Mark Miller

Tuesday, 25 January 2005 11:18

The OCRC is knocking at the door

An allegation that an employee believes he or she has been discriminated against by an employer presents a number of serious and complicated questions.

When the employee feels compelled to take those allegations to a governmental agency, an additional set of questions arises. So what do you do when a discrimination charge arrives in the mail?

Jane is the human resources manager for Mid-Size Corp. She arrives at the office one Monday morning and finds a notice from the Ohio Civil Rights Commission (OCRC) in the mail, informing her that Susie has filed a charge of discrimination against Paul, her boss. Susie alleges that Paul discriminated against her based on her pregnancy by failing to promote her to manager.

One of the first decisions Jane must make is whether to retain an attorney to handle the charge. Mid-Size is not required to retain an attorney to represent it before the OCRC or the Equal Employment Opportunity Commission (EEOC).

While not required, it should be carefully considered. Many times, the employee who has filed the charge will be represented by an attorney. Moreover, as the information disclosed in the investigation of the charge may be used in subsequent litigation, having an attorney involved at the outset may be helpful in ensuring the best possible defense.

Jane will also likely need to decide whether the case should be mediated. Both the OCRC and the EEOC strongly encourage employers and employees to mediate disputes. The OCRC's mediation program is free and staffed by trained mediators, who are not later involved in the investigation of the charge. If mediation is not successful, the charge returns to the regular investigation process.

While there is no formulaic way to determine if mediation is appropriate, Jane should carefully consider this possibility. In many cases, if not most, mediation has few drawbacks. It allows both parties to air their dispute in a neutral forum before the parties get too entrenched in adversarial positions. Mediation also allows charges to be resolved while limiting the expenditure of both time and money.

When Jane receives the charge, she must also consider taking steps to ensure evidence is preserved. She should make sure that e-mails are retained and documents are not destroyed. Jane has no obligation to create documents that do not exist, but she must save those that do.

In some cases, if Jane does not take proper precautions to preserve evidence, Mid-Size may create an additional cause of action for spoliation of evidence, which may turn a low- or medium-risk case into a high-risk case.

Another way Jane can turn this case into a high-risk case is by failing to take steps to prevent retaliation. Regardless of whether Paul actually discriminated against Susie, Paul is likely to feel hurt by the allegation. He may worry about his job and his reputation.

He may react by lashing out at Susie. He may try to issue her a disciplinary notice for a violation of company policy that, while legitimate, has been ignored for years, and that many other employees have also violated without repercussions.

Jane needs to take steps to ensure that this does not happen. She should meet with Paul and remind him that Mid-Size does not tolerate any type of retaliation. Jane may also want to consider taking Paul out of his role as Susie's supervisor on a temporary basis or require Paul to discuss changes to any aspect of Susie's employment with Jane before the change is made.

Obviously, Jane faces a lot of very important decisions. She must decide whether to hire an attorney, whether to mediate, how best to preserve evidence and how best to prevent retaliation. These early decisions are very important and will have a tremendous impact on how the charge proceeds.

Steven R. Miller is a staff attorney in the Cincinnati office of Vorys, Sater, Seymour and Pease LLP, where he practices in the labor and employment group. Reach him at (513) 723-4039 or

Wednesday, 26 May 2004 12:04

Who's eligible?

On April 20, 2004, the U.S. Department of Labor issued its long-awaited final regulations updating the exemptions from the overtime rules of the Fair Labor Standards Act (FLSA). Some portions of the regulations have not been updated since 1949.

The new regulations are more than 60 pages long, and the DOL's explanation is more than 200 pages long. Employers should discuss with their legal counsel how these regulations, which take effect Aug. 21, 2004, will impact their business.

The FLSA requires employers to pay overtime to employees. It also exempts certain employees from overtime pay. The most common exemptions are for administrative, executive and professional employees, the so-called "white-collar exemptions." In order to be exempt under the white-collar exemptions, an employee must meet two basic tests -- the salary test and the duties test.

Salary test

To be exempt, the white-collar employee must be paid on a salary basis. The new regulations increase the minimum salary from $250 per week to $455 per week. That is, if an employee makes less than $455 per week on a salary basis, he or she must be paid overtime for extra hours worked regardless of job duties.

To be paid on a salary basis means the employee must be paid the full weekly salary for any week the employee performs any work, without regard to the number of days or hours worked.

There are seven exceptions to the salary basis test in which an employer is allowed to dock an employee's salary. Of these exceptions, the only new one allows docking for "good faith for violation of work place conduct rules." These rules must be applicable to all employees and concern misconduct, such as workplace violence, theft and sexual harassment.

Significantly, the new regulations provide a safe harbor for situations when an employer makes a mistake and docks an employee's pay improperly. Under the old regulation, if an employer inappropriately docked an employee's pay, the overtime exemption could be lost for a class of employees. That led to the possibility that a minor mistake could result in major lawsuit liability.

Under the new safe harbor rules, the salary basis and overtime exemption will not be lost if the employer:

1. Has a clearly communicated policy prohibiting improper deductions, including a complaint mechanism

2. Reimburses employees for any improper deductions

3. Makes a good faith commitment to comply in the future

However, if the employer willfully violates the salary basis regulations by continuing to make improper deductions, the overtime exemption may still be lost for a class of employees.

Duties test

If an employee is paid at least $455 per work week on a salary basis, the analysis turns to the duties performed by the employee. These tests are slightly modified under the new regulations. Job titles are not controlling in this analysis. The actual duties performed determine if the employee meets these tests.

To qualify for the executive exemption, an employee must:

* Have the primary duty of the management of the enterprise or a recognized department or subdivision

* Customarily and regularly direct the work of two or more other full-time employees or their equivalent

* Have authority to hire or fire other employees (or if recommendations as to hiring, firing, advancement, promotion or other change of status of other employees are given particular weight).

To qualify for the administrative exemption:

* An employee must have the primary duty of performing office or nonmanual work directly related to the management or general business operations of the employer or the employer's customers

* The employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance

To qualify for the professional (learned or creative) exemption, an employee must:

* Have the primary duty of performing work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized, intellectual instruction

* Have the primary duty of performing work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

The new regulations also contain a special exemption for highly compensated employees. In some instances, an employee who earns more than $100,000 only needs to perform one of the exempt duties to be exempt from overtime.

These new regulations are extensive. Employers are well advised to contact their legal counsel promptly to discuss the impact of these changes on their business. Steven Miller is an associate in the Labor and Employment group of Vorys, Sater, Seymour & Pease LLP. Reach him at (513) 723-4000.

Friday, 25 April 2003 11:52

Re-employment rights

As a result of current world events, many employees have been called away from their jobs to serve in the United States Armed Forces.

Congress attempted to make it easier for them to return to their civilian lives when it enacted the Uniform Service Employment and Reemployment Rights Act of 1994. USERRA prohibits discrimination against individuals who serve or have served in the armed forces and governs the rights of those who have served when they return to civilian employment.

Generally, USERRA provides that employees who leave their jobs to serve in the armed forces are entitled to return to their civilian jobs in the position they would have had if their employment not been interrupted by military service.

USERRA permits an employee to serve a total of five years on active duty without loss of re-employment rights. However, military service leading to a discharge that is "other than honorable," "undesirable," for "bad conduct" or "dishonorable" terminates an employee's re-employment rights.

An employee must apply for re-employment after service in the military ends. The time within which an employee must apply depends upon the amount of time served in the military.

Generally, employees must apply within the following time periods: If they served 30 days or less, they must apply at the beginning of the workweek following the end of the service period; if service was at least 31 days but less than 181 days, they must apply within 14 days of the end of service; and those who served more than 180 days have 90 days from the end of service to apply.

Upon satisfactory completion of the employee's military obligations and after application for re-employment, the employee must be put into the position that he or she would have had if employment had continued without interruption.

This request can be thought of much like an escalator -- an employee gets back on the escalator at the same step he or she would have been on if not for military service. This could be the pre-service position, a better position, an inferior position, or, if the employee's position was eliminated as a result of a reduction in force, no position at all.

If a disability is sustained or aggravated during military service that prevents the employee from performing the job which he or she is entitled to, the employee must be offered a position of like seniority, status and pay for which he or she is qualified or could become qualified through "reasonable efforts" on behalf of the employer.

An employee who is re-employed after military service may not be terminated except for cause. The length of time an employee receives this extra job protection depends upon the length of military service as follows: 30 days or less, no restriction; at least 30 days but less than 181 days, 180 day restriction; more than 181 days, one year restriction.

This is just a brief overview of the issues involved when an employee returns from military leave. Because there are many pitfalls employers can encounter, it is a good idea to discuss re-employment issues with employment counsel. Steven R. Miller is an attorney in the Cincinnati office of Vorys, Sater, Seymour and Pease LLP, where he practices in the labor and employment group. He can be reached at (513) 723-4039 or by visiting

Wednesday, 26 April 2006 09:37

Turning leads to sales

Consumers are increasingly taking the shopping process into their own hands - and typically outside of the view of your highly-skilled retail sales staff. And these wily and well-informed consumers control when, how and to whom they identify themselves. In the automotive industry alone, Jupiter Research estimates that 22 percent of all retail sales in 2004 were generated from the Web - a number that is forecasted to grow. Being able to predict and relevantly interact with these consumers is paramount.

"Most retail organizations employ a form of lead management system to identify, manage and track these leads," says Jack Bowen, chief marketing officer at global software and lead management consulting firm Urban Science. A world-class process begins with lead collection and distribution; continues with lead scoring, drives differentiated lead treatment; uses robust data analytics and metrics; and concludes by tracking retailers' adoption of performance standards. Smart Business recently caught up with Bowen in his Detroit office.

You started the lead process with lead collection and distribution. What exactly does that involve?
At some point, shoppers or buyers will identify themselves in a retail environment - either through the Web or at point of purchase. That introduction is accompanied by personal data, and/or session information. A savvy marketer will compile all of the various leads and corresponding information into a single tool to be used by the retailer. Typically, the marketing organization is provided with the information directly through its Web site or other collection points (call centers, events). However, secondary industries have grown to develop, aggregate and sell what are called third-party leads to retailers and marketers - is a well-known example of an aggregator in the auto industry.

Just aggregating and distributing leads is a sign of a strong operation. By taking it one step further, though, a marketer can add even more value.

How do you know if the lead is going to buy?
Separating shoppers from buyers will give marketers a considerable edge. We do this through lead scoring, a process in which the leads are ranked on their chance of closing, thus resulting in a purchase. To get the score, the lead data is compared to demographic data and owner information. For example, clients can benefit from certain data mining tools that calibrate close-rate models for use in real-time online lead scoring.

Marketers and retailers need to understand that lead scoring is not an end, it is a means. The fact that the marketer knows the score of a lead doesn't increase its likelihood of closing, but the score arms them with the knowledge to determine how that lead should be treated.

So if lead scoring doesn't increase the chance of a lead closing, what does?
Consumers are more likely to buy if they're treated according to their expectations. To determine these treatments, scored leads are separated into segments based on their rank. Then we assign a treatment to each segment. If the lead ranks as a 90 - which has a high chance of buying - then we would recommend an aggressive approach. Essentially, the treatment depends on the score.

Through this "treatment determination" process, a marketer prioritizes his resources against the leads with the greatest likelihood to close. This doesn't mean leads with lower scores should be ignored, it means that the marketer must find an effective way to treat that lead in order to raise its likelihood of closing.

Once the leads are assigned their treatments, everything is sent on to the retailers, who have the task of following up.

How do you know what impact the system is having?
The data accrued throughout the lead management process is a gold mine. It can be used to further refine and target a company's marketing strategy, but some analysis must be conducted before a marketer can reap the rewards. The most important is a disposition and close rate analysis, in which a lead is followed throughout the entire process, ending with whether a purchase was made.

This data can be analyzed by retailer, by geography, by a certain chronological period, by certain demographics; any combination possible. Then, certain patterns begin to emerge and the marketer will see which treatments actually work. Reporting that information back to the marketing organization is what keeps everyone on the same page.

How can you maximize retailer engagement?
Once a marketer begins to understand what is causing leads to close, and which of his treatments are working, then he should establish a series of behavioral standards for his retailers. For example, if it's discovered that leads have a higher chance of closing if they are followed up by the retailer within an hour, a marketer might want to set an hour as a standard follow-up time. By monitoring the system, he can see if his retailers are meeting his expectations.

JACK BOWEN is chief marketing officer for Urban Science in Detroit. Reach him at (800) 321-6900.

Tuesday, 25 May 2004 07:17

R&E tax credit changes

Now more than ever, middle-market manufacturers must continually innovate to stay competitive.

Fortunately, recent tax changes should make it easier for them to do so, with new IRS regulations allowing more companies to qualify for the federal research and experimentation (R&E) tax credit. To take advantage of this credit, it's critical to understand the law and document your R&E activities thoroughly.

The R&E credit
Under Internal Revenue Code Section 41, companies can take a credit equal to the sum of 20 percent of the excess of "qualified research expenditures" for the tax year over a base amount, plus 20 percent of basic research payments. Qualifying activities include:

  • Product development or improvement
  • Prototype, patent, trade secret or proprietary information development
  • Production process enhancement or improvement
  • Process automation
  • Internal engineering department operations
  • Employment of technical personnel (as employees or contractors)

Broader research definition adopted
Until recently, a narrow definition of "qualified research" under the regulations meant that many companies could not claim the R&E credit. However, the latest rules have liberalized this definition. Now, research must meet the following requirements.

  1. It must be intended to eliminate uncertainty regarding the development or improvement of a business component.

  2. It must be undertaken to discover information of a technical nature, relying on principles of physical or biological sciences, engineering or computer science.

  3. Its application must be intended to be useful in the development of a new or improved business component.

  4. Substantially all of the research activities must constitute elements of a process of experimentation relating to a new or improved function, reliability, performance or quality. The solution should not be readily known at the outset of the research.

Certain activities are excluded from the definition of qualified research, and more stringent regulations apply to internal-use software.

It's important to note that, between the tax credit and the deductions for R&E expenses, there is an interplay that reduces the actual tax benefit to less than 20 percent. To guard against double deductions, the IRS stipulates a formula that reduces the amount of the credit.

If you do not take the reduced credit, you must reduce your otherwise deductible research costs by the credit amount. Taking the reduced credit allows you to deduct the credit while still receiving a 13 percent reduced credit.

Complete, real-time documentation
The IRS aggressively audits R&E claims. And should you be audited, it may require you to produce items such as meeting minutes, engineering drawings, test results, patent and copyright applications, and management reports.

The agency's Research Credit Audit Techniques Guide defines the documentation that companies must have to support R&E claims.

Collecting the required documentation after research activities are completed (for example, in the face of an audit) can be burdensome. It may also result in less accurate or complete records. If you plan to take the R&E credit, it's wise to establish ongoing documentation.

It's also a good idea to maintain research logs. These logs should document:

  • Each research approach applied
  • Any revisions, tests and rejections
  • New alternatives and uncertainties about their outcomes
  • Any new information, products or functionality resulting from the research
  • Research completion dates

The broadened R&E tax credit can provide significant benefits to innovating mid-market companies. But to take full advantage of this credit, plan carefully to avoid costly and time-consuming audit headaches down the road.

Lou Miller is an executive with the accounting firm Crowe Chizek and Co. LLC. Reach him at (574) 236-8661 or

Monday, 22 July 2002 09:56

The road to growth

The road to profitability might be lined with improved sales, but many companies often overlook cost containment opportunities as a way to make an immediate impact on cash flow and the bottom line.

In today’s hectic business environment, organizations run lean. Workers are forced to perform more duties without adequate time or focus to review operations in a comprehensive manner. The status quo becomes the norm and only those initiatives directly related to sales growth are determined appropriate and receive attention.

However, for some proactive companies, outsourcing of activities or projects and even entire functions is increasingly common. These specialists are objective, thorough and can accomplish measurable results at lower priority.

While double-digit sales growth is important and always exciting, margin improvements should probably be a higher priority. With the proper focus and expertise, improving margins through cost reductions is often easier than maintaining a double-digit growth number and the effects to the bottom line are immediate.

Take, for example, a typical manufacturing company, which has revenues of $30 million and net profits of $2 million. Assuming a typical cost structure, a 10 percent sales increase ($3 million) may generate additional profits in excess of $200,000. Impressive numbers, but be aware of the costs to achieve the increase.

Less than a 2 percent reduction in the cost structure of the organization would achieve similar results.

If cost reduction initiatives affect the bottom line directly and more quickly than increased revenues, why are most priorities driven toward sales growth? Some might contend that costs are in line with industry averages or that cost cannot be reduced further without affecting quality, service and morale.

Others believe costs are part of doing business. Still others believe sales growth is what drives job growth. None are without merit, but it is critical to realize that sales growth, in the long run, must be profitable sales growth.

If sales are increasing but margins are not, this is not profitable growth and will have to be addressed, sometimes painfully and usually at the expense of future growth.

At the same time, if an organization achieves modest sales growth and costs (fixed and variable) are being reduced, the owners will be delighted because of the profit margin increases.

Profit margin improvement is not always easy, particularly today, when most organizations have been restructured, staffs are overloaded and internal expertise concentrates on customer satisfaction and revenue growth. Companies seeking to improve margins along with sales should:

  • Avoid downsizing and invest in your employees. They are your No. 1 asset. Challenge them.

  • Create teams to conduct assessments and develop profitable solutions. Competition is a marvelous motivator.

  • Map the purchasing process, identify and correct the disconnects. Make sure adequate controls are in place.

  • Create incentives for employees to eliminate waste, reduce costs and recommend cost saving ideas.

  • Consider retaining an independent business adviser to provide an objective opinion and recommendations.

Mark Miller is president of Cost Control Systems of Ohio.

Monday, 23 May 2005 11:50

Giving notice

To offset the FSC/ETI exclusion -- which allowed the United States to income from experts at a lower rate than other business income before the World Trade Organization ruled it "impermissable" -- the IRS announced a new corporate tax deduction, "Income Attributable to Domestic Production Activities" for qualifying domestic manufacturers.

Originating with the American Jobs Creation Act of 2004, IRS Code Section 199 permits taxpayers who obtain income from "qualifying production activities" to deduct a percentage of this income, provided a "significant part" (equal to 20 percent of the cost of goods sold) of the production is performed in the United States.

Exceeding its original intent, the new manufacturing deduction is more acquiescent than its forerunner, welcoming all U.S. manufacturers. This generosity has proved costly. The most expensive section of the act, Section 199, carries a hefty $76 billion price tag, $26 billion more than the cost of the FSC/ETI exclusion.

It's an investment many hope will be counterbalanced with new jobs and domestic economic growth.

The new deduction introduces a 3 percent corporate tax rate reduction, previously set at 35 percent. The reduction is scheduled to incrementally increase, reaching 9 percent when completely implemented in 2010. Qualifying taxpayers can claim a percentage of the year's qualified production activities income or its taxable income, whichever is less. However, this deduction is restricted to 50 percent of W-2 wages for that same year.

Attempting to respond to previous ambiguities surrounding the provisions of this deduction, the IRS has issued Notice 2005-14. The notice outlines four applicable categories and advises on the deduction calculation for domestic production gross receipts, cost of goods sold allocation, other deductions and period costs, and other notable provisions.

Identifying and segregating qualifying domestic production gross receipts, at the item level, is the first step. While not expressly stated, the notice demands this level of detail because it limits the deduction to the production costs of the actual property, eliminating the service elements eligibility.

Consequently, taxpayers are required to segregate the property's production elements from any embedded service component. In cases where the service components are a vital part of the production process, and thus cannot be separated, or amount to less than 5 percent of total income, the IRS has waived this requirement. If all facets meet the criteria of production procedures, all gross receipts from the sale are eligible for the deduction.

Next, identifying cost of goods sold requires allocating costs with associated revenue using the same methodology applied when allocating qualifying domestic production gross receipts. If cost of goods sold cannot be determined, the notice does allow the taxpayer to apply another reasonable method to quantify qualified activities.

For assigning other deduction and period costs, whether expenses or losses, to the revenue, the notice provides guidance utilizing the rules set forth under Regulation §1.861-8. The regulations outline comprehensive classification rules for allocating gross income expenses and grant flexibility for unclassified expenses that are accurately assigned to the gross income.

In addition, for small taxpayers (averaging under $25 million in annual gross receipts over a three-year period), the notice stipulates deductions can be calculated using a standard percentage -- total of qualifying production activities divided by the total of all sources.

Other notable provisions ratified with the notice's institution include forbidding the inclusion of Internet-driven software as qualified income and permitting income generated from real estate construction sales, provided the contractor is identified in a North American Industry System and the real estates value has been removed from qualified gross receipts.

As outlined in Notice 2005-14, the IRS has tackled many of the ambiguities regarding Section 199 deduction eligibility; still, it has yet to conclude the debate surrounding proper calculation methods and the ownership of work-in-process related to contract manufacturing arrangements. However, aware of the remaining uncertainty, the IRS is working on standardizing these guidelines, as well.

Reach Lou Miller, CPA, at (574) 236-8661 or

Sunday, 30 July 2006 10:15

Intent delivered

You and your team work for months analyzing data, developing plans, communicating your vision throughout the organization -- and finally you pull the trigger on what you feel is going to be a game-changing program. But as you visit your retail locations, there’s hardly a trace of your game-changer. Your program seems to have come to a screeching halt at the edge of your wholesale team.

What went wrong? And how might you have ensured that your intent was carried through to the retail staff? Whether it was a marketing, sales, financial or behavioral program, the answer could likely be: standards management.

“Standards management is a practice employed to measure the alignment of company intent with retail behaviors and performance,” says Moritz Seidel, president of Webfair AG. “By auditing retail behavior and ensuring compliance with standards, a company can ensure that in-market performance lives up to expectations with respect to brand standards, quality or financial performance.”

Smart Business spoke with Seidel about why these programs work -- and how they can have a lasting, powerful influence on a retail organization’s performance.

What does a world-class standards management program involve?
Many retail and franchise organizations specify retail standards with which retailers need to comply in order to receive, keep, or get rewarded within a franchise contract.

The process begins by establishing performance standards that are managed via checklists. Next is the requirement to prepare for and execute a performance audit. Once complete, the audit results will provide an analytical base, which will drive action planning to address shortfalls in performance.

It’s a complicated process that can be a challenge to manage, but there are software products that can automate almost every step, thus keeping the process simple and relatively error-free.

How are standards developed?
Through thorough and careful analysis, a company should be able to discover pretty strong relationships between achieving performance benchmarks and their corresponding results. With that knowledge, companies can establish benchmarks that will serve as performance standards <m> and decide to whom the standards are applied. In a large organization, these standards might differ by outlet format; for example, urban outlets might have different standards than rural outlets. Or standards might vary by state or country.

What happens after standards are set?
The next phase -- audit preparation -- is about assessing compliance with the established standards. It begins with the company deciding who should perform what task and when. Capturing and documenting performance standards, drafting a solid audit team -- with the requisite expertise to evaluate performance and, finally, scheduling specific audit activities are key elements of the pre-audit phase.

Then it’s time for the actual audit, which involves comparing the outlet-specific checklist of performance standards against retail results -- and seeing how the outlet measures up.

So what happens with the results of the audit?
After the audit is performed, the marketer will most likely notice exceptions -- a gap between the condition of the outlet and the established company standard. There is work to do either on the part of the company or the retail outlet -- and thus begins the action planning phase of the process.

An exception indicates that performance changes need to be addressed. State-of-the-art standards management software should take management through a series of questions to address what the appropriate next steps should be. Such questions could be: What actions need to be performed to comply with standards; who need to perform these actions; and when do they need to be performed?

This stage can be very complex since there are typically hundreds of people in the field, all of whom need to comply with different standards; there are different deadlines, and it all needs to be managed. It’s a definite challenge to manage the process across different hierarchies, countries and languages.

As I’ve mentioned, there’s software available that automates the entire process and informs everyone -- through e-mail alerts -- to complete the proper tasks at the right time. The software ensures actions are being performed and being checked by intermediate management. It makes steps easier and less error-prone. When these audits are managed manually, errors can occur that corrupt the resulting data, leading to a number of costly problems.

The last step will be an analysis of the entire process, through which a marketer examines each step and reviews how it progressed. Though analysis, benchmarking and reporting, a company can get a clear overview of how its entire retail network is performing.

MORITZ SEIDEL is president of Munich-based Webfair AG, one of Europe’s leading suppliers of automotive sales and service quality management systems. Webfair is a wholly-owned subsidiary of Urban Science, a Detroit-based consulting firm. Reach Seidel at

Wednesday, 24 May 2006 11:20

Retail network analysis

In retail marketing, proper planning is vital to business success. Whether the business involves restaurants, auto repair shops or specialty retail outlets, a thorough market analysis can provide a clear picture of the strengths and weaknesses of a retail sales channel.

“A marketer can maximize success by identifying opportunities and developing network plans,” says Mitch Phillips, global director for network analysis at Urban Science, a Detroit-based international consulting firm. “Typically, today’s retail networks operate at only 60 percent to 80 percent efficiency, so a marketer that does retail network planning has room to gain a considerable advantage.”

Smart Business spoke with Phillips about how retail network analysis can result in marketplace success.

Achieving optimal performance within a retail network seems like a major undertaking. Where do you start?
The objective of a retail network is two-fold: to provide a competitive environment in which to shop and to provide convenient access for both sales and service. Through almost 30 years of experience in network analysis, we’ve learned to divide the process into three segments: network planning, network management and network intelligence. When all three work seamlessly together in an integrated management system, the network will perform at its peak potential and achieve critical competitive, cost and customer-relationship advantages.

How can a marketer be sure he has the right network plan?
The plan is a result of much research, analysis and evaluation, so a lot of care has gone into making it on-target.

The first step in developing the plan is to look at the number of retail outlets, the location of those outlets and the performance of each location. After all, the outlet might be in the right place, but if it isn’t run efficiently, it won’t succeed.

After analyzing these factors, the market is evaluated and a network plan is developed. It will determine the number, type, size and location of outlets necessary to achieve the manufacturer’s objectives. It also requires measuring the present performance of the network and its outlets to determine what to do next. It needs to be flexible enough to meet the needs of a rapidly changing global marketplace. A well-designed plan can increase customer satisfaction, can cut operational costs and reduce financial risk, and can fully demonstrate the product’s potential in the marketplace. Planning centered on these issues is essential for success.

Once the plan is in place, how do you ensure it stays on track?
There are two factors that influence manufacturers in the marketplace: consumer behavior and competition. Through network management, a marketer can continually monitor these factors — and modify the network plan where necessary — to take advantage of any substantial changes.

Secondly, it’s necessary to keep tabs on outlets and examine the ones that fall below expectations in attracting and retaining customers. Manufacturers should work consistently to boost the low-performing outlets above the expected sales level. By shaping up these locations, the entire network becomes healthier.

So how does network intelligence — the third aspect of network analysis — fit into the picture?
The foundation for all the planning work and for all the management decisions must be intelligence about the network — not just data, but the right information gathered in the right method. Markets should be studied to determine any changes due to competitive action or consumer preferences. Then, the lessons learned from the market study should be applied to the continual network planning process.

Therefore, while gathering customer data and feedback are the first step in developing network intelligence, manufacturers must be certain they assemble the most useful information.

Information-gathering also includes constantly building knowledge of comparable experiences within the network’s customer base and within the manufacturer’s other networks as well. The information should be based on real-world experiences and carefully analyzed before being placed in the loop to provide knowledge to the next generation of planning.

Factors like best practices and stimulated competitive response should be fed into the system and adopted as part of managing the network as well.

Is network analysis the only pathway to achieving peak retail performance?
It’s key to have a solid network analysis process. In addition, there are two other elements that are equally important in reaching complete marketplace success. One is increasing sales performance across the network on an outlet-by-outlet basis. The other is to have a plan for acquiring, developing and retaining a customer base (through lead management and CRM programs).

With all three elements working together, a retail marketer will truly be able to maximize his brand’s performance.

MITCH PHILLIPS is global director for network analysis at Urban Science. Reach him at (313) 259-9900 or (800) 321-6900.

Friday, 29 October 2004 05:23

M&A transaction costs

The topics of how to properly classify M&A transaction costs and under which circumstances these expenditures are considered tax deductible have been a source of great debate.

Transaction costs can significantly increase the cost of any acquisition. With so much at stake, the discussion of how transaction costs are classified by the Internal Revenue Service has spanned more than a decade.

Plagued by uncertainty, taxpayers historically relied more on speculation than fact when determining which costs qualified for deduction. Recently, IRS tax regulations finally defined the deductibility rules for these expenditures and outlined the importance of proper documentation.


Evolution of the law

The transformation from ambiguity to clarity, while welcomed, was not easy. The evolution of transaction costs law began in 1992, when INDOPCO Inc. v. Commissioner first established the precedent that expenses incurred as part of an acquisition should be capitalized if they produce long-term benefits. The IRS attempted to soften its translation of this U.S. Supreme Court decision, issuing an explicatory ruling, which differentiated deductible investigatory costs and nondeductible capital expenditures.

This clarification stipulated that deductible costs existed if the expense was incurred prior to the "final decision" date and was "investigatory" in nature. Investigatory was defined using a "whether or which" test.

This guideline considered fees instrumental in determining whether to acquire a business and which business to acquire as deductible. While this interpretation and a later bank acquisition court case calmed many issues surrounding the categorization of the transaction costs, it created a new topic of debate -- the decision date.


A clear translation

Finally, in December 2003, the IRS established clear regulations that outlined when and how a cost was considered deductible. The ruling defined specific "facilitative" costs that demanded capitalization and others that did not regardless of when they were incurred.

This explanation also introduced the "bright line" test. This bright line established consistent guidelines to follow when figuring the key decision date.

The analysis defined the decision date as the first of two dates. The first is the date a letter of intent, exclusivity agreement or other similar papers (with the exception of a confidentiality agreement) is implemented by an agent acting on behalf of the acquirer or target.

The second, the date the taxpayer's board of directors (or a committee representing them) approved the transaction's material terms, or if a board's approval wasn't necessary, the date the parties signed a binding written contract.


Proving your point

While this clarification simply defined the criteria needed to classify transaction costs, taxpayers were still strongly encouraged to provide documentation that supported their classifications. In the case of acquisition fees paid to investment bankers -- known as success-based fees -- the IRS instituted special documentation requirements.

In fact, the IRS went as far as to define the requirement stating supporting documents "must consist of more than merely an allocation between activities that facilitate the transaction and activities that do not."

Any success-based fee not substantiated with the proper contemporaneous documentation was automatically judged facilitative and accordingly, not tax deductible. In addition, the IRS attached a deadline requiring that taxpayers complete all necessary paperwork by the return due date for the year in which the transaction closed. The requirements may seem strict.

Success-based fees are commonly the largest source of expense incurred after the acquisition process. Moreover, investment bankers' billing methods make qualifying the exact time of their service difficult.

As a result, documenting the percentage of fees incurred prior to the decision date is easier said than done. But despite the obligatory paperwork, wise taxpayers wanting the maximum possible deduction welcome the guidance these new regulations bring.

PAUL AILSLIEGER, JD, LLM, is a senior manager, and LOU MILLER, CPA, is an executive with Crowe Chizek and Company LLC. Ailslieger is in Iraq to serve his country's call to duty. For more information about transactions cost, contact Miller at (574) 236-8661 or

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