Competitive energy markets give business leaders an opportunity to choose a supplier, negotiate rates for electricity and natural gas, and customize a suite of innovative products and services to meet their needs. But nearly 38 percent of industrial and 67 percent of commercial companies still haven’t cashed in on the state’s open energy market because they’re still relying on old buying habits, says Robert D. Gabbard, president of PPL EnergyPlus.
“I firmly believe that an open marketplace creates efficiencies and is superior to a vertically integrated monopoly, because prices have been trending lower since 2008 and the early adopters have been able to reduce their company’s overall energy costs by 5 percent to 10 percent and, in some cases, even more,” says Gabbard.
Smart Business spoke with Gabbard about how businesses can capitalize on Pennsylvania’s open energy market by forming new buying habits.
What major changes have taken place in the Pennsylvania energy market in the last five years?
The creation of an open, competitive energy market in Pennsylvania has spawned industry consolidation and several mergers in recent years. On the one hand, consolidation is advantageous because only the most efficient and financially sound suppliers survive and savvy executives have seized the opportunity to garner additional savings by leveraging their purchasing power.
On the other hand, executives must use due diligence to select a financially sound supplier and choose products and services that support their business model. For example, if your company has implemented a green initiative, select a supplier that offers energy from renewable sources.
Or, if your goal is to drive revenue by signing new customers to long-term agreements, it makes sense to reduce price volatility by negotiating a long-term energy contract.
The bottom line is that there’s no need to settle, as business leaders have the opportunity to select a supplier and a suite of products and services that fit their company’s needs.
What is the most important thing businesses in Pennsylvania should know about the competitive energy market?
Pennsylvania is no longer operating under a monopolistic structure, but you don’t have to take a lot of risk or sign a long-term contract to garner lower rates and better service. Start by making small changes that create new buying habits, such as researching suppliers, requesting quotes and then signing a simple, short-term contract. Once you’re comfortable with your supplier and the bidding process, you’re ready to source additional savings by utilizing demand-side management programs or shifting daily production schedules to capitalize on lower energy rates throughout the day.
You don’t have to predict your future energy needs to receive a low rate, because there are programs for businesses that can’t forecast or that expect a change from their historical usage, and there is even a program that offers price certainty while allowing customers to take advantage of a reduction in wholesale energy prices. Your supplier should offer to conduct an analysis and help you identify ways to lower your total energy costs that exceed a reduction in your basic energy rates.
What trends should businesses be paying attention to in the energy sector?
Unlike the old days, executives need to monitor the underlying commodity prices monthly or quarterly so they can spot opportunities to extend and renew their energy rates and contract terms. If you don’t have time to monitor the wholesale market, select a supplier that will do it for you and contact you when an opportunity arises.
Energy companies competing for business in a competitive, open marketplace foster innovation and technology developments, so be on the lookout for products and services that will help you monitor and control your daily usage and forecast your future needs. Don’t hesitate to suggest a new product from your supplier.
The key is selecting a trusted supplier that is compatible with your company’s culture and business objectives, because Pennsylvania business executives no longer have to settle for the status quo.
What makes PPL EnergyPlus different from other energy suppliers?
We’ve been in Pennsylvania for more 90 years so we understand our customers’ needs and the nuances of each city. At the same time, we offer the security of a multinational Fortune 500 company with a strong balance sheet. Our in-state network of power generation plants creates operating efficiencies by allowing us to deliver energy across very short distances.
But our greatest differentiator is our business model and our commitment to customized service instead of taking a one-size-fits-all approach. We consult with business managers and recommend specific ways to use power more efficiently before suggesting a customized slate of products and services
PPL EnergyPlus, LLC is an unregulated subsidiary of PPL Corporation. PPL EnergyPlus is not the same company as PPL Electric Utilities. The prices of PPL EnergyPlus are not regulated by the Pennsylvania Public Utility Commission. You do not have to buy PPL EnergyPlus electricity or other products in order to receive the same quality regulated services from PPL Electric Utilities.
Robert D. Gabbard is the president of PPL EnergyPlus. Reach him at RDGabbard@pplweb.com or (610) 774-4168.
Although pricing plays a pivotal role in generating profits, most firms end up leaving money on the table, because they rely on ad-hoc or undisciplined practices instead of a well-honed strategy. Worse yet, they don’t establish a price based on the product’s value, or forgo profitability by hastily initiating discounts to grab market share.
“Executives don’t run enough ‘what if’ scenarios before establishing a price for a product or service and then hope that something good will happen,” says Dr. Jagdish Agrawal, associate dean and professor of marketing for the College of Business and Economics at California State University, East Bay.
Smart Business spoke with Agrawal about the dos and don’ts of pricing management.
Why do companies overlook the need for disciplined pricing management?
For starters, academia hasn’t paid enough attention to pricing so MBAs aren’t familiar with the tools or the need for a rigorous methodology. In fact, there isn’t a single academic journal on the benefits of good pricing. Executives also tend to think that the market establishes the price for goods and services, when it’s up to the seller to educate buyers on their product’s value.
What are the components of an effective pricing strategy?
These best practices are integral to an effective strategy.
- Start with a profit objective. Market share and profits aren’t necessarily related; conceptually, you can reduce your price to zero, lose money and capture the entire market. Start with a profit objective before establishing a price for the product and then research the market to see if it’s on target.
- Practice value-based pricing. Pricing should be determined by the value of a product or service, not production costs. Research the competition and then adjust your price up or down based upon the inferiority or superiority of your product.
- Understand market segmentation. Airlines are experts at market segmentation based pricing. They understand that business travelers don’t pay for their tickets so they don’t care about price, but families always shop for the best deal when booking a vacation.
- Price proactively. Avoid knee-jerk reactions to competitive price changes by continuously monitoring buyer preferences as well as social and economic changes so you can adjust prices proactively.
- Develop prices collaboratively. Solicit input across the entire enterprise, because each group offers unique expertise and perspective that leads to better pricing.
- Invest in marketing. It’s not that buyers won’t pay more, but they need education and data to appreciate your product’s value.
How can companies utilize tools to attack pricing both tactically and strategically?
Savvy companies understand price elasticity and customer preferences and use niche software programs to conduct incremental break-even analyses. For example, what will happen if you drop the price of a product by 5 percent? How much will sales go up and will you still make a profit? Conversely, what will happen if you don’t reduce the price? Start with a conjoint marketing analysis to uncover the nexus between price and value by forecasting the impact of various price changes and then conduct trials or tests to validate the results before initiating wholesale price changes. Some product managers are turning to a new field called behavioral economics, which helps them understand buyer motives and strategically offer rebates or other discounts to communicate a product’s price and value to customers.
How can companies avoid typical mistakes?
Marketing has four variables, or ‘Ps’: price, product, promotion and place. Because price is the most flexible, people tend to use it for instant gratification. But it’s a mistake to temporarily lower prices for competitive purposes, because it compresses margins across the entire industry. Another error is incorporating irrelevant or non-incremental expenses into the cost assumptions because it results in an inflated price that isn’t based on the product’s value. Fixed costs like managerial salaries aren’t necessarily impacted by the number of products a company produces, so you stand a better chance of developing value-based pricing and realistic forecasts by excluding them from the estimated costs. Isolated pricing decisions made by a single department like marketing or accounting are usually off the mark. Instead, develop the brand’s positioning and profit objectives before creating a coordinated promotion and advertising campaign. Next, develop various pricing scenarios through a collaborative effort and run ‘what if’ models to validate your sales and profit goals. If necessary, adjust your product’s positioning or marketing strategies until they align with the desired outcomes, because everything should flow from the brand’s positioning.
How can companies boost profitability through pricing improvements?
Start with the actual product or service to uncover untapped market segments and incremental profit opportunities. Does your product solve a problem? Are there prospective customers who would be willing to pay more for a solution? For example, retailers usually charge less when customers buy online, but some people are willing to pay more for the experience of shopping in a pleasant environment. Train everyone in the company on pricing fundamentals and methodology so they make better pricing decisions and spot additional opportunities to sell goods and services for a higher price. Remember, price is the only marketing variable not associated with the product’s cost, and price allows you to realize the value of all your investments and boost profits.
Dr. Jagdish Agrawal is associate dean and professor of marketing for the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3290 or email@example.com.
It’s not unusual for borrowers to sign a loan agreement without understanding all of its provisions. Now, those hasty decisions are coming back to roost as business owners struggle to turn a profit in a tepid economy and comply with a host of pre-existing debt covenants. To make matters worse, business owners often commit another faux pas by failing to notify their banker before a violation occurs and end up facing rising interest rates, increased collateral requirements or limited cash advances.
“In better times, bankers were often willing to overlook minor covenant violations,” says Jonathan Sigal, first vice president of loan review and senior portfolio officer for Wilshire State Bank. “Now, bankers are worried about a borrower’s financial ability to make their loan payments, so a covenant violation is serious stuff.”
Smart Business spoke with Sigal about common loan covenants and how executives can take steps to avoid a violation.
What do debt covenants typically cover or require?
Bankers use covenants to set parameters that business owners need to take into consideration when making decisions that could jeopardize their ability to fulfill their loan obligations and to ensure that the loan’s provisions are consistent with the borrower’s risk profile. They tailor the covenants to mitigate each loan’s specific risks by imposing a series of financial and reporting requirements. For example, the covenants may mandate a certain cash flow or asset-to-loan ratio, so a company doesn’t become overleveraged and borrowers can liquidate assets to make their loan payments in a pinch. Bankers may require landlords to submit a quarterly rent roll or notify their loan officer if certain situations occur. Business owners need to understand the covenants and how to comply, because violations are no longer considered a minor inconvenience, and regulators insist that bankers strictly adhere to the loan’s provisions.
What’s the best way to avoid a covenant violation?
Business owners should read the loan document and understand the covenants before signing on the dotted line, because education and awareness are paramount to avoiding a violation. Next, assess the feasibility and long-term impact of the covenants by authoring a business plan and financial forecast. It’s better to know up front if you need to boost margins or postpone additional investments in order to meet the covenants over the life of the loan. Finally, create a spreadsheet and proactively compare your monthly results against the covenant requirements so you can change course or make adjustments before a violation occurs. Since reporting usually takes place on a quarterly or semiannual basis, continuously monitoring the company’s position gives executives the opportunity to head off violations at the pass.
What should executives do if a violation is imminent or unavoidable?
Don’t wait until a violation occurs to schedule a meeting or pick up the phone. Alert your banker right away and be ready to outline what you’re doing to change the situation. Bankers have to protect their interests, so once a violation occurs, they become enforcers and often have to initiate disciplinary action. But if you lay out the problem in a letter or e-mail, and offer a viable resolution and a timeline, your banker may become your supporter and even propose ideas or possible solutions. Remember, your banker must have confidence in your managerial abilities and know that you’re on top of the situation. Finally, always document your discussions in writing and create a paper trail, since there’s no such thing as a verbal agreement in the banking world.
Is it possible to get a waiver or reduction in covenant requirements?
If a covenant is redundant or the reporting requirements prove to be too burdensome, it’s possible to have it eliminated or modified as long as both parties agree. It’s also possible to get a waiver if you can show that an adverse situation is temporary. For example, perhaps a large customer has impacted your cash flow, but they’ve recently agreed to pay invoices every two weeks, or your company has incurred nonrecurring expenses or one-time losses that are reflected in your financials. If your request to modify a covenant increases the bank’s risk, be prepared to offer something in return like transferring accounts from another financial institution or providing additional collateral, such as a deed to a second property. Bear in mind that the bank may charge a fee for modifying covenants, but in general, bankers will acquiesce without changing any terms if a covenant waiver makes sense and doesn’t impose a lot of additional work or extra risk.
Do you have any other advice for executives?
Chief financial officers and accountants are usually familiar with debt covenants, but business owners also need to understand the commitments and responsibilities, because a violation can lead to severe restrictions or even foreclosure. Ask questions during the loan documentation and drafting phase, so you can create a realistic forecast using a variety of assumptions and contemplate the business impact of fulfilling the requirements. How does the covenant define cash flow when calculating ratios and is it possible to exclude certain expenses from the calculations? Remember, a bank can re-price your debt if your company undergoes significant changes to its financial position or operating results, and how you handle a violation may factor into their decision.
Jonathan Sigal is first vice president of loan review and senior portfolio officer for Wilshire State Bank. Reach him at (213) 427-7921 or firstname.lastname@example.org.
HR professionals haven’t seen a need to revise their company’s health care strategy. After all, they’ve been busy with staff reductions and taking steps to offset rising health care costs, while waiting for a government committee to clarify the murky details of health care reform.
But it’s time to stop procrastinating and get back to the drawing board, because employer health care costs are projected to rise by 7 percent in 2012 and insurance carriers are reporting an increase in employee claims for illnesses related to post-recession stress.
“It’s easy to avoid change in times of uncertainty, but at some point it only puts you further behind,” says Bruce Davis, principal and national practice leader for Health & Group Benefits at Findley Davies. “Employers should continue introducing purposeful changes to their health care plan within the context of a clearly conceived strategy.”
Smart Business spoke with Davis about the latest health care trends and how employers are using the information to make plan changes and update their current strategy.
Is cost shifting the new reality?
Surveys show that companies will continue shifting costs onto employees, who are already stressed because they’re working longer hours and haven’t received a substantial raise since the start of the recession. So this is the perfect time to revisit your basic contribution philosophy. For example, it might make sense to shift costs for dependents and part-time workers instead of reducing the health care subsidy for full-time employees. If you communicate a new pricing structure and reinforce the eligibility requirements before open enrollment begins, employees may voluntarily lower costs by removing ineligible dependents or transitioning to a less expensive plan. If your plan costs are still too high, consider conducting a dependent audit or changing the spousal requirements, because you may be able to avoid additional cost shifting.
Is wellness really the solution to rising costs?
Employees receiving short-term disability benefits may be responsible for more than 50 percent of an employer’s health claims. Furthermore, new studies indicate obese workers have greater incidence of workers compensation claims and a longer/more expensive duration of treatment.
Also, working long hours while caring for an aging relative creates so much stress that employees often use the Federal Medical Leave Act to take time off and are less productive when they finally return to work. Savvy employers are starting to understand the connection between work-related absences, family issues, depression and disability claims, so they’re taking a holistic approach to wellness by bundling health incentives with workplace safety programs. They’re also offering stress-reducing benefits like EAP and elder care resources in an attempt to control the entire spectrum of health-related costs.
Will employers continue migrating toward high deductible health plans and HSAs?
High deductible plans and HSAs are not a magic bullet for rising health care costs. In fact, data show that education and market-driven plan changes may yield similar results. One company with a zero deductible plan substantially lowered its costs by educating employees and helping them become smarter health care consumers. Generic drugs already accounted for 40 percent to 50 percent of this company’s filled prescriptions, but teaching employees to request less costly alternatives from physicians and pharmacists increased generics to 70 percent. Employees have a vested interest in maintaining their coverage, so don’t underestimate their desire or ability to help the company save money.
How are employers handling health care reform?
While some employers have been reluctant to change their current plans and forgo grandfathered status, because they would have to comply with additional requirements, other HR professionals have been concerned about the excise tax on ‘Cadillac plans,’ so they have been tweaking their plans to stay below that tax threshold. They’re initiating changes to control costs, like adjusting co-pays on prescription drugs, changing contribution levels and encouraging employees to proactively manage their health by offering incentives to complete a risk assessment.
How should employers approach this year’s open enrollment period?
Many are using this year’s open enrollment period to educate employees, scrub ineligible members from the program and introduce outcome-based incentives. Several of our clients are using inducements to increase participation in programs that help employees manage chronic conditions, as the majority of health care claims emanate from illnesses like diabetes and hypertension. The use of onsite medical clinics is also increasing, especially for employee assessments and health care screenings. These clinics have been successful because fewer families have a regular physician and employees are more inclined to proactively manage their health when they have convenient access to a doctor.
What else can employers do to manage health care costs in this era of uncertainty?
Employers are leveraging their purchasing power to lower costs by joining prescription drug collaboratives and purchasing groups. They’re also excluding certain pharmacies to improve overall ingredient cost discounts and eliminating coverage for expensive brands that have generic or over-the-counter alternatives. In addition, employers are re-considering the use of more narrow networks of hospitals and physicians to optimize discounts while preserving quality and access. Also, the competitive market for life and disability coverage has let companies request bids and apply the savings to health care. Overall, it’s not a time for rash decisions, but there’s never been a better time to institute small changes and revisit your health care strategy.
Bruce Davis is a principal and national practice leader for Health & Group Benefits at Findley Davies. Reach him at (419) 327-4133 or email@example.com.
After battling a lackluster economy for years, most executives are out of ideas for increasing revenue and lowering operating costs. But the smart execs are reviewing history to predict which customers will buy more or splurge on high-end products and enticing them with strategic advertisements. And some are analyzing data to hone inventory purchases or decide how to optimally deploy resources.
The savvy executives don’t have a crystal ball, but they have invested in software and staff to conduct data mining and predictive analytics. Research from Accenture confirms that high-performance businesses are five times more likely to use analytics strategically when compared with low performers.
“Business leaders can avoid mistakes and predict future demand for products and services by utilizing data mining and predictive analytics,” says Dr. Zinovy Radovilsky, professor of management for the College of Business and Economics at California State University, East Bay. “Unfortunately, most don’t know where to start, so they continue to make decisions based on managerial opinion instead of facts.”
Smart Business spoke with Radovilsky about the opportunities to control costs and increase revenue through mining and predictive analytics.
What are analytics and data mining?
Analytics is a diverse field of statistical, qualitative methods and models used for predicting future business trends and customer behavior, and savvy executives are using the practice to make opportunistic business decisions. The process starts when professionals extract or mine data so it can be analyzed and used to identify relationships between the predicted parameters and other factors. The analysis phase is called descriptive analytics, which helps organizations discover what happened in the past, why it happened and how these events impacted the business. Predictive analytics uses the results of both data mining and descriptive analytics to make predictions and optimize business decisions.
How can mining and analysis turn data into dollars?
Analytics may highlight ways to increase customer retention or cross-sell certain additional products and services. At the same time, predictive analytics can reduce operating costs by predicting demand so companies can better forecast inventory or reduce wasted resources. The need for predictive analytics is spreading across various industries and business functions, like marketing, finance, operations, supply chain and human resources.
Predictive analytics and data mining help executives forecast future demand by analyzing customer behavior and profitability by market segments, so they can boost revenue and profit margins by selling additional high-value products and services to certain customers. For example, 1-800-FLOWERS.com attracted 20 million new customers and increased repeat business 10 percent by employing a real-time decision manager that uses predictive analytics applications, business logic and historical purchasing data to motivate customers by offering flower arrangements that appeal to their personal preferences.
How can predictive analytics and data mining reduce operating costs?
These examples illustrate how data mining and analytics can reduce operating costs.
- Predicting future demand helps operations and supply chain managers develop accurate inventory forecasts, purchase the right amount of supplies and eliminate unnecessary waste.
- Predictive analytics can substantially improve allocation of critical resources including equipment, labor and material. For example, after developing and implementing an optimization model to allocate small boat resources, the U.S. Coast Guard reduced its small boat fleet by some 20 percent and overall fleet operating cost by around 5 percent.
- Response modeling allows companies to identify repeat customers from the outset of the relationship and reduce the cost of mailing or calling by targeting only those who are likely to respond. The bottom line is that companies can cut marketing costs by targeting fewer customers while getting the same response.
How does a lack of data analysis or an inability to forecast future events restrict a company’s success?
Companies have accumulated a substantial amount of quantitative business data about their products and services, customers and suppliers. But, their ability to create a competitive advantage by utilizing the data and employing appropriate quantitative models varies significantly. In fact, two-thirds of U.S. companies surveyed by Accenture acknowledged that they need to improve their analytical capabilities. Some organizations still rely on executive opinion instead of using data and analysis to predict the future and make prudent business decisions.
What should executives consider before embarking on a data-mining mission or investing in software or experienced personnel?
Implementation of data mining and predictive analytics can be very time consuming and requires changing the existing decision-making processes and culture, hiring analytical staff and making investments in computer technology. Executives should consider several important things before implementing and managing predictive analytics projects.
First, clearly formulate strategic goals of using predictive analytics and data mining, and identify where the tools will likely make a difference. Then, prioritize the goals by their business impact and ease of implementation and utilization. Finally, identify prospective return on investments before purchasing software, hiring staff and training current managers to use analytics.
Dr. Zinovy Radovilsky is a professor of management for the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3302 or firstname.lastname@example.org.
Although bankers sounded a bit more optimistic about the commercial real estate market during the second quarter, more than half of the $1.4 trillion in commercial mortgages coming due nationwide in the next five years are underwater and many banks are refusing to renew the loans.
Owners who purchased property at the peak of the market in 2005 or 2006 face the biggest challenge, because commercial property values have since declined by almost 35 percent. Now, they must refinance to deal with looming balloon payments, but few owners can meet today’s stringent underwriting criteria.
“Roughly 90 percent of commercial mortgages require a balloon payment after five years,” says Vincent Shin, first vice president and manager of the South Regional Underwriting Center for Wilshire State Bank. “So owners may need to consider creative financing options to avoid a short sale or foreclosure.”
Smart Business spoke with Shin about refinancing options for commercial mortgage holders.
How has the underwriting criteria changed for commercial property loans?
Prior to 2008, banks considered the underlying equity when evaluating an application for a commercial property loan. Now they’re scrutinizing the underlying cash flow of the business for owner-occupied properties, at a time when many businesses are struggling to turn a profit. In fact, you could say that cash is king. And while bankers used to accept a debt service coverage ratio (DSCR) of 1.0, bankers now want a DSCR of 1.25. To give you an example of the impact, a business owner now needs monthly cash flow of $12,500 instead of $10,000 to qualify for a $10,000 loan payment. Compounding the problem, banks are requiring loan-to-value ratios ranging from 40 percent to 50 percent and high occupancy rates for tenant-occupied buildings.
How can business owners evaluate their situation?
Work with your CPA to determine your debt service ability, so you have a general idea whether you can qualify for a new loan. Do everything possible to boost your company’s cash flow or fill your building with quality tenants by granting temporary rent reductions or improving the property. Then, talk to the current note holder to gauge their appetite for refinancing your existing mortgage. Your current lender will know the state of the marketplace and the approximate value of your property and should help you find a solution to your problem, because the lender has the most to lose if you default or request a short sale.
What are the best refinancing options?
For owner-occupied buildings with outstanding loans of less than $2 million, an SBA loan is your best option. Owners of tenant-occupied buildings should shop around for a deal, because each bank has its own risk tolerance and loan portfolio that influence their desire and willingness to write new mortgages. Drive a hard bargain if your business is flush with cash and use a possible short sale or foreclosure as a bargaining chip to motivate your current lender.
What should owners do if they can’t refinance their commercial property loan?
Beyond a short sale or default, consider these options if you’re facing an upcoming balloon payment.
- Partial principal forgiveness. Some banks may be willing to reduce your loan principal to avoid a short sale or foreclosure.
- Second property. Consider mortgaging another piece of real estate with a lower loan-to-value ratio to pay off or reduce your current loan.
- Offer additional collateral. Sweeten the deal by pledging a second property or offering the bank additional assets or accounts.
- Bifurcated loan. Consider splitting the current loan into two parts and refinancing a smaller primary loan that satisfies the desired loan-to-value ratio. Then, finance the remaining indebtedness under a second deed of trust. For example, if the current property loan is $1.5 million, refinance $1 million through a traditional loan and immediately apply for a secondary loan to secure the remaining $500,000. The secondary loan will probably require a balloon payment down the road.
- Private equity. Refinance through a private equity loan.
- Add partners or investors. Consider bringing in an additional business partner or investor who could provide an injection of cash to reduce the loan principal.
- CRA loan. The Community Reinvestment Act (CRA) was enacted by Congress in 1977 to encourage federally insured banking institutions to help meet the credit needs of their communities, including those of lower-income areas. A building must be owner-occupied to qualify.
Do you have any other tips for business owners facing a balloon payment?
First, start the refinancing process at least six to 12 months before your balloon payment comes due so you can shop the market and improve your company’s cash flow. Use the ramp-up period to clean up your credit report, acquire new customers or tenants or sell an underperforming business unit. Author a business plan, sales forecast and personal profile, because prospective bankers want to see how you intend to pay for the loan. Finally, consider a variety of refinancing options. Owners need to be creative to survive in our current economy.
Vincent Shin is the first vice president and manager of the South Regional Underwriting Center for Wilshire State Bank. Reach him at email@example.com or (562) 345-3102.
Executives can’t control the fluctuating economy, rising cost of raw materials or shifting customer preferences. But savvy leaders are taking control of a key business cost — energy — by choosing an energy supplier, selecting a product structure to support their business needs and eliminating financial uncertainty by negotiating long-term energy supply contracts that provide them the price and product structure that meets their needs.
Reducing energy costs by even a small percentage can create a hefty competitive advantage. According to a 2011 report by Aberdeen Research, energy costs make up 25 percent of total operational costs in large U.S. plants, and IBM says that office buildings account for 70 percent of U.S. energy use. The authors note that managing energy costs is a top priority for 68 percent of business executives, and while the top-performing companies are exceeding their goals by 20 percent, the laggards are falling short by almost 11 percent.
“In Pennsylvania, it’s hard for executives to control operating costs if they purchase energy from their regulated utility because their default service prices, in many cases, change every 90 days,” says Annette Durnack, director of Retail Energy for PPL EnergyPlus. “Pennsylvania companies that purchase their energy from a competitive supplier can lock in rates for a term that meets their needs and select from a variety of cost-reducing products, rather than only one product offered by the utility.”
Smart Business spoke with Durnack about how to create a competitive advantage by choosing an energy supplier and complementary product structure.
Why should businesses be thinking about their energy supply?
Energy costs are a significant portion of total business costs for many companies. In Pennsylvania, businesses are not at the mercy of regulated utility rates. Opportunities abound to reap savings by choosing an energy supplier in the competitive market and to realize additional savings by requesting quotes now because prices have dropped 25 percent since the market peaked in 2009.
In addition, businesses choosing a competitive supplier can benefit from a customized slate of products and services that support their business plan. For example, if a company wants to woo new customers by launching a green initiative, it could partner with a supplier that offers renewable energy sources and agree to purchase a portion of its supply from a renewable component. Or if a customer needs to lock in the price of the product they produce for three years and energy is a big part of that cost, locking in an energy supply price can help achieve that objective.
When is the best time to buy energy?
The spring and fall months are traditionally the best time to buy because prices drop as demand ebbs. Beyond optimizing seasonal price differences, companies can garner additional savings by choosing an energy supplier in the competitive market. Companies that don’t choose a supplier will see energy rates fluctuate because regulated utilities change their rates for default service — the service you get if you don’t select a competitive supplier — every three months.
In turn, businesses may have to raise prices for goods and services, which can impact customer loyalty, revenue and margins, and create a climate of financial uncertainty. Companies that partner with a competitive supplier enjoy a competitive advantage because they can contractually lock in prices for 12, 24, 36 months or longer, and choose a product structure to meet their unique business needs.
What products and services can providers offer beyond energy supply?
A competitive supplier can offer renewable energy options that help businesses reduce their carbon footprint, run a green operation and market their environmental stewardship to the community. Some providers also offer companies the opportunity to earn revenue or credits by participating in demand response programs if they are willing to curtail consumption when high electricity use strains the power grid. Companies can select a demand response product that best suits their needs and earn consistent, predictable revenue, even if an energy curtailment event never materializes. Some providers also offer weekly market updates so companies can stay on top of trends in the energy market, request quotes and time their energy purchases to capitalize on falling energy prices.
How can a demand response option benefit businesses?
Companies know the prices they’ll be charged and the discounts they’ll receive when they sign a long-term contract with a supplier and select an appropriate demand response program. And because energy costs make up a significant portion of a company’s operating budget, long-term contract pricing allows them to confidently forecast future expenses and bolster revenue by consummating multiyear deals with their customers. Not every state has a competitive electricity market, so companies that take advantage of Pennsylvania’s open market and demand response programs can get a leg up on the competition.
What are the advantages of bundling energy supply and energy services?
Buying bundled services provides the convenience of one-stop shopping and the opportunity to negotiate an advantageous deal by leveraging your total energy expenditures and purchasing power. Partnering with a supplier offers additional benefits, as a partner is more likely to build a relationship, understand your business plan and challenges, and then recommend a customized slate of services and products that will help your company compete. And an energy partner will help your business tailor your energy purchases to best meet your individual needs.
PPL EnergyPlus, LLC is an unregulated subsidiary of PPL Corporation. PPL EnergyPlus is not the same company as PPL Electric Utilities. The prices of PPL EnergyPlus are not regulated by the Pennsylvania Public Utility Commission. You do not have to buy PPL EnergyPlus electricity or other products in order to receive the same quality regulated services from PPL Electric Utilities.
Annette Durnack is director of Retail Energy for PPL EnergyPlus. Reach her at AMDurncack@pplweb.com or (610) 774-3182.
The business world is filled with reports of vibrant companies that persevered through change and fleeting memories of defunct organizations that couldn’t adapt to shifting market conditions. In fact, D&B reports that over 96,000 U.S. businesses failed during 2009 and more than 80,000 failed in 2010, proving that a lack of change management is a risky proposition.
Unless executives provide employees with a model of the future state and a roadmap leading to the goal, workers may resist change or languish amid uncertainty.
“You can’t guide an organization through change by winging it,” says Kimberlie England, principal and national practice leader of Communication and Change Management at Findley Davies. “Executives need a strategic plan that moves people from being aware of change to embracing it, by weaving new ideas into the organization’s culture.”
Smart Business spoke with England about her reliable methodology for driving organizational change in today’s turbulent business climate.
What’s the first step toward effective change management?
Executives must anticipate change and follow a series of sequential steps to shepherd their company through any transformation. First, they should assess the organization’s current state and readiness for change, using surveys or focus groups. This evaluation process pinpoints the underlying causes of employee fear or reluctance and allows leaders to proactively eliminate potential barriers to change by introducing targeted solutions. Don’t make assumptions when assessing your organization’s readiness for change; rather, review fresh data and devise innovative solutions.
How can executives bolster support for change?
Unless leaders openly embrace change, employees never will. Executives must build the case for change and help employees connect with new ideas by modeling the way. In fact, the perception of a double standard can foster an unhealthy ‘us versus them’ mentality and cause employees to resist a beneficial change.
For example, a CEO can’t announce a new wellness initiative and expect employees to modify their habits. He or she has to emphasize the benefits of a healthy lifestyle, lead by example, and outline a host of tantalizing rewards to motivate employees. Remember that line managers and stakeholders play a critical role in fostering organizational change, so make sure they’re committed to your plan before launching a major initiative. Finally, be sure to stop at critical junctures to measure your team’s progress. Otherwise, you may lose people along the way and never reach your final destination.
How can executives create a future vision?
Employees will respond favorably to change if they know where they’re headed, and because most people are visual learners, use a model to communicate your vision in addition to words. Paint a picture of the future state and provide a roadmap with milestones leading to the desired goal, so employees can chart the company’s progress and stay focused, especially during a complex change that may take months. Knowing where you want to go also benefits leaders, because it helps them develop a strategy for achieving their vision. Finally, support employees during the journey by acknowledging each milestone achieved and continually reinforcing the benefits of the change.
What constitutes a successful strategy?
A successful change strategy includes these critical elements.
- Stakeholder involvement: Include key stakeholders during the planning phase so they embrace ideas, become advocates for change, and help push the company forward during the implementation phase.
- Quantifiable objectives: Define the specific objectives of the initiative along with a series of interim milestones, so employees can use the plan as a roadmap to chart their progress.
- Defined audiences: Identify groups of key influencers, such as line managers and union leaders, and use targeted messages and tailored benefits so they fully understand and endorse your plan.
- Targeted communications: A successful strategy should define the specific communication channels for reaching various audiences. Consider e-mail, blogs, webinars, online chat, and social media to invite an open dialogue about the proposed change.
How can executives author specific goals or metrics to measure interim progress?
Consider the steps that lead to the ultimate goal and how the change will look and feel to establish interim measures during the strategic planning process. For example, you’d expect to see an increase in visits to a new website when the company announces a transition to self-service benefits. Next, move to more sophisticated measures, like an increase in employee registrations and growth in online claims to chart your actual progress. Change is not a linear process, so employees may slip back or temporarily revert to old habits, but executives can persevere by reinforcing the need for change and providing additional motivation until the transformation is complete.
What are the final steps?
Continue to reward and recognize new behaviors when you reach the implementation phase, but don’t get lost in the minutia. Focus on the final goal and stick with the strategy. Use testimonials to cite examples of success and illuminate the path toward the new state by providing frequent updates and noting when employees pass important landmarks. You’ll know you’ve reached your final destination when the plan is no longer an idea and becomes an integral part of the organization’s culture.
Kimberlie England is a principal and the national practice leader of Communication and Change Management at Findley Davies. Reach her at (419) 327-4109 or firstname.lastname@example.org.
Projectization is increasingly embraced by companies to cope with the challenges of the competitive global environment such as tighter budgets, diminishing resources, aggressive time constraints and competition to improve efficiency. The short-term ventures allow companies to maximize precious resources and tools while responding quickly and efficiently to changing market conditions. But today’s burgeoning portfolios pose tactical and strategic challenges that can create an operational nightmare or, worse yet, produce a string of project failures that can derail an entire company.
“Managing multiple projects is a competitive necessity,” says Dr. Vish Hegde, associate professor of management for the College of Business and Economics at California State University, East Bay. “But unless executives provide direction so projects are prioritized and aligned with the company’s strategic and financial goals, they can create an operational mess and cause project managers to fail.”
Smart Business spoke with Hegde about the challenges of managing multiple projects and how executives can avert operational meltdown by providing guidance and considering multiple characteristics when organizing projects.
Why is multiple project management so challenging?
Occasionally a project is so large and complex it requires the undivided attention of a single manager. In many companies, it is not uncommon to see project managers have to simultaneously juggle as many as five to 13 mid-size projects without dropping the ball. Their mission is complicated by the fact that projects are constantly being added, changed, or removed in response to changing market conditions, which alters the dynamics of the portfolio and forces managers to cope with an inefficient workload or fight for limited resources. Executives need to consider several characteristics when grouping projects or assigning resources, and provide project managers with the tools to balance multiple priorities and make prudent decisions on the fly.
How should projects be grouped to create synergies?
Grouping projects randomly can create inefficiencies, so most companies evaluate tactical characteristics when organizing projects. Certainly managers should consider project duration and complexity as well as technical and functional similarities when grouping projects, but they also need to consider the objectives and goals of the project, time pressures, workflow and resource availability to optimize every possible synergy. It’s imperative that executives provide guidance so project managers can balance tactical needs with strategic considerations and optimize efficiencies by sharing common resources.
What should executives consider when assigning projects?
Realistically, project managers can’t handle too many simultaneous projects without affecting quality and efficiency. If they’re juggling too many ventures, project managers will spend most of their time transitioning and won’t have time to dive into detail, devise a plan and actually lead the project. In fact, they’ll be inclined to simply go with the flow, which is symptomatic of an over-leveraged project manager. Balance a project manager’s slate of assignments by considering the mix, types and phases of the various initiatives in addition to his or her capabilities, because a project manager needs a broad range of technical and non-technical skills and the ability to multi-task in order to master a complex portfolio.
How can resource allocation and planning create efficiencies?
Sometimes CIOs launch multiple projects without considering the availability of critical resources, so employees struggle to balance conflicting priorities as project managers haggle for their services. Consider projected completion dates and the number of projects in the queue when evaluating the availability of shared resources as well as the organization’s overall capacity to handle a large portfolio. Help project managers avoid conflict and optimize scarce resources by providing benchmarks or a decision template that spells out the company’s priorities and the best way to schedule and allocate shared resources in various situations.
How does resource scheduling fit in?
Team members have to refocus and get their bearings each time they switch assignments, which impacts productivity and may ultimately delay the project portfolio. Executives should consider these challenges when scheduling shared resources and provide training in time management and multitasking to enhance their basic competencies. It’s important to control costs by leveraging the cost of human capital, but, at some point, over-scheduling critical resources becomes counter-productive.
Should project managers consider project interdependencies?
Certainly executives want to maximize the savings from working on several interdependent projects and select ventures that maximize investments. To achieve this important objective, the CIO should provide guidelines to help project managers select interdependent projects from a bank of possibilities, since their priorities and schedules could change as projects are added or removed from the process. Project managers should evaluate several criteria when making their selections, including the project’s benefits, available resources and technical synergies.
Dr.Vish Hegde is an associate professor of management for the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-4912 or email@example.com.
More than 90 percent of American businesses are classified as small, but don’t under-estimate their power. Collectively, these enterprises employ more than half of all private sector workers, generate more than half our nonfarm gross domestic product and have created 64 percent of our economy’s net new jobs in the last 15 years.
In fact, the success of small business owners is so integral to the health of our overall economy that back in 1953 Congress created the U.S. Small Business Association (SBA) to serve as their personal advocate.
“The SBA offers owners a bounty of resources to help their small business grow,” says Anna Chung, senior vice president and SBA manager at Wilshire State Bank. “They not only help owners find funding, they’ll even help them write a business plan and navigate the lending process.”
Smart Business spoke with Chung about the opportunities to grow your small business through an SBA loan.
When should small business owners consider an SBA loan?
The SBA offers a number of financing programs to help small businesses grow. Established business owners usually apply for a 7(a) or a 504 loan. A 7(a) loan offers financial help for businesses in many different areas while a 504 loan provides long-term, fixed-rate financing to purchase major fixed assets for expansion or modernization. Although 504 loans can’t be used for operating capital, many owners use the funds to purchase a large building or second location, which helps free up money for expansion by allowing them to lease out the extra space. If you sign a large contract that requires purchasing additional inventory or equipment, call your banker right away so he or she can review your credit history and contract to see if you can finance the purchases with an SBA loan.
Do SBA loans offer better terms than other commercial loans?
An SBA loan is a standard commercial instrument that offers some very favorable terms. For example, the loans feature higher loan-to-value ratios, longer repayment periods and no balloon payments, yet still allow owners to partner with their local banker. Borrowers can purchase property by putting 10 percent down and pay back the loan over 25 years, which is better than most commercial mortgages. An SBA loan is ideal for growth as long as small business owners anticipate their future needs. Because if you wait too long to apply you could end up running out of cash, and owners need to show adequate working capital to qualify.
How does the SBA support banks in granting loans to small businesses?
SBA loans were designed to help small business owners who couldn’t qualify for a standard commercial loan, either because they have a smaller net worth or less working capital. So if an owner has access to other financing at reasonable terms he may not qualify for an SBA loan. The SBA guarantees up to 75 percent of the loan amount, which encourages a banker to lend, but the banker is responsible for meeting the SBA’s strict underwriting guidelines that are designed to mitigate risk.
How does the SBA qualification process differ from other commercial loans?
Owners still need to furnish a business plan, resume and copies of tax returns and financial statements, but these guidelines differ from standard commercial loans.
- Collateral. The loan must be collateralized if the borrower has collateral to offer, because the SBA requires bankers to mitigate risk whenever possible.
- Ownership. If the borrower owns several companies or controls several affiliates, lenders must review tax returns for those enterprises in addition to the owner’s primary concern.
- Down payment. Lenders must determine the source of a borrower’s down payment, even if the funds have been deposited into an escrow account. So owners need to provide documentation tracing the origin of a down payment.
- Tax returns. Owners must supply three years’ tax returns instead of two to qualify for an SBA loan.
- Criminal records and green cards. If a borrower has an arrest or conviction record the loan must be submitted to the SBA for approval. And an applicant’s green card must be validated by the INS before his or her loan is approved.
- Processing time. Most SBA loans are underwritten and approved in 30 to 45 days. But if the owner plans to purchase property, which requires an appraisal or an environmental impact report, the underwriting process may take 60 to 90 days.
Does the SBA offer other support to small business owners?
The SBA provides Small Business Development Centers (SBDCs) which offer owners free and confidential assistance with financial, marketing, production, organization, engineering and technical problems and feasibility studies. Many centers partner with local universities and engage local CPAs, retired executives and consultants to advise small business owners. In fact, the staff can even recommend a banker and help an owner develop a business plan or create a sales forecast to qualify for an SBA loan. The SBA also provides mentorships and free counseling services through a nonprofit organization called SCORE. SCORE has more than 389 chapters and 11,000 volunteers serving urban, suburban and rural areas. Keep in mind that the SBA also offers specialized assistance to women and veterans, so why not unleash the power of your small business advocate by visiting a local office.
Anna Chung is the senior vice president and SBA manager at Wilshire State Bank. Reach her at firstname.lastname@example.org or (213) 637-9742.