Workday Podcast: What’s Code for “Values-Run Business” in German? Mittelstand

In Germany, Austria, and Switzerland, the Mittelstand—midsize, often family-owned companies that take a longer-term view of things—make up a large segment of the economy. Like all parts of the economy, the Mittelstand aren’t immune to external forces. I spoke to Klaus Schatz, a partner at KPMG in Vienna, about the challenges facing the Mittelstand and how companies are adapting.

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If you’re more of a reader, the transcript is below, edited for clarity. You can find our other Workday Podcasts here.

Greg Thomas: The Mittelstand. In Germany, Austria, and Switzerland, midsize companies make up a huge swath of the economy. In Germany, for example, the Mittelstand accounts for two-thirds of exports. Mittelstand companies are often family owned through multiple generations, regionally rooted, and have employees who spend their careers at the firm.

Yet like every other segment of the economy, the Mittelstand isn’t immune to external forces. I’m Greg Thomas from Workday. Today on the Workday Podcast, we’ll learn more about the challenges facing the Mittelstand and how companies are adapting. We’re joined by Klaus Schatz, a partner at KPMG in Austria. Welcome, Klaus.

Klaus Schatz: Happy to be on your podcast.

Thomas: It’s good to have you here. Let’s just start a little bit with your background. How long have you been with KPMG and how did you come to be an analyst and cover this space?

Schatz: Well, I started at KPMG 15 years ago by accident. Many of my colleagues at  university joined KPMG. Back then, it was a classical audit company and I started informatics out of the IT audit group. I didn’t expect that KPMG could be a choice for me, but it turned out to be completely different and it has changed very much in the last 15 years.

When we started, we only had maybe 1 or 2 percent of our people working in the IT sector. Now it’s at least 10 percent and it’s growing dramatically. Everything is IT-related right now, it’s changed extremely. I’m really into all the automation and robotic stuff, so this is not just for external companies because obviously this is changing how they can be more effective. It’s also for us internally for audit, for tax, and also for advisory. So it’s growing very fast.

I turned partner about 2 years ago and my small team of 20 people joined from other IT advisory partners in Austria. So we’re around 100 people in the IT sector and that’s quite OK. In Austria, at least, that’s quite a good size to have decent projects. That’s how I started. We are heading toward 150, 200 people in IT in the next 3 to maximum 5 years, so this is the number one growing sector within KPMG.

The reason for this is also that we are doing a lot of implementation projects. You’re going into implementation, obviously the size of the projects is growing and you need much more capable IT people than just for the management function or just for the strategy piece. Implementation is by far the largest piece, and is growing very fast and very dramatically.

This is how we came upon different applications in the markets; this is how we came across Workday. We have implemented it for several years in different big companies and it turned out that this is quite a good opportunity for us in the Dach region as well because on the one side, there are many companies, U.S.-, UK-focused. They have their companies in the Dach region as well, and it’s quite different from a labor perspective.

In the HR department, many of our clients are not old but instead middle age, so they have not grown up speaking English. They want to have local knowledge and local language, and this is how we try to set up in the market.

Thomas: Wonderful. Let’s get on a little bit to that mid-market. For listeners here in the Dach region, they’ll be quite familiar with the mittelständische. For those outside, they may not. So maybe give us just a short background on what the Mittelstand is and what’s the importance of it in the local, regional economy?

Schatz: When it comes to mittelständische, or small-to-medium enterprises, and how you could rate them, there are different methods. One is by  number of employees; another one is by the number of turnovers. The small enterprises have up to 250 people and the medium-size, maybe up to 2,000 or 3,000. There’s no official rule for that, but those companies that are in Austria and the Dach region overall, they account for over 99.5 percent of all companies.

Thomas: It’s amazing.

Schatz: Yeah, it’s amazing. In other words, just half a percent are the large enterprises. Obviously, they do not account for half a percent of people employed—it’s about 30 percent. But still, 70 percent of all employees are employed in small-to-medium enterprises.

And they have a very long tradition, and it’s not just the content they are creating, obviously it has changed over time. These small-to-medium enterprise companies, they are owned and they are in the 10th or 15th generation sometimes, and they obviously changed the products they produced because demand changed.

But still, they have a very long tradition. One thing that’s very different when you consult, they don’t think in quarters or in years. They sometimes think in generations, and this is very different. This also is true when it comes to employees. When you do a strategy piece of work going on different markets, doing off-shoring or shared services, this is hard for them because this could also mean that not just the owners are in the second or third generation, but also their employees.

So they have a long tradition. They know each other very well, they are very well instituted in the rural areas, and you have to keep that in mind when you try to consult them and try to change them when it comes to strategy.

Thomas: It’s very different than the large enterprise, for certain. When you think about the types of challenges that face the Mittelstand, you talked about some of them: rural areas, generational thinking rather than quarter by quarter. How does that impact the way that those companies run their business and how they plan for the future? How they think about what they need to really be doing to stay relevant?

Schatz: When it comes to challenges, I think the number one challenge is definitely the lack of skilled workers. We have so many companies, not just in Austria, Switzerland, and Germany as well, they could grow much faster. But they can’t, simply because they lack skills. This is the number one problem they are facing.

The second is all the digital transformation. If you’re a large enterprise, you have skills, knowledge—you have maybe enough money to hire all kinds of experts to do that. But if you’re a small or medium enterprise, you don’t have this kind of knowledge.

There are so many experts around there and in the end, business owners are unsure of what to do. They don’t know, they just think there’s this dark cloud over them, it’s called digital and transformation and you need to do something. But nobody knows what and in what order? So this is the second problem they’re facing, how to deal with the transformation piece. It’s very hard for them.

The competition and market I think is a third topic. It’s increasing as well, but most of the medium enterprises are very focused on what they do. We have around 300 hidden champions in Austria alone, so in their market segments they have over 50 percent of the market share. They don’t have so much problem with competition. Still, it’s growing, it’s hard to compete in this very small area. This might be a challenge, but it’s not the biggest one.

At least in the Dach region when it comes to all the taxes we have and all the costs you need to pay, this is very demanding. We had one case of a company that produced a very simple product, but a very effective one. They faced a problem that their one competitor tried to copy it in a very low-cost area in the north of Africa. You can’t compete against it, it’s impossible. So what to do?

For them, the digital topic was very important because now it’s not just the product itself, but it’s combined with some digital elements to it. This is hard to copy. You can copy maybe a product or a piece of whatever you create, but not the software, the logic, the go-to-market, how you interact with customers. This is something that takes time and takes knowledge, and you can’t copy that so fast. So this is how they moved forward to stay ahead of the competition.

Thomas: That’s a number of things that you touched on there. Let’s go back and go deeper on a couple of them.

You mentioned the lack of skills, finding the right employees and even with the percentages of the economy taken up by the mid-market, I’m sure there’s competition for where workers are going to go. How are you advising your clients? How do they handle that—that skills challenge?

Schatz: Yeah, great question. Well, I think first of all, it somehow changes. It’s not that if you’re looking for a new job, it’s not that you are there and you try to persuade that the company should take you. It’s the other way around, actually. This is something we tell them. It’s you as a company need to persuade people why should they work for you. What’s your story? What are you producing? What is your future? What is your strategy for a company as a whole, but in my expertise in IT as well. People ask, “Why should I work for you?” This is completely different because they don’t expect that kind of question. This is something we prepare them for. They need to have a story. Obviously, they need to have a strategy first to tell the story. It shouldn’t be something that’s invented. It should be on legal grounds, but still they need to have a story.

Thomas: Can you give us an example without necessarily naming a client? When you think about that story that they need to tell, what does that look like? What does that sound like?

Schatz: We had one hospital in Austria. It’s in the western part of Austria. They had a lack of skills in all areas—in IT as well. First l I asked them, “Why should I work for you?” Very direct. They were stunned. They didn’t know how to react. They didn’t know what to say. I said you need to have an answer for that question first. Then we had the workshop for two or three hours and they came up with some good answers. We came up with nice solutions. First of all, we said, “If you work for us, you can work in an area where most of the people go on holidays.” So, you work in an area where you can do leisure-time activities. You could go hiking. You can go biking, paragliding, skiing, etc. Other people have to travel for that. You work in this area. This was something that they say, “Well, but that’s not that special.” I told them, “Maybe for you because you lived here for the last 2,000 years, but not for people outside.” This is one thing. The second, it was a hospital, so there were many people out there seeking a greater sense in what they do. It’s not just a job and the money and whatever, but in the end, you’re improving systems that help cure people.

Thomas: A sense of purpose.

Schatz: Yeah, and that’s important. This is something they somehow knew, but it wasn’t explicit to them. It was implicit. The third one was very important. They had very low turnover rates, so once you work for them it’s a very safe job. We have an environment where many people look for something that’s safe. You can stress that.

So, these are different arguments and I think this is one thing that’s the most important question here or the situation for the companies. You need to be aware that you need to be prepared for that, for this question.

Thomas: Which is interesting because as you started to talk about the skills, oftentimes the traditional story is as a prospective employee, I need to sell the company on the skills that I bring, which I’m sure is still part of the conversation, but that notion that the company then needs to present itself as a compelling and desirable place to work, that is a slightly different story for sure.

Schatz: Obviously this is true for the area where you have a lack of skills, but that’s the most important problem or the most important topic for the small or medium companies. They cannot grow fast enough because they have a lack of skills. We even have situations that companies do not just pay for the job. They tried to have arrangements for their wives or their kids to have a kindergarten school, everything, housing, just to move them. You might want to move to Vienna or Salzburg because you know these cities, but if I told you to move to some rural area you have never heard of, it’s hard to figure out that this might be even nicer regarding the living quality. So, this is something that really takes lots of money to shift people and to make them stay in the new area.

Thomas: Let’s go onto something else you mentioned, which was the notion of high taxes, works councils, lots of regulation. In some industries that are quite export driven, how do you advise your clients or what do they face when they think about the environment around taxes, regulation, and the like, and competing on a global scale?

Schatz: Well, we will never be world champion when it comes to taxes. We will probably always be more expensive or have a higher percentage than other countries, so I guess that’s hard to change, but there is a very stable situation. The worker councils are quite modest, so this is important as well. There is something that’s coming up extremely fast. At KMPG, we call it intelligent automation. We try to help the companies automate as much as possible in all of the low-level stuff, so it’s nothing very important, nothing that you would want to do all day long.

Thomas: Manual tasks.

Schatz: As soon as you do that, I think you can be a little bit more competitive, each and every task you automate because it’s very simple and fast. It’s the same amount of effort. If it’s automated, it’s the same. It’s the same when you go into production. If you can produce with just limited labor and it’s automated, there is no difference producing it in Austria than in India because the equipment itself will cost more or less the same. Maybe you have lower wages in India, but you have more governance and steering complexity when you do that. So, there is a huge shift with automation and when it comes to industry for 4.0 or smart industry. If this is automated, you can do it practically anywhere you want. This is what we try to shift them toward because in the end, that makes them more competitive right now.

Thomas: One other issue and then we’ll come back to digital transformation and the role of technology. For companies that are family owned, you mentioned 10, 15 generations, that’s decades if not centuries of family ownership and long-term employment as well. What kind of challenges does that create in terms of continuity and keeping the company in the family while remaining competitive and at a desirable place to work?

Schatz: This is a good question. At KPMG, we have a family business barometer. This is for the sixth year running. We asked companies, what about your future? What about your problems you have? What about your succession plan and everything else? One of the toughest challenges they have is to find someone to take over the company because a lot of young people don’t want to step into their mother’s or father’s shoes. They want to do something else. They have their own plans. This is very hard when you’re an old family-owned business. For them, it’s very hard to implement external management.

In this case, it’s quite hard for them to let go for external ones, but sometimes there is no other choice. This is the only one they have. I know many of them are the same age as I am, so around 40, and they should take over their father’s own business, but they don’t want to. If it’s a good business, they have some money in their bank account, so they have different choices. For them, it’s quite tough. There are hundreds or thousands of companies in the Dach region alone, who need to figure out what to do next in the next 5 to 10 years. This is a generational topic, so now all these generations are retiring and there are limited people who really want to take over this piece of work.

Sometimes it’s creating nice opportunities, how to figure it out together at least with the owner and his children. How to steer this emotional and still very interesting topic of succession planning that sometimes creates tension.

Thomas: So, let’s talk about one of the things that I think is particularly interesting about the Mittelstand, and that is that in order to survive and thrive, perhaps especially outside of population centers, is partnering with universities and ways to attract/grow talent. What does that look like? Talk about that.

Schatz: There are many companies in Austria in the Mittelstand. They don’t have specific business functions like in marketing or when it comes to programming software or it comes to invention. So, they are really heavy into innovating by collaborating with universities. This is a win-win situation for them. First, the universities as well need to have some third-party topics they can deal with. They need some ideas that they can try on; the second is that the companies come in contact with students they might need later in their own companies. So, it’s a win-win situation for both of them.

They may create something very innovative that helps the company stay ahead and they may find some skilled people at the universities or maybe one step below. It’s certainly, in Austria, a large educational institution that’s called Höhere Technische Lehranstalt, where they are taking advanced charge and a very technical area, and most of them are out of school already. They are being squeezed out of school and companies try to get them as fast as they can—even before they start their university career. So, the earlier you get into this, or you present yourself in Höhere Technische Lehranstalt or you’re in technical universities, the better it is.

We did that in Austria as well. It was a very nice situation. We created some apps in Höhere Technische Lehranstalt and then one or two people turned out to be good. They might be good for us in our company. So, it’s good for them, for the teachers, the school itself, because they again can use that to say, “Well, if you go to our school, we have so many contacts with good, large companies and you’ll learn interesting stuff.” For us, it’s the same. It’s a win-win situation.

Thomas: Let’s go on talking about digital. You mentioned earlier it’s a cloud kind of hanging over some of these companies. Expand on that. Why is it such a challenging topic for the Mittelstand?

Schatz: First of all, and this is something that’s, I guess, quite specific at least for Austria, Germany as well. Switzerland is not that different in this area. They are afraid of what they don’t know. They don’t know what cloud is. So, typically, they say, “Well, what’s happening? What’s happening to my data. If I turn to a cloud provider and I’m not happy with him, how can I turn this back? Is this a one-way road or how do we  figure out this topic?” First of all, they are afraid. Second, we have very strong GDPR rules, etc. Sometimes they act as an excuse. I guess, most of the time, but still, as long as the excuse is taken, at least this is an excuse and they don’t want to move to the cloud.

Thomas: It is a different way of thinking, though, right?

Schatz: Yes.

Thomas: In the on-premise days, I had a server, maybe a number of servers sitting in the corner, I had all the attendant challenges I had to manage, and I had security, but it was there. Maybe I felt some level of control, whereas in the cloud, it’s a partnership. I have someone that I’m walking with on a journey, and it is a different way of thinking, isn’t it?

Schatz: It is. You should be aware of that, most of the cloud companies are not from Europe. Let’s say, most of them probably are from the U.S. That’s not good or bad, but that’s a fact. There have been some problems regarding that in the last years and the degree of how much trust is in there. So, this is everything that’s emotional, kind of. This prevents it a little bit, and I see this for European cloud providers because they do a very good marketing job to definitely point out in each and every occasion that they are a European-owned cloud provider, and that data is stored in Europe only. This is definitely something that’s important.

This is just a gut feeling. So, they don’t trust it and they don’t know what to do and it’s the U.S. and maybe, I don’t know. But to be honest, this is changing. We see because of the lack of skills, there is no choice for them anymore. You can house your IT hardware and software in-house on-premise, but you need skills and people for that, and if you don’t have them you don’t have the choice anymore. This is something that’s moving quite dramatically, that’s shifting, and I think that’s maybe like the popcorn effect. It takes a long time until the first one pops, but if it starts it goes very fast. The same applies here. So, there are one or two market leaders who are going for this shift and the rest will follow. You need to figure out who is one of the very-

Thomas: —first kernels.

Schatz: Yes. What’s the first. If they switch, the word will spread very fast and so the popcorn effect in the end will take care of us.

Thomas: So, let’s dive into GDPR and data privacy just a little bit. Is that a particular challenge for the Mittelstand, maybe because of those IT skills issues and the like, or is it like any other company? Is just something we need to conform to?

Schatz: Same again when it comes to digital innovation. The GDPR, the rule for each and every company is the same. If you’re a small company, you need to figure out what to do with that. You don’t have security specialists or people in this area, so again, it’s hard to figure out because laws for each and every company are the same. It was very hard in Austria and there were a lot of headaches for many owners of companies how to do that in a balanced way. Because it’s not the GDPR itself, nobody tells you what exactly you need to do. This is something that can really cost a lot of money, but in the end, you don’t know was this enough or was it may be too much. So, typically you would hesitate a little bit and say, “Well, let’s try to do it very low scale first and if it turns out that there’s maybe not enough, we will improve it later,” but most of them needed external advice on that.

Typically, the small and medium enterprise are very well connected, so they  exchange ideas lots of times. This is very important for them to stay ahead. Also, IT leaders have really good group meetings to help themselves in the end. So, this is one way they can help, but I guess, without external consultants, it’s hard for them because it’s quite a tough challenge.

Thomas: If someone’s listening, perhaps they’re an owner of a Mittelstand company and they’re thinking about these issues, what advice would you give them to prepare and to be able to maintain that continuity, keep the company perhaps in the family? What’s top of mind for you?

Schatz: I guess, it’s everything about digitalization the next few years. It’s not just a buzzword, and I would advise them not to have one big digitalization strategy and then figure out what to do, but to do it piece by piece. There are small components to it in each and every area. There is no start and no end. This is not a project.

Thomas: It is a process.

Schatz: This is a process, this is a cultural change, and I would advise them not to be afraid of what’s happening, but to be on the forefront and try to use it because this might make some differentiation in the future and just start with it.

Thomas: Wonderful. Well that’s all the time we have for today. I want to thank Klaus Schatz from KPMG for joining us today on the Workday Podcast. If you liked what you heard, please subscribe to the Workday Podcast, and thanks for listening

Schatz: Thanks for having me, Greg.