Business operations are subject to a number of internal and external risks, as are ownership interests in businesses. How organizations and their owners address these risks can have a significant impact on the value of businesses and interests therein.
“An enterprise risk management process involves identifying risks relative to an organization’s objectives, assessing them for likelihood and impact, developing a response strategy and monitoring progress,” says John T. Alfonsi, managing director at Cendrowski Corporate Advisors.
A well-defined enterprise management process (ERM) framework can protect and create value for organizations and their owners, he says.
Smart Business spoke with Alfonsi about ERM to better understand its applications.
Where is risk addressed in a business valuation?
The most common method of valuing a business is the ‘income approach,’ which requires a valuation analyst to project a business’s future cash flows, then calculate the present value of the sum of these cash flows by employing an appropriate discount rate. The valuation analyst must address risk in two primary areas: projected future cash flows and the discount rate. Effective ERM processes can help businesses increase value by affecting the estimates for these quantities.
How does risk impact projected cash flow?
There exists a risk that an organization will not achieve its projected figures. As such, the process by which management projects future cash flows can impact a valuation analyst’s assessment of the business. A key risk in the process is information integrity, the quality of information generated through monitoring and data assimilation.
Information integrity allows management to make well-informed decisions and should provide a valuation analyst with greater confidence in a business’s projections.
Valuation analysts can analyze information integrity by examining historical projections and assessing elements of the internal control environment.
A valuation analyst also should examine the variance between historical projections and a business’s actual performance. If a strong correlation exists, a valuation analyst can be highly confident in current projections, if the process employed by the organization remains constant. If not, the analyst must examine the variance between the past projections and actual performance to discern whether bias existed in past estimates and current projections.
What about risks in the discount rate?
The discount rate is the yield necessary to attract capital to a particular investment, given the risks associated with that investment. A project with relatively high risk will require a relatively high yield to compensate an investor for bearing these risks.
In determining the discount rate, there are two sources of risk that need to be quantified: systematic and unsystematic.
Systematic risk is the risk one must bear for taking on a risky investment in the market. However, systematic risk is estimated by calculating the return to public equities due to availability of data. The ERM process has little impact on systematic risks unless the business’s performance is heavily tied to market performance.
Unsystematic risk is sometimes broken down into two components, industry risk and company-specific risk. Industry risk reflects the risks identified with the industry in which a business operates. Company-specific risks encompass all other risks, including size, depth of management, geography of operations, customer and/or vendor concentration, competition and financial health.
How can ERM processes mitigate company-specific risks and increase value?
An ERM process should quickly gather and assimilate high-quality information for use in the organization’s decision-making process, allowing the organization to rapidly assess the impact and likelihood of risks associated with changes in its internal and external environments. Early assessment and mitigation can help preserve value and capitalize on risky events when competitors do not react as swiftly to environmental changes
John T. Alfonsi is managing director at Cendrowski Corporate Advisors. Reach him at (866) 717-1607 or firstname.lastname@example.org.
Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC
Today’s workforce is unique in that there are now four generations of people working together — traditionalists born from the 1920s to the 1940s, baby boomers, Generation X and millennials.
That presents challenges to employers in bridging generational gaps and getting workers on the same page.
“There are now four generations of people in the workforce, and they all bring something very different to the table. They have unique characteristics in terms of values and what is important to them personally,” says Liz Howe, Director of Business Development at Benefitdecisions, Inc.
“There is a lot of buzz about the lack of communication among the generations. They come from different places and have different ways of doing things. It’s about getting them to play in the same sandbox, if you will.”
Smart Business spoke with Howe about the differences between generations and the affect it has on the workplace.
There have always been multiple generations in the workforce, how is it different now?
It’s that there are still people born in the ‘20s to ‘40s in the workforce in high, C-level roles, along with baby boomers, Generation X and young kids out of college.
Combine that with the progress made over the last 20 or 30 years in technology and the Internet. The world is a completely different place and that can pose challenges in getting things done. One segment of workers says, ‘This is how it’s been done,” while another says, ‘Why do we do it this way?’
How can you bring them all together?
Companies need to consider what’s important to each group. The traditional generation was raised in a really hard time and tends to revert to how things used to be done; Generation Xers don’t identify with that. If you have a Gen Xer managing a traditionalist, he or she needs to think about what is important to that person — a flexible work arrangement, succession planning and teaching them technology.
That same manager would handle a millennial differently. Priorities to a millennial are having a work/life balance and having a relationship with his or her supervisor that doesn’t involve micromanagement, but more of a team-oriented approach. So it might be more of a mentorship than just being a work manager.
With baby boomers, no news is good news. If a manager isn’t calling and asking questions, they’re in good standing.
What is the danger of managing everyone the same?
You lose the employee engagement factor, which is a hot topic these days. Millennials aren’t as loyal to companies as baby boomers, and if they’re not happy they will leave for a company that better fits their culture. That has become more socially acceptable and other generations are seeing that. Ten to 15 years ago it wasn’t acceptable to have four or five companies on your resume, now tenure is three years before people want a promotion or a different role.
You need to be thoughtful about managing employees and what types of benefits you’re providing by catering to what they find important. There’s been a real push toward wellness programs. Some businesses provide different types of insurance — pet insurance is huge. Other companies will match charitable contributions to an organization of the employee’s choice rather than just giving a cash bonus. People today are much less monetarily driven than they’ve ever been.
What are the benefits of having all of these generations together?
It brings some depth and breath of knowledge to an organization, along with a wide variety of skill sets. It’s an advantage to have people raised at a time when there was little or no technology all the way down to people who don’t know anything but technology and the Internet.
The challenge is to get them to communicate with each other so you can take full advantage of their knowledge.
Liz Howe is director of Business Development at Benefitdecisions, Inc. Reach her at (312) 376-0452 or email@example.com.
Insights Employee Benefits is brought to you by Benefitdecisions, Inc.
Health care cost transparency is the ability of patients to learn how much a medical service or treatment costs, preferably before receiving the service or treatment. This is important because treatment and service costs vary widely from doctor to doctor and from facility to facility.
“In all my travels, with all the different hospitals I visit — hundreds of them — only one had the general charges of fees and services, like cost per day in the hospital, posted up on the wall. It just doesn’t exist today,” says Mark Haegele, director, sales and account management, at HealthLink.
“This system has made it difficult for people to get the information. We’re getting there, but a spotlight on transparency and the cost and options gives people a little more decision-making authority,” he says.
Smart Business spoke with Haegele about the shift toward transparency and helping employees shop for better health care prices.
Why do health care prices vary so much?
Physicians are just trying to diagnose you to help you get better. In addition, surgeons only get paid if they recommend surgery. So, cost doesn’t really weigh into whether patients get knee replacement surgery or are sent to therapy for six months.
If you go to a store and look for a refrigerator, one of the first things you try to figure out is the price. But if you go to the doctor, and you’re talking about getting your knee replaced, that conversation — if it ever comes up — comes up at the very end.
The average treatment for heart failure might vary by tens of thousands of dollars within the same city. A list of Medicare costs, released by the Centers for Medicare & Medicaid Services, found a difference of $21,000 to $46,000 in Denver, Colo., or $9,000 to $51,000 in Jackson, Miss.
Only some rate differences are because of health care’s complexity. If two people with the same insurance get a tonsillectomy at the same hospital, they still could have different doctors ordering different levels of anesthesia and pain medicine with different philosophies on hospital-stay length.
How does transparency lower costs?
As the government, media and patients push for reliable cost and quality information, it motivates the entire system to provide better care for less money. For example, according to the book “Unaccountable: What Hospitals Won’t Tell You and How Transparency Can Revolutionize Health Care,” the governor of New York mandated that hospitals publish their mortality rates for heart surgery. By the year following, hospitals started implementing quality metrics to reduce mortality, and the trend in the mortality rates dropped dramatically, which ultimately saved lives.
In another instance, a Thomson Reuters study of a Chicago employer found a cost variance of 125 percent for health insurance members receiving an MRI of the lower back without dye, with similar differences in diagnostic colonoscopies and knee arthroscopy procedures. If employees were given information to select providers at or below the median cost, it was estimated the company could save $83,000.
What can benefit administrators do to help facilitate transparency?
As a general rule we feel helpless, but there are some things benefit administrators can do to move costs. You’ve got to get information out to members, and then align incentives. The average member, once he or she meets the $2,000 out-of-pocket maximum, for example, doesn’t care if a hip replacement costs $5,300 or $223,000. They should — but most don’t make better purchasing decisions until it impacts them.
Under a self-funded health plan, you have more control over what you are able to publish and demonstrate to employees, as well as more ability to align incentives. But regardless, you need to start identifying costs of providers of key procedures to treat your health plan like an asset.
By putting together a best-in-class grid for your members, and then aligning incentives to ensure they use the lowest cost providers, such as giving a $200 gift card, you can empower your members and move the needle on health care cost.
Mark Haegele is director of sales and account management at HealthLink. Reach him at (314) 753-2100 or firstname.lastname@example.org.
Website: Visit the website to learn more about transparency and other key health care business trends.
Insights Health Care is brought to you by HealthLink
The purpose of an arbitration clause is to resolve disputes by means of a private proceeding that is generally perceived as quicker and less expensive than the court system. Yet many contracting parties do not fully analyze the arbitration clauses in their contracts, and so do not draft such provisions in a comprehensive and precise manner. These lapses can lead to costly and time-consuming disputes.
“Any party entering into an arbitration agreement, therefore, would be wise to carefully analyze the arbitration clause thoroughly, with a view to ensuring that it will accomplish all of the party’s goals,” says Courtney D. Tedrowe, a commercial litigation partner at Novack and Macey LLP.
Smart Business spoke with Tedrowe about what it takes to draft an effective arbitration clause.
What are the key considerations in drafting an arbitration clause?
Broadly speaking, there are two categories of issues to consider when drafting an arbitration clause. The first of these concerns the extent to which the court will be involved in pre-arbitration and post-arbitration issues. The second category concerns the parameters and procedures of the arbitration proceeding.
Why consider the court’s involvement in pre- and post-arbitration proceedings?
Just because you have an arbitration clause doesn’t mean that you will avoid court proceedings. Not infrequently, a party will oppose the arbitration demand on the grounds that it does not fall within the scope of the arbitration clause. Under the Federal Arbitration Act, courts are required to ensure that the claim is arbitrable. However, the arbitration clause can specify that the arbitrator decides such substantive ‘arbitrability’ issues, effectively limiting the court’s role from the very outset.
The parties may also restrict the court’s involvement in post-arbitration proceedings. Some post-arbitration judicial action is inevitable, since courts, not arbitrators, have the power to reduce the arbitration award to an enforceable judgment and to decide any challenges to the award. Here, the parties can use the arbitration clause to limit the grounds of appeal, further reducing the chances that the award is vacated, and minimizing the risk of lengthy appeals.
How should the arbitration clause be drafted to provide for procedural matters?
Parties can agree to pretty much whatever they want when it come to procedures. Typically, agreements simply select an organization’s rules, such as the American Arbitration Association, JAMS or ADR Systems.
There are two big pitfalls here. First, most organizations have more than one set of rules with sometimes very different deadlines, discovery options and evidentiary rules. When drafting the clause, be sure that you select not just the organization, but the specific set of rules most favorable to the particular situation.
Second, organizations change their rules regularly, meaning parties will likely be bound to use the rules in effect at the time of the dispute, which may have changed.
Can parties modify the applicable rules?
Yes. For example, although the rules of evidence do not typically apply in arbitration, parties may specify that they will apply, or that only certain rules of evidence apply. Parties also have the ability to craft the discovery process to their particular situation. The arbitration clause can set forth, among other things: whether parties may take depositions and, if so, how many; whether documents requests and interrogatories will be allowed and, if so, how many; and the parameters of any other discovery method.
The clause may also deal with the hearing location; pre- and post-arbitration motions, such as motions to dismiss; and the arbitrator’s power to fashion specific remedies.
How much freedom do the parties have to control the arbitrator selection process?
Parties have complete control over who arbitrates their dispute. The specific arbitrator could be identified in the clause, or the clause can set forth the rules by which an arbitrator is selected, either expressly or by selection of a particular organization’s rules.
Courtney D. Tedrowe is a commercial litigation partner at Novack and Macey LLP. Reach him at (312) 419-6900 or email@example.com.
Insights Legal Affairs is brought to you by Novack and Macey LLP
Recognized as one of the world’s most prestigious business award programs, the Ernst & Young Entrepreneur Of The Year Awards celebrate gravity-defying innovators who build and run great companies. This June, we gather here and in 24 other cities across the U.S. to honor all of our regional finalists and welcome the award recipients from the class of 2013 into our Hall of Fame.
Entrepreneurs change the world and make it a better place to work and live. We honor them for their fortitude and resilience, and we celebrate their ability to forge new markets, navigate uncharted territory and fuel economic growth.
Congratulations to this year’s finalists and winners for their unyielding pursuit of business excellence. We are honored to share their inspiring stories with you.
Todd E. Novak
Midwest program director
Consumer Products and Services
Family Business Award of Excellence
Private Equity/Venture Capital Backed
James Reynolds, Jr.
T. Scott Law saw the trends developing as medical billing continued to get more and more complicated. Thinking there had to be a better way he set out to improve the medical delivery process for medical practices by founding Zotec Partners in 1998 as a solution.
Now, insurance submissions and rejection appeals, which in the past had taken upwards of 13 minutes to prepare, can be completed more accurately in seconds using Zotec’s advanced Electronic Billing Center software programming and client-focused support personnel.
Zotec has functioned as both a software licensor and a billing service provider, though these two arms originally operated independently. Clients could choose to only license the software, or they could also choose to partner with Zotec’s billing services team.
After working under this model for many years, Law recognized that there was room for improvement. Clients that chose only to license the EBC software were not achieving the level of efficiency he knew could be reached by Zotec’s services team.
Relying on a billing team at Law’s small start-up company that had yet to build a recognizable brand was understandably not palatable for clients. They were comfortable using the EBC software, but Law felt there was a greater method to help improve client bottom lines.
Over time, Zotec has earned its clients’ trust, primarily due to Law’s continual focus on providing a quality software product and personalized experience. In 2007, Law believed that his company had generated enough credibility and was ready to be taken in a completely new direction. He shifted Zotec to a “bundle” approach, where clients could no longer license the software separately from the service.
By providing a bundled offering with consultative services included, all clients now have access to an experienced billing expert who can provide guidance and support.
Customer reaction to this has been extremely positive, and client bottom-lines improved dramatically as a result.
How to reach: Zotec Partners, www.zotecpartners.com
Industrial and Distribution
When Peter C. Anthony took over as president and CEO of UGN, Inc., the first action he took was indicative of his philosophy. He changed the company's term of "employee" to "team member."
His philosophy was that everyone at UGN is part of the same family, or team. In a complex manufacturing process such as that at UGN, a manufacturer of high quality interior trim, soundproofing and thermal insulating products for auto manufacturers, every member is vital, and he wanted people to feel that way.
Anthony’s commitment to inclusiveness is also demonstrated in the transparency in which he runs the company. Every month, he shares a copy of the P&L statement to the entire team. His goal is to connect people directly with the product of their labor.
Anthony recognizes it is often difficult for a team member, who performs one specific job, to see how he or she contributes to the company's success. When he shares the company's financial performance with everyone, it demonstrates his belief that every member of the team plays a part in UGN's success.
On a weekly basis, Anthony sits down and has a brown bag lunch with team members in the factory.
One of the greatest challenges faced during his tenure as CEO was the 2009 recession. In the fourth quarter of 2008, the company's orders disappeared. The recession brought an opportunity for Anthony to truly flex his entrepreneurial muscle. He guided the company through the recession using the following key concepts: all management took pay cuts across the board; new cross-training programs for team members were developed; and work weeks were shortened rather than issuing layoffs.
Within four months, Anthony guided the company back into profitable territory.
Another challenge was the Japanese tsunami in 2011, which halted Japanese auto production almost immediately. UGN offered furloughs with paid benefits rather than mass layoffs. The strategy proved highly successful, and resulted in strong retention.
How to reach: UGN, Inc., www.ugnauto.com
Brian Spaly thought the world was ready for a brand new men’s shopping experience.
He had an idea that would be unique in the retail clothing industry. As members of Trunk Club, men discover clothes that are perfect for them without actually visiting a store — the clothes arrive in a trunk.
While his timing was not the best — starting a company during the height of the recession is hard enough — adding to that was trying to launch a company that sells luxury goods for men in their mid-20s to mid-30s. Despite the odds, Spaly would not be deterred.
With no proven track record, he had to work hard to negotiate favorable terms from designers and clothing vendors. Fortunately, he was able to overcome this challenge by working largely with his former company, Bonobos, a retailer of men’s clothes, as well as his contacts within the retail industry.
Trunk Club members are connected with a stylist, who uses their measurements, tastes in clothing, and personality to pick out clothing, which is shipped to the customer in a “trunk.” The styling service is all free of charge. It’s an “on approval” arrangement; the member tries on the clothes and purchases only what he likes.
Trunk Club has grown from one employee to 150 employees since its 2009 creation. Spaly has developed an apprenticeship structure that is common in professional services firms. His stylist team consists of stylists, senior stylists and managers. A senior stylist oversees eight-12 stylists and a manager will oversee two to four senior stylists.
Spaly pays more than the going rate for employee salaries and Trunk Club offers full benefits to its team. The result has been little to no turnover. The majority of employees have come to Trunk Club through referrals of current employees. The company promotes a very diverse and inclusive work environment.
How to reach: Trunk Club, www.trunkclub.com
Industrial and Distribution
Todd Berger first got a taste for the transportation and logistics industry as an intern for American Backhaulers — and it didn’t go well. He vowed to never work in that industry again.
After all, it was a time when pioneer companies like Google and Apple were the leaders of innovation, and in Berger’s words, the transportation and logistics industry “just wasn’t ‘sexy’ and lacked innovation, and I wanted to change that.”
Fortunately, Berger thought it over and came up with a different goal. He re-entered the industry in 2001, working as a dispatcher at Transportation Solutions Group. Berger recognized the need to anti-commoditize the business and proposed opening a trucking company to ensure TSG’s competitive position in the industry.
While management was skeptical of his venture with Berger being only 26, he created and began to operate Freight Exchange, a full truckload carrier that subsequently turned a profit in its first year of operations.
From that point on, a curious situation occurred. The more initial pushback he received from management, the better the final outcome. In 2009, Berger proposed his idea of 3PLogic, a contract logistics management provider that included customized software. He again received criticism from management because 3PLogic required a significant capital investment for software to be developed and key personnel to be hired.
Berger was unfazed. He presented the idea to a current client — and the customer decided to fund a significant portion of the venture. 3PLogic now provides logistics services, technology solutions and consulting services, and is considered the strongest arm of the group.
Berger’s style is a trial-by-fire leadership philosophy that he applied early in his career and still follows today, believing that a leader can learn something new the same day that it is put into practice.
He also is always cognizant of demonstrating a strong sense of humility not only within his demeanor but throughout the operation of the business.
How to reach: Transportation Solutions Enterprise, www.tse-llc.com