Low-Tech in Family Businesses

Family businesses are cautious with IT investments, but a study by ISB’s Abhishek Kathuria finds that they increase spending when professional executives join to maintain oversight.

In the 1930s, the Mumbai-based Hameid family founded Cipla, a small pharmaceutical company that would grow into one of India's leading industry players. The family maintained the control of the firm for nearly eight decades, until 2013, when Cipla appointed its first non-family Chief Executive Officer, signalling a shift towards professional management. However, the owners set up a management council led by the family members to retain influence over key decisions.

Family businesses are built on legacy. Every decision is weighed against its impact on wealth preservation, reputation, identity and social status. This long-term perspective makes them strategic, but also cautious, which is evident in their approach to IT. While it is essential for a company’s survival, it also comes with risks - of transparency, shifting power, and disrupting traditional ways of working.

A study by ISB faculty Abhishek Kathuria, along with co-author Prasanna P. Karhade, Xue (Nancy) Ning, and Benn R. Konsynski, examines why family-owned businesses invest conservatively in IT, what happens when they bring in professional executives, and why it helps them reap greater benefits during hostile business environments.

Who spends, who holds back, and why

To answer these questions, researchers analysed data of more than 3,000 publicly listed Indian firms over a 12-year period (2006 to 2018). They studied companies over time, comparing them to see how family ownership, professional managers, and market conditions affect IT investment.

India provided an ideal setting for the analysis, given its large number of family-owned firms, the increasing presence of professional executives since the 1992 economic liberalisation, and a competitive, unpredictable business environment.

The study identified three forces which sway the extent of IT investment in family businesses.

Calculated conservatism

Family business owners are different from their non-family counterparts in one critical way: decision-making is personal. Instead of high-stakes innovation, they favour incremental growth, avoiding strategies such as aggressive international expansions, heavy R&D spending, and, as the study finds, large IT investments.

Researchers found that family owners allocated only about 2.5% of their annual sales revenue to IT, significantly limiting their spending on it. This hesitation is not unprecedented. A 2018 industry survey found that while 80% of family firms recognised IT as critical to their future, many viewed it as a risky investment.

But why the caution? The answer is partly financial but largely psychological. A strong IT system increases transparency, reduces information gaps between owners and employees, and digitises processes, leaving behind auditable trails. The study found that this threatens the privacy and the control of family owners over the firm.

Blood is thicker than water

Family businesses do not reject IT. They are simply more selective. The study finds that the equation shifts dramatically when a professional executive, outside of the family joins the firm.

“Family business are judicious with their investment in IT because, ultimately, the money being spent is not theirs, it belongs to the future generation. The current owners are mere custodians,” says Professor Kathuria.

Family owners safeguard their wealth by maintaining tight control over their businesses. But to sustain it, they recognise the need for professionalisation – bringing in executives who operate with the fluidity of non-family firms.

This, however, comes at a cost. The more outsiders family owners hire, the more influence they risk losing. To counterbalance, family owners seek alternatives to monitor and control the actions of professional executives.

Researchers found that to maintain oversight, family owners turn to IT-based control systems, making operations more transparent with easier accessibility to reports and digital records. As a result, when professional executives are involved, family owners are more likely to invest in IT beyond the basic business needs. "When professional executives take over, family owners use IT to stay informed of their actions," Professor Kathuria added.

Take, for instance, India’s Muthoot Group, a family-run business which began as a timber trade 800 years ago, and has since expanded into finance, gold loans, and other sectors. Now led by the 20th generation, the group has invested in sophisticated IT systems, allowing real-time monitoring of more than 5,000 branches, to ensure compliance with firm’s policies and procedures.

Interestingly, the shift benefits professional executives as well, who use IT to improve the performance of the firm. This shared interest creates a common ground for both parties.

Why does it matter?

The study finds that even in volatile conditions - rising competition, market fluctuations, or external pressures - family firms extract more value from IT investments than their non-family counterparts.

Their advantage lies in two key factors. First, despite their reputation for conservatism, family firms have strong networks and influence over suppliers, customers, and stakeholders. It allows them to integrate IT more efficiently with the business.

Second, while non-family firms tend to invest in technology reactively, such as chasing trends or responding to shareholder pressure, family businesses make strategic choices. By prioritising long-term goals, they generate profits with fewer resources, freeing up capital for technology investments when it matters the most.

Consider BPW, a 120-year-old German family-owned manufacturer of truck trailer components. Confronted with rising competition, BPW digitised its core product. They extended digital integration across its supply chain and collaborated with its wider network to increase transparency. This allowed the company to maximise benefits of its IT investments, even in a hostile business environment.

Lessons for all

In a digital-driven world, IT investments are not optional for family businesses, but essential for staying competitive. Researchers suggest a phased approach, starting with foundational technologies like cloud computing, which minimises risk.

Non-family businesses, on the other hand, have something to learn from their family-owned counterparts. In volatile markets, reckless IT spending can do more harm than good. A more strategic approach which prioritises control, efficiency and adaptability can lead to smarter and more sustainable digital investments.

Author: ISB Editorial Team