Leslie Stevens-Huffman

Wednesday, 25 April 2007 20:00

Beating the odds

Employers are not expecting a decline in the rate of health care cost increases any time soon. That is according to a survey of 573 large employers conducted by Watson Wyatt Worldwide in conjunction with the National Business Group on Health. The survey cited an expected average annual increase of 8 percent.

This news is even more disappointing when factoring in that the number of employers offering consumer-directed health care plans (CDHP) continues to grow. In the same survey, the number of companies offering high-deductible health plans increased from 33 percent in 2006 to 38 percent in 2007.

A bright spot in the survey was the revelation that some firms are beating the odds and reducing the rate of increase from an average of 8 percent to 2.5 percent. Watson Wyatt Worldwide explored how these firms had gone about achieving that result.

“The best performing companies in the survey were more likely to implement programs that go beyond employee cost sharing,” says Dean Hatfield, senior benefit consultant for the Group Healthcare Practice at Watson Wyatt Worldwide. “They have involved the use of financial incentives, effective information delivery, efficient quality of care, maximum health and productivity, and decisions based upon data and metrics.”

Smart Business spoke with Hatfield about how the best performing companies are achieving better cost management results through comprehensive solutions.

What are the best companies doing to curb the rate of health care cost increases?

One of the most efficient ways for companies to curb their health care trend is by improving quality. When employers looked at the outcomes from medical facilities such as hospitals, they began steering employees toward hospitals and physicians that specialized in the employees’ needs for procedural or condition-related treatments. Consequently, the patients had fewer complications and lower mortality rates.

Rather than shopping for the lowest rate, employers looked at the available data and made decisions based upon medical outcomes. Not only were results better, but costs were lowered.

What other types of data should CEOs look at to help reduce health care costs?

The best companies looked at the data surrounding their employees’ health issues, such as employee absenteeism and the effect of employee wellness on productivity, to help structure their health programs — and didn’t just focus on the aggregate cost of their health program.

For example, firms have found that obesity is the cause behind many illnesses and subsequent rising costs, including lost time. So now they are doing a better job of instituting programs that promote behavior changes. They are creating customized communication pieces tailored to defined employee segments with relevant and meaningful messages that teach employees the health conditions that can be improved — or even avoided.

How important is employee education for achieving cost reduction?

It’s absolutely vital. The survey results show that most employees don’t understand key terms in their health plans like ‘co-insurance’ or ‘formularies.’ Because they don’t understand how their health coverage works or how they might benefit from selecting cost-effective health care services, employees are not effective cost management partners.

Merely cost-shifting to employees is clearly not enough. You have to educate them so they can become better managers of their own resources and their own health. The data also show that only about 50 percent of the employees read all of the materials provided them about their medical coverage and the other 50 percent only read the enrollment insert or plan changes.

What is the best way to provide information to employees?

The survey says that the most effective way to communicate with employees is by sending information in printed format to their homes (69 percent). Other effective means include providing information in printed format at work (67 percent), via the Internet (62 percent) and in face-to-face meetings (44 percent).

Research is key to making communication messages relevant and meaningful. Face-to-face education sessions are the most effective communication method, and different marketing techniques can maximize the attention spent on health care.

Teaching employees about not just the cost of care, but the value of changing their health behavior, is more effective if the education sessions are live and interactive.

Most employers are focusing on plan design and cost-sharing. It is effective in the short run but not in the long run. The best savings in the long run are being achieved by providing personalized, tailored programs and resources that inspire employees to take action; keeping health improvement behaviors on track; and boosting individual accountability through employee education and promotion of best practices.

DEAN HATFIELD, CEBS, is a senior benefit consultant for the Group Healthcare Practice at Watson Wyatt Worldwide. Reach him at (415) 733-4100 or dean.hatfield@watsonwyatt.com. For more information, visit www.watsonwyatt.com.

Monday, 26 March 2007 20:00

Bloodless medicine

Bloodless medicine” started as an alternative designed to meet the needs of patients who opposed blood transfusions for religious reasons. Now, the practice has gained popularity due to the reduced risk of infection, better outcomes and lower treatment costs.

Bloodless medicine refers to the use of devices, techniques and careful preparation that enable patients to lose less blood — especially during surgical procedures. The result is that many patients are able to undergo surgery without external blood transfusions.

The statistical outcomes for patients who have fewer transfusions during surgery are better. Patients also are learning that risk avoidance is a medical benefit resulting from the bloodless techniques, regardless of their religious beliefs.

“We started treating patients with bloodless techniques here in Orange County in the early 1980s, so we have a great deal of experience,” says Dr. Vinod Malhotra, medical director of the Bloodless Medicine and Surgery Program at Chapman Medical Center. “Because 60 percent of surgeries are elective and preplanned, the benefits achieved through elimination of blood transfusions are obvious. Patients just need to be educated and learn to ask for them from their physicians.”

Smart Business spoke with Malhotra about what patients should know about bloodless medicine and its related benefits.

What are the advantages of bloodless medicine?

First of all, there is less risk of contracting a blood-borne disease. While today we are able to detect the presence of many viruses such as HIV in transfused blood, there was a time when we were not able to do so.

Unfortunately, many patients contracted HIV and hepatitis C through blood transfusions. What we do know, is that by avoiding transfused blood altogether, patients contract fewer diseases.

Also, an allergic reaction occurs in 4 to 10 percent of all patients who receive a transfusion. Studies have shown that patients who receive banked blood experience increased adverse outcomes and longer hospital stays. Accordingly, the cost of treatment goes up.

In addition, there is now growing evidence of the clinical adverse effects of blood transfusions on a patient’s immune system. Studies have also shown that exposure to red blood cell transfusions increases the risks of the recurrence of cancer and the development of post-operative infection.

Is there a quality differential with transfused blood?

Yes, there certainly can be. Blood actually ages and legally, it can still be transfused up to 42 days after the date of donation. When we examine red blood cells under an electron scanning microscope, what we observe is that after 20 days, the red blood cells actually start to shrink so the blood loses its vitality.

Unfortunately, sometimes due to shortages, not every patient requiring a transfusion receives freshly donated blood. Trauma centers need and use the most blood, so they have it on hand; consequently, they frequently transfuse some of the oldest blood to, ironically, the sickest patients.

This is also the problem with patients attempting to donate and store their own blood prior to surgery. Patients often may need to donate several units, but it requires about a month to donate that amount of blood safely. By the time of the surgery date, the blood has aged and become stale when it is transfused.

What makes bloodless medicine surgical techniques unique?

Prior to elective surgery, the surgeon should work with the patient to build up his or her red blood cell count. Patients should avoid aspirin and other blood thinners to help reduce bleeding during the procedure.

Surgeons can further minimize blood loss by using alternative surgical techniques, such as carefully avoiding bleeding during surgery and using a laparoscopic approach.

Additionally, surgeons may use a machine called a cell saver that actually siphons away a patient’s blood that is lost during the procedure, cleans it, separates out the red blood cells and reinfuses the cells into the patient. These machines are available to hospitals, so patients should ask their surgeon to make arrangements to use the machine prior to surgery.

What differentiates one bloodless program from another?

A team approach at the hospital and the amount of experience of the surgical staff with the bloodless techniques is a vital component to outcomes, as is the willingness of the surgeon to use them.

Patients should not only ask about the experience of the medical team and their outcomes but make certain that the surgeon understands the philosophy and the patient’s wishes.

More than 89 percent of patients say they prefer not to have a transfusion during surgery. Considering the risk reduction, bloodless medicine just makes sense.

DR. VINOD MALHOTRA is medical director of the Bloodless Medicine and Surgery Program at Chapman Medical Center. Reach him at (800) 970-9470. For more information visit www.chapmanmedicalcenter.com/Bloodless.

Wednesday, 28 February 2007 19:00

Paying for performance

For CEOs, success is predicated on the growth of the organization’s top and bottom lines. The sales force is usually accountable for the lion’s share of the required revenue increases, and they are often motivated toward the goals that are outlined in the variable compensation plan.

Although sales compensation needs to be considered a strategic endeavor, it becomes a tactical one when CEOs quickly attempt to fix the compensation structure if they find that it is not producing the desired results. So says Scott Barton, senior consultant with Watson Wyatt Worldwide. He says that there are three traditional reasons behind a CEO’s quest to find a better sales compensation structure: incentive expense is too high in relation to revenue growth; plan designs are inconsistent, fragmented or unclear across the organization; and sales management believes cash pay-out opportunities are not competitive.

“Our research shows that a number of factors define high-performing sales teams versus low-performing ones,” says Barton. “As we start to look under the hood at sales compensation, we often find a disconnect between the desired performance and the financial incentives.”

Smart Business spoke with Barton about the current trends in sales force compensation and how CEOs can align financial rewards with the company’s business strategy.

How can CEOs structure global compensation for sales?

Find the appropriate balance between global consistency and local specialization. A global structure should include a common comp philosophy and set of metrics for monitoring plan effectiveness. Local managers depend not only on competitive total pay opportunity for finding and keeping sales talent, but also a plan structure that fits with regional norms. Local attitudes toward at risk pay and tax policy are common differentiators.

Getting a handle on how each region pays its various sales roles is a huge endeavor in a fragmented, global sales organization.

Ultimately, though, the CEO needs to measure and compare the sales comp ROI from each geographic region. What matters for most companies is growth — growth in revenue, profit and acquisition of new customers.

CEOs need to understand what's limiting growth. Sometimes it's the company's best customers. Watson Wyatt research shows that salespeople in poor performing companies spend much less time acquiring new business than their high-performing counterparts. Companies with a culture for business development have an edge for growth. The energy of high-growth sales teams and cultures contrasts sharply with that of organizations engrained in account management.

By comparing key growth stats, monitoring pay and performance results and experiencing first hand the sales culture in each region, the CEO should have a good foundation for building a global sales compensation structure.

Are CEOs including a broader base of employees in variable compensation?

We are seeing a trend toward inclusion of staff not traditionally eligible for variable pay plans. Drivers include creating a performance-based culture, greater sense of urgency and teamwork. For example, operational teams and IT project managers might now have a portion of their pay tied to goals that contribute to sales productivity.

There’s also a movement toward team-based compensation that includes employees who have a direct effect on customer retention and the overall customer experience. In the past, sales and those responsible for customer satisfaction were measured and compensated separately; now, some plan elements cross over, creating greater focus, accountability and synergy.

How can CEOs align sales compensation with the company’s goals?

Make certain the salespeople can influence and are accountable for the company's goals. A common disconnect is to include in the incentive plan measures for which the reps have limited influence, such as profitability or product mix. The goal is to pay salespeople for what's important to the company. To hold back pay from otherwise productive salespeople because of poorly performing lines of business is a dead end. Effective salespeople go to where they can influence their results and income.

What’s the best way to structure a plan to drive sales force effectiveness?

Plan design should be centered on how you want the sales people to spend their time. Compensation should be directly connected to results. Quotas are the bridge. Putting sufficient pay at risk into the plan — on average about 30 percent of the target pay should be variable — helps keep employees engaged and contributes to meaningful pay-for-performance relationships.

SCOTT BARTON is a senior consultant in the Compensation Practice of Watson Wyatt Worldwide’s San Francisco office. Reach him at (415)733-4263 or scott.barton@watsonwyatt.com.

Wednesday, 31 January 2007 19:00

The value of subacute care

Patients who are recovering from illnesses or accidents often find that the type of care that they require falls into a gray area when they search for providers. Hospitals, known as acute care facilities, are not geared toward long-term recovery needs, and nursing homes often do not have the right staff or treatments to improve the patient’s condition. The subacute care unit has emerged, fulfilling the need for many patients at a lower cost.

The Web site of the American Health Care Association defines subacute care as follows: “Subacute care is generally more intensive than traditional nursing facility care and less than acute care. It requires frequent (daily to weekly) recurrent patient assessment and review of the clinical course and treatment plan for a limited (several days to several months) time period, until the condition is stabilized or a predetermined treatment course is completed.”

Many patients enter the subacute unit with tracheostomy tubes or gastrostomy tubes, and — after aggressive treatment — the tubes often can be removed, says S. Salman Naqvi, M.D., medical director and pulmonary critical care specialist with the Subacute Unit for Coastal Communities Hospital.

Smart Business asked Naqvi what CEOs should know about subacute care.

What is the subacute level of care?

For patients who need to transition from an acute care facility, the subacute unit offers a complete course of treatment, which is generally more intensive than a skilled nursing facility. We often treat patients who may have suffered a head injury or need wound care or aggressive pulmonary hygiene. Some enter the facility in a persistent vegetative stage.

We offer an aggressive course of treatment that includes medical care as well as full rehabilitation services such as speech therapy, physical therapy — including full range-of-motion exercises — and social stimulation.

How does the subacute unit differ from a nursing home?

Nursing homes, or skilled nursing facilities, tend to offer services that are more custodial in nature, and the physician is only required to make monthly visits. In our unit, the patients are seen by a physician every week, and there is a physician on duty every day. We engage in an aggressive course of treatment designed to rehabilitate the patient.

We also employ a teamwork approach in designing and executing a course of treatment and consequently the nurses get to know the patients very well. I meet with the nurses daily, and we discuss each case. Once a month, the entire team, including physical therapists, dieticians, pharmacists and social workers, meet with the patient’s family to review our course of treatment. Family members are very important to patient recovery, so it is important to include them and get their feedback as to how the patient is progressing and can best be treated.

Who can benefit from a subacute unit?

Patients range from 20 to 90 years of age. Some often stay for a few months on a transitional basis, while others actually stay for extended periods of time. Our fees are anywhere from 40 percent to 60 percent less than acute care hospitals, so we offer a cost-effective solution.

How does the subacute unit treat the ‘whole patient’?

We have an activity department, and each patient is taken to the activity room where he or she can watch movies, play games, or listen to stories to create mental stimulation. We also give showers and baths instead of bed baths, and our social services team is involved with the physicians as well.

In an acute facility, the patients often can become depressed; by treating the needs of the ‘whole patient,’ we help to lessen depression.

In addition, we don’t like to over-treat the patients. If they come into the facility with a catheter or an IV line, we work to get those removed as soon as possible. Our goal is to rehabilitate the patient so he or she can be released and returned to a quality lifestyle.

S. SALMAN NAQVI, M.D., is medical director and pulmonary critical care specialist with the Subacute Unit for Coastal Communities Hospital. Reach him at (949) 548-3177.

Wednesday, 31 January 2007 19:00

Family incentive trusts

As executives plan for their retirements and ways to secure their families’ futures, they have traditionally set up wills and trusts to pass along wealth to their children and to mitigate tax consequences.

These types of estate-planning documents can provide peace of mind for executives, along with financial security.

A relatively new way to pass along a sense of ethics and values that helped to create the family wealth is the Family Incentive Trust (FIT). The FIT provides more than just a vehicle to distribute assets; it establishes a framework that correlates to the beliefs of the grantor and helps reduce the worry that heirs will make errors or life choices that are not reversible.

Executives and CEOs who have worked hard and put a great deal of effort into building their wealth don’t want a child to become a less-than-productive member of society because of a significant inheritance, says Kerry-Michael Finn, vice president of financial planning for the Western Market of Comerica Bank.

Smart Business spoke with Finn about how FITs can help high-net-worth individuals assure the future for their families.

What is an FIT?

An FIT is a trust that passes along assets to the next generation, while trying to minimize potential negative effects. For example, the trust may specify that the inheritance be passed along through income matching or it can be distributed based upon clauses that require the heirs to achieve specific education levels or contribute community service time.

Income matching can be very valuable, because it may allow an heir to pursue a career in teaching or philanthropy that might not otherwise be an affordable option. It is also possible to tie monetary rewards to other achievements, such as refraining from drug or alcohol abuse or raising a family. Monetary awards can also provide the capital to make a down payment on a home or start a business.

How can CEOs benefit from having an FIT?

If the family business is privately held, it may be possible to pass along the ownership through the trust and preserve the same values that built the business. Even if the wealth has been built through a career in public companies, the concept of transferring values as well as cash can still be achieved.

How can I make certain that an FIT is a positive motivation for my heirs?

This can be accomplished by making certain that the document is flexible enough to accommodate a variety of circumstances while allowing each heir to become successful in his or her own way. For example, placing a requirement of obtaining a four-year university degree might not be achievable for everyone, but receiving a certificate through a trade or technical college as a substitute might be the type of incentive that will transfer the value without placing an unreasonable restriction on the heir.

If I currently have an existing trust, can it be amended to include an FIT?

In some cases, yes. Incentive language can be added or incorporated into an existing trust document. It may be best to review the existing trust as some tax laws may have changed since it was originally drafted, so it might be more efficient to draft a new document.

What measures can I take to make certain the FIT is flexible enough to handle unforeseen circumstances?

When an FIT is created as an irrevocable trust, it has a safety net built in, because the assets in the trust are not considered as assets of the beneficiary and generally cannot be attached by creditors or subject to division through a divorce decree.

The standard provisions of an FIT allow for additional distributions based upon the need for health, education or maintenance and support by the heirs. In addition, the FIT allows for additional distributions at the discretion of the trustee.

I normally recommend that the trustee be a family friend, attorney or accountant along with an institution. In these cases, having a family friend and an institution serving as co-trustees can be beneficial, because the institution will outlive the individual trustee. It is always good to start the process well in advance, so that the staff at the institution can get to know you and your values and thus make decisions and interpretations that they believe are in line with your core beliefs. I also recommend that grantors draft a letter or statement that very specifically states their beliefs and wishes for this trust.

KERRY-MICHAEL FINN is vice president of financial planning for Comerica Bank. Reach him at kfinn@comerica.com or (714) 424-3823.

Sunday, 31 December 2006 19:00

Maximizing business value

In the hectic times that accompany the launch of an entrepreneurial venture, often the last consideration for the CEO is how to establish a structure that will maximize the value of the business when it is eventually sold. However, if there was ever an opportunity to “begin with the end in mind,” it is before the first sales are actually booked, new client contracts are signed and the form of business entity is chosen.

As the business grows, knowing how the value of a business will eventually be established is vital when making decisions that will maximize the purchase price when the time comes to sell the business.

“If you wait until you receive an offer, it may be too late or very costly to remedy the situation,” says Steven J. Untiedt, a partner with Procopio, Cory, Hargreaves & Savitch LLP, a San Diego law firm. “I have heard some investment bankers estimate that the value of the business can be reduced by as much as 25 percent or more if you don’t anticipate and structure correctly in advance of a sale.”

Smart Business spoke with Untiedt about what CEOs should know as they establish a new business, or how they can take the necessary steps to re-position their existing company.

How can a lack of planning affect the purchase price of a business?
The purchase price of a business is often determined using the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). The value of a business may equal some multiple of EBITDA, which varies depending on the type of business and industry that you are in. Therefore, anything that negatively affects earnings will have a significantly greater negative impact on the purchase price of your business. For example, if an important customer contract cannot be assigned or transferred to the buyer, the buyer will significantly discount the purchase price because of the negative impact on the potential earnings of the business. Sometimes going back and fixing these problems can be very costly.

Why does the form of the business entity matter upon a sale?
When it comes to closely held corporations, most buyers are interested in purchasing the assets of the company; they are not interested in acquiring ownership of the entire company by purchasing its stock from the shareholders.

If the founders initially elected to incorporate as a ‘C’ corporation, there will be two levels of tax that will levied upon the proceeds of the sale; one at the corporate level (because the corporation will recognize income upon the sale of its assets) and one at the shareholder level when the net sales proceeds are distributed to the shareholders as a dividend. As a result, the shareholders could end up with 35 percent to 40 percent less than they would otherwise have received, after taxes.

Is there any way to mitigate the adverse tax consequences of being a ‘C’ corporation?
Certainly paying attention at the outset and electing to establish the entity as a tax ‘pass-through’ entity (such as an ‘S’ corporation or limited liability company), when possible, is the best way to go. An ‘S’ corporation can always convert to a ‘C’ corporation in the future, if the need arises. Initiating any of these solutions sooner rather than later, before the business appreciates significantly, would be prudent.

At the time of sale, it may also be possible to negotiate an allocation of the purchase payments for tax purposes that lessens the adverse tax consequences.

How can CEOs best structure client agreements to obtain a maximum value when the business is sold?
Make certain that you pay attention to the boilerplate provisions in any agreements that the company enters into, such as those provisions that relate to assignment of the contract. It is best if these agreements give you the ability to assign the contract to others upon the sale or a merger of the company, and that the assignment can be accomplished without requiring the approval or consent of the other party to the contract. The value of a contract will be discounted if its assignability is in doubt.

How can promising someone an ownership interest in a closely held company affect the sale?
When a commitment of stock or other equity in the company is made to a key employee or some other person or entity, without properly documenting it, CEOs often do not anticipate how that will play out upon a future sale or merger — especially in the early days when the business is struggling. Even oral or ‘napkin’ promises may be enforceable. The ownership of the company must be clarified and documented prior to any sale or merger, and you may have to obtain a release from any persons or entities who claim an ownership or other interest in the business.

STEVEN J. UNTIEDT is a partner with Procopio, Cory, Hargreaves & Savitch LLP. Reach him at (619) 515-3281 or sju@procopio.com.

Sunday, 31 December 2006 19:00

Self-funding strategies

Most CEOs are all too familiar with the nearly 15 percent average annual increases in the direct cost of health insurance and the subsequent impact on the company’s bottom line. It’s when companies begin expanding through mergers and acquisitions that the indirect costs and the inflexibility of most health insurance plans become apparent.

With vast regional differences among health plans and coverage provisions, health insurance issues often impact on business expansion initiatives.

Mike Lutosky, employee benefit broker with Westland Insurance Brokers, says that there is no need for CEOs to become victims of the business cycles of the health insurers — a situation which has been further exacerbated by industry consolidation, causing average HMO premiums to double over the last few years. He says that what CEOs need is an effective strategy that provides an alternative to traditional health insurance.

“What’s your current strategy to control health coverage costs? If you are waiting until 60 to 90 days before your current renewal and then merely reacting to the increase that your health insurer dishes up, you aren’t strategically dealing with the issue,” says Lutosky.

Smart Business spoke with Lutosky about how CEOs can incorporate self-funding into their overall strategy for controlling the cost of health care.

What is self-funding?
Self-funding is an alternative to fully insured group health insurance plans. Instead of an insurance company collecting premiums and paying your claims, the company funds the program, sets the rules and has control over paying claims. More than 60 percent of U.S. companies offering benefits use a self-funded program.

What are the qualifications for offering a self-funded program?
Companies in any industry with as few as 50 employees should consider implementing a self-funded program. Frequently, CEOs who want to establish their firm as an ‘employer of choice’ prefer self-funded programs because they have greater flexibility in terms of plan design, claims payment thresholds and claims processing speed.

Because consumer satisfaction with health insurance is based upon personal experience, employee satisfaction is much higher when companies offer a self-funded program that avoids yearly swings in premiums and coverage limits. With greater consistency, employees feel more secure and have fewer reasons to look for new opportunities.

How can CEOs benefit from self-funding health coverage?
CEOs will regain an enormous amount of control with a self-funded program. Financially, there is an increase in cash flow through the ability to recapture the use of plan reserves, and the company will earn interest on the money held in reserve. Self-funded plans comply with federal guidelines instead of state-mandated laws, and there is a reduction in most of the state-imposed taxes. Not only are the administrative fees lower through a third-party administrator than through traditional health insurance plans, but with a self-funded plan you see where every penny spent on health care goes.

I worked with one company that wanted to make an out-of-state acquisition. There was a key employee in the new firm who was vital to the business, but because the plan offered here in California was more expensive and did not offer a comparable level of benefits, the acquisition was impacted. With a self-funded plan, this kind of scenario can be avoided. You have the flexibility with self-funding to design a separate plan for a group of key employees when merging or acquiring.

How can CEOs limit risk with a self-funded program?
We protect against catastrophic loss by purchasing reinsurance from an A+ rated carrier. Because the market is plentiful, there are numerous choices for CEOs when selecting a reinsurance company. With the average monthly HMO premium standing at $250 to $300 for each employee, self-funding your benefits program makes more financial sense than ever. In more than 20 years, we have only had a handful of employers move back to a fully insured program for financial cost reasons.

What are the steps to initiating self-funded health coverage?
Self-funding is a much more proactive way of dealing with the issues associated with providing employee health coverage than the reactive process of soliciting competitive bids 60 days prior to renewal. We start by educating CEOs about self-funding. Then we provide a financial analysis, to see if it is financially viable for your organization to consider self-funding. Next, we design a comprehensive transition plan for the company and its employees.

Self-funding gives CEOs a strategy and a plan to better understand and deal with the financial impact of escalating health care costs. This strategy gives CEOs a large measure of financial control and understanding that does not exist in a fully insured program.

MIKE LUTOSKY is an employee benefits broker with Westland Insurance Brokers. Reach him at mlutosky@westlandib.com or (619) 641-3276.

Sunday, 31 December 2006 19:00

King of the hill

Timing in business is everything, and Dick Heckmann’s success at K2 Inc. serves as proof that good things can happen when a CEO with the right background and experience comes into the role just when that expertise is most needed.

Such was the case in 2002, when Heckmann was serving as nonexecutive chairman of sporting goods manufacturer K2.

At the time, K2’s stock was hovering around $8 a share and was stagnant, but the retail side of the industry was anything but stale. The industry was quickly changing to a big-box retail model as expansion moves by Sports Authority and Modell’s were forcing single product manufacturers to expand or be acquired.

When Heckmann received a call from K2’s incumbent CEO warning that he might choose to file bankruptcy rather than supply the security needed to comply with the covenant terms required by the banks providing K2’s lines of credit, Heckmann sprang into action, calling upon his contacts and experience to quickly resolve the problem.

“Why play chicken with your vendor?” says Heckmann. “It’s a huge stain on the record of your company. I called the banks and said that I would not only give them security, but I would commit to raising more money.”

Within weeks, Heckmann had become chairman and CEO of the company, shoring up the financial foundation and raising the necessary capital to make the acquisitions that would position the firm to compete in the evolving retail environment.

Establishing the foundation
Heckmann began his career as a stock broker, and he used his knowledge of what captivates Wall Street in formulating his strategy and planning his first moves.

“My lead card was to shore up our financial situation, so I called a friend and raised $25 million,” says Heckmann. “Following the change in leadership and business strategy, the company’s stock price began to rise upward toward $10 per share, enabling me to raise even more money.”

In 2005, K2 had sales of $1.3 billion, but just three years earlier, in 2002, that number was around $580 million. The company needed to diversify its product offerings through acquisitions to be competitive in the new retail landscape.

Heckmann set his sights on acquiring legendary baseball glove manufacturer Rawlings because the ensuing merger would significantly increase the size of the organization.

“I wanted to find the biggest, highest-profile deal that I could find because I wanted to get the attention of Wall Street,” says Heckmann. “We were a one-trick pony, we were snow farmers. With Rawlings, we achieved visibility, and they were counter-seasonal.”

Heckmann says that the Rawlings acquisition began to build a portfolio of brands providing K2 with marketing synergy opportunities, and the additional product lines established an expansion platform that could be enhanced through future acquisitions, such as the addition of baseball bat manufacturer Worth.

Besides repositioning K2 as a player in the minds of investors, Heckmann says that the Rawlings acquisition began to cause a shift in the attitude of the company’s employees.

“The most important thing about the Rawlings acquisition is that it gave our people a reason to feel proud again and a reason to believe,” says Heckmann. “Now it was fun to be with the company again.”

He says that his predecessor at K2 was paralyzed by the thought of risks, and the company stagnated. Heckmann, rather than avoiding risk, uses a methodology for evaluating the pros and cons of each deal, looking for conditions that he says often correlate to success.

In addition to evaluating the opportunity for increased marketing synergies, he looks for companies that are manufacturing domestically so that he can shift that function overseas and further leverage K2’s excess capacity in China — a move that instantly increases margins. Since beginning this practice, K2’s employee base in China has increased from 2,000 workers to almost 10,000.

“I also look for companies who are underdistributed on their brands because what we bring to the marriage is additional reach,” says Heckmann.

The additional sales through the expanded distribution network help to pay the cost of the acquisition, and he often uses the increased margin from the outsourced manufacturing to offer incentives to retailers, which further increases sales.

His pre-acquisition analysis includes running numerous financial models that reflect the worst-case scenarios that might occur after the purchase so he can avoid a fatal error.

"Every decision you make in business is fatal to something,” says Heckmann. “You just never want to make the decision that’s fatal to the company.”

That type of review has caused Heckmann to pass on acquiring ski makers Rossignol and Salomon. With K2 now owning a dominant share of the ski market, he says that the potential downside outweighed the upside, and should the ski market become soft, it could be the tipping point from which the company could not recover.

This customer is king
Heckmann says that he spends up to 50 percent of his time in front of customers and relies heavily on their advice on everything from potential acquisitions to price points, product consolidation and new product development.

For example, he says he was calling on Target, which leans heavily toward the women’s sporting goods market, when the customer suggested that pink baseball gloves might potentially be a hot-selling item to young girls. While the Rawlings representative at the meeting was not initially keen on the idea, Heckmann says that the customer has a finger on the pulse of what the buyers want, and so the pink baseball glove was born.

“Discussions with customers provide the checks and balances for me,” says Heckmann. “I won’t do anything unless the customer tells me that they want it.”

His customer-driven attitude also plays a key role in fashioning his philosophy and attitude toward assimilating new acquisitions. Counter to some thinking on cost reduction as part of post-acquisition strategies, Heckmann refuses to consolidate functions and reduce headcount in administrative areas that might have an impact on service or the customer experience.

“I build the business around what the customers want,” says Heckmann. “We only have 22 people in our headquarters because no one at headquarters should be making decisions that affect customers. We don’t consolidate accounting after an acquisition because that’s not customer-friendly. We run at a higher expense, but we also have the highest margins in the industry, and we are the industry leader in seven categories. The easier you make it for customers to sell stuff, the better it will go.”

Hunting elephants
While acquisitions can have financial benefits, getting people to work cohesively when merging different corporate cultures, pay plans and personalities can be a challenge for any leader. The assimilation of people into a shared mission and vision is so vital to the outcome that many companies fail because the balance sheet starts to reflect the internal struggles.

As an owner of the Phoenix Suns, it seems natural for Heckmann to use sports analogies and philosophies as part of his people management plan. This was the case when he discovered that the previous K2 CEO had all of the division managers competing for capital bonuses, a practice that was contrary to his vision of teamwork.

“There was no recognition of the other companies when we were out in front of customers,” says Heckmann. “Now we go in as a group to the customers and ask how we can get more business.”

Heckmann says he gives strong support to his managers by allowing two to three years to get their numbers on track following an acquisition. However, he has little tolerance for those who resist the new company direction and appear to be working against the changes.

“I believe in the lead-elephant theory,” says Heckmann. “You shoot the lead elephant, and all the other elephants run off into the woods until a new lead elephant emerges from the group. A good example occurred after the Rawlings acquisition. They thought that everyone would love them forever because they were Rawlings, and it was very hard to get them to buy in to the fact that they were going to need R&D.”

After terminating the CEO and making other major managerial changes, Heckmann says that today, Rawlings has a successful R&D function, complete with a technical center staffed by 26 engineers.

Although acquisitions can mean the occasional need to perform an elephant execution, Heckmann says that one of the positive sides of the process is that, along with a new company, he often gets great new managers.

“One of my greatest accomplishments was when we acquired Worth, we got Robert Parish,” the CEO of Worth who was promoted to president of Rawlings, says Heckmann. “He struggled mightily, and he did some things that I wouldn’t have done, but I continued to back him until it worked. “I think you need to back off as a manager and let the numbers be the litmus test.”

Given the continued retail consolidation and the lack of overall growth in the sporting goods market, Heckmann plans to continue to make strategic acquisitions according to the model he has honed while pushing for continued new product development to facilitate growth from the stable of brands that K2 has collected. But he says that no matter how much planning and experience a CEO brings to the table, each acquisition brings its own unique challenges.

“Every acquisition ends up being a giant headache,” says Heckmann. “Rawlings was a struggle for a year-and-a-half. But once you get the process finished, you can reap the rewards. I’ve learned from every acquisition that I’ve done, and I’m still learning.”

HOW TO REACH: K2, www.k2inc.net

Friday, 24 November 2006 19:00

Dynamic duo

Brothers Mark and Scott McMillin had little time to think about the majority interest of their father’s company, The Corky McMillin Cos., they had just acquired back in 1989, because they spent the next several years trying to save it from bankruptcy.

The privately held real estate company had fallen victim to one of the industry’s vicious down cycles, and it took everything the family could muster to save it.

Its financing was arranged through a handful of local banks and savings and loans. As the financial institutions began to fail and were taken over by the government, loans were called and the company found itself in crisis mode. “We were cutting overhead and managing cash flow daily on a set of 3-by-5 cards on a huge conference table,” says Mark McMillin, who shares chairman and CEO duties with his brother, Scott. “Our loans were being called, and we couldn’t draw on our lines of credit.”

It was through a legal contact in San Francisco that they finally found financing in Taiwan and avoided bankruptcy. “From that experience, we learned to diversify our sources of equity,” says Mark McMillin. “We now borrow from more then 15 different sources.”

Spread your risk
From that experience, the brothers learned that the future of the company would lie in greater diversity of the business model, and they began fashioning directional changes, including the decision not to develop all of the land that the firm acquires. “Over the last five or six years during the housing boom, our core business is now more focused in land development and investment,” says Scott McMillin. “We don’t build on all of the land that we invest in. We understand that in good times, there are two profits to be made — one from the property and one from the building improvements. In bad times, there is only one profit to be made.”

The company, which was founded by their father, Corky McMillin, doesn’t disclose revenue, but Hoover’s estimates revenue at $464 million, while Reed Business Information puts its housing revenue at $593 million, with other revenue adding an additional $287 million.

The brothers have also learned to take a more pragmatic approach to deal-making. “When the economy is good, it appears that there are too many good deals out there,” says Mark McMillin. “Interest on our money is our biggest line item. Every deal that comes through now, I put some realism and conservatism into it.”

Learning to reduce the financial risk associated with the building industry by buying and holding land was one change that the brothers implemented as a result of the lessons of the 1990s; the other was that expanding beyond the San Diego real estate market when staying local posed growth limitations for the first time. “In order to grow, we needed to look outside of California, and we also wanted to look at markets that are counter-cyclical to San Diego,” says Mark McMillin.

That decision has resulted in acquisitions in Bakersfield, Visalia, Imperial Valley and now San Antonio, Texas. For a family-owned business, bringing outside companies into the fold can be a challenge, and to do it successfully, the brothers didn’t stray too far from the core beliefs and values that are part of the company’s foundation. “First and foremost, when we look at a company for a potential acquisition, we want the firm to be operating under the same parameters as our own, so they have been built by other entrepreneurs,” says Mark McMillin. “We have to have a comfort level with their people.”

One of the main points of emphasis is on the people who come with the company. “Real estate is a local business, so we really are making that acquisition for the express purpose of buying their intellectual capital and knowledge of the local marketplace,” says Scott McMillin.

Before making acquisition decisions, the brothers complete their financial due diligence and then spend time with the top two or three managers from the prospective acquisition, as well as with the departing owner to assess the staff’s market knowledge level and cultural compatibility. Once the acquisition is made, the McMillins have learned from experience that effective assimilation is vital. “In order to teach our method of quality, we send people in from San Diego,” says Mark McMillin. “We’ve learned that you can’t just throw the manual at them.”

Executives from the acquired company are brought to the headquarters, shown the new processes with hands-on training and are assigned a coach.

The methodology for effective acquisition assimilation was perfected following the Bakersfield purchase and is one that Scott McMillin says is transferable to other industries. “Initially, we consolidate financially and get a pulse on the cash flows and projections,” he says. “Then we involve them in our best practices operationally, and jointly we develop a business plan after some due diligence and by using their local knowledge. We continue to support them the first six months and begin the co-training process.”

Cumulatively, organic and acquisition growth have resulted in about 1,000 employees. It has been important for the brothers to lead by example with their consensus-building abilities, because the company is structured on the philosophy of teamwork, with much of the decision-making conducted by committee and the real estate development work conducted by project teams.

Success through teamwork and culture
The Corky McMillin Cos. uses an executive committee to determine strategic direction and resolve differences.

The executive committee structure was put in place by Corky McMillin, and the group participates in strategic planning and corporate decisions, including land acquisition and development, homebuilding construction, sales and marketing, and customer service. “We make group decisions here, and we move slowly,” says Scott McMillin. “Even if we are going to terminate someone, that decision is reviewed by a group of people. It works for us because our business units work together to bring products to market.”

Projects are also managed by teams. For example, in developing communities and neighborhoods, the project teams include managers from sales, marketing and planning. All of the team members understand both the overall project objectives and the individual components of the project, eliminating decision-making in silos. “You take the typical real estate executive, and they allow the project manager to make all of the decisions,” says Scott McMillin. “Our company project managers don’t have that type of authority. Everyone’s open to listen to ideas, and we’ve never stopped anyone from providing input or being involved.”

The committee structure also serves to spread accountability for the end result, something Scott has carried on from his father. The compensation plan also supports the team-work philosophy and group accountability, with all employees potentially able to receive a bonus each year based upon total company performance.

In addition, the firm sponsors an off-road racing team, and employees have the opportunity to work with the crews as a real-life example of the correlation between teamwork and success. The racing team is also used as a marketing vehicle, as a way to maintain the family culture of the organization and to provide some fun along with the growth.

The concept of earning opportunity was part of their succession planning curriculum and was instilled in the brothers as they progressed through the ranks. Mark McMillin started with the firm in 1979 and Scott McMillin came on board in 1981. Both started at the bottom of the organization and worked their way up, earning the respect of managers and co-workers by living the culture that favors hard work and hands-on involvement.

“I went through all the chairs,” says Scott McMillin. “Being an owner, I came to understand why decisions are made and to support the managers and become personally responsible.” Today, the same practice remains in place. A manager brought in from outside the company is required to take a rotation through the chairs and will not be promoted until the new person impresses the managers with his or her abilities and earns their respect and confidence. In addition to continuing the culture established by their father, the brothers have kept a close watch on staff morale through the transition when Corky McMillin passed away in September 2005.

“We have formal feedback sessions with the managers three times per year,” says Scott McMillin. “We bring together about 80 people for half-day sessions just to receive feedback. I also measure the morale by being out on the front lines and talking to people. I spent time in sales and marketing, so I think I can pick up on the vibes.”

HOW TO REACH: The Corky McMillin Cos., www.mcmillin.com

Friday, 24 November 2006 19:00

Recruiting top performers

Just as CEOs are struggling to cope with the need for increased corporate accounting compliance resulting from a deluge of complex regulations, the task has been made even more difficult by a shortage of experienced accounting professionals. While businesses and accounting firms scramble to fill many newly created jobs, baby boomers are starting to exit the workplace, creating an increasing gap between supply and demand for seasoned accounting practitioners.

“CEOs need to know that they aren’t just competing with other companies for the necessary talent — they are competing with CPA firms,” says Joyce Salter, a senior manager in the Audit and Business Advisory Services Group at Haskell & White LLP.

As evidence of the problem’s severity, a recent survey conducted by the American Institute of Certified Public Accountants revealed that “finding and retaining qualified staff” was the top issue among 35,000 participating CPA firms. Companies in a wide range of industries certainly will have experienced this shortage as well.

Smart Business spoke with Salter about how CEOs can compete for talent when experienced accounting professionals are receiving multiple offers as they seek new opportunities.

Why is there such a demand for experienced accounting professionals?

The biggest contributing factor is the governmental regulatory requirements imposed by the Sarbanes-Oxley Act of 2002 (SOX). In particular, Section 404 of SOX imposes a significant increase in the internal and external financial reporting requirements by public companies.

Most public companies, especially the smaller ones, don’t possess the internal resources to handle compliance with Section 404. Therefore, businesses must hire new staff or retain outside consultants. In either case, these professionals are the same people that public accounting firms are attempting to recruit to handle the added external audit requirements, as well as the waterfall effect of new rules spilling over to private companies and not-for-profits.

What are the best sources for candidates?

Executives can turn to familiar sources for candidates, such as executive search firms. However, those recruiting services can come at a fairly hefty price. Being a CPA, I always suggest that CEOs look at the cost-benefit of using search firms.

A more cost-effective solution is to build a pipeline of candidate referral sources from among former employees, current colleagues and friends. Who better to provide a referral than someone you already know?

With all of the competition in today’s marketplace, it is critical to develop creative, alternative sources for recruitment. Accounting industry professional associations provide fertile ground for new talent.

Also, don’t overlook college students — they are tomorrow’s business leaders. Start planting seeds now to build your company’s reputation as a premier employer by maintaining an active presence on college campuses.

What are the top reasons that candidates might decline an offer?

First, they might decline if your offer is not competitive with the marketplace. Do your homework and know what the competition is offering before you draft and extend your offer.

Second, a candidate might decline if he or she is unfamiliar with your company or its brand. In addition to ongoing marketing activities, be sure to communicate the advantages of your company throughout the courting and interviewing process. Companies that are effective at recruiting have finely crafted value propositions and well-honed branding.

Finally, your offer may be declined if the candidate doesn’t feel that his or her needs are being met. Recruiting is a highly personal business. Find out what is driving the candidate from his or her current position.

What can I do to make certain that my company is viewed as an employer of choice?

The individuals you are recruiting likely have worked in the accounting profession for up to 10 years and have a pretty good idea of what they want in an employer. Achieving better work-life balance often tops the list of desired attributes, so integrate this concept into your operating philosophy as much as possible.

Another major consideration for experienced candidates is career progression. I can’t overemphasize the value of having a formal career-planning process in place and introducing candidates to prospective co-workers who have ascended in the organization.

Have serious candidates meet with several employees at various levels in the company. This benefits both the candidate and the company, as it allows both sides to evaluate the interpersonal chemistry and the ‘fit.’

Lastly, actively demonstrate that you care about the candidate’s decision. Little things do count, so don’t be afraid to send that basket of flowers.

JOYCE SALTER, CPA, is a senior manager in the Audit and Business Advisory Services Group at Haskell & White LLP in Irvine. One of the largest independently owned accounting and business advisory firms in Orange County, Haskell & White provides a full complement of tax, accounting and auditing services to public and private middle-market companies. Reach Salter at jsalter@hwcpa.com or (949) 450-6200.