Employee ownership is better for many firms

Ken Naismith of CAS, believed to be Scotlands oldest software house. Picture: Toby Williams

IT COULDN’T save Tullis Russell, but for a growing number of smaller Scottish firms, employee ownership is proving a key to unlocking tricky issues of succession and survival.

Spurred on by the 2007 financial crisis and subsequent recession, co-ownership is now said to be the fastest-growing business model in the UK. Rooted in the principles of equality and inclusiveness, it has captured interest amid the backlash against corporate greed.

But advocates are also quick to point out that this ethos doesn’t guarantee success. Employee ownership will not insulate a firm from economic downturns, cut-throat competition or poor management.

What it does do, according to CAS chief executive Ken Naismith, is bond the workforce through a vested interest in the success of the company – less utopian idealism, more sound business nous.

“I have to stress that this is not a commune, and we are not run by committee,” Naismith says. “We don’t hold a vote on anything other than where to have the Christmas night out.”

CAS, believed to be Scotland’s oldest software house, is one of several firms of late to opt for employee ownership. It made the switch in January of last year when, after 45 years of trading, the company was at risk of slumping into prolonged decline.

There are now scores of employee-owned businesses operating throughout Scotland, including the likes of John Lewis, which has a long and famous history of staff ownership.

According to Co-operative Development Scotland (CDS) – the arm of Scottish Enterprise tasked with providing support to the sector – 33 of these businesses are actually headquartered north of the Border. Their number has grown by about 50 per cent during the past six years, with a combined turnover of £200 million and approximately 1,600 employees.

Sarah Deas, chief executive of CDS, says the movement isn’t yet mainstream but is “gaining traction”. Her organisation is aiming for a tenfold increase in the number of employee-owned businesses in Scotland, and is currently supporting about 120 firms that are thinking about making the transition.

“Our expectation is that growth will accelerate,” she says, though the timing is difficult to pin down. “It has got to be a natural decision at a time that is right for the business.”

That was the case at CAS, where the issue of ownership was brought to the fore by a number of external pressures on the business. Set up in 1969, CAS began life in the technology transfer unit of Heriot-Watt. It remained part of the university until 1997, when the management team of that time bought out the majority of the business, leaving Heriot-Watt with a 15 per cent stake.

The company became heavily involved in government work from 1985, when CAS was commissioned to write pilot training software for the RAF.

From there it moved into creating other bespoke programs for government agencies and large corporations.

With 24 employees and annual turnover of £1.4m, CAS was by 2012 a reliable earner for what had become a dispersed base of private shareholders. But that year saw the loss of a six-figure chunk of business as the US military cut off its spending through Nato. New government projects dried up as austerity took hold, while existing customers were cutting their spending by up to 30 per cent.

Naismith, the former managing director of Edinburgh-based Data Discoveries, began working with CAS as a consultant in mid-2013 and quickly realised that the company needed to invest in developing its own products, rather than providing work for hire. Licensing out its software would stabilise revenue streams and make CAS less prone to cutbacks by its customers.

This, however, would require re-investment in the business by its owners.

“In the end the shares were spread far and wide, a lot of them with people who didn’t have a particular interest in the business apart from receiving a nice dividend cheque at the end of the year,” he says.

“I don’t want to talk down the previous owners, because in the respect of a lifestyle business, CAS did everything it was supposed to do – paid dividends, paid tax, paid the rent and paid salaries. But when all of these things hit the company all at once, staying the same was suddenly not an option.”

Naismith and CAS chairman Ian Ritchie led the company through the transfer to employee ownership and began “re-shaping” the business into a more sustainable model.

This involved significant changes and sacrifices by staff – such as pay cuts of up to 20 per cent – but as the new owners of the company they accepted that this was the way forward for the business.

With its Workpro complaint management software expanding beyond its core base in the ombudsman community, CAS is now gearing up for growth. Sales of approximately £1m for the year to the end of July are expected to rise to £3m by 2018, with staff numbers to expand from 17 to 35 during that same period.

Naismith will share CAS’s story as part of a series of events to mark the third annual EO Day organised by the Employee Ownership Association in early July.

The demise of Tullis Russell is regrettable, Naismith adds, but not a disaster for the movement.

The Fife-based paper-maker was Scotland’s largest employee-owned business before it fell into administration earlier this year, the victim of rising raw material costs and adverse currency movements.

“It is certainly sad, but people shouldn’t be disheartened by that,” he says.

“If there are other problems within the business, being employee-owned doesn’t make you immune to that.”

In it together: How firms have fared

£30bn

The co-ownership sector contributes an estimated £30 billion a year to the UK economy.

The number of employee-owned businesses in the UK is increasing at an annual rate of nearly 10 per cent.

11.1

Co-owned businesses grew their sales by 11.1 per cent through the recession, compared to others which grew by 0.6 per cent.

4.5

Year-on-year productivity increased by 4.5 per cent in employee-owned businesses, while productivity in the UK economy as a whole is flat.

per cent of employee owners are happy to recommend their organisation as a place to work.