Ideally, the moment you take the reins of a business, you should already know how you are going to exit. Within three to five years prior to your exit, you should be well into your exit-planning process.
According to Joel J. Guth, an advisor in Smith Barney’s Citigroup Family Office, the five most common ways owners exit their businesses are to transfer to family members, sell to key employees, sell to co-owners, sell to a third party or file an IPO.
In this and the next several issues of Smart Business, Guth will discuss each option in more detail, noting the advantages and disadvantages of each. This month, the topic is transferring ownership of your company to a family member.
When is it appropriate to transfer a company to a family member?
For a successful transfer, three conditions must exist.
One, a family member must have a desire to own and run the business, rather than the owner forcing the business on his/her family. You need to have a very open discussion with the family member and understand if the business is his/her true passion.
Two, the family member must have the needed skill sets to own and run the business. This is very difficult for many owners to determine, especially if they are evaluating their children. We often encourage the owner to discuss his/her child’s strengths and weaknesses with key employees inside the business as well as with outside professional advisors. You need a very impartial appraisal of your successor.
The third condition is the right family dynamics need to exist. If the owner has multiple family members in the business, he/she will need to be able to pick a successor without destroying the family relationship. If you have three children working in the business, how will the two not picked to be CEO react when they are informed they will work for their sibling? Many times the family dynamics are the hardest part of the succession plan.
What are the advantages of selling the company to a family member?
First of all, you are transferring ownership of the company to a known entity. You can help ensure continuation of the business’s culture and mission.
The second advantage is that it allows the owner to remain involved in the business. If your child takes over, you can probably still come to the office every day. (Whether that’s good or bad for the business is a separate discussion.)
The third advantage is that you’re providing wealth and income for your children and maybe even future generations if the transition is successful.
What are the disadvantages?
One is that you are probably going to have very little cash up front. Very few children have the means to write a big check up front to buy the company. Many times, families are using a loan from mom and dad to fund the purchase of the business. The children then use the proceeds from the business to pay back the loan. In this scenario, the risk is that the owner’s financial well-being is still tied to the success or failure of the business. If the business hits hard times, mom and dad could still be very much impacted financially.
Another disadvantage is that the business may still require substantial involvement from the owner. The children may still look to mom or dad to make the decisions. This reluctance to assume control may have long-term effects on the management of the business. Key employees may decide they do not respect the new CEO and continue to approach mom and dad with issues.
As discussed above, transferring control to one or more children may cause resentment and jealousy among the family. Everyone has a different opinion of fair and equal. You can execute a successful transfer of ownership and control, yet it may still damage or destroy family relationships.
A final disadvantage is some owners realize they can reap more cash (and experience less risk) through a sale to a third party. This is especially true as deal terms become more favorable to sellers.
How does an owner go about transferring company ownership to a family member?
The first step is to get an official valuation of the business. If your goal is to sell it to a third party, you want the highest possible valuation. If your goal is to transfer the business to your children, you may be looking for the lowest defensible valuation.
Normally, parents begin to gift shares of the company to the son or daughter. Depending on the size of the gift, the gifts may be tax free. Or, if your child has the money or the ability to get a loan, he/she may purchase the stock outright. Many times the worst scenario is to leave the company to your offspring at death.
Citigroup Family Office is a business of Citigroup Inc., and it provides clients with access to a broad array of bank and nonbank products and services through various subsidiaries of Citigroup, Inc. Citi-group Family Office is not registered as a broker-dealer nor as an investment advisor. Brokerage services and/or investment advice are available to Citigroup Family Office clients through Citigroup Global Markets Inc., member SIPC.
Securities are offered through Smith Barney, a division and service mark of Citigroup Global Markets Inc. Citigroup Global Markets Inc. and Citibank are affiliated companies under the common control of Citigroup Inc.
JOEL J. GUTH is a registered representative of Smith Barney, a division of Citigroup Global Markets Inc. Reach him at (866) 464-2750.
An election and Gov. Arnold Schwarzenegger’s continuing efforts to promote business development in California resulted in another year of modest legislative change for employers here, according to Thomas H. Reilly, a partner in the Newport Beach office of Newmeyer & Dillion LLP.
“The governor vetoed several bills that would have had an impact on employers, including bills that would have established a health care system funded by employer contributions,” Reilly says. Other vetoed bills would have increased penalties for gender-based pay discrimination, provided unemployment compensation to employees who are locked out during labor disputes, and more.
“The governor has been a check-and-balance on a labor-friendly legislature, and that’s been helpful to employers,” Reilly says. “In his recent state of the state address, however, the governor proposed a universal health care system funded partially by employer contributions. Employers may not be as fortunate in the current legislative session.”
Smart Business asked Reilly to sum up the four new pieces of California legislation already in the books.
What is Assembly Bill (A.B.) 1835?
A.B 1835 increased the state minimum wage. On Jan. 1, 2007, the minimum wage in California increased from $6.75 per hour to $7.50 per hour. Effective Jan. 1, 2008, the minimum wage in California will again increase from $7.50 per hour to $8.00 per hour. Employers are required to post amended wage orders reflecting these changes.
Moreover, as a result of these changes, the minimum salary that may be paid to exempt employees (executive, administrative or professional) increased to $31,200 per year ($2,600 per month) on Jan. 1, 2007, and will increase further to $33,280 per year ($2,773.33 per month) on Jan. 1, 2008.
In a limited number of industries and occupations employing unskilled workers, the minimum wage hike may have a significant impact. In most industries, however, employers have long been unable to pay minimum wages and attract or retain competent employees. The bill will not have a significant impact on most California employers, who were already paying substantially more than the minimum wage.
What is A.B. 2095?
This bill clarifies that California’s mandated sexual harassment training requirements, which became effective in 2005, apply only to supervisors working in California. California law does not require employers to train supervisors working outside of the state.
Notwithstanding the clarification in A.B. 2095, we recommend that employers train all supervisors in preventing sexual harassment, regardless of their work location. Federal law and other states’ discrimination laws also prohibit sexual harassment. If an employer chooses not to train supervisors in another state and a harassment claim arises in that state, the claimant’s attorney will use the absence of training to demonstrate the employer’s indifference toward protecting its employees.
This bill also amends Labor Code section 204 to allow overtime paid in the next consecutive pay period to be itemized on that period’s pay stub, provided that the pay stub lists the dates of the pay period for which the employer is correcting its initial report of hours worked.
What about the two other pieces of legislation?
A.B. 1806 requires that the California Department of Fair Employment and Housing post its employment discrimination posters and sexual harassment information sheets online. Employers can download these required posters and information sheets at the department’s Web site, www.dfeh.ca.gov.
Senate Bill (S.B.) 144 provides comprehensive regulation of health and sanitation standards at retail food facilities. S.B. 144 will have a substantial impact on employers in the retail food service industry, but not on other employers.
Finally, don’t California employers have to remove Social Security numbers from pay stubs now?
Not yet. S.B. 101, which passed in 2005, requires that employers remove Social Security numbers from pay stubs by Jan. 1, 2008. In their place, employers may use the last four digits of the employee’s Social Security number or an identification number other than the employee’s Social Security number. Employers should implement changes necessary to comply with this law during 2007.
S.B. 101 was intended to combat identity theft and allows substantial penalties against employers that continue to use Social Security numbers on pay stubs after Jan. 1, 2008. Employees who are damaged from a ‘knowing and intentional’ failure to comply can recover their actual damages or penalties of up to $4,000, whichever is greater, plus attorneys’ fees.
THOMAS H. REILLY is a partner in the Newport Beach office of Newmeyer & Dillion LLP. Reach him at firstname.lastname@example.org or (949) 854-7000.
Recent amendments to federal court rules will impact how businesses handle electronically stored information, which includes e-mail and other documents that reside on corporate computers and servers. The new rules are designed to put electronically stored information (ESI) on the same legal footing as traditional paper documents.
“The rules apply to every company that may become involved in litigation — essentially, any company that transacts business,” says Chris Griesmeyer, a partner at Levenfeld Pearlstein LLC. “However, mid-sized companies are likely to find compliance with the new rules particularly troublesome and should take steps to manage their ESI before a lawsuit even begins.”
Smart Business asked Griesmeyer to discuss the new rules and how company officers should react to them.
What kind of burdens are imposed by a request to produce electronically-stored information during a lawsuit?
The problem is one of volume. A company with just 50 employees can generate more than 300,000 e-mail messages a year. Consequently, electronic information is often measured in ‘terabytes,’ which is the equivalent of 500 million typewritten pages. A company asked to print or photocopy a single terabyte of information would need more than 1,000 pick-up trucks to haul it.
Moreover, because electronic information is extremely cheap to store, companies tend to stockpile mass quantities of outdated information. Because of this volume and because highly trained forensic experts are needed to manage the e-discovery process, it is not unreasonable for a company to spend hundreds of thousands of dollars simply navigating the pre-trial discovery process.
Is there any way to mitigate the financial burdens imposed by e-discovery?
The new rules allow a party to object to an e-discovery request because obtaining the information would be unduly burdensome or cost-prohibitive. However, if you object to an e-discovery request, be prepared to produce your chief technology officer and IT consultants for their depositions. And if their deposition testimony fails to prove that the burden or expense is sufficiently ‘undue,’ then be prepared to produce the information.
At the same time, a court has the power to limit discovery if there is a way to obtain the electronic information that is more convenient, less burdensome or less expensive. The new rules encourage parties and the court to discuss these issues before a trial begins.
What do the new rules say about privileged documents in the e-discovery context?
If a party produces a document that is protected under the attorney-client privilege or the attorney-work product doctrine, then the protection is typically waived and the document becomes fair game. But if a privileged document is inadvertently produced, the new rules provide an automatic ‘claw-back’ mechanism. If a party accidentally produces a privileged document and notifies the recipient, the document must then be returned, sequestered or destroyed until the court resolves the issue of privilege. The same claw-back mechanism is also available to nonlitigants responding to a subpoena.
The new rules also say courts may not impose sanctions on a party for failing to produce ESI that was lost as a result of the ‘routine, good-faith operation’ of a computer system. The catch is that you cannot exploit the routine operation of a computer system in order to thwart your discovery obligations.
In light of these new rules, what steps do you recommend corporate officers to take?
First, companies should establish formal policies to routinely purge and destroy ESI that is no longer needed. Any retention and destruction policy should be individually tailored to balance operational requirements, IT infrastructure, regulatory and compliance responsibilities, and litigation requirements.
Second, make sure your employees understand and adhere to the policy. There is a famous case in which the company’s policy was to recycle backup tapes every 45 days. If the company had simply followed its own policy, there never would have been a discovery dispute. But, for whatever reason, its employees failed to recycle the tapes. As a result, the company was asked to produce 93 backup tapes, which would take six months to review and produce at an estimated cost of $6.2 million. That’s an expensive lesson.
Finally, once you become involved in litigation, it’s really important to retain experts to make sure you’re getting complete electronic information from the other side, as well as managing your own ESI production. Even the best lawyer is not as good as a forensic expert when it comes to obtaining, analyzing and reconstructing electronically stored information. The forensic consultant will know how to identify deleted documents, missing e-mail messages and crucial metadata.
CHRIS GRIESMEYER is a partner and vice chair of the Litigation Practice Group at Levenfeld Pearlstein LLC. Reach him at (312) 476-7574 or email@example.com.
If there is one thing about computers that corporate officers and directors must understand, it’s this:
Information security is no longer a single-product solution or policy document. It is a system — and that system is only as strong as the weakest link. The days of placing a firewall at the ingress of your network and being able to forget about security are gone. “When a breach occurs, a lack of security becomes very evident to corporate officers,” says Jeff Foltz, senior vice president of information access security, data security and business continuity management for FirstMerit Bank headquartered in Akron. “Even companies that do it right can still get breached, and they can lose millions of dollars. The companies that don’t do it right or fail to implement strong security countermeasures can face various state and government fines as well as legal fees.”
Smart Business asked Foltz how a company can make its computer system more secure.
What kind of companies should be most concerned about Internet Information security?
Any company that is using anything that connects with an Internet browser or exchanges data over the Internet, right down to the PC level, including PDAs, Blackberrys, Palm Pilots and any other medium that allows easy exchange of data.
Every industry has a very specific target audience that people would like to hack into or compromise. For instance, a virus that will delete all JPEG images wouldn’t have a significant impact on a bank’s operations, but it could cause a lot of damage to a graphic design firm. So you have to inventory your company’s critical assets — including each type of data element like spreadsheets, general ledgers and formulas — and evaluate different solutions.
Typically, what are the chances that a virus or worm from the Internet can invade a corporate computer system?
If you have one of the major anti-virus programs like those made by Symantec and Maxi McAfee — and you’re staying up to date with your virus definitions — you’re reasonably assured that your systems aren’t going to be compromised by a rampant virus.
The minimum that any computer system needs is a firewall, an anti-virus program and spyware or malware scanners.
But because layers provide the best protection, you shouldn’t rely on one solution. For instance, at the front door where your firewalls are, you should have an anti-virus program from one vendor that scans everything that comes into the system. At the server or desktop level, you need to have additional virus protection from a different vendor.
When you deploy a defense-in-depth strategy, you should also analyze costs. You don’t want the cost of solutions to exceed your level of protection. This can become a fine balancing act.
What are security patches, and what is patch management?
Patches are supplementary software updates to security operating systems and firmware software that identify and correct new or potentially new code vulnerabilities, or protect against new viruses, worms or malware. Updates come from vendors in the form of e-mail notifications and downloads.
Patch management pertains to measured, layered security and continual updating of all IT infrastructure including PCs, servers, firewalls, routers and switches. It consists of protecting your entire IT infrastructure from harm, and being timely is super-critical because the time frame has shortened. You can’t wait a month anymore to patch critical vulnerabilities on all systems.
Are ‘business secrets’ — and other information stored electronically — safer than they were 20 years ago? Why or why not?
I would say no. Twenty years ago, a majority of information was fax or microfiche so you had to physically steal the media from inside a company. But today, with laptops, the availability of wireless hot spots and portable USB flash drives, access to critical data and information is much easier.
Companies must take measures to protect themselves and to conduct due diligence with companies that they’re doing business with — especially financial institutions. If you are outsourcing, you should ask what the other company’s security policies and programs are, and they should include biannual security assessments by an unbiased third party.
Where can companies get information on security issues and possible solutions?
Plenty of background information is available, like Secure Computing magazine. Using Google as a search tool, I read product comparisons and research vendors on the Web. Information security symposia — which include topical discussions of threat vectors and ways to minimize those risks — are common in the Cleveland area.
JEFF FOLTZ is senior vice president of information access security, data security and business continuity management for FirstMerit Bank in Cleveland. Reach him at (330) 996-6638 or firstname.lastname@example.org.
By partaking in a cost segregation study, your company can recognize significant tax savings in real, permanent dollars. Although the overall concepts have existed for some time, certain court cases and some rules simplification have made cost segregation increasingly popular. “A large percentage of the companies we meet with move forward with a cost segregation,” says Peter A. Bellini, CPA, a principal at Skoda, Minotti & Co., Cleveland-based CPAs, business and financial advisers.
Smart Business talked to Bellini about how cost segregation identifies, segregates and reclassifies the physical assets of your business that qualify for shorter depreciable tax lives.
What is cost segregation?
Cost segregation is an IRS-approved method of reclassifying components and improvements of a commercial building from real estate to personal property. The process allows the assets to be depreciated on a 5-, 7- or 15-year schedule instead of the traditional 27.5- or 39-year depreciation schedule of real property. The results will greatly reduce a company’s taxable income and increase its cash flow.
IRS rulings over the past several years and administrative changes have allowed taxpayers to take advantage of these previously understated depreciation expenses on property already in service by utilizing a change in accounting method that no longer requires the need to amend tax returns. New construction, buildings purchased in the current year, or any building placed in service after 1986 are eligible. Substantially large lease-hold improvements are also eligible.
What does a cost segregation study do, and how can it help a business?
Cost segregation uses an engineering-based study and analyzes construction documents, blueprints, invoices and other relevant information to determine which components of the facility can be depreciated over a shorter time period.
As instructed by the IRS Code, commercial real property must be depreciated over 39 years. Many of the components can be classified as personal property and depreciated over five, seven or — in the case of land improvements — 15 years. By depreciating personal property and land improvements over shorter lives, a company is able to recognize significant deductions and tax savings on its current and future tax returns.
What types of assets can be reclassified?
The types of items that can be reclassified to a shorter life include: site preparation, demolition, certain electrical systems, doors, windows, HVAC, ceilings, carpet, certain types of millwork, cabinetry, certain plumbing, special tooling for production lines, and even generators.
When do cost segregations make the most sense?
Cost segregation studies are applicable for any building placed in service after 1986. The starting threshold for a study to make sense economically begins around $500,000 in building and improvement costs. For buildouts and lease-hold improvements, that threshold can be materially lower. However, for practical purposes, buildings placed in service after 1995 will yield the greatest impact after taking into account several factors, primarily the time value of money. In addition, if a building was placed in service in 2002, 2003 or 2004, there are special bonus depreciation rules in effect that can compound your tax savings.
How can a cost segregation study increase cash flow?
Whether it is a current-year purchase or an existing building, the accelerated deductions reduce tax liabilities, thus increasing cash flow that can be used to help grow your business in other areas. Your tax adviser should review the study and deductions yielded in order to best use the benefits as part of overall tax planning.
Depending on the tax bracket of the business or individual, many companies have seen savings of 10 to 20 times the total cost of having the study done. In some extreme cases or with larger companies, that multiple has been over 60 times.
What is needed to perform a cost segregation?
It’s real easy to get started, because all you need for an initial analysis is a description of the building and a copy of the depreciation schedules. If it makes sense to move forward, a site visit, blueprints and copies of construction documentation are also required.
Is there any danger of the cost segregation rules being changed in the future?
There isn’t anything on the horizon that would change the cost-segregation process, because it’s not contained in one specific law. It’s a combination of various areas of the IRS Code melded together to arrive at an overall tax benefit for owners of real estate.
PETER A. BELLINI, CPA, is a principal at Skoda, Minotti & Co. Reach him at (440) 449-6800 or email@example.com.
What you might need, says Blake Sellers, president and CEO of Avvantica Consulting, LLC, is business-intelligence-for-decision-support (BI-for-DS) capability, which will allow easier access and analysis of existing business data.
“When managed properly, a business intelligence implementation can deliver continuous benefits through a series of relatively short projects,” Sellers says. “With this approach, the company is better able to manage the risk of an individual project while working to obtain real business benefits in a relatively short period of time.”
Smart Business asked Sellers to further describe the concept of BI for DS.
What is business intelligence (BI)?
It goes by many names, depending on how it’s used. Some of the names are data warehousing, data marts, executive information systems (EIS), executive dashboards, multi-dimensional analysis and reporting, corporate performance management (CPM), business performance management (BPM), decision support systems, and online analytical processing (OLAP).
How does business intelligence differ from traditional information systems reporting?
Most business applications are designed to capture and/or manage transactions. Examples might include entering a customer order, receiving material against a purchase order, or recording a journal entry. Some level of reporting is usually available from most transaction systems, but they generally are not that useful for decision-making especially strategic decision-making.
On the other hand, business intelligence develops and displays information that can be used to make better management decisions. Two things are unique about business intelligence. One is that you are bringing multiple ‘views’ of your data together in the same place. The other is that the database itself is designed for query and analysis, which is difficult to do in typical transaction systems.
Why are standard reporting systems insufficient?
First, transaction management systems and their associated databases are typically designed and then optimized to support many simultaneous users updating the database. A key design objective of standard reporting/transaction management systems is sub-second response time for a large number of users. Unfortunately, databases designed with that objective are not optimal for analysis. In some cases, attempting to use a transaction system for substantial analysis and reporting can bring the system to its knees. So you need a database structure that’s designed for analysis and reporting.
Second, typical business applications only have access to a limited set of data files. With a business intelligence application, you can combine information from multiple data sources, which allows for multi-dimensional analysis ‘at the speed of thought.’
Can you provide an example?
Say a company needs improved sales reporting. Key data might come from five separate systems: an order management system, a payroll system, a customer relationship management (CRM) system, a planning and budgeting system, and the general ledger.
For this particular analysis and reporting need, management wants to understand things like sales year-to-date, sales versus prior years, sales versus goals, sales trending, commission calculations, what products are selling, forecast accuracy, and much more. A BI-for-DS system represents an effective approach for bringing all of this information together.
What are the key components of a business intelligence application?
Start with various source databases. Extract the source data from the original systems, transform it, and load it into the BI databases. Part of this extract/transform/load (or ETL) process might be aggregating daily transaction data into weekly or monthly totals, or mapping unique codes from separate systems that actually mean the same thing.
The results of the ETLs are first stored in a relational database, because certain reporting may not require multi-dimensional access.
Next, create the multi-dimensional database which is often referred to as a ‘cube.’ This is typically the key element of a business intelligence application.
Finally, design a user interface to extract information from the cube that typically includes reports, graphs, gauges, tables, query/analysis and so on.
What’s the best way for a company to get started?
Start by identifying and building a specific prototype or ‘proof-of-concept’ application. This will allow the organization to get started with minimal risk, and will also help to build momentum and support for the overall concept of BI for DS.
In parallel, we recommend that companies develop a high-level strategy for business intelligence. For a medium-sized company this can generally be done fairly quickly; six to eight weeks is typical. The strategy helps a company to define an overall technical architecture for BI, identify its priorities, determine the level of resources required, and estimate the overall time frames that are likely to be involved.
BLAKE SELLERS is president and CEO of Avvantica Consulting, LLC. Reach him at (214) 379-7920 or BSellers@AvvanticaConsulting.com.
“Voice over Internet Protocol has been around a couple of years,” says John Curry, owner of Curry IP Solutions. “If you are happy with your existing telephone equipment, you need an ATA (analog telephone adapter) that converts the signals. Or you can upgrade to an IP PBX or an IP telephone, neither of which requires the ATA device.”
Smart Business discussed current and future VoIP technology with Curry.
How does VoIP operate?
If I were to use an IP telephone, I would plug it directly into the high-speed broadband service and I would plug my computer into the telephone. That will deliver a quality of service that prioritizes the voice in front of your data connection.
Depending on what signal your VoIP service provider is using, the voice service will take 64 kb or 9 kb of space per live conversation. But by having the telephone as the first preference to the broadband connection, you will have excellent quality of service. Most people don’t notice any change in the quality of voice transmissions, due to bandwidth used by the data. If you do use large amounts of data, you may want to consider a separate dedicated broadband connection or Ethernet service.
What are some advantages of VoIP?
You can lower your costs by having your broadband connection provide your voice services. If you shop around, you can get unlimited nationwide calling on business packages that equal the basic packages from local phone companies. It can come with every feature imaginable, including a find-me-follow-me feature, which will ring your desk phone, then ring your cell phone past the caller ID, so you can see if you want to answer the call. It can then pass the call to your voicemail box, and it will e-mail the call to you in a wave file.
Mobile commuters or telecommuters can unplug their telephone from their desks and plug it into any broadband connection, including their home or hotel connection, and whoever dials them will find them.
It’s a wonderful product for the virtual office. For example, if you have sales people working at distant locations, you can view their activity in real time if you want.
VoIP is an excellent training tool as well. I could, in theory, have a person working in Philadelphia or South Florida and provide ‘soft coaching’ on the line during a sales call, so that whomever they’re speaking to doesn’t hear me.
Last year, our company realized that we didn’t need a building, so we moved our equipment to a carrier hotel and everyone works out of their homes. We’ve embraced the instant messenger, e-mail and VoIP worlds. It’s all basically the same thing.
What about emergency assistance?
Emergency assistance (9-1-1) is currently available, but limited. We ask for the local phone number of the police that you would typically call from your area and hardcode your phone to dial that number. The pitfall is that if you move the phone to another locale, you have to go online and change that emergency number. Another option would bundle a fax line into your VoIP service, so if 911 was dialed from your physical location it would be routed out your fax line.
Newer technology will triangulate the location of the 911 caller similar to our cell phones but that technology is in beta testing and is extremely expensive now.
Some reports say that security and encryption are a problem because you’re running through the Internet. Is this true?
A Voice VPN solution provides secure voice for enterprise VoIP networks by applying IPSec encryption to the digitized voice stream. Our company, for instance, encrypts our voice in and out of our soft switch.
Remember, though, that anything can be hacked even your local phone, which is easily available in your basement or right outside your home.
Is VoIP for everyone?
No. If you wish to remain in the 19th century, this technology not for you. If you want to take advantage of a robust telecommunications service and improve productivity, it’s for you.
It’s evolving as we speak: the quality, the features available, the equipment. The future is bright.
“The legal liability involved in electronic communication is a massive issue,” says attorney Dan Albers, a partner in the Intellectual Property and Litigation departments at Barnes & Thornburg LLP.
“Electronic communication tends to be more informal than written letters. Before the electronic age, you sat down, dictated a letter, edited it, really thought about it, and then sent it. Now, in the age of instant communication, people write things they don’t mean.”
E-mail is now the most common form of business communication. Smart Business asked Albers about some of the legal problems with all those e-mail messages flying through cyberspace. Next month, we ask about libel, copyright infringement and maintaining trade secrets.
What potential legal issues are involved with electronic communications like e-mail messages?
One substantive issue is defamation, like libel or slander, depending on who the message is published to. Another is dissemination of private facts. Another relates to privacy concerns. Those are issues that need to be addressed from time to time by companies of any size.
Other issues can deal with how you keep and what you do with electronic communications for the purpose of ongoing litigation. If you think you’ll be involved in litigation or it’s likely that you’ll be involved in litigation about a particular topic, you need to save electronic communications.
An example is the antitrust case involving Microsoft. Its own e-mails relating to antitrust issues were called into evidence. Ultimately, the company was hung out to dry based on a series of e-mails from its top executive officers including Bill Gates. The officers made comments about pricing and what they were going to do to their competitors.
Then there was the Sunbeam case in Florida where the company had not maintained its electronic communications even though officers knew there was going to be litigation. The judge directed the jury to find liability. There was a $500 million verdict and then a $1.5 billion punitive award, in part because the company had not kept its electronic discovery and the jury was drawing adverse inferences from that failure.
Are e-mails and other electronic communications public record?
It depends on how you define public record. Are they available to the public? Typically not. Whether they become public record depends on how the company uses them and views them within a business. Typically, if you send something to another person in your organization, you don’t expect that it will then be communicated to the public. On the other hand, you would expect that it would be subject to review by anyone who works within the company, particularly your supervisors.
Companies need to have specific guidelines in place as to what the public access is. Generally, if you write something on a company computer, the company has the right to look at it. If the employee is writing bad things about his supervisor or he’s sending off personal e-mails and getting involved in illicit things through his work computer, the employer has the right to not only access those communications but then to use them in actions against the employee. But are the e-mails part of the public record? Probably not.
How common is it for e-mails and other electronic communications to be subpoenaed into a court of law?
Typically, if Parties A and B are involved in a lawsuit, the court will not subpoena their documents because they’re already in the case. The lawyers will simply ask their opponents for electronic communications. It’s a burden, it’s expensive and it’s difficult, so parameters are usually negotiated. How far back? Who? What subjects?
Subpoenas are for third-party sources of documents. For instance, if a vendor/customer relationship is relevant to a lawsuit, the lawyer may go to the vendor and ask for e-mails to or from the customer.
Though subpoenas are very common, courts tend to be more protective of the third party because it’s not involved in the litigation. Strict limits are set on what communication must be produced. The judge may even ask the requesting party to bear all or part of the cost of executing the subpoena.
So remember that when your company is subpoenaed, the process is subject to negotiation. If collection will be terribly burdensome, you need to document it through your IT person. Most courts will tell the lawyers that their clients must pay at least part of the cost if they want the documents bad enough.
DAN ALBERS is a partner in the Intellectual Property and Litigation departments at Barnes & Thornburg LLP. Reach him at (312) 214-8311 or firstname.lastname@example.org.
Are they asking it of your company?
“Client service really crosses over all corporate disciplines,” says Mike Trabert, CPA, CVA and a partner at Skoda, Minotti & Co. “With effective client-focused cultures, the goal should be to exceed the client expectations, not just meet them.”
It would be easy to say that a client-focused culture might lean heavily on technology, teamwork, processes and customer account planning. But that’s not putting the proper emphasis on the people aspect: from upper managers, who define the culture; to middle managers, who administer the culture; to customer-service employees, who are on the front lines and dealing with customers on a regular basis.
“All the team members are responsible for breathing life into a culture,” says Trabert.
Smart Business asked him to list some ways a business can attain a truly client-focused culture.
What are the warning signs of an ineffective client-focused culture?
Walt Disney once observed, ‘Just when everyone is saying how great we are is when we’re the most vulnerable.’ It’s a reminder that a client-focused culture must be both maintained and improved.
If clients don’t perceive additional value from the services you provide, they tend to deem your services as a commodity and would be more apt to question fees. In addition, not providing client service training, both formal and on the job, indicates that there’s not enough focus on the culture.
Ultimately, the loss of clients would indicate that you’re not providing the services the client deserves.
What are some of the factors that separate effective client-focused cultures from ineffective ones?
Ideally, you want to over-promise and then over-deliver on the over-promise.
An effective culture needs to be strategic. A lot of small things can be done in the area of client service, but they should be part of an overall plan. The focus should be on adding value to the client. It’s also important that there be a training and mentoring program so that all clients receive the same high level of service.
In any aspect of a business, you have to pull yourselves out of the day-to-day operation and think more strategically. Effective programs also focus on internal service as well as external.
How can a company go about creating an effective client-focused culture?
First, the programs have to be strategic in nature, and there has to be a buy-in from all team members. Then, a vision has to be established. Next, determine the approach to achieve the client service mission. Finally, incorporate specific strategic goals into the approach to achieve the mission and the vision.
The bar should be set high. Companies face not only direct competition but also indirect competition. Your customers know what superior customer service is through their personal experiences with companies like Disney, Ritz-Carlton and Nordstrom.
Who plays the most important role in making a client-focused culture effective: upper managers, mid-level managers or customer-service employees?
Initially, upper management needs to determine the client focus culture, but once that’s established, all the team members are responsible for breathing life into that culture.
For example, in our business the partners might decide clients would be better served by using an integrated client relationship management (CRM) system whereby all activities relating to the client are entered into the system so that anyone in the firm associated with the client has current knowledge of what’s going on. All team members play an important role by recording the activity as it occurs, and the technology department sees that the system continues to operate smoothly. Everybody’s involved.
With a larger organization, it would be more challenging to communicate all client interactions, phone calls, e-mails and meetings, etc. without a centrally managed database that all team members are using.
How do you deal with errors?
Everybody makes mistakes. Nobody’s perfect.
The ideal is to have client service recovery procedures, which are different for individual businesses.
The main thing is that everybody should know how to recover from a situation that’s in their part of the client interaction -- to make it right as soon as they can. It’s one of the most overlooked parts of any training program.
How do you determine whether your new corporate culture is, in fact, becoming more client-focused?
If you’re doing it right, you’re going to hear more ‘wows’ or heartfelt thank-yous from your clients. Referrals will continue to be strong and even increase.
The best cultures also have tools in place to measure the results, and they have accountability.
MIKE TRABERT, CPA, CVA, is a partner at Skoda, Minotti & Co. Reach him at (440) 449-6800 or email@example.com.
Earlier this year, the foundation and its executive director, Andy Danner, were honored by Mount St. Joseph College as “Co-op Employer of the Year.”
“That tells me that we’re doing something right with these kids,” says Danner. “I’ve told them we’ve keep taking the students as long as they have them. It’s worked out really well for us.”
Smart Business talked with Danner about how to successfully integrate a cooperative education (co-op) program into a corporate setting.
Just for the record, define ‘co-op students.’
To our organization, they are local college or university students who need an internship or co-op to fulfill a course requirement. After spending a semester or longer with us, they earn class credit. Sometimes, though, they’re strictly volunteers, not earning class credit, working for experience or to build a resume.
None of the positions at our organization are paid, and there’s really no structure to when a co-op begins and ends. Naturally, a lot of them occur because of school semesters. We like them to stay a full year so they can see all of our events in action, to make it worth their while. The only thing we ask from them is a minimum of 15 hours of time per week. That boils down to two days a week that gets them involved in our day-to-day operations.
Why hire co-op students?
As a nonprofit, we only have so many funds to allocate toward staff. Therefore, we rely upon local college students to help us in areas that our staff can’t cover.
We reap the benefits of bringing in some talent that can enhance our events and day-to-day operations in every aspect. In return, they receive hands-on experience.
Anthony Munoz is a pretty recognizable name here in the area. With that comes some pretty significant connections with our partners and stakeholders, and we can put the co-ops in a position to appear and interact with those people.
We offer a lot of fringe benefits, so to speak, beginning with our relationship with the top companies in the area. We try to treat the co-ops and interns to lunch every once in a while, take them to a game or two. It doesn’t replace paying them, but it’s a small way to say thank you.
What are some typical assignments?
A lot of the jobs are administrative. For example, we just ran a football academy with 500 kids, and one of my co-ops made sure that 500 registrations were processed, followed up with the kids and their parents, made sure the equipment was ordered, food vendors were in line, t-shirts and prizes ordered. In short, everything from A to Z.
We’ve also brought on some graphic design students. To really put out professional and first-class ads and marketing pieces, it benefits us to have co-ops who specialize in that area.
What should employers look for in working with a college to hire co-op students?
Interviewing all of our interns and co-ops is an important part of the process. We want them to understand, as much as possible, what our organization is trying to accomplish. In turn, we want to meet them, to hear what their goals are, and to know what they’re looking to achieve.
We’ve had experiences with some kids who think it’s going to be all fun and games. Those experiences haven’t worked out. But kids who understand that there’s work to do here -- those are successful.
What is the employer’s responsibility in hiring co-ops?
Our corporate partners who see our program working and see the co-ops making contributions often ask for references. But I tell them that they have to devote some time to organizing the workload. You want these kids, but when they come in, you want to give them some responsibilities. You don’t want to waste their time. It’s definitely a commitment.
Our organization takes great pride in making sure these kids have a good experience and that they learn. We really want to prepare them for life after school.
Also, in almost every case, we have some sort of follow-up review that we have to develop and submit. Mount St. Joe’s has an actual form that we have to fill out and grade the student in certain areas. Other schools ask for a letter of recommendation. We also have one-on-one exit interviews that are important.
On a personal basis, what’s most rewarding?
Before I moved to Cincinnati, I was a head baseball coach at a small college in Illinois. One of the great things about coaching is that you get to teach kids something that you enjoy. Although I don’t do that now, the internship program is the closest thing to it. When they get excited about what they’re doing, I get excited. It’s one of the better parts of my job.
ANDY DANNER is executive director of the Anthony Munoz Foundation, named the 2006 Co-op Employer of the Year by the College of Mount St. Joseph. Reach Danner at (513) 772-4900. Reach the College of Mount St. Joseph Cooperative Education Program at (513) 244-4888 or (800) 654-9314.