Facing a severe and protracted economic downturn, chief financial officers are worried about controlling costs, sales executives are worried about retaining and motivating sales staff, and everyone is worried about declining revenues, customer defections and eroding market share.
To alleviate the concerns, seasoned sales executives dipped into their stash of proven recessionary tactics to set interim sales goals and revise compensation plans before hunkering down for the duration. Now that the economy is stabilizing, those recession-induced plans may yield unintended consequences such as over-rewarding lower-tier performers while shortchanging their hard-charging counterparts. Employers must take steps to recalibrate sales compensation programs and revise performance expectations to comport with 2010 market conditions.
“Companies don’t want to be stuck with a 2008 sales compensation program in 2010,” says Matthew Lucy, senior consultant with the Sales Effectiveness and Rewards prac- tice at Towers Watson. “Companies are realizing it’s time to reassess their incentive plans in light of the new economy and build for growth.”
Smart Business spoke with Lucy about the hazards of latent sales compensation plans and the best ways to motivate and reward top performers in a recovering economy.What should employers consider when reassessing sales compensation programs?
Start by reviewing your company’s revised go-to-market strategy and ensure sales rewards and compensation plans are aligned with the company’s current goals (as opposed to the goals of a few years ago). For example, companies may choose to scale back heavy discounting practices in order to bolster margins, after bowing to market pressures for nearly two years. Include profit elements in revised sales com- pensation plans to encourage representatives to raise prices and sell value over cost. And though there’s rarely a shortage of opportunities for competent business developers, expect increased competition for their talents in 2010. It will be critical to compare your company’s compensation plan against competitors to ensure you can stave off turnover or acquire additional sales talent to meet post-recession business objectives.
Which additional design elements drive per- formance?Employers need to ensure that their plan mechanics (for example, thresholds and targets) are set appropriately for the new economy. Companies often lower bonus thresholds during a recession to motivate employees, or they link sales bonuses to company results in order to control costs. But those tactics may simply increase total compensation without increasing revenues and, worse yet, they may benefit poor performers at the expense of top performers. Additionally, payouts for meeting team goals or MBOs can fail to encourage per- sonal performance, which is fundamental to healthy revenue growth. Consider modi- fying quotas or individual performance goals to benefit sales representatives at all performance levels without compromising plan integrity; use contests and spiffs to help fill the gaps if the recovery sputters.
How can sales managers establish realistic measures and quotas in an uneven economy?
Accurate quota setting is the most over- looked way to reduce costs. Simply setting accurate quotas may reduce overall com- pensation costs by 10 percent to 20 percent without altering plan designs. Use these tactics as part of a comprehensive quota development methodology.
- Shorten time horizons. Setting quarterly quotas or allowing midterm adjustments on annual goals will enable more accuracy in a shifting economy.
- Bottom-up quota development. Indi- vidual sales goals are often apportioned from full company objectives, which can lead to unrealistic targets. Quotas need to be a collaboration of top-down and bottom-up quota development. This process should uncover territories that can shoulder more of the growth burden as well as those that may be tapped out.
What’s the best way to use contests and spiffs?
Competitions are the perfect tool to launch new products and services, bolster eroding margins or ease the sting from a temporary setback in the economy. Contests should last three to six months and offer winners a modest reward, because they should not be used as a substitute for effec- tive sales compensation plans and quota setting practices. In fact, set aside no more than 5 percent of the total incentive budget for contests and spiffs at the beginning of the year and consider limiting awards to representatives achieving most of their sales quotas or exceeding performance thresholds to reinforce the importance of meeting goals. Drive the point home by cen- tralizing contests to keep renegade managers from offering rewards that deviate from the company’s core strategy or diminish fundamental sales achievement.
What other tactics drive sales performance?
This is the perfect time to revisit the pro- ductivity of your sales force. Finding ways to force sales personnel to decrease admin- istrative tasks and increase face-to-face selling time and other revenue-generating activities is a sure method of driving sales. Companies may have eliminated sales support personnel during the downturn or delayed investments in tools like CRM software, mobile devices or lead databases, but it’s easy to assure the return on these investments as long as sales quotas are in- creased proportionally.
MATTHEW LUCY is a senior consultant with the Sales Effectiveness and Rewards practice at Towers Watson. Reach him at (310) 551-5603 or firstname.lastname@example.org.
Historically, executives have been able to guide their companies through a negative business cycle by reining in costs and waiting for an economic resurgence. While some aspects of the current recession call for traditional protocols, don’t expect a return to business as usual anytime soon. Unprecedented events in the financial services industry have changed the trajectory of business by ushering in a new era of regulation and an evolution in the way business is transacted.
“Business is built on trust. The collapse of confidence in the financial industry created a tipping point for the entire economy bringing business to a halt,” says Rick Beal, managing consultant with Watson Wyatt Worldwide. “From reinventing the roles and responsibilities of board members to creating a flat organizational structure to foster innovation and nimble decision-making, executives must reposition every aspect of their organizations or risk being left behind.”
Smart Business spoke with Beal about the dramatic changes facing executives and the actions they must initiate to adapt their organizations for future success.
How are changes in the broader economy impacting Northern California?
Two types of companies will emerge from this recession: very large, complex employers that have diversified business portfolios and a global presence and small niche companies focused on a single product or service. We’re already seeing the impact of this evolution in our region, as companies that were once connected to the housing, auto or financial services industries have undergone major restructuring. Thriving businesses will be increasingly reliant on technology, which is good news for Northern California, but they will also require top-flight intellectual capital, so expect to see them engage in a fierce battle for talent.
What other changes are anticipated, and how will they impact human capital?
Given the projected tax and compliance cost increases, companies are looking to lower operating expenses, so they are enhancing strategic partnerships to deliver their products and services to customers. Successful execution of an alliance-based business model will require new technologies and employees who can develop and nurture relationships. In addition, future success will require uninhibited business innovation and the ability to react quickly in a fluid business environment. As a result, we’re seeing large companies addressing organization structures and role leveling systems to foster agile decision-making. Employees who can think independently while mitigating risk will succeed in this environment. Companies with comprehensive talent management programs will be most successful incubating future talent and dissuading defections to competitors.
How will these changes impact the role and composition of corporate boards?
At one time, being a member of a corporate board was a plum assignment, now it’s an exposed position that carries significant personal liability, as boards are being held accountable for the company’s actions in courts of law and in the court of public opinion. Board members must be highly engaged individuals who possess the expertise to assess the company’s risk position without becoming micromanagers. With businesses becoming more reliant on strategic partnerships, board members are expected to bring value by introducing possible alliances. These changes have altered the composition of boards and the profile of candidates, as boards strive to include members who understand best practices in audit and executive compensation.
How can executives manage the increase in government regulation and oversight?
Business lost the trust of the public and now will pay a price. The outcry over evaporating net worth and ill-timed paydays for a few business leaders created a pitchfork moment. The resulting pro-regulatory pendulum swing will likely overshoot its mark. Executives now must:
- Increase transparency. It’s critical to police your business from the inside. Provide transparency around compensation, risk positions and your company’s relationship to other organizations and industries. While the government’s primary focus will be on preventing the systemic risk that took down the financial services industry and everything else in its wake, easy targets for political intervention will suffer the greatest consequences.
- Articulate your company’s employee value proposition. In today’s environment, all compensation packages must be proportionate to the return they generate for shareholders, and employees must understand how the payouts contributed to business success. Use communication tools effectively to demonstrate how the company’s compensation and benefit plans flow from and are linked to the achievement of business outcomes.
- Mitigate risk. Conduct a risk analysis using empirical data and design incentives to mitigate risk into your reward plans. Assess the headline risk but don’t be ruled by it. Resist anecdotal opinions. Make your case to your internal and external constituents based on evidence. Work to improve the bonds of trust with employees, shareholders, business partners and regulators.
Rick Beal is the managing consultant for Watson Wyatt Worldwide in Northern California. Reach him at email@example.com or (415) 733-4310.
During economic downturns, executives often turn to human resources for advice and solutions as companies focus on survival and resort to layoffs and compensation/benefit reductions. Lessons from previous recessions show that staff reductions in particular must be strategic, requiring HR and senior executives to consider the long-term business ramifications before recommending cost-cutting moves. But this recession is ushering in an additional challenge, as HR has also suffered layoffs, necessitating an internal search for increased efficiencies and ways to maintain employee service levels with fewer resources.
“This is an opportune time for HR to get its own house in order, because HR organizations are shrinking,” says Julie Egbert, SPHR, senior consultant for the Technology and Administration Solutions Practice at Watson Wyatt Worldwide. “Nationwide, we are seeing the numbers of employees serviced by each HR professional rise, so HR must find ways to be more productive.”
Smart Business spoke with Egbert about the multidimensional role of HR in helping businesses survive the tough economy.
What is HR’s role in developing and executing strategic staff reductions?
HR should suggest reductions that won’t impact the company’s long-term growth or ability to rebound when the economy shifts. During the last recession, companies eliminated entire segments of middle management, thinking those cuts would result in the largest savings. But when the economy turned, many companies had lost too much institutional knowledge and hands-on expertise to capitalize on the improving conditions.
This time, instead of offering across-the-board early retirement options, packages are being offered strategically and many companies are opting for pay freezes, salary reductions and decreased 401(k) matches to retain vital employees. HR should also develop an employee communications strategy that outlines the reasons for the cuts to bolster morale and engagement, so productivity is maintained.
Finally, HR should work one-on-one with high-potential resources to assure their retention and readiness for future leadership roles.
How is the downturn impacting HR?
HR isn’t exempt from the need to increase efficiencies and reduce costs because, across the board, HR organizations are shrinking as well. Three years ago, the ratio of employees serviced by each HR representative was 100-to-1, now we’re seeing ratios of 150-to-1 or 200-to-1 and some companies are even pushing toward ratios of 800-to-1 with outsourced process models and employee self-service systems. To achieve substantial productivity increases, HR must review every program and process to find efficiencies.
Where should HR look for opportunities to increase efficiency?
- Review all compensation and benefits
plans. Make sure bonus and benefits expenditures are delivering their intended impact
and ROI. Eliminating underutilized benefit
plans can save hard and soft costs.
- Review existing contracts. Vendor pricing may have changed because of head count
reductions, especially for outsourced payroll
processing or retirement plan administration.
Vendor consolidation, elimination of under-utilized services or negotiating longer-term,
lower annual rates may restore some lost
- Review vendor service level agreements.
If it’s not possible to reduce prices, HR may
be able to negotiate for increased services,
which will reduce administrative burdens
and internal costs, and increase employee
- Review current outsourcing models. HR may have outsourced portions of some functions, resulting in costly process redundancies, or outsourced entire functions that could be handled in-house through existing human resource management systems (HRMS) technology. Only specific cost-benefit analyses will determine whether complete functional outsourcing or another HR service delivery model provides the best value.
Can HR technology yield savings?
Many companies have delayed upgrades, so they’re seeking savings through better utilization of better technology or outsourcing.
- Consider hosted solutions. Moving to a
hosted HR technology solution could reduce
costs while providing increased functionality.
Volunteering to be a beta test site is another
way to save money and secure free upgrades
from the HR vendor, but that move carries
- Move to employee and manager self-service. Develop a self-service portal or out-source services to third-party suppliers with
online capabilities to maintain service and
employee morale while reducing costs.
- Fully utilize existing technology. Eliminate unutilized or underutilized HR technology to gain efficiencies without additional investment. For example, an untapped talent management program can assist with succession planning in light of layoffs and position the company for success once the economy rebounds by developing a bench of future leaders.
JULIE EGBERT, SPHR, is a senior consultant for the Technology and Administration Solutions Practice at Watson Wyatt Worldwide. Reach her at (415)733-4224 or firstname.lastname@example.org.
Business executives are battling time and the economy, necessitating that every company has a strategic plan.
But all too often, executives stop managing once the plan is written; forgetting that what happens next is the most critical part of the process. Achieving buy-in across the enterprise, cascading the goals down through the organization and following the objectives through to completion is the difference between having a strategic business plan and achieving one.
“Don’t confuse strategic planning with managing strategically,” says Wayne Pinnell CPA, managing partner, Haskell & White LLP. “This time, many of the recessionary-induced changes may be permanent, forcing executives to employ strategic management techniques to re-vision their organizations for success in a new economy.”
Smart Business spoke with Pinnell about the strategic management and planning techniques executives should employ in today’s business climate.
What constitutes an effective business plan in today’s environment?
Thirty-page glossy plans are out — one-page working documents are in — because a short plan gives everyone in the organization a clear, concise picture of the priorities and it’s easier to manage the goals and amend them if the economy shifts. The plan should read like the responses to a Joe Friday interrogation — stating just the key facts. Describe each initiative by outlining where the company is now, where you want to go, when you want to get there and how you plan to get there, and also name who is responsible for each assignment. The plan should be created by those who have a vested interest in the outcome, which can vary by organization, but blending operational managers with strategic thinkers on the planning team often results in a plan that is visionary, yet detailed and realistic.
What’s the next step?
Communicate the plan to every employee in the organization, making sure that everyone buys in to the organization’s mission and understands his or her role. It is important for every employee to know how their particular role supports the overall organization’s business and goals. Short slogans or tag lines of three to eight words are an excellent way to remind employees about the company’s vision; create one and use it on e-mails, stationery and brochures. Executives may not have time to survey every employee to gauge acceptance and understanding of the plan. Make a few phone calls and chat with employees in the hallways, asking them for feedback to validate the effectiveness of your communication strategy.
What’s the most effective way to cascade the goals down to each individual?
While you are communicating the vision, amend the employee performance plans, disseminating accountability and responsibility for achieving the company’s objectives to each individual. Aligning employee compensation with the overall strategy of the company, both individually and on a team basis, adds another layer of reinforcement toward achievement of the larger objectives.
How should executives manage the plan?
After a new plan is introduced, review meetings should be held at least every 30 days, because getting off on the right foot and driving a momentum change are critical to ultimately achieving the plan. Short-term review points provide an opportunity to reset the ‘must do’ actions over the next 30-, 60- and 90-day periods. It is important to distinguish the ‘must do’ items from those you should or could do, as ‘must do’ items are those considered to be critical to success. While staff members should report on their progress during the meetings, it may require that you remind them via e-mail about upcoming sessions, so everyone knows what to expect and to let the staff know you are serious about following the plan through to completion. Appoint a scribe to take notes during the meeting, and then send out the minutes and a list of action items after each session.
Adjust a goal if situations have changed making it unachievable or no longer a desirable outcome. Don’t shy away from holding people accountable or let ‘lack of time’ be an acceptable excuse, as we all have the same amount of time available — it’s just how we choose to use it that makes the difference. Look at any macro objectives in a micro way to see if political, social or economic events necessitate a change and review the assumptions you used in creating the goal to see if they are still valid. In this economy, you may need to challenge your own assumptions more frequently than in the past.
What other steps should executives take?
Too often, executives create a business plan, and it sits on the shelf because there’s enough momentum in the economy to carry the company forward. One of the biggest myths about this recession is that ‘spring is just around the corner,’ so we can just ‘hunker down’ and wait and things will ultimately get better. Executives need to create change, and the only way to move an organization toward a new strategic vision is by managing strategically.
WAYNE R. PINNELL, CPA, is the managing partner at Haskell & White LLP. Reach him at (949) 450-6314 or email@example.com.
“Creating connections between employees and business units fosters collaboration and increases productivity, group problem solving and knowledge transfer,” say Susan Sanders and Kris Addington, senior consultants for Watson Wyatt Worldwide.
Smart Business spoke with Sanders and Addington about how companies can drive employee engagement and productivity through interactive strategies.
How can social networks benefit companies?
Addington: Collaboration tools are a great way to bring geographically disparate groups of employees together to share knowledge and ideas toward a common goal. Online discussion groups, internal blogs, collaboration sites and profile pages allow employees to join in the company conversation and are an effective way to leverage intellectual capital. Social networks, such as internal ‘Facebooks,’ bring people with similar interests and issues together and make it easier for employees to track down internal experts.
Sanders: When they’re more connected to the company, they’re more connected to their job. That’s what leads to increased retention and higher productivity. Also, it’s important to recognize that millenials expect companies to have these capabilities, so when we start to recover from the current economic situation, socially networked companies will be in a better position to compete for their talent.
Which strategies are most effective?
Sanders: There isn’t a one-size-fits-all best solution. Instead, organizations need to develop social networking strategies that support current business objectives and provide solutions to business issues.
For example, if there’s an important business need to foster knowledge sharing, a portal with collaboration and document sharing capabilities may be the best way to use social media. Or, if there is a desire to open lines of communication between executives and their work force, blogs and discussion forums are great ways to create two-way conversations. Organizations that use the bandwagon approach in an effort to appear state of the art generally don’t see great results.
Addington: I agree; it’s essential that social networking tools support specific business goals. Successful strategies also take culture and user readiness into consideration and have a change management plan in place to help ensure adoption, including communications, pilot programs and training.
How can employers implement strategies cost effectively?
Sanders: Developing social media doesn’t usually demand a significant capital investment. Many organizations leverage existing technology platforms, such as SharePoint. Also, you don’t have to do everything at once. Our advice is, ‘Think big, start small, scale up’ implement in phases based on top business priorities.
Addington: Starting small can mean
piloting social networks or collaboration
sites within a single community before
committing to a companywide rollout.
The pilot will determine the most effective ways to engage participants and identify the most beneficial information to foster change. Or, start with a wiki of company acronyms or an online employee directory, where employees can add their bios and search on co-workers’ backgrounds. These tactics cost relatively little, but measure the interactive readiness of the employee population before executives commit to a larger investment.
How can executives overcome the fear that social networking will distract employees and lead to negative conversations?
Addington: There are several steps you can take to minimize negative results. Establishing a clear set of communication guidelines will remind employees that any business-related communication is expected to be professional and respectful. Reserve the right to remove comments and content that are deemed offensive. Reward online activity that fosters knowledge sharing and collaboration.
Sanders: From what we have seen with organizations effectively using social media, the benefits of social networks far outweigh the potential negatives. Employees are having conversations offline and online regardless of whether or not the organization provides the channel. With social networks, executives can listen to and be a part of that conversation.
SUSAN SANDERS is a senior consultant for intranet portals and collaboration at Watson Wyatt Worldwide. Reach her at (415)733-4255 or firstname.lastname@example.org.
KRIS ADDINGTON is a senior communications consultant for Watson Wyatt Worldwide. Reach her at (415) 733-4141 or email@example.com.
It’s hard to sustain long-term business growth with short-term strategies. That’s what Michael E. Uremovich discovered in 2006, shortly
after assuming his new role as chairman and CEO of Pacer
International Inc., an intermodal and logistics freight transportation
Pacer’s former management team had made 14
acquisitions leading up to an initial public offering in 2002, sidestepping the challenging and often expensive task of dealing with acquired
owners and fully assimilating the acquired companies.
important not to disappoint investors in the early stages after going
public,” Uremovich says. “So the former management team chose not
to address some of the strategic acquisition issues, until the company
became more mature. It was clear to me that I needed to act and redirect the company in order to stimulate growth.”
Much of the capital raised during the IPO went toward reducing
acquisition debt, not infrastructure consolidation, and soon the company’s revenue and earnings growth slowed. Incongruent computer
systems were costly to run and failed to satisfy customer needs, while
a patchwork leadership team failed to operate under a unified vision.
Now, Uremovich would have to tell shareholders that he needed to
make a number of changes, some of which would require significant
Uremovich is regarded as a logistics industry guru, who helped revolutionize the business. He was a member of a team that invented the double-stack train, where one cargo container rides atop another, doubling
the train’s capacity for transporting goods and reducing costs. He also
served as managing director of the worldwide transportation practice
for Coopers & Lybrand and was a principal at Booz Allen Hamilton.
Prior industry experience gave him knowledge about the needs of customers, which he quickly put to work as part of a plan to reinvigorate
growth at Pacer.
Uremovich spent his first days as CEO listening to Pacer’s staff discuss
key business issues. His initial impression was that many of the conversations centered on internal problems and not the needs of customers. Then,
through in-depth financial reviews, he discovered that $400 million, or
roughly 25 percent, of the company’s annual revenue was unprofitable,
which represented nearly $20 million in lost opportunity. To Uremovich,
that was conclusive proof that the company’s division leaders were not
focused on the right priorities.
“All you had to do was be a fly on the wall and listen to the conversations,” Uremovich says. “Everything I heard was ‘we’ oriented, no one was
talking about our customers.”
Pacer was structured in five autonomous business units, each headed by
its own president. One of Uremovich’s first goals was to work with each
business leader to make his or her division profitable.
“I asked each of the presidents to come to me with a plan to get the
business moving,” he says. “I wanted the plans to be tightly focused,
because I also felt that we were focused on too many things and not all
of them were important. So I asked each president to focus on six
things, and I stated that I expected some of those to be customer initiatives.”
An example of one initiative that delivered increased revenue by satisfying customers occurred in the company’s transport service unit. The team
began a focused sales campaign offering heavy haul services to customers, but the initiative also included a program to improve safety and
reduce claims. As customers gained confidence in the safety of their
cargo, they began buying more of the specialized trucking services.
“I’ve never been a fan of scorecards, because they only measure where
a company’s been, not where it’s going,” Uremovich says. “I prefer benchmarking against future business objectives because it’s more effective in
Several things happened as Uremovich maintained a vigilant schedule of
monthly follow-up meetings with each division leader, tracking the
progress of the initiatives. First, he discovered that he benefited from the
discipline of a monthly review schedule, because he avoided distractions
and remained tightly focused, and second, he also found that some of his
management team didn’t buy in to his vision of a unified company or could-n’t execute on the critical few components, so he began making changes.
“I think I was guilty of the same mistakes that many CEOs make,
because we’d all like to believe people will see the right path, but that’s
not always true,” Uremovich says. “I tried a couple of public executions,
in the hopes it would be a motivator, but in hindsight, I think I should have
acted more quickly.”
Now two years later, three of the five company business units have
turned around, one is improved and one is still struggling.
Create operational efficiencies
Pacer was operating a number of systems and programs, including four
disparate general ledger systems, the remnants from acquired IT infrastructures. The result was higher costs and more frequent mistakes.
Without a common financial or human resources system, there were multiple people involved in processing every transaction, creating the opportunity for costly errors.
In addition, customers were unable to track their cargo through a single
portal as it passed from one Pacer transportation division to another,
including the invoicing and payment application processes. That created
back-office redundancies, and it failed to meet customer demand for a single logistics provider with a seamless process.
But developing an ERP system for a company the size of Pacer is expensive, and while the decision was ultimately made to build a single platform
using SAP, Uremovich had to manage the expectations of investors, telling them to expect some short-term pain in order to realize long-term
“I communicated to the shareholders the importance of integrating
to one system across all service units, because ultimately, it would
drive profitability and growth,” he says. “Fortunately, there was recognition on the part of the shareholders that this had to be done; in fact,
most shareholders thought we should have done it earlier. But the
potential size of the commitment was substantial, in excess of $35 million in capital.”
Uremovich says that Pacer was experiencing another post-acquisition hangover — out- of-control spending.
“I’d give us a C-plus in terms of spending control in today’s business
climate,” he says. “I instituted more rigorous control processes and
new rules of engagement about who can approve expense accounts.
I wanted to encourage the staff to think and act like responsible owners.”
As the development of the new data system moved forward,
Uremovich was able to reduce operating costs and make staff reductions. In addition, Uremovich changed the company’s employee
bonus program to support his cost-control and customer-focused initiatives. Instead of earning a bonus only on the company’s performance, employees can now earn half of their bonus based upon the performance of their business unit, while the other half is based upon full
company results. And under this new bonus plan, employee turnover
has been reduced by 50 percent.
Focus on service
“Taking over as a CEO who needs to make significant investments,
does have a higher risk for failure, especially for a while,” Uremovich
says. “So it’s not for people who are risk averse, but it’s also an opportunity to achieve something. In my opinion, you can never go wrong
under those circumstances by focusing on the customer, because somebody out there better pay attention to those people.”
Uremovich’s final growth strategy was to drive Pacer toward
becoming a world-class intermodal and logistics service. He says that
customers are more interested in reliability than price, so demonstrating service consistency is vital as is providing a one-stop shop that
offers customers the flexibility to select the most effective mode of
For example, customers often need to contract with multiple firms,
transporting freight from ships to railroad containers to trucks, which
increases costs and decreases reliability. Under Uremovich’s unified
service model, customers can switch between rail and trucks, while
still keeping their entire shipment of goods in the care of one provider.
Uremovich also renegotiated many of the company’s rail contracts,
using his years of industry experience and relationships, to create
more favorable terms that will benefit customers and improve margins.
“A number of things changed in the industry around the 2004 to
2005 time frame, and now there are really only two rail providers,”
he says. “So the terms and conditions in those contracts are vital
in determining a firm’s competitiveness in the transportation
Uremovich also insists that the firm’s senior executives visit customers, and he personally conducts new business pipeline reviews
with the company’s sales staff, so he can keep tabs on what’s important to customers and be involved in landing the top four or five
prospects on the list. Now that division leaders operate under a unified vision, sales staff cross-sell services to clients, which has
increased growth and revenue.
So far, his solutions seem to be on target. While 2007 operating
income was below 2006 levels, it was above all other years since the
IPO and revenue increased over 2006 by 4.3 percent to $1.9 billion.
“We really were a creature of private equity,” Uremovich says. “Our results were never bad, but I couldn’t see a way that we could sustain
long-term growth, given our structure. When funding is used to make
acquisitions and create exit strategies for investors, it works in the
short term, but play that out 25 or 30 years and it stops working. As
companies become more mature, you really have to address the long-term strategic issues to sustain growth.”
HOW TO REACH: Pacer International Inc., www.pacer.com
Just 90 days ago, unprecedented levels of fear existed among businesses and consumers about the stability of the U.S. banking industry. Now, strong banks are getting a boost from the U.S. Treasury’s Capital Purchase Plan (CPP), which is investing $250 billion in banks that have been approved to participate in the program by primary regulators and the U.S. Treasury. The program has been successful in quelling fears and restoring confidence and both consumers and businesses will benefit from banks’ strengthened balance sheets, which frees up funds for lending.
“Anything the government can do to add stability to the banking industry overall is a good move,” says Brian Keenan, president and CEO of Fifth Third Bank, Tampa Bay. “We have been making loans all along, but CPP will allow us to be more flexible with strategic lending opportunities.”
Smart Business spoke with Keenan about how consumers and businesses will benefit from the Treasury’s investment in banks.
How does CPP enable banks to lend?
The CPP is part of the $700 billion Emergency Economic Stabilization Act, signed into law in October. Through the CPP, the government will invest in senior preferred shares of financial institutions, and then encourage the banks to buy back the shares from the government when the markets stabilize. It is designed to help strengthen the balance sheets of many U.S. financial institutions by helping them raise their capital levels. This additional capital positions banks to weather volatility in the economy and to extend credit to qualified businesses and consumers.
Is this program a bailout?
The term ‘bailout’ is not appropriate for this program. It’s really intended to be an investment in banks, which will generate a return for U.S. taxpayers in addition to stimulating the economy. The CPP is designed to assist financial institutions in fulfilling their important economic role of making loans to businesses and consumers and getting all of us closer to our goal of a stronger U.S. economy. I realize that Americans aren’t necessarily comfortable with their government investing in financial institutions, but keep in mind that these are investments, which have to be paid back when the economy rebounds.
How does the program restore confidence?
One benefit of the CPP is an increase in confidence, and we have already sensed greater calm among our customers because they feel the U.S. banking system has stabilized. People were panicked to the point that they were considering withdrawing their money from banks altogether, which is not the right thing to do. As financial institutions, like Fifth Third Bank, are approved for a Treasury investment, it sends a signal of strength to their customers, not only because of a boost in capital levels but because the Treasury has suggested that it will only invest funds in healthy institutions. Also, the increased coverage limits provided by the FDIC are helping depositors feel reassured about the safety of their money.
How will the Treasury’s investment benefit consumers and businesses?
When the CPP invests in strong banks, it provides them with additional capital, which increases their ability to extend credit to qualified businesses and consumers. As barriers are removed, banks will be better able to maintain and increase lending levels to strong businesses to ensure their operations are uninterrupted. This is designed to increase economic activity and reduce some of the negative impact of the current economic environment.
The additional capital should also make it easier for qualified borrowers to get mortgages and other types of loans, and we’ve recently seen a drop in interest rates, which is helping homeowners refinance to more affordable terms. The CPP gives banks more flexibility to help those who may be facing foreclosure or having difficulty making payments on other kinds of obligations.
What else can banks do to help customers in these difficult economic times?
The economy is still highly volatile, making it difficult to plan. We’re spending more time consulting with business executives, helping them forecast for the first quarter and budget for 2009 interest expenses. We’re also working with consumers to reduce banking fees, evaluate their portfolios and plan for their retirement. It’s important for businesses and consumers to review their finances proactively and initiate conversations with their banker if there’s even the slightest chance they might fall behind on business loan or mortgage payments. With strengthened balance sheets as a result of CPP, your banker has more options to help you get through these turbulent economic times.
BRIAN KEENAN is president and CEO of Fifth Third Bank, Tampa Bay. Reach him at (813) 306-2453 or firstname.lastname@example.org.
The SEC’s proposed change from Generally Accepted Accounting Principles (U.S. GAAP) to International Financial Reporting Standards (IFRS) has many executives scratching their heads. Rumors persist about whether the change will ultimately affect private companies, and the 2014 compliance date for public companies requires further clarification. As the SEC takes final comments about the proposed change, CEOs must separate truth from fiction to understand the true business impact of IFRS and prepare to comply with its passage.
“We’ve generally thought that we have the best accounting standards here in the U.S.,” says Rick Smetanka, CPA, partner-in-charge of audit and business advisory services for Haskell & White LLP. “Now, given the growth in international equity markets, it’s become clear that we need to get on board with the rest of the world or risk being left behind. However, with any change, there’s often uncertainty and misinformation in the air, and the inevitable change to IFRS is no exception.”
Smart Business spoke with Smetanka to understand the reasons behind the change to IFRS and to extract the truth about its impact on U.S. businesses.
What’s the real likelihood of this change occurring?
It’s a myth that this change will never take place because the U.S. has the best accounting standards in the world. While we’ve been focused on the credit crisis and the slowing economy in this country, one by one the countries in Asia and the European Union have adopted these standards. The reality is, given the growth in India, China and other international markets, U.S. capital markets have been getting relatively smaller so we’re no longer the dominant global force that we once were. This time it’s not a bluff; the global standards are coming.
Won’t this change strictly impact public companies with international operations?
There’s no truth to the myth that your company must have international operations to be affected. This new way of reporting will apply to public domestic companies whether they have international operations or not. While it’s true that the changes will impact public companies first, ultimately, IFRS will likely spell the death of U.S. GAAP. Even private companies, especially those posturing for a buyout or an initial public offering (IPO), will be impacted or face the possibility of having to recast their financials under international standards to complete M&A or other financing transactions.
Full implementation isn’t scheduled until 2014; what’s the rush?
While 2014 is the proposed implementation date for most U.S. public companies, those companies will also be required to report their 2012 and 2013 financial statements using IFRS for comparison purposes. Further, a select group of approximately 100 of our largest public companies may actually start reporting under the standards beginning in 2009. Given the systems changes that need to take place, the companywide education and preparation efforts that will be required, and a realistic implementation date of 2012, CEOs should start planning for the transition sooner rather than later.
Aren’t the international standards quite similar to U.S. GAAP?
The rumor that the two sets of standards are very similar is not completely true. U.S. GAAP is a rules-based system and IFRS is referred to as a principles-based system, which is subjective in nature and much more flexible. As a result, more judgment will be required of financial statement preparers and auditors and there is a potential that standards will be interpreted differently based on international and political bias. As an example of differences between IFRS and U.S. GAAP, the U.S. uses historical cost-based accounting for fixed assets like equipment and land; under international standards, companies may report those assets at current fair values with periodic changes in fair value being recorded in that period’s earnings.
Won’t compliance simply be accounting’s responsibility?
This transition will have a far-reaching impact on many facets of a company. Expect the change to IFRS to impact everything from executive compensation because it will change how profit is calculated to how CEOs communicate with investors, shareholders and analysts. It will also change the ways companies work with lenders, because debt covenant structures and debt service ratio calculation methods will also change. Expect that IT will be heavily involved, as the company’s internal and external financial reporting and data tracking systems must be adapted. Lastly, CEOs should expect that the change to IFRS will require additional investments to educate and train employees. Ultimately, increased comparability of financial information is expected to provide a solid long-term return on these investments.
RICK SMETANKA, CPA, is the partner-in-charge of audit and business advisory services for Haskell & White LLP. Reach him at (949) 450-6313 or RSmetanka@hwcpa.com.
Given the volume of news about the credit crisis, most executives might surmise that business loans are difficult, if not downright impossible, to secure in today’s lending environment.
But Chad Loar, vice president and middle market team leader for Fifth Third Bank, is on a mission to set the record straight. He says that business loans are still available, but taking a shotgun approach to the market will no longer work. Instead, executives should conduct research and prepare detailed documentation before approaching a lending institution, because a pragmatic approach is best.
“The financing spigot has not been turned off,” says Loar. “Many regional banks have taken the initiative to identify distressed loans in efforts to price risk accordingly as well as exercise opportunities to sell a portion of these loans to raise capital and be in a good position to grant new loans. But lending policies have tightened and terms have changed, so business owners need to prepare before approaching a lending institution.”
Smart Business spoke with Loar about the available sources of working capital and the best practices for securing funding.
What types of funding are available?
Traditional business lines of credit and loans for owner-occupied real estate are still available along with financing for merger and acquisition transactions, although in general, repayment time frames have shortened for leverage buy-outs that consist of unsecured loans. Instead of seven to eight years to repay an unsecured acquisition note, business owners and private equity groups need to realize that repayment terms for such unse-cured notes in this economy now only warrant four to five years at the most and must meet qualification requirements imposed by the shorter amortization schedule.
Which lending markets offer the best opportunity?
Super regional banks continue to fund new loans, but are being much more stringent and conservative, whereas community banks with surplus capital are poised to take on higher risk. If you have an existing banking relationship, start there because the bankers are familiar with your business and it helps to have an established track record. The continued expansion of factoring companies also provides funding that’s secured by accounts receivables or inventory. SBA loans are another option. If your business is growing and creating new jobs, investigate whether you can secure variable rate demand bonds through your city or county. Last, investment bankers and private equity groups are still offering funding in exchange for an equity stake in the business, although that market has tightened considerably.
What’s the secret to securing financing?
First and foremost, business owners must furnish complete, accurate and timely financial reporting. It is imperative that the company’s financial and accounting staff closes the books timely and reports the financials statements to the bank or financial institution within a specified timeframe. Also, the lender will want to review the past, present and future financial health of your business. So bring audited financial statements for the last three fiscal years as well as a year-to-date statement.
A written business plan is the best way to provide the lender with all the required information but, whether it’s part of a business plan or a separate handout, be sure to include a forecast for the balance of 2008 and 2009, including a revenue pipeline report. Lenders want to review the documentation that supports your top line projections. The business plan should also contrast your company’s performance in major financial categories, such as SG&A and R&D expenditures, against standard industry benchmarks and include a strengths, weaknesses, opportunities and threats (SWOT) analysis as part of the presentation.
The bottom line is that business loans will not be granted without professionally presented and thorough documentation.
What else should executives know about the current lending climate?
Understand the banker’s position and educate yourself, so you can approach the lending market pragmatically, because the current climate also results from of a lack of liquidity in global markets. Owners should plan for a longer due diligence process and higher interest rates. Business loan approval is now taking around 30 days and as long as 60 days, if property is involved and appraisals are needed. While it’s still possible to secure working capital or other debt needs, lenders are spending more time scrutinizing deals, so owners will be more successful if they prepare thoroughly and research the market before approaching a lender.
CHAD LOAR is vice president and middle market team leader for Fifth Third Bank in Tampa Bay. Reach him at (813) 306-2452 or email@example.com.
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 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 the 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 firstname.lastname@example.org or (619) 641-3276.