William Hoffman

Monday, 22 July 2002 10:02

Lure of the Orient?

For several hundred million people in Asia-and for the thousands of American companies that hired them, bought from them or sold to them-the recession of 1999 started in 1997. Currencies collapsed, speculative bubbles burst, industries shriveled, a 32-year-old dictatorship was overthrown, and the consequent shudder sent through the economies of the world made many businesses wonder if "Asia" was synonymous with "crisis."

How curious it seems at this moment that the bright spot in that blighted region of the world would be... China.

"For small and growing businesses, there are a number of reasons to be bullish on China," according to Desmond C. Wong, national director for Ernst & Young, LLP's China Advisory Group, Chicago.

Wong suggests business owners ask themselves: Is the U.S. market for your products or services limited for the foreseeable future? Are you under heavy pressure to contain costs to maintain margins against fierce competition? Can your products be produced in a low-labor cost country and shipped to market at a cost advantage relative to your current cost structure? Do you have a technological edge to achieve cost efficiencies in China relative to elsewhere against your competitors? Would your product or service appeal to buyers in China or other southeast Asian nations?

"If you answer yes to all of these five, or any of these five," Wong says, "then you are past due to consider China."

"Economically speaking, China is sound but the region isn't," says Martin Regalia, chief economist at the U.S. Chamber of Commerce in Washington, D.C. China maintained the value of its currency, the renminbi or yuan, while neighboring countries shaved theirs. China's economic growth has slowed, from an ecstatic 10-plus percent annually to a merely robust 7 to 8 percent.

While questions persist, especially about the solvency of some of the country's banks, tens of millions of Chinese have joined its burgeoning middle class in the last decade, and hundreds of millions more are eager for labor at wages a fraction of even those offered by most neighbors. "The growth prospects in China still look very good," Regalia says.

Of course, considering Wong's five questions, the last-will your product sell in China?-is likely the most difficult to answer. "Your apple drink may attract 10- to 15-year-olds in the United States, but in China it may attract 50-year-olds," notes David Gudgin, sales and marketing manager for Euromonitor in London, England. Euromonitor's global market analysts have recently received research requests from American companies seeking Chinese markets for alcoholic drinks, tobacco, cosmetics and toiletries, household cleaning products, packaged foods and white goods (refrigerators, freezers and other large electronic appliances), among others.

"If confidence in the region had completely fallen away, nobody would be asking us questions about it," Gudgin says. Instead, Euromonitor recently opened an office in Singapore, so it could keep an eye on the region. "We find manufacturers are continuing to take China very seriously."

China still exports far more ($62.5 billion in 1997) to the United States than it imports ($12.8 billion in '97). But "anything an American manufacturer makes that requires a high labor content can be made in China," Wong says. "It's a rent-or-buy decision," he adds, explaining that while big companies may open an office and bring staff to China, smaller companies have the option to use the many U.S.-China outreach programs established on both sides to promote trade.

"Smaller companies are more likely to get results sooner, as long as they pick the right opportunities," Wong says, because they can negotiate using fewer intermediaries on their side, and this appeals to Chinese. The key to manufacturing in China is to exploit the cost advantage, he says. The key to selling there is to consider the culture, needs, disposable income levels and cache of your offering for Chinese tastes.

China is not for the risk-averse, Regalia cautions: "The Asia situation is going to negatively affect the investment environment in China," though Regalia believes China's growth rate will soon recover its double-digit heights. The chamber is monitoring the situation closely for its members. "They want to learn the easy way, not the hard way-by the easy way, I mean learning from others' mistakes, not having to learn from their own," Regalia says. China "will come back, and when it does, the people who got back in at the right time stand to make a lot of money for their risk."

Monday, 22 July 2002 10:00

Save this column

Just about the last thing a futurist wants to do is make a prediction. And before this millennium thing got started, few people asked them to. Fortune 1000 companies such as AT&T, IBM, Motorola and Honeywell were happy to pay futurists for their enlightened projections—forecasts, the futurists call them—on where the next hot market, product or regional war would be. And the futurists could go home safe in the knowledge that their employers expected them to hedge a bit, that by forecasting the future they might actually be changing it.

Then we came along. Small Business News asked a few of these professional prognosticators to gaze into their Pentium-powered crystal balls and predict ... er, forecast ... some major events or developments in the year 1999. These futurists are no ordinary psychics: Their discipline has been recognized by the American Academy of Sciences since 1969. Prestigious institutions including the United Nations and the Defense Logistics Agency listen to their reports. And big companies pay big bucks for their wisdom. Herewith, a peek into the penultimate year of the second millennium.

“I’m going to predict that the Y2K problem will be a fizzle,” says Earl Joseph, president of Anticipatory Sciences, Inc., who used to forecast for Sperry-Univac Corp. before contracting his services to IBM and others. While technologists are getting exercised about the Millennium Bug, Joseph and others believe business and governments caught enough of the problem in time to prevent the lights from going out and world from plunging into darkness. On the other hand (a favorite phrase of futurists), “It doesn’t take too many companies having a problem for it to have a domino effect,” Joseph says.

Fizzle or not, someone’s going to make a killing on Y2K, expects Tim Mack, principal at AAI Research, a strategic and political trend analysis firm for Philip Morris Companies, Inc. and Defense Department. Agreeing with Joseph that the Year 2000 problem will be something less than an apocalypse, Mack adds that profit opportunities have made and will continue to make new millionaires in dealing with the threat, perhaps even after Jan. 1, 2000, has come and gone. If disaster strikes, Mack says, it may be due to unforeseen links or connectivity between Y2K compliant organizations and noncompliant ones.

A deflationary recession by fourth quarter 1999, according to Greg Schmid, director of strategic planning at the Institute for the Future in Menlo Park, Calif. “Every other business cycle downturn we’ve had has been generated by inflation coming from bottlenecks,” notes Schmid, who has consulted (futurized?) for Deutsche Telekom, Allstate Insurance and Chase Manhattan Bank. “The worrisome thing is a deflationary cycle, in which a recession is generated by a fall or collapse in prices.” The result, Schmid believes, could be the worst economic crisis since the Great Depression.

Or not. “There’s no recession; are you kidding?” scoffs James V. McTevia, chairman of McTevia & Associates, which consults for NationsBank and Ford Motor Co. The coming year will see a slowing, though, he predicts (McTevia has been a management consultant for more than 40 years, so he lacks the futurists’ bane for commitment). “This is certainly not the time to expand. This is certainly not the time to have your capital tied up in buildings and equipment. This is the time to have some liquidity.” Repair rather than replace that aging machine. Cut expenses. Trim your labor force. “Sit tight,” McTevia advises. “The country is well. There’s just going to be a slowdown.”

“The prospects for war with Iraq are really good,” thinks Howard F. Didsbury, special studies director for the World Future Society, the grandfather of futurist associations. “And this time we’ll probably go in with paratroops and everything.” Will the American people stand for it? “Saddam Hussein is nobody’s fool,” answers Didsbury. Hussein is banking on Americans’ squeamishness when confronted with large body counts of dead American soldiers. “Presidents in the United States historically have taken military action, and then the public follows it.” War with Hussein could throw a lot of predictions about the economy into the hopper, Didsbury and other forecasters note.

The forward thinkers add a few forecasts to their list; 1999 will see:

• The first human clone, possibly overseas, since the backlash in the United States is likely to be cyclonic.

• New third-party challenges. Minnesota Reform Party Gov. Jesse “The Body” Ventura “is going to make over government in the Hollywood style,” says Joseph in St. Paul, Minn.

• Electronic books as the hot new household appliance. It’ll be cheaper to transmit books electronically, Joseph notes, and friendlier to the environment.

• Instantaneous credit. Schmid thinks lenders will install computer programs that monitor your saving and spending activity and instantly qualify and notify you for loans.

• Customized biopharmaceuticals. Drugs that not only fight cancer, but fight your cancer, are coming to market. “If you can reach 2020,” Joseph believes, “you’re going to live a long time.”

Monday, 22 July 2002 09:59

Inflation's evil twin

Todd P. Martin's personal experience with deflation-inflation's evil twin-was fairly typical for an American.

Martin recently went shopping for a computer. He decided on a Gateway model and sent an order to the South Dakota-based manufacturer. Two days after he opened the box, the machine dropped $150 in price.

Two weeks later, it dropped $250 more. Martin's frustration was muted because Gateway had built a 30-day price protection guarantee into his purchase. The company expeditiously refunded him $400.

That's deflation for most Americans today: Prices go down, consumers pay less-and they like it. "We don't have true deflation yet," says Martin, chief economist at People's Bank of Connecticut in Bridgeport, which with $11.3 billion in assets is the state's largest bank. "If we do see it, the deflation we've experienced is really the good kind."

Deflation for much of the rest of the world is different story. Consumers in Japan are so terrified by falling prices that they've stopped buying and wages are stagnant-in some sectors even declining. In Indonesia, the 31-year-old dictatorship of President Suharto has been supplanted by food riots and looting of Chinese-minority owned businesses. In South Korea, an entire generation of workers is experiencing mass unemployment for the first time. In Russia, the currency deflates as fast as foreign governments and investors can pump money in to re-inflate it.

Yet their deflation is our deflation, as foreign markets for American goods wither and desperate overseas manufacturers dump their inventories on American docks at business closing prices. Asian deflation is showing up not only in bargains at local computer stores, but in layoffs at Boeing, Intel, National Semiconductor and MCI WorldCom and scores of other Fortune 1000s.

"There are lots of goods-producing firms that are having to wrestle with this," says David McClain, professor of financial economics at the University of Hawaii. Pulp and paper manufacturers tell McClain of absorbing 25 percent reductions in shipments over the past year. Steel is so scared by Asian dumping it's run to Congress for protection.

So far, the effects of global deflation on Americans have been limited to companies with markets in-or competition from-hard-hit Asian countries. The question lingering on some very important minds, then, is whether and under what circumstances deflation might get its passport stamped for an extended visit to the United States.

There! He said it!

The effect of Federal Reserve Chairman Alan Greenspan's comments on a November 1997 audience was primarily incomprehension. Few on the House Banking Committee seemed to understand that his use of the "D" word crossed a lexical Rubicon.

In the financial press and markets, however, Greenspan's invocation of deflation as a Fed concern was morally equivalent to Grandma swearing a blue streak over Christmas dinner. Suddenly, a subject that had been the purview of fringe theorists and Dow doomsayers was the topic of conversation among central bank chieftains and heads of state.

There are certainly facts to warrant concern today. From December 1997 to November 1998, the last 12-month period for which complete figures are available, the Producer Price Index fell 0.7 percent. For the 12 months preceding that, it was down 1.2 percent. Not a big decline, economists agree, but worrisome nonetheless, because it's continuous.

"You can make a case that there has been a slight deflation at the producer level," says Dave Huether, director of economic analysis at the National Association of Manufacturers in Washington, D.C. "That's what the numbers tell you."

The government breaks the PPI down into three major components: crude, intermediate and finished. Huether analogizes these to the process of turning wheat into flour and flour into bread. Finished goods prices dropped 0.7 percent from December 1997 to November 1998, compared with 1.2 percent in the previous 12 months. Intermediate prices dropped 2.9 percent for the former period, 0.8 percent for the latter. But crude prices fell 15.8 percent for the 12 months up to November 1998 and 11.3 percent the year before that.

That latter number was driven mainly by cheaper energy. Crude oil prices fell 40 percent in 1998, notes Dan Laufenberg, vice president and chief U.S. economist at American Express Financial Advisors Inc., in Minneapolis. The last comparable decline in crude prices occurred during the much-publicized crash of 1986, when oil lost 28 percent of its price.

While producer prices tanked, the consumer price component of the Bureau of Labor Statistics inflation index continues to register slightly positive numbers-the consumer price index (CPI) was up about 1.5 percent for 1998. Service price inflation, which accounts for 60 percent of the CPI against the goods component, was 2.5 percent for 1998. And wages rose about 3 percent.

Why the mixed signals? Producer prices are under pressure from devalued foreign currencies, bloated inventories and global excess capacity, all of which drive overseas competitors. Consumer prices, though, can remain stable or even rise somewhat in response to wage pressures because U.S. companies invested heavily in productivity-enhancing technologies and techniques during the last decade. "Our companies don't compete through cheap labor," Huether notes. "They compete through high productivity."

"So far, this whole global financial crisis has been a net gain for consumers," Martin says. Consumer prices are stable, wages are rising, the economy appears healthy. So why is Alan Greenspan worried about deflation?

Keeper of the flame

In P.Q. Wall's opinion, Greenspan can't be worried enough.

"The next 24 months will see a '29-style crash," predicts Wall, editor of The P.Q. Wall Forecast, a monthly investment newsletter published from New Orleans. An adherent to the controversial Kondratieff theory of 60-year-long boom/bust cycles, Wall says, "The only thing that's going to be good to own between now and 2013 is bonds."

Wall, who predicted both the 1981-82 prime interest rate peak and the start of the current bull market, believes Asia's economic tidal wave is looming over American business. "We're having a boom right now because we're the only part of the city the flood hasn't reached yet."

Raymond J. Keating takes a different tack. "When you see the workings of the market going off track, it's usually linked to governments doing something stupid," says Keating, chief economist for the Small Business Survival Committee in Washington, D.C. "Usually something egregiously stupid." One of the stupider moves government made in recent history was taking the dollar off the gold standard, he believes.

Whatever explanation one ascribes to the current economic dilemma, Wall, Keating and others agree the drama has one key player: Alan Greenspan.

"Our people are very confident," says Richard L. Babson, chairman and president of Babson-United Investment Advisors, Inc., a Wellesley, Mass., registered investment advisory. Babson manages $2 billion in assets for institutional and high income investors. Countries and companies coping with deflation worries need discipline, infrastructure and institutional memory, Babson says, "and we have that in spades with Alan Greenspan."

The Federal Reserve is America's bulwark against both deflation and inflation, Babson and others says, because both are monetary phenomena. Classic deflation, properly defined, means a shrinking money supply, Babson notes, not just persistently falling prices, wages and interest rates. "Politically it's more palatable to have inflation than deflation," Babson says, though the Fed is disinclined to permit either.

"This deflationary impulse will be forestalled if the Fed clearly understands its role, which is to reflate the economy with sufficient liquidity," says David McClain, the University of Hawaii professor, who also advises for Babson-United. "We shouldn't underestimate the Fed's enthusiasm for a low inflation rate. That's where they live."

But it's n ot a safe neighborhood. Scott L. Greiper, director of research at Barington Capital Group, says low interest rates are the only thing that allow a nation with virtually no savings to continue spending. Wages appear to have risen alongside a very low rate of inflation. But adjusted for inflation, wages remained stagnant throughout the current seven-year American economic expansion. The Federal Reserve may be walking a tightrope between controlling money supply to stave off inflation or deflation and the need to keep interest rates down to fire a maturing expansion.

"I think we're walking a fine line," says Jan Holman, vice president for investment services at American Express Financial Advisors.

Coping with uncertainty

A deflation joke: The good news is, gasoline will soon cost just 35 cents a gallon again. The bad news is, at that price, you won't be able to afford it.

Deflation talk took a siesta this fall, as the Asian crisis seemed to ebb and a trio of quarter-point cuts in the Fed's prime interest rate eased consumers-the undisputed champions of America's economic resurgence-through the Christmas holiday season. While there haven't been any gruesome reminders of foreign crises, no bloody revolutions or collapsed financial houses, worry is creeping into some decision-makers' outlooks.

"The economy is like a tuning fork; it's very finely pitched," says Charles Freeman, chairman and CEO at Commercial Capital Corp., one of New York City's largest small business lenders. "You're always trying to tweak it a bit." Big companies that have squeezed every efficiency from their operations are under pressure from shareholders to keep earnings high and so turn to mergers or acquisition of promising smaller companies. Resulting layoffs too frequently fill the streets with unemployed nonconsumers.

"The question," Freeman says, "is how quickly does the small business economy pick up these lost jobs?" It took seven years for New York to soak up the last round of mass layoffs spurred by merger-and-acquisition frenzy. "If any sector of the economy is able to pick up the slack of layoffs in the economy, it's the small business sector." But with initial public offerings reporting spectacularly poor returns, many small companies can only boost their earnings by becoming takeover targets.

"Deflation is a horrendous thing for all companies, but small caps are hit particularly hard," Greiper says. Small business is concentrated more in the service sector, which is less exposed to the international crisis. They tend to have better earnings than larger companies with higher overhead, inflated shareholder expectations, and cost concerns. But investors expect more at a time when companies are frequently delivering less. Greiper says many investors are abandoning small caps for more secure stakes in older, bigger firms. Small cap stock performance was anemic in 1998, he and other analysts note.

For the moment, the crisis in general and deflation in particular seem to be at bay. "We're doing quite well, and Europe is doing quite well," says Babson of his top-hat clients. "The question is whether [the crisis] is going to spill over into South America." Babson sees a one in three chance that Japan's depression will deepen, or Brazil will suspend debt payments, or some other calamity will befall world markets, bringing recession on the United States.

Yet in Todd P. Martin's bank, customers still line up for home mortgage refinancing loans, even as interest rates continue to fall each month. Customers don't wait for lower rates; if the rate drops 50 or 100 more basis points, they simply refinance again. "Overall I think people still have an inflationary mindset, or a price stability mindset," Martin notes.

It took the Federal Reserve most of a decade to wring out of the American psyche the '70s-era expectation that grocery store prices would be higher every time they shopped. That mindset is generally agreed to have emerged after the 1973 oil price shock, when gas prices tripled in a year.

The jury is out on whether the Asia crisis will be recalled as a bookend turning point in mass economic psychology. For now, from his office at the bank, Martin says simply, "I'm starting to sense more of an awareness of what deflation is."

Monday, 22 July 2002 09:59

Attending to business

Rod Murrow recalls the associate whose secretary couldn't get to work on time to save her job. Murrow's associate tried persuading, cajoling, threatening, but nothing worked to inspire the assistant to arrive at her appointed starting time of 8 a.m. So the associate asked the secretary what time she wanted to start. They agreed to adjust her starting time to 9 a.m. to ensure prompt arrival and commencement of duties. And it worked.

For a while. Two weeks later, the secretary was back to her old habit of showing up late for work. The last straw broke when the associate arrived at his office after an early morning appointment to find his next appointment waiting outside a locked door in a darkened hallway. "We spend a lot of time gnashing our teeth trying to fix people," says Murrow, a Kansas City, Mo. attorney who lectures on employment law for SkillPath Seminars. "And the cold, hard truth of it is, there are some people who cannot be fixed."

Tardy and absent employees cost their employers enough in aggravation and lost productivity. They can also affect morale and work force cohesion when their behavior infects other employees or goes undisciplined by management.

"Companies that have concerns need to experiment and try to understand what works, rather than letting it go and not meeting their goals," says Monica M. Griffith, vice president of human resources for The Human Equation Inc., a Fort Lauderdale, Fla.-based outsource of personnel department duties for small businesses. "Having a policy and not enforcing it ... is like not having a policy at all."

When it comes to absentee and tardiness policies, here are some things that work.

Consider a time bank. Managers "are astonished at how well this works," Murrow says, "and the only way they can explain it is that there are some people who just enjoy abusing sick leave." With a time bank, all paid leave-sick time, vacation, "mental health" days-are rolled into one sum from which employees may draw for any reason.

Time banks recognize employees as responsible adults, Griffith says, eliminating employees's incentive to lie and managers's reluctance to challenge the falsehoods. Habitual absentees hate time banks, Murrow says: "There's no longer a reward there; there's nothing to beat."

Know the law. The 1990s have experienced a wave of new employee rights legislation, from the Family and Medical Leave Act to the Americans with Disabilities Act, observes Richard G. Vernon, director of the labor and employment law department at Lerch, Early & Brewer, in Bethesda, Md. But "the employer is the one who determines whether a leave is FMLA covered or not," Vernon notes. "If someone is going to be out longer than three days, they should be sent a FMLA notice."

Similarly, with ADA, "The [employer's] obligation is to accommodate unless it creates an undue hardship." But the employee still has to be able to show up on time and perform the job duties. Acquaintance with employers's legal obligations can quickly clarify many absentee and tardiness policy questions.

Analyze the problem. Know where and when tardiness and absenteeism are a problem. Griffith suggests establishing a central authority-preferably one person-to which all instances are reported and approved. Review the figures broken down by employee, job title and department on a monthly or quarterly basis. Sometimes, simply looking over the numbers will reveal the cause of absenteeism; if numerous employees take repeated leaves from one department, perhaps the work there is overly stressful or poorly organized. Other times, just noting a problem to the absentee employee solves the problem, Griffith says.

Discipline promptly, consistently, progressively. "What we've found works best is the straight old progressive warning system," Murrow says. That is, warn verbally on the first instance, warn in writing on the second, discipline on the third and consider termination thereafter. Of course, "Every case has to be examined on its own merits," Vernon says.

Your policy should reflect your company's underlying needs and culture. Yet the principal is the same-establish the rules, publish and publicize them, then live by them. And while acknowledging varying workplace attendance responsibilities, Murrow says, "Employers need to practice what they preach."

Monday, 22 July 2002 09:58

Paperless office, ha, ha, ha

If you kept all the records your business produces, you’d be buried in paper. However, not having the right record readily available when the IRS calls may be hazardous to your company’s health. That’s why you need to speak with a CPA or other records retention experts before any spring cleaning.

“You want to keep records if you need to produce them for any authority,” says Joel S. Cohn, tax partner at Snyder, Cohn, Collyer, Hamilton & Associates, P.C., a Bethesda, Md.-based accountancy. Snyder, Cohn offers its clients a handy “records retention schedule” to help them decide what paper must stay and which can go.

“Some documents you really need to keep forever,” Cohn notes. Say you bought a building in 1980 for which you took a tax depreciation. Even if you’re audited in 1999, the IRS may request settlement sheets and other documents that always affect your tax treatment. Thus, Cohn’s firm recommends that regardless of what the IRS says today about retention, your company should keep any paper regarding a permanent acquisition or other critical business decision.

Generally, contracts, legal correspondence, audit reports and tax information, insurance records, financial statements, journals, minute books and bylaws for directors and stockholders, property records, stock and bond certificates and trademark registrations need to be kept permanently.

You should keep serial records such as accident reports, accounts payable records, checks, lease agreements, customer invoices, payroll records, purchase orders, voucher registers and such for seven years. Snyder, Cohn suggests you or your CPA research applicable state and local retention schedules and add a year to each just to be on the safe side.

Nonlegal correspondence, bank reconciliations, deposit slip duplicates, purchase orders, requisitions and the like may be disposed of after one year.

Cohn cautions that “There is nothing beyond argument,” especially for well-heeled litigators at government regulatory agencies. Storage is a business decision, he acknowledges, but “barring costs, it’s always better to have this than to be scurrying around later on.”

Electronic storage is an option, he adds. The IRS has rules on where such retention is a viable alternative. Your CPA should be able to find out which records are covered and what standards are in place.

Monday, 22 July 2002 09:58

Don’t have a cow, man

“It’s often assumed that after you reach the top of the corporate ladder ... that you’re more disposed to give ulcers than to get them,” says Dr. Paul J. Rosch, president of the American Institute of Stress. But it really is lonely at the top, Rosch says, and boardroom-quality stress is of a different type than that experienced by those governed by the boardroom.

CEO stress manifests itself as insomnia, headaches, backaches, nervousness, stomach distress, high blood pressure and other symptoms common to many forms of stress. It differs from others in its cause: CEOs often feel they have to set a perfect example and be in full control. Anything less may induce a stressed reaction.

Also, senior executives and business owners at smaller companies suffer stress disproportionately, in part because of their closer proximity and involvement with employees, customers and clients and their frustrations and concerns.

CEO stress is imposed to a greater degree by uncontrollable circumstances—Rosch notes that bosses diagnosed with cancer face a tougher recovery because they lack the support systems that typically pop up around others. They or their subordinates may also hide symptoms and treatment for fear of the effect on stock prices.

What to do? Rosch says, “There’s nothing you say that’s generic. ... You’ve got to find what works for you.” Meditation, exercise or a hobby may work for you or it may bore you to tears. What works for you, Rosch says, is what makes the symptoms lessen or disappear.

Lucinda Bassett, founder of the Midwest Center for Stress and Anxiety and author of “From Panic to Power” (HarperCollins; $25), suggests a few techniques to identify stressful situations and control them.

Be gentle with yourself. Don’t berate yourself for feeling anxious or stressed.

Give yourself credit for the accomplishments you’ve had, even the smallest ones.

Keep an open mind. Yoga may look silly, but if it works, what the hey? You have to be willing to feel better no matter what it takes.

Don’t overreact. Instead of fighting your stressed or anxious feelings, listen to them. They may be saying something you need to hear.

Keep a notebook. What were you doing, saying, eating when you felt stressed? Who were you with? Patterns may emerge that will help you reduce your stress level.

Monday, 22 July 2002 09:43

Banking on a risk

After scouring Stark County and Northeast Ohio for three months looking for potential investors, after navigating a half-dozen federal bureaucracies to secure preliminary approvals, after recruiting experienced hometown managers and employees to staff their offices, Steven G. Pettit says of he and his partner, L. Dwight Douce, “We’re very much looking forward to becoming bankers again.”

Starting this month, they’ll get their chance. Douce and Pettit’s Ohio Legacy Bank, N.A., goes public April 14 on the Nasdaq securities market. Legacy will open in spanking new buildings this spring in Wooster, and soon afterward in Canton.

But while Ohio Legacy Bank will offer 1.2 million shares on the national market at $10 a share, Douce and Pettit’s round-the-clock local marketing campaign is designed to securely anchor the new bank in the Canton area — local investors have already purchased 20 percent of Legacy’s equity.

“They’re all local people,” notes Pettit, the new bank’s Stark County region president. “Basically lived in this community all their lives.”

Ohio Legacy Bank president and CEO Douce says, “We could’ve taken the posture months ago that, ‘Look, we need $10 million,’ and scoured the country for 10 individuals out of state potentially to write $1 million checks. But we just didn’t think that’s the right approach if you’re truly trying to penetrate each one of these markets, and do it in a very local way.”

In February, Douce voted his confidence in the bank by investing $250,000 of his own money; Pettit has invested $20,000.

“So what we’re doing first is allowing the public in each of our communities to purchase shares, and allow them the opportunity to say, ‘This truly is my bank, because I own stock in it.’ It’s a longer process to do it that way, but we think it’s the right way to go,” Douce says.

The importance of being earnest

Douce and Pettit have known each other more than three years. Douce was chief operating officer at Signal Bank, N.A., when it was purchased by FirstMerit Bank, N.A., where Pettit served as senior vice president and loan officer.

Lately, though, they’ve become closer. During a recent interview, Pettit says, only half in jest, “We’re basically living with each other.”

Douce says, possibly joshing, “We probably know more about each other than we want to know.”

Ruefully, Pettit adds, “I can guarantee you, we’ve seen each other more than our wives have seen us.”

That kind of commitment will be necessary to make Ohio Legacy Bank a success, according to Harold T. Hanley, managing director at Keefe, Bruyette & Woods Inc., Ohio Legacy Bank’s underwriter.

“The key to the success of these community banks is the individuals,” Hanley says.

More than a decade of bank consolidations, mergers and acquisitions have drained local markets of their community banks, Hanley and others observe. Pettit and Douce, both well-known in their respective communities, have enlisted a “who’s who” of local business owners as investors and board members, Hanley notes. Those business people represent a vote of confidence in Legacy’s management talent, he says, and an important bridge of community support.

Their personal rapport will serve them well as Ohio Legacy Bank becomes established, Douce and Pettit believe.

“We’ve learned during this process that we are both persevering,” Douce says. “We’re both cut out of that mold, and we provide a lot of support for each other.”

Pettit agrees: “There have been days when things didn’t quite go as well as we’d hoped, and we need to buck each other up ... motivate and support each other in what we’re trying to do.”

Putting the customer first

Community support isn’t just a vote of confidence in Legacy’s managers, however. It’s an expression of the sentiment among business owners that local decision-making and services could make the difference when promising new ventures apply for loans, or depositors need extra-mile service, says Bob Belden, president of The Belden Brick Company in Canton.

Belden says he’s heard the community’s yearning for a service-oriented community bank during numerous meetings with groups and individuals. He’s seen other financial executives proposing to fill that need come. And go.

“I never asked people what [customers] would pay” for those kind of local services, which Pettit and Douce promise will be at the core of Ohio Legacy Bank’s appeal. “I guess I made my vote by investing my money,” Belden adds, noting that he will serve on the new bank’s board of directors.

Pettit says, “I think not only local decision-making, but the local service aspect, is what we’re really trying to push. In many cases, with the larger institutions, if you have a question about any one of the current products of that bank, it seems you’re constantly dialing 800 numbers and talking cross-country about your specific need or problem.”

“What we’re trying to do,” Pettit says, “is create an atmosphere where our customers can come right into their branch, or call our bank in each community, and have someone there who can help you with that problem.”

Ohio Legacy Bank employees and executives will serve as much as possible as one-stop managers, not only for their customers’ business banking demands, Pettit says, but for home mortgage and other personal banking needs. Customers won’t be shuffled between departments for discrete services, he says.

“Most of our customers will be known by our bankers,” he says.

Belden notes that personalized service could well cost customers more. When MegaBank down the street offers a 6 percent loan, Belden wonders, will depositors sign for one with the local bank at 7 percent?

“People want all those things,” he says. “But when it comes down to paying for them, that’s another story.”

Community is key

Persevering to secure local commitment, service, and control has so far taken Douce, Pettit and their Ohio investors most of the way to making Ohio Legacy Bank a reality. But even Douce admits the recent performance of publicly traded bank stocks “has made it a little more difficult than we anticipated.”

Mike J. Marcotte, president of Marcotte Financial Relations in Rochester, Mich., says community commitment may make the difference for Legacy. Realtors, builders, and smaller businesses generally display a great deal of enthusiasm for locally-controlled banks.

But “a couple of bad loans can have a big effect on a new bank,” says Marcotte, who provides investor relations services for Legacy-size institutions.

It’s not the best of times for so-called “de novo” banks, Marcotte and others — including Douce and Pettit — acknowledge. Marcotte notes that publicly traded bank stocks are down about 12 percent in value compared with a year ago. Interest rate worries make investors skittish, even now when, as Belden says, “people seem fearless when it comes to investing.”

Brokerages are rethinking their earlier, bullish recommendations for bank stocks, Pettit says. Yet bank stocks are healthy, and most have met analysts’ earnings expectations, Pettit says. Stock prices are low, but that could mean a buying opportunity, Douce adds. A year ago, the environment for investing in bank stocks looked better, he says.

“I think we’ve concluded that we picked a very good time to start,” Douce says. “I think both communities are ripe for” Ohio Legacy Bank.

Marcotte believes Pettit and Douce’s legwork building community involvement and support should pay off.

“I don’t see anyone having trouble starting a ‘de novo’ bank, if you have the right executives and the right board,” Marcotte says.

Squire, Sanders & Dempsey, Legacy’s IPO law firm, and Crowe, Chizek and Company, the new bank’s auditor, are well-known and experienced organizations, Marcotte says.

“This is a pretty typical deal,” he adds.

Of course, Douce, Pettit and others acknowledge that there’s nothing to prevent Legacy from falling victim to the merger mania that has devoured other community banks over the past decade. But Pettit thinks that’s unlikely — FirstMerit’s purchase of Signal netted it 27 new branches in Northeast Ohio, he says.

“With us being as small as we are, it probably really wouldn’t benefit one of the larger institutions to look at us, even four or five years down the road, when we have a small handful of branches,” Pettit says.

Douce says Ohio Legacy Bank hopes to turn a profit in about 18 months and local business owners and potential depositors are already approaching Legacy executives, asking when the bank will open in their neighborhoods.

Pettit says ‘de novo’ banks in Ohio have an impressive track record — one in Columbus posted a profit after just nine months.

Marcotte says, “I think it’s an exciting time to see a new bank go up.”

Tuesday, 23 October 2001 10:50

Stop organizing!

Organized labor is on the offensive, in Ohio and around the country. Employer advocates are offering this advice to business owners and top executives: Don't wait until you've become a target.

"Union avoidance can be practiced by anybody and everybody" throughout a company's hierarchy, says Matthew Goodfellow, executive director of Chicago's University Research Center Inc., a not-for-profit group dedicated to union and strike avoidance.

"The basic trouble," Goodfellow says, "is that the employer, the owner or the president normally doesn't really care what takes place inside the plant. His interest is always outside, in the market, where the opportunities are. All he wants is that the inside of the plant is orderly and stays productive and ships the goods.

"In order to avoid unions, the employer has to have some kind of interest in what goes on inside the plant," Goodfellow says.

Holding the line

There's good reason to be concerned, Goodfellow and others agree. According to the National Labor Relations Board, the score for Ohio union elections in 1999 (the last year for which complete figures are available) was unions 102, employers 101. That's a big improvement for Ohio locals over 1998, Goodfellow says, when the score was unions, 86, employers 114.

In Columbus, however, employers seem to be enjoying better results.

Job security was the prime concern cited by 146 employees of Columbia Gas of Ohio when they held a union election Dec. 21. However, the Utility Workers Union of America lost that election, 101 to 32.

After Columbia was acquired last November by NiSource Inc., the Merrillville, Ind.-based parent announced plans to reorganize in Central Ohio, notes Doug Flowers, a Columbia spokesman. While NiSource promised to add a net 75 employees downtown, field workers feared the reorganization would cost their jobs.

"We'd like to continue to work directly with employees and plan to do that," Flowers says, following the union's defeat. "We don't think it's necessary for any third party involvement to make that happen."

Other area employers challenged by organizing drives:

  • Columbus-based AirNet Systems Inc. won a 1999 vote against the Teamsters, who tried to organize the company's pilots.

  • Holiday Inn-City Center dodged the bullet late last year when hotel union organizers canceled an expected vote.

  • Honda of America Manufacturing in Marysville defeated at least two attempts by the United Auto Workers and at least one attempt by the Teamsters to organize its production and maintenance workers during the past 15 years.

Some employers have even managed to reverse labor's activist trend. At least four companies acquired during the past decade by Worthington Industries Inc., employees voted to decertify their local unions after becoming part of the company.

Labor on the march

Nationwide, unions seem to have reversed a trend, dating back to the 1950s, of almost continuous erosion in total membership -- and membership as a percentage of the American work force.

Unions added 265,000 members in 1999 and 100,000 members in 1998 after years of membership declines, according to the federal Bureau of Labor Statistics. Union membership stabilized in 1999 at 13.9 percent of the total work force -- the first time since 1955 that the union portion of the work force did not decline, notes Lynn C. Outwater, managing partner at employment law specialty firm Jackson Lewis in Pittsburgh.

Wages and benefits usually rank low among the motivating factors for workers recruited into union campaigns, says Outwater, whose office serves many Ohio firms she declined to name for fear of inviting more union activity. Job security, corporate restructuring, downsizing and reductions in pay and benefits resulting from restructuring and downsizing are more often the major motivators for organizing drives, Outwater and others say.

"Unions have been more successful, I think especially in recent years, as a result of these concerns," she says.

Outside agitators

The National Labor Relations Board has repeatedly ruled, and the U.S. Supreme Court in 1995 affirmed, that a company could not refuse to hire an applicant simply because that individual was a union organizer.

"This was a signal to other unions that they can apply for various jobs (for) the sole purpose to organize the plant from the inside," Goodfellow says.

And that could be how it starts, says Armando Azarloza, general manager at BSMG Worldwide Inc. in Los Angeles.

"Some external factor usually triggers the interest of the local to begin an organizing campaign," he says.

Azarloza has advised Wal-Mart, management consulting giant Maximus Inc. and Catholic Healthcare West, among others, on how to avoid getting hit by an organizing drive -- or how to defeat a drive once it's begun.

"These unions have adopted in-your-face tactics," Azarloza says.

Organizers may start rumor campaigns slandering an employer's policies and practices; big unions have advertising budgets, printing presses and van-based mobile organizing centers.

"I have argued that if you are aggressive, you will be successful. We've tried to become as sophisticated and aggressive as they are," Azarloza says.

Hospitality industry employees -- often low-paid, foreign-born and undereducated, he says -- are a favorite target for newly aggressive union campaigners.

"Health care is becoming increasingly difficult (for employers), and it's becoming a No. 1 target for labor," Azarloza adds.

Even so-called "new economy" Internet companies like Amazon.com have become the target of union drives, he notes.

Know your work force

So what are employers to do when faced with the announcement that employees are gathering petition signatures for a vote to unionize their company?

One thing consultants agree you can't do is fire the organizers.

"Any arbitrary distinction is ruled out," Goodfellow says, both by the recent labor relations board case and by labor management law set down in the National Labor Relations Act.

Outwater says, "That law is really what I call the Bible when it comes to employees' right to organize or not to organize, and employers' rights to free speech, and obligations not to violate the rights of employees."

State laws have little to say about most private employment settings, she adds.

Thus, Goodfellow says, "Whatever dissatisfactions the employees have -- reasonable or unreasonable -- the employer has to find out to do something about them."

Of course, it's best to know already what those grievances are, Goodfellow and others agree.

"It isn't about avoiding unions," Outwater says. "It's about treating employees properly."

Overbearing, unreasonable, arbitrary, indifferent and inconsistent management and administration of company policies are a great place for organizers to make their opening to unhappy employees. Poor and unsafe working conditions, discriminatory supervisors and mandatory overtime also prepare union campaigners' ground for them.

"All these things carry a lot of weight with employees," Goodfellow says. "Money is way down the list."

If you have a good relationship with your employees, you can ask them about their complaints, and perhaps make accommodations to dampen pro-union sentiment.

"Ninety-nine percent of employees will be happy if an employer does something, even if it's only halfway," Goodfellow says. "They'll be pleased just to be heard."

Audit your employees

But if you have a good relationship with your employees, chances are you wouldn't be under the union gun. If you're already the target of an organizing drive, Goodfellow and others suggest, you should consider conducting an employee audit.

This involves hiring a third-party consultant to come in and review your operations. The auditor also offers to hear employee grievances in a private setting with guaranteed anonymity to reduce fears of retaliation.

"This knowledgeable outsider tells the employees, 'I'm only interested in what you have to say, not who said it,'" Goodfellow says.

His University Research Center maintains a list of recommended employee auditors nationwide, along with many other free, pro-employer services.

Honda of America Manufacturing Inc. in Marysville has conducted employee audits for years, notes spokesperson Sharon Van Winkle, though not directly in response to organizing attempts. A 1999 Teamsters' petition fell short of the 30 percent of 8,000 Marysville, Ana and East Liberty Honda employees needed to call a union election.

"I don't know that we've avoided a union," says Van Winkle, who credits the audits and other team-oriented, employee participation policies with making Honda one of Fortune magazine's "100 Best Places to Work." "Most people would just say that we're in the best position to take care of ourselves."

Not every employee complaint is reasonable, Outwater says. But Goodfellow emphasizes that negotiators should try to reach a reasonable compromise. If employees complain a workspace needs an air conditioner because it's too hot, they might settle for an electric fan.

What you can do

If the battle is already under way, Azarloza says, you should treat a union election campaign just like an election campaign.

"It really takes a kind of campaign team approach to it," says Azarloza, who as a former congressional press secretary has seen both kinds of campaigns up close.

Protect your company's public image, Azarloza advises. Organizers may try to trash your reputation to build public support for their efforts, and they are media-savvy.

Build relationships with your key business constituents (suppliers, customers, etc.). But don't neglect public groups that may be neutral or supportive of your stand. Prepare to justify your business decisions to these constituencies.

Use friendly public faces to tell your side of the story. Not every employer is fortunate enough to have nuns in senior executive positions, as BSMG client Catholic Healthcare West did during a recent organizing drive. But a popular senior executive or an employee well-regarded for community service can help your case in the media.

Help employees willing to publicly oppose the organizing drive. "I call this providing air support," Azarloza says. "If you provide air support, they'll go out in the trenches and fight for you."

Fight misinformation. Don't let inaccurate or unjust charges go unanswered in the media. Respond quickly. "You have a 24-hour news cycle, just like in politics," Azarloza says.

Shift the debate to your issues and point of view. "Once you can turn the debate to the issues you think are important, rather than the issues the union is putting forward, they'll often go on the defensive, and you'll find you can make your case more effectively," Azarloza says.

Know your rights, both under the National Labor Relations Act, and in case law that elaborates on the act. "Just because you're a target of an organizing drive doesn't mean you surrender your chance to fight back," Azarloza says. How to reach: University Research Center Inc., (312) 263-7321; National Labor Relations Board, (202) 208-3000; Honda of America Manufacturing, (937) 644-7714; Armando Azarloza, BSMG Worldwide Inc., (310) 966-5516; Lynn C. Outwater,the Jackson Lewis law firm, (412) 232-0185

William Hoffman (whoffman@erols.com) is a free-lance writer for SBN Magazine.

Monday, 22 July 2002 10:09

Stop terrorizing my grandmother

Stop terrorizing my grandmother

For all its flaws, Social Security can be fixed without jacking up taxes, slashing benefits or turning the whole thing into one big game of Retirement Roulette.

Commentary by William Hoffman

Her voice, never very strong and lately not too steady either, now took on an edge of panic. I had never seen her cry, but was certain I'd know it over the phone, though it's nothing a grandson ever wants to hear. "I just don't know what I'm going to do," she said, "if they really start fooling with Social Security."

I didn't know how to tell her she was in part a victim of my profession. Since editors started emphasizing active verbs in headlines over probing content in stories, I'd noticed a detachment between the two, to the extent that I could read a headline or hear a broadcast news teaser and know I was being fed an inflated invitation to see the sponsors' commercials. My wife and I actually made a game out of how often we heard "You won't believe..." and "You'll be shocked..." leading up to the evening newscasts. I should've known that not everyone plays this game for laughs.

My 92-year-old grandmother served as a career assistant in the Department of the Treasury before retiring in the late 1960s to her hometown in Iowa. She was one of those faceless bureaucrats who late-night talk-show hosts get so much mileage out of these days, and we all laugh, though to her the jokes still hurt. Back then, working for the government was an honorable profession, and though the pay wasn't good, the civil servants could count on a subsistence pension in addition to their Social Security checks. But my grandmother now has too much time on her hands, and instead of playing canasta or rotting away in a home, she reads. And what she reads scares the wits out of her.

Maybe it should. At least a half-dozen bills are pending in Congress that would partially or wholly privatize Social Security, which for all of its faults is the only retirement plan most Americans have ever known. Republicans and Democrats alike have been ringing the alarms over the last 20 years, warning of a looming cataclysm for a dangerously depleted Social Security trust fund. No wonder. It's Republican and Democrat congresses that have looted the trust fund over the last 20 years, to expand Social Security for non-retirement benefits, to paper over the deficit, treating our elders' national pension account like a giant bottomless cookie jar.

Now the opportunists and speculators have arrived, exploiting public excitement about the legitimate Social Security crisis their own agents created, in hopes of lining their pockets with what's left.

Privatizing Social Security is one of the goofiest ideas since Reagan turned the savings-and-loan industry into a floating craps game. Social Security was created precisely to keep Grandma's retirement nest egg out of the hands of gamblers. Social Security privateers promise that their profiteering won't endanger seniors' basic social safety net, though my grandmother and I suspect they have in mind the orphanages and soup kitchens that constituted the "safety net" of the 1930s.

Privatization proponents point out that interest on Social Security funds compares dismally to equity market returns. They neglect to mention that Social Security was never designed to make one rich.

Proponents want to let participants opt out of the system to invest their withholdings in more profitable ventures. They know this would lead the wealthiest contributors simply to go private, leaving the poorest to share the crumbs among themselves, and defeating the sole original purpose of Social Security as a national retirement insurance program.

The privateers preach that individuals should take responsibility for their own retirement plans. Their advice to the weak, the gullible and the deceived: Caveat emptor. You won't believe the wrath of the deceived if Social Security privatization turns into another S&L craps shoot.

William Hoffman is the national correspondent for Small Business News. He welcomes your comments, via e-mail: whoffman@erols.com.

Monday, 22 July 2002 10:09

Searching for Stakhanovites

Searching for Stakhanovites

All the best employees are already working, either for you or your competitors. Reconsider not just what new recruits can do for you, but what you can do for them.


To hear the recruitment specialists tell it, good help has never been so hard to find.

"This has been the most interesting labor market that I have seen in all my years," says Cathleen Faerber, principal at The Wellesley Group Inc., a Chicago-area executive search firm. She tries to lure executives away from their current jobs into positions her clients seek to fill. "People are really content, and it takes more to get someone to move today."

Robert I. Greenberg, whose Scientific Search, Inc. prescreens applicants for Philadelphia-area health-care and technology companies, notes: "Industry experts expect that, by the year 2015, there will be 20 million more jobs than qualified candidates. And we're feeling some of that demand right now." His agency "is turning away more work now than we used to be able to accept."

With unemployment lingering below 5 percent nationally, and dipping as low as 2 percent in some areas, executive search firms and employee recruiters warn that there is no end in sight. There are many tools-some new, some tried and true-for employers who fear they've plumbed the depths of their local labor market or who feel ambivalent about venturing outside of it. The experienced hands advise trying:

  • Job fairs. Organized at convention centers by local chambers of commerce and increasingly by government agencies, the "cattle call" brings hundreds of potential hires to employer booths. Most likely catches at a job fair are newcomers to your city, Greenberg says; the best candidates are hard at work at their current jobs. Caveat: "You get what you pay for," he adds.

  • Campus events. Make a presentation for your company at an appropriate technical or junior college or university in your area. This strategy works best for identifying eager, talented near-graduates unfamiliar with the hurly-burly job-search environment. "It's like a farm system," Greenberg says. "You're growing talent for tomorrow."

  • Open houses. This tool reduces the pool of applicants to only those interested in you. That can work to your advantage or disadvantage. "The open-house concept is almost exclusively used by bigger companies who have multiple openings available," Greenberg says.

In these and other scenarios, tracking the universe of applicants and their progress through the job market is essential. Resumix Inc., a Sunnyvale, Calif., company offers a software automation tool that categorizes past and future applicants, normalizes their qualifications and identifies the best candidates. "Normalizing" qualifications allows Resumix automatically to match comparable skills, notes company spokesperson Mindy Fiorentino.

Other areas employers should watch include: Your own company. "You're going to have to develop and invest in your people," says Michael Fradette, co-author of The Power of Corporate Kinetics and a partner at the Deloitte & Touche Consulting Group in Boston. You're going to lose some as employees defect to higher-paying or distant jobs, "but some of them stick. And those will make you a better organization."

Additionally, "You've got to make your [work] environment very attractive, because once you've got them, you don't want to let them go," Fradette says. New hires and current employees you want to keep will recognize a comfortable, fulfilling, energetic, collegial work environment and want to stay, reducing turnover and the need to recruit. In a tight labor market, Fradette cautions, "[Employees] have to make the decision that they want to be there."

Interim Career Consulting President Scott DePerro says that understanding the new "emerging worker" may be key to recruiting and hiring effectively in the tight labor market. A 1997 Lou Harris & Associates study commissioned by Interim found that most employees are satisfied with their jobs, unlikely to move, less affected by downsizing than once believed, and more interested in personal growth than higher income.

"The most striking difference is their definition or loyalty" when compared to traditional baby boom and post-WWII-era workers, DePerro says. "The downsizing experience over the last 10 years has fostered this new attitude, where workers have accepted more responsibility for their careers." Companies that are flexible internally, empower employees and reward achievement over seniority are more likely to attract and retain quality hires. "Companies that are arrogant are going to have a hard time finding good employees."

Recruiters are uncertain about the impact of the Internet. "The Internet is a way that's often overlooked, but it's beginning to produce results," DePerro says. More crucial is not to overlook any recruitment avenues: "It's not just one recruitment approach, but a combination of all types that it takes to recruit top talent these days," the Interim executive says. "It's very dangerous to just use one recruitment approach."