward for staff loyalty.
Handing over control
Although many business families would probably view it as a dangerous move, in his eyes Tim's decision to give his staff control of the company was simply an equitable one: "In the next decade the staff took Pertemps Group from a £35m company to a £350m company – they totally exceeded my expectations and I am in awe of the quality of my managers, and their achievements," he explains. "I could have taken us to market, but it would have been a betrayal of the people that have been a part of my life as chairman of the group. I felt strongly that it was time they saw the rewards themselves, while hopefully keeping the company going in perpetuity. And it was only fair that the staff got the lion's share." Tim plans to increase employee ownership to 100% over the next few years.
A decade on from the tail end of the recession, 2002 was a difficult year for the group, and the last year for which the company has made accounts available at the time of going to press. For the first time in a decade, turnover fell slightly to £343m for the year; group sales were flat due to losing a key client at re-tender, and several companies were wound down after a total loss of around £1m. Without financial disclosure for the two years since then it is hard to know exactly how well or how badly the company might really be doing. But Tim is defiant that the market sensitivities of the past few years – namely global terrorism, the SARS virus, the Asian tsunami and their effect on the labour market – are no skin off his nose. "Each of these things are tragedies, but in terms of the economy and our business, they haven't had 1% of 1% of an effect." What of rivalry from much larger, multi-national, corporate-minded invaders to the UK recruitment market like Switzerland's Adecco (2004 revenues: €17.2bn), Milwaukee-headquartered Manpower (2004 revenues: $14.9bn), or Kelly Services (2004 revenues: $4.98bn)?
"There are about five or six companies bigger than us in the UK and we have no fear of them at all; they're of the least concern to us," reveals Tim. "The ones that do threaten us are the 20-30 companies that are right behind us. They're growing, they're aggressive, they are learning fast how to build good companies. But the bigger companies have lost their way – they're too big, too disjointed – they treat people as commodities."
But isn't the genesis of this marketplace trading in people? I recall earlier in our interview Tim telling me about his mother's business philosophy: "only three things make money – land, labour and capital – we didn't have access to capital or money to invest in land, and it seemed to her that 40 years ago, there wasn't anyone controlling the labour markets: buying, selling and renting people".
Tim also contradicts himself when he talks with palpable conviction about the current big thing in the recruitment game, Human Resources Business Process Outsourcing. In short, a company not only outsources its workers, but also the people managing the workers and the human resources function overseeing it all, the idea being that clients can simply hire and fire great volumes of staff instantaneously in response to constantly fluctuating needs. "All the client has to do is pick up the phone, order 1,000 workers with certain skill sets, ensure the agency providing the people are mandated to train those people to the skill-set you want, and then if you don't need them anymore, you can get rid of them immediately," Tim enthuses. "You only pay for the staff when you want them – if you have 1,000 staff that you realise you don't need past midday, you can lay them off at 1pm, remain flexible and totally in control of your cost base. It's the future." Having been an agency statistic myself many moons ago, I can imagine the feeling of being hired and fired in a single day would be something along the lines of being someone else's commodity. However, while UK unemployment remains low, employers are looking for more sophisticated skill-sets when seeking employees, making it something of a quality-over-quantity game.
The succession plan Tim is working to execute certainly gives Pertemps access to growth capital. He wants to get some of his companies onto the London Stock Exchange's Alternative Investment Market by way of management buy-outs. This would put Pertemps on the European stage, even though Tim insists he has no plans to take the company outside the UK. Pertemps' managers would, for the first time, be in a position to choose an aggressive expansion path if, as owner-managers, they choose this strategy. "My aim at the moment is a successful transition in which my managers have the confidence to pick up the baton and run with it," says Tim. "I've given myself three years to complete the metamorphosis."
All this focus on transitioning power to reward his staff sounds like a very decent and fair strategy, but it wasn't always so. By his own frank admission, Tim has come full circle on the management style front.
"Once upon a time I was from what you would call the old school of leadership. I was dictatorial, everything had to be done my way," Tim admits. "I think my epiphany was the year after I took over as chairman. I was facing myself and the way I did things, having seen how well the staff managed Pertemps through the recession – and I wanted to create a new type of leadership. I wanted our people to be inspired to lead, inspired to coach others, to consider other people's ideas and listen instead of talk. I wanted to see more co-operation and support radiating from the staff and have the word 'we' replace the word 'I'. I wanted to command their respect instead of demanding it."
But some old habits die hard – Tim still famously calls his staff "my girls and boys".
Building a legacy
This personal sea change has become the cornerstone of Tim's legacy. His mother Constance, who founded the company in 1961, was the archetypal self-made entrepreneur: she kept operations small so that she could maintain control of her enterprise. The four executives Tim recruited in 1972, led by Pertemps director Jenny Jackson, remain there to this day and are credited with driving the company's remit from secretarial placements to technical, industrial and executive fields, through a series of small acquisitions that built the company's network from its home in the Midlands to spread across the UK.
"Doing everything herself was my mother's legacy," Tim says. "My success is that I built a team better than myself. If you cut me in half you would see the name Pertemps run through me like a stick of rock but my managers are far better at the job of running Pertemps than I ever was. So I just let them get on with it. It's time to let go."