Leslie Stevens-Huffman

Friday, 25 April 2008 20:00

The future of capital gains

The clock is ticking toward the 2010expiration of the favorable capital gainstaxation laws enacted under the Bush administration in 2003. This portends hugeimplications for individuals and small businesses alike because small businesses areoften structured as sole proprietorships orpass-through entities, so capital gains arepassed along to the owners, and becausestock ownership is now commonplaceamong Americans. In 1980, only 13 percentof Americans owned stock, but by 1998, thatnumber had grown to 52 percent. One thingis certain, the next president must deal withthe issue, and the options include everythingfrom maintaining the more favorable rates totreating capital gains as ordinary income.

“The sunset on the Bush legislation is nearing,” says John M. Wyson, tax partner withHaskell & White LLP. “The capital gains taxnow affects so many of us that when politicians argue that the capital gains tax is a taxon the rich, they are painting with an increasingly broad brush. Business owners shouldbe more interested than ever to hear whatthe candidates are proposing.”

Smart Business spoke with Wyson aboutwhat business owners should know aboutthe expiration of the capital gains tax ratesand the current positions of the leading presidential candidates.

How do capital gains and ordinary incomediffer in terms of rates?

The most common form of ordinaryincome is salary and wages, and it is taxed atprogressively tiered rates with brackets ranging from 10 to 35 percent. If capital gainsbecome taxed as ordinary income, it will betaxed at those same rates, and there’s somehistoric precedent for that because, prior to1921, capital gains were generally taxed atthe same rates as ordinary income. Then in1921, Congress enacted favorable tax ratesfor sales of long-term capital assets. Sincethat time, the tax rate on capital gains hasvacillated. In the mid-1980s, the maximumtax rate on long-term capital gains was set at28 percent until 1997 when it was lowered to20 percent. It was reduced to the present day15 percent in 2003. Although the rates havevaried, Congress generally remained consistent by encouraging longer-term investments.

Short-term capital gains, sales of capitalassets held less than 12 months, are still generally taxed at the less favorable ordinaryincome rates.

Will the political party controlling the WhiteHouse impact the new tax rate?

It’s perceived that Republicans generallywant to lower taxes and Democrats want toraise them. However, the capital gains ratewas raised in 1986, during President Reagan’sterm, and lowered in 1997, during PresidentClinton’s term. So, the political party of thepresident does not always dictate which waythe rate will go.

What can we expect from the likely candidates we see today?

John McCain has indicated a desire toextend the 15 percent rate on capital gains.Barack Obama, as part of his ‘Tax Fairnessfor the Middle Class’ plan, supports a returnto the 28 percent maximum rate on capitalgains. Hilary Clinton has expressed her intention to raise taxes on capital gains eitherthrough a proactive change in the enactedrate or by simply allowing the Bush tax cutsto expire.

Who will be affected by changes in the capital gains tax rates?

Those affected may include the rich, middle class and even working class families;basically, anyone who holds and sells stockor other capital assets at a gain. The tax alsowidely affects small businesses. Large corporations are generally unaffected by changesin the capital gains rates because a corporation’s regular income and capital gains areeach taxed at corporate rates.

It’s worth mentioning that the capital gainstax does not apply if you don’t sell. As WarrenBuffett has said, ‘The capital gains tax is nota tax on capital gains; it’s a tax on transactions.’ As a result, wise investors, like Buffett,who are really in it for the long-term, can endup with very low effective tax rates.

What action should business owners take inadvance of the election?

Most experts agree that, regardless ofwhich party is in the White House next year,capital gains rates will likely remain at 15 percent through 2010. So, there doesn’t appearto be any urgency to trigger gains by sellingcapital assets between now and the election.However, if taxpayers have a significantamount of ‘gain’ property, they should discuss the various options of minimizing capital gains taxes with their tax adviser.

How will California capital gains tax rates beimpacted?

Unfortunately, California has no favorabletax rate for capital gains. Rather, capital gainsare taxed as ordinary income. With the topindividual tax rate in California at 10.3 percent, the extra state tax paid on capital gainscan be significant, particularly when a taxpayer is in an alternative minimum tax position and is unable to get a federal deductionfor the state taxes paid. While the expirationin 2010 won’t affect California’s rates, taxpayers always have the opportunity to expresstheir opinions and perhaps influence ratesthat nurture long-term investments.

JOHN M.WYSON is a tax partner with Haskell & White LLP. Reach him at jwyson@hwcpa.com or (949) 450-6200.

Wednesday, 26 March 2008 20:00

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 benefits 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.

Wednesday, 26 March 2008 20:00

Dialing it in

 Joseph Ram is no stranger to change.

He founded InfoSonics Corp. 14 years ago, and, in that time, he has led the company through three major repositioning initiatives, taken the company public and reached record revenue of $240.9 million in 2006.

As a distributor of wireless handsets and accessories, InfoSonics operates in an industry that has evolved quickly. Ram, the company’s president and CEO, says that given the dynamic nature of the industry, he frequently reviews data in an effort to forecast the company’s future market position and isn’t afraid to make changes.

In an industry where success is a moving target, Ram’s latest plan includes expansion into the Latin American and South American markets, a move which required him to lead yet another corporatewide repositioning initiative.

“Making changes is always difficult, and it can take years to fully transition a company,” Ram says. “Along the way, you can doubt yourself, and people will question the decisions you are making. You have to have a tremendous amount of self-confidence, and you have to believe in your vision because you always have your detractors. CEOs need to envision where they want to be in two years and in five years, and eventually, by persevering, you can get very close to your goals.”

Here’s how Ram has conquered the challenges of change while taking InfoSonics to new levels of success.

Craft the vision

Surviving in today’s business climate means being willing to change.

“Every day the world is changing a little bit faster,” Ram says. “There are no assurances for any CEO that you are going to continue to make money unless you are willing to shift your business model.

“I’ve always had the ability to detach myself from the day-today operations, to take the time to look forward. Some CEOs go on retreats, others talk with their friends, but you have to take time to talk about the future. Most people look at the daily activities in a company and think that everything is urgent, but in reality, everything is not urgent. You really have to take time away from the fray on a daily basis and review where you are going.”

To anticipate your company’s future growth, the first thing you need is intelligence from multiple data sources, and you need to review it often and be completely honest with yourself about what lies ahead.

“I think that you need to look at industry data, the global economy and the local economy when looking at your company’s strategic direction and the prognosis for continuing growth,” Ram says. “Start with the outer circle, and look at what’s affecting your operation from the outside, and then look at the inner circle to see where your organization fits within the marketplace.”

Ram spends part of his time engaged in sales activities, none of which are more important than selling his revised vision to constituents.

“Once you have a plan in mind, the hardest part is to sell it,” Ram says. “In my case, I have to sell my plan to our board, our investors, and the members of the senior management team and the employees. The employees will then sell your plan to people outside the company, like customers. The complexity of the organization and the extent of the changes you are proposing determine how long that will take, but it can take months just to build consensus.

“Once, I thought I had completely sold my idea only to find that I hadn’t built consensus, so I had to go back in order to convince people. I think the best methodology for building consensus is to present everyone with the facts. Explain the situation, and give everyone the same set of facts, so they can see the logic behind your plan. If it makes sense and it’s logical, they’ll get behind it. If it doesn’t make sense, they won’t follow you just because you’re the CEO. And of course, as the CEO, you have to be convinced that your plan will work because you need to sell your idea with conviction.”

Ram has an interesting philosophy when it comes to dealing with those who doubt the vision. While many CEOs might choose to eliminate those who aren’t on the bus with the proposed changes, Ram says that CEOs just have to work harder to convince any dissenters.

“You just have to work harder to convince the naysayers,” Ram says. “You have to admire them for their guts. I don’t think that just because somebody doesn’t agree with you that you should let them go; I think you should embrace them.”

Execute the plan

Once the strategic vision is sold, Ram provides his managers with the plan’s parameters as part of the execution stage.

“I provide the managers with the strategic vision and some parameters, and they provide the detail that will execute the plan,” Ram says “We work from three sets of goals, which all have timelines. The plan includes macro goals, such as where you plan to be in the global marketplace, tactical goals, which detail the execution of the plan, and then the financial goals that result from the completion of the macro and tactical goals.”

Flushing out the details of the plan is a process that is often extended throughout several weeks as the exchange of information crosses the desks of managers stretched out across InfoSonics’ global footprint. While each manager authors their respective portion of the plan, Ram checks in weekly with each one in order to gauge each person’s progress. Ram says that if it occurs, he welcomes disagreement among the team members during the process of laying out the tactics.

“It’s important to have your most influential people be in charge of executing the plan so they can lead the other employees,” Ram says. “I think we thrive on disagreement here because it really helps us look at a problem from different angles, and as the CEO, you really don’t want to brainwash people.

“I think that most people come into a planning session understanding that they aren’t always right, so they are open to other suggestions. Usually, we can come to a consensus about our tactical plan. I also think everyone understands that as the CEO, you often have to make difficult decisions, and unless the team can reach an agreement, you’ll have to step in.”

The steps in the plan’s execution phase are laid out like dominos, requiring one department to achieve its goals before another department can execute the next step in the plan. The sequential nature of the plan not only allows Ram to track each group’s progress, but it also helps him focus his attention.

“I monitor the tactical achievements of each department once we move to that stage in the process,” Ram says. “The goals and timeline are laid out sequentially. For example, engineering has to complete their portion if we are offering a new product or service before sales can get the contracts signed, and I focus most of my attention on the weak areas. I think that most CEOs enjoy spending time with the strong areas in the company, but in reality, you need to dedicate your time and efforts to those who need the help.”

Celebrate achievements

Bringing a company and its employees through the emotional roller-coaster ride that often accompanies a major change initiative can be a challenge. As a change process veteran, Ram has learned to make the best of tense times.

“I think that people want to be part of a winning team,” Ram says. “As an employee, even if I think I’m underpaid, the work environment is more important, and the psyche of employees is such that they are motivated to help the company move forward and win. A major repositioning effort is a great time to work shoulder to shoulder with employees, and as long as they understand the vision, they will support you. In addition, it’s important to let the employees know that there’s light at the end of the tunnel.

“Each year, we set aside a certain percentage of our earnings, which go to InfoSonics employees and to charity, so they are financially motivated to help the company succeed. We always take a reflective look at the end of each year to see where we’ve been and to review what we’ve accomplished. This is important because it helps with morale, and it makes people feel like they’ve been part of a team that has accomplished something. I always maintain an open-door policy and let people voice their opinions, and having that kind of culture helps when you are going through big changes.”

A look at InfoSonics’ revenue after the first three quarters of 2007 hints that there might be light at the end of the most recent repositioning tunnel. Year-to-date revenue numbers for nine months of 2007 show a decrease in revenue in Central and South America for the company. However, net sales in the third quarter of 2007 were a record $69.4 million with South America sales representing 59 percent of net sales, or $41.1 million, compared to $49.1 million in the third quarter of 2006. Central America sales were 33 percent of net sales or $22.6 million, compared to $16.4 million in the third quarter of 2006. Latin America made up 92 percent of the company’s sales in the third quarter of 2007.

Ram says that he will continue to persevere through the company’s shift into newly emerging markets despite the challenges because he thinks it’s the best move for the company, and he has confidence in his vision.

“I think it’s crucial to be honest about the enterprise and yourself, so you can remain objective and make the right decisions,” Ram says. “Leaders can fall in love with a product or a customer and then they fail to make objective decisions, which can ultimately lead to business failure. When you go through these big transitions, you’re going to have good days and bad days. You have to continue to believe in your plan and in yourself, and you can’t show it if you have a bad day.” <<

HOW TO REACH: InfoSonics Corp., www.infosonics.com

Sunday, 24 February 2008 19:00

The human impact

Executives used to worry about whether their employees had their heads in the game because the commonly held theory was that employee focus created a competitive advantage. Now executives must win the minds, hearts and souls of their workers because recent research has shown that employees who are emotionally attached to their companies are more productive. Achieving that level of engagement requires a holistic management style.

According to Gallup, companies that are adept at engaging their employees are significantly outperforming companies that don’t engage their workers. In fact, the earnings per share growth rate of the top performing companies in a recent Gallup study was 2.6 times that of the companies that scored below average in engaging their employees.

“Engagement not only improves productivity, it reduces employee absenteeism and turnover,” says Hosetta Coleman, SPHR, Senior Vice President of human resources at Fifth Third Bank (Tampa Bay).

Smart Business spoke with Coleman about how to nurture employee engagement through a holistic management style.

How does work environment engender engagement?

To drive engagement, it’s important to create an inclusive environment; one that elicits employee feedback and ideas. When people feel like they have a voice, they will become more involved and they also feel valued. Here at Fifth Third Bank, we have a monthly session called ‘Bagels with Brian,’ where new and more tenured employees can participate in a question-and-answer session with President Brian Keenan. They have the opportunity to ask Brian questions in an open forum, and he gets the opportunity to share information about our growth plan and vision. We made adjustments to our on-thejob branch training format based upon feedback we received, and now our training is much more effective.

What other tools encourage employee involvement?

By giving employees a stake in the outcome, they are more likely to become involved with their work on a deeper level. Variable compensation plans that reward employees for business outcomes are highly effective tools, and they don’t have to be limited to sales staff. Consider offering new business referral bonuses to everyone because they engender ownership for results, and they also help employees see that their individual contribution matters. Referral bonuses are another effective tool because they not only help attract talent, but they also directly incentivize employees by offering them a role in furthering the company’s growth plan.

Here at Fifth Third Bank, our managers have a round-table discussion group that specifically focuses on work processes and ways to make our company more productive. We not only get great ideas during these sessions, but people feel like they have more control over their work, and when they have control, they think and act more like owners than employees.

How can CEOs measure their employees’ level of engagement?

Talk to them and learn their dreams and aspirations. Conducting employee engagement surveys through third parties, such as Gallup, allows executives to measure employee engagement levels and benchmark against other companies. Conducting spot climate surveys and eliciting feedback through online tools, such as Zoomerang, allows executives to keep their fingers on the pulse of the organization and initiate a continuous improvement process around employee engagement.

Are there other techniques for improving employee engagement?

Consider an employee action team that specifically focuses on driving engagement. Who better to make recommendations about how to drive employee engagement than the employees themselves? We have a group here at Fifth Third Bank called the Pride 53 Team, and they’ve made a number of recommendations that we’ve adopted. For example, they recommended that we encourage our employees to become involved in the community, so they feel connected externally, not just internally. When they represent the company in outside events, they feel a sense of pride and ownership about the company, and it makes them feel and act like entrepreneurs.

Also, begin the engagement process before employees are hired and carry it through to your on-boarding process and beyond. Our recruiters talk to prospective employees about what it’s like to work at Fifth Third Bank as part of our assessment process because we want to select employees who will be engaged by our culture. Brian Keenan speaks to each new hire group during orientation, and we have follow-up sessions at 30, 60 and 90 days, so they feel bonded with the organization. I think most of all, it’s important for executives to have talks and communication with employees that go beyond the financial results. To gain the hearts of employees, you have to show that you care about them as individuals, and you can’t do that unless you get to know them through conversation and by using a holistic management style.

HOSETTA COLEMAN, SPHR, is Senior Vice President of human resources at Fifth Third Bank (Tampa Bay). Reach her at (813) 306-2424 or Hosetta.coleman@53.com.

Sunday, 24 February 2008 19:00

Profits and purpose

CEOs who have been perplexed about the tarnished image of corporate America now have the opportunity to drive profits and positively impact the world. Often referred to as the fourth sector, the for-benefit business model is composed of organizations driven by both social purpose and financial promise that fall somewhere between traditional companies and charities. The success of this hybrid model is behind the emerging trend toward greater social responsibility and purpose in all companies, placing competitive pressure on CEOs to reinvent their company’s mission and vision.

“The emergence of the for-benefit business model and the rise of corporate scandal is really a call to action for CEOs,” says Rick Smetanka, partner with Haskell & White LLP. “There has been a growing discussion and debate in this country regarding the role that businesses play in our society; many believe that corporations are soulless and exist only to generate financial profits for shareholders. The next generation CEO will embody the notion that profits will be earned by prioritizing social responsibility.”

Smart Business asked Smetanka about what differentiates the for-benefit model and how CEOs can reposition their companies to profit through social responsibility.

What are the drivers influencing greater social responsibility?

Studies show that our country’s faith in corporate leadership is at an all-time low. Memories of Enron and WorldCom and the disappointing choices made by business leaders, such as Bernie Ebbers and Martha Stewart, are behind the tarnished perception, which is causing many business leaders to reexamine their role within their own organizations and, more importantly, the meaning of their business to society at large. Without an action plan, CEOs may find themselves in a position like Wal-Mart, fighting an uphill battle against poor public perception and stagnant valuations that have fallen behind their forward-thinking competitors.

What is a for-benefit business?

Some for-benefit companies have been around for a while and are well recognized, such as Newman’s Own, and Ben & Jerry’s was a for-benefit company before it was acquired. Many of these firms are very successful because their customers identify their brand with their cause. Although the business concept is still evolving, the trend toward for-benefit corporations, also known as B corps, is growing. Even Wall Street investment bank, Goldman Sachs has a team that analyzes the environmental, social and management responsibilities of these new companies in much the same way a traditional financial analysis is conducted.

Essentially, the for-benefit company recognizes the generational shifts that are occurring in our society today and uses those shifts to create a competitive advantage and drive profits. In a country characterized by aging demographics and a young work force, for-benefit companies appeal to both consumers and employees through a commitment to making a difference in the world. These types of businesses are where consumers will want to shop, where employees will want to work and what communities will embrace.

What steps should CEOs take to focus on social responsibility?

First, give customers reasons to think about your organization as more than a commodity. The for-benefit model creates a greater bond between customers, employers and suppliers, and everyone understands the larger objectives. Many of these for-benefit companies use their social objectives as their primary marketing focus, which gives them an identity and establishes their values in a public forum.

Also, adopt a stakeholder model rather than a shareholder model. The shareholder model emphasizes profitability over responsibility and all business activities focus on driving returns to the company’s owners, while the stakeholder model aligns the interests of customers, vendors, employees and community to benefit everyone. Today, leaders and companies that practice a stakeholder model may enjoy a competitive advantage over their peers.

How should CEOs manage employee and supplier relations?

Become an employer of choice. Trader Joe’s and Costco are known for how they treat staff, and treating employees well is part of social responsibility. Training, good compensation and employee advancement programs will drive a socially responsible corporate culture as well as attract the best and the brightest people. Engaged employees will be more innovative and productive than their peers, and CEOs will likely earn a strong return on their investments. Treat suppliers as partners and contribute to their success through collaboration and by providing value-added advice. In turn, suppliers will be motivated to provide high-quality goods and services at fair prices.

What else should CEOs do?

Be an active participant in the community and make sure your corporation stands for something besides profits. Many organizations, such as Patagonia, donate a percentage of their revenue to charities and challenge their customers, vendors and business partners to do the same. By supporting the community and specific social initiatives, CEOs can lead their organizations to a higher level of profitability and social responsibility.

RICK SMETANKA is a partner with Haskell & White LLP. Reach him at (949) 450-6313 or rsmetanka@hwcpa.com.

Sunday, 24 February 2008 19:00

Performance driver

In the latest communications effectiveness survey conducted by Watson Wyatt Worldwide, information from 750 companies representing 12 million global employees provides hard data substantiating the correlation between effective communication practices and improved business results.

“The relationship between effective communication practices and shareholder value is no longer anecdotal,” says Kathy Kibbe, west division communication practice leader for Watson Wyatt Worldwide, San Francisco. “This is our third communications ROI study and, when we look at the results, companies with the most effective employee communications programs provided a 91 percent total return to shareholders from 2002 to 2006, compared to 62 percent for firms that communicated least effectively. Additionally, companies that improved their communications effectiveness experienced a 15.7 percent increase in market value.”

Smart Business spoke with Kibbe about how CEOs can drive communications effectiveness within their organizations and the best techniques for achieving results.

What is the CEO’s role in influencing effective communications?

CEOs and other members of the C suite set the tone for communications effectiveness by creating a line of sight between the mission, vision and goals of the organization and the employees. Top executives recognize the role managers play in communicating the organization’s messages and how vital those managers are in driving a plan to improve communication. Our research shows that employees want to hear directly from their CEOs about important business messages. They also want their managers to translate those issues into their daily realities — and managers need C-suite support to do that.

What were the secrets of the top performing companies?

Best performing companies keep their customers front and center as they communicate organizational change. Letting employees know how their performance impacts customers not only drives employee engagement, it drives financial performance. For example, we worked with a retail client to build an internal customer support center and our mission was to make sure that every employee in that call center had a strong sense of their internal customers as well as how their service to employees affected external retail customers down the line.

Managers can play a role in connecting the dots for employees who may not deal directly with end customers, such as IT professionals. In companies with high communications effectiveness, the IT workers know who their internal customers are and how their work impacts both internal and external customers. Also, when change is communicated, the discussion should focus on why the change is beneficial for customers, not how it will better serve the company.

How can CEOs support managers in their roles as communication leaders?

Managers are the interpreters of change within an organization. They give the change context, so it’s important that managers know not only how to communicate change but how to talk to employees about what the change means to them individually. It’s also important to involve internal groups, like communications and HR, in the design and execution of communications programs, especially around organizational change. In our survey, highly effective companies had comprehensive change management programs that engaged managers in the process; those companies reported that their managers were nine times as likely to enthusiastically implement new approaches to work.

How are the executives in the top performing companies measuring ROI?

These executives are measuring employee engagement as an indicator of communications effectiveness, and they are also tracking the scores within specific employee groups to see where they might have more localized issues. Some are also tracking employee retention and productivity increases as a way to measure communications effectiveness. After deciding which levers they want to move to drive shareholder return, CEOs can track the results and refine the organizational communication strategy.

The top performing companies also incorporate company branding into internal communications programs as part of their employee engagement and retention strategies. Internal branding allows companies to define to candidates the employment experience, how employees are expected to perform and what they receive in return.

Did the survey note any opportunities for improvement?

We’re seeing a downward tick in the number of companies that are soliciting employee input about major decisions, such as how work gets done. Companies are also becoming a little less transparent in communicating the reasons behind major changes. My sense from talking to clients is that they are not soliciting input because they fear an inability to act on employee recommendations. But sometimes having the conversation about why the organization can’t meet employees’ requests is just as critical. It’s this kind of respect for opinions and willingness to be open about the business that can drive real engagement. There are too many benefits to making employees part of the discussion to shy away from having the conversation.

KATHY KIBBE is the west division communication practice leader for Watson Wyatt Worldwide, San Francisco. Reach her at (415) 733-4334 or kathy.kibbe@watsonwyatt.com.

Tuesday, 29 January 2008 19:00

Eliminating waste

There’s waste in every organization. Waste is defined as anything that adds cost to a production process that does not add value to your product. Ignoring waste in your organization puts your business is at a competitive disadvantage.

“As an external auditor, I have the opportunity to see across the entire enterprise when I work with clients,” says Pat Ross, principal with Haskell & White LLP. “That holistic, external view of the company’s departments has helped me identify the best practices for recognizing and eliminating waste in a company’s production process. Companies that engage in waste elimination on an ongoing basis reduce costs while increasing efficiencies. Ignore waste in your production process and a more astute competitor may just beat you in today’s global marketplace.”

Smart Business spoke with Ross about how CEOs can identify the sources of production process waste and develop an action plan to eliminate them.

What are the major categories of waste in a production processes?

While many of these waste categories apply to manufacturing processes, these elements exist to some degree in all processes, so even CEOs of service companies can benefit from reviewing the list. The list was categorized by Toyota after years of research.

1. Overproduction: The tendency to produce more than what’s needed or to produce it before it is required. Companies often over-produce when they follow the ‘just in case’ manufacturing principle instead of the ‘just in time’ manufacturing practice.

2. Waiting: This occurs whenever time is not being used efficiently. Waiting happens because the material flow may be poor, the production run too long or the distances between work centers too great. It is not unusual for a product or service to spend 99 percent of its time waiting to be finished, and time is money.

3. Transporting: Any delay in the process of delivering the product or service to the customer is a nonvalued cost. More importantly, every transport event is an opportunity for damage or loss to occur and quality to deteriorate.

4. Inappropriate processing: Think of the analogy, ‘using a sledge hammer to crack a nut.’ Are you using the right tools and processes for the job and the right people?

5. Unnecessary inventory: This is often referred to as work in progress (WIP), and it is a direct result of overproduction and waiting. Reducing WIP allows other production process problems to surface.

6. Unnecessary motion: This is related to ergonomics, and it means adding additional worker motion to the manufacturing process, such as repetitious bending, stretching or reaching. Adding motion not only slows down manufacturing, it can increase workers’ compensation claims.

7. Defects: These can be internal defects found before the sale that result in scrap, rework or delays, or they can be external defects after delivery, which result in warranty claims, repairs and lost customers. As a rule, the cost of a defect increases tenfold for each production or supply chain step.

How can CEOs determine if these waste categories exist in their companies?

Brainstorming with your team is one of the best ways to uncover sources of waste in your processes. Certainly CEOs can hire outside experts, such as consultants, but I find that many times starting with the internal team is best because the people who work on the front line frequently know the sources of waste. They usually have solutions, as well. Consider offering a financial incentive or other recognition as a way to encourage employees to identify categories of manufacturing process waste.

What is the next step?

Estimate the cost to your company for each waste category you’ve identified, and estimate a time frame for reengineering the process that’s producing the waste. Prioritize which items you’ll tackle first, by selecting the top three items that will provide the greatest financial impact and where change can be achieved within six months. Then, develop an action plan to initiate improvement through elimination or reduction of your targeted waste sources.

What constitutes a good action plan for manufacturing process waste elimination?

There are best practices for drafting and executing an action plan designed to eliminate waste:

  • Develop realistic and achievable action plans.

  • Assign specific accountabilities and time-lines for each step in the change process and appoint a coordinator to work with those responsible for implementation of action plans.

  • Conduct weekly meetings to review progress with formal presentations.

  • Develop disciplinary outcomes for non-achievement of actions and benchmarks.

  • Increase accountability by holding regular sessions where each team member reports on his or her individual contribution toward successful attainment of the action plan.

  • Celebrate your results. Recognizing members of the team for eliminating waste will increase employee engagement and encourage them to identify other sources of waste within your organization.

PAT ROSS is a principal with Haskell & White LLP. Reach him at (949) 450-6362 or pross@hwcpa.com.

Tuesday, 29 January 2008 19:00

Health and productivity

Employers are reinventing their wellness programs into comprehensive health and productivity (H&P) programs for a very good reason — improved profits. A recent study conducted by Watson Wyatt Worldwide of 355 human resources and health benefits managers at U.S. organizations with at least 1,000 employees reveals that the companies with the most effective H&P programs acheived 20 percent more revenue per employee, 16.1 percent higher market value and 57 percent higher shareholder returns.

“Companies are embracing the progress that has been made in the health and productivity space,” says Caty Furco, office practice leader, Group and Health Care, for Watson Wyatt Worldwide, San Francisco. “Companies with effective H&P programs outperform other companies. Organizations that understand the linkage between effective programs and their company’s performance are ahead of the game. We are in an era that can have a positive impact on both business and employees, and that’s exciting.”

Smart Business spoke with Furco about what constitutes an effective H&P program.

What is the current thinking regarding H&P programs?

Global competition and pressure for greater efficiency are causing employers to seek new ways to help manage benefit costs and increase worker output Increasingly, companies are looking at the health of their workers as the new growth engine to stave off health care inflation and keep employees on the job and productive.

In addition to stronger revenue per employee, companies that have a strong H&P program were more effective at managing direct benefit costs. The philosophy behind the new H&P programs is that companies need to appeal to their entire range of employees in order to drive employee engagement toward improved health and productivity.

What drives employee engagement toward health and improved productivity?

A traditional siloed approach toward employee health and productivity is out; a holistic approach is in. What this means is that employee programs that support stress reduction, a healthy work environment, support for time off, management of chronic conditions, health education, on-the-job safety, health insurance and disability coverage are no longer viewed separately — they are combined and integrated into a single approach. Employees’ life experiences are not segmented, so benefits should be approached in a way that can provide the right services across the entire benefit and workplace continuum. A single access point makes it easier for employees to use the program. Creating incentives that inspire excitement and employee adoption rates are also part of the holistic approach. An integrated approach also gives the company a single data repository, so it can use the information to refine its offerings and construct effective employee incentive programs. A lack of actionable data was one of the barriers to H&P effectiveness as cited in our study, so a single data repository is a plus.

What constitutes an effective H&P program framework?

An effective H&P strategy goes beyond simply adding more programs; it integrates prevention (at home and work), manages health and provides incentives for behavioral change. Our survey identifies that the top three elements for an effective H&P framework include: employee engagement driven through the use of incentives and communication; appropriate programs, including the use of technology; and a way to measure and continuously improve the results.

A single technology intake from a user perspective makes it easy for employees to do everything from recording a sick day to signing up for an education program; on the back end, the technology tracks utilization, membership and ROI, and provides an integrated set of data analytics. Naturally, the one constant throughout the framework is communication. The more the program is communicated, the greater the results. H&P must become part of a company’s corporate culture and new reality of how business is run.

Will an H&P program be costly?

A best-in-class H&P program does not have to be expensive to be effective. It’s important for each program to uniquely reflect the culture of the organization and its employees. Monetary incentives as low as $50 for weight reduction or smoking cessation can often catch the attention of employees, and doing something as simple as waiving co-pays on drugs used to manage chronic illnesses may be enough to encourage employees to take those drugs consistently and manage their conditions. While we can look at the results and the H&P framework used by other companies and learn from them, the best design is one uniquely tailored to that organization, and it’s not necessary to keep up with leading-edge inventions to be successful.

How quickly can CEOs expect results after installing an H&P program?

A successful H&P program will produce results over time because you are changing employee behaviors. While deploying these concepts and programs won’t necessarily produce immediate results, the numbers in the survey should be incentive enough to begin and sustain the journey.

CATY FURCO is the office practice leader for Group and Health Care Practice of Watson Wyatt Worldwide for Northern California. Reach her at caty.furco@watsonwyatt.com or (415)733-4309.

Wednesday, 26 December 2007 19:00

A fresh perspective

When Dan Pittard became president and CEO of Rubio’s Restaurants Inc., the operator of Rubio’s Fresh Mexican Grill, in August 2006, he immediately examined its business strategy and targeted market niche.

Pittard, who was brought in to fix the company’s faltering expansion efforts, first learned about the importance of strategy at Harvard Business School, and later as a partner at McKinsey & Co., where he helped consumer companies develop profitable growth plans.

Now, he needed to fix a restaurant chain that had a lot of potential, but was lacking in direction.

“I really liked the food,” Pittard says. “But I thought that the strategy was not the best strategy. Our competition is cheap, and I knew the economics of the situation. As a small company, we aren’t going to win a price war. We needed to shift our strategy.”

Initially, Rubio’s Fresh Mexican Grill appeared to be one company that was capable of growing beyond its founder-led era with ease. The company started as a single taco stand in Mission Beach, Calif., in 1983, went public in 1999 and reported net income of more than $3 million in 2004. But sometimes the best strategy for a small founder-led organization won’t continue to be the right plan to take a company through a heavy growth phase and beyond. After expanding to more than 160 locations, Rubio’s profitability waned, and subsequently, the company reported a loss for fiscal year 2005.

Enter Pittard, who besides his experience at McKinsey & Co., also had been a senior executive with Frito-Lay where he helped roll out Taco Bell products into supermarkets. He accepted the assignment and the challenge knowing that Rubio’s had more than $10 million in the bank and a board that was supportive of his ideas to shift the company’s strategy and everything that supported it.

Designing the strategy

The basis of any strategy is an idea. “To design a strategy, you have to start with a hypothesis,” Pittard says. “In this case, the hypothesis was that Rubio’s appealed to more upscale clientele who would be willing to spend more than $5 for a meal. You have to use data and conduct market research to validate your hypothesis and then set a strategy.”

Pittard purchased publicly available data and conducted market research on existing and prospective customers to validate his hypothesis.

“You want to get the best facts that you can, but usually getting all of the available data is too expensive, so you get some data and then make your decisions,” Pittard says. “That’s what you get paid for as the CEO is to use your best judgment. When Ted Turner started CNN, he bet on a hunch because there probably wasn’t enough available data to support the notion of a full-time news network. That’s often the case in entrepreneurial ventures, but if you have an established marketplace, there’s usually some data to look at.”

The data helped Pittard focus his efforts on reaching the most appropriate target market to produce a profit, but he also weighed the company’s competitive position and its economics structure in developing his strategy and validating his decision.

“As you conduct your market research, you really want to have it become clear in your mind who your customer is,” Pittard says. “Are you going to position for a cost advantage in the marketplace or with a superior product? It’s hard to do both so you have to decide. There have been very few companies that managed to position as both a value leader and a low-cost leader. Google comes to mind as an exception in the technology industry, but there are few companies that have managed to accomplish that.

“It became clear to me that we just weren’t structured to compete on price, and we had been failing trying to go down that path. Given our size, I thought we were much better structured to compete on value.”

Once you’ve selected your target market segment and defined your value proposition, you want to apply the economics to understand the amount of market share you have to garner to be profitable. In Rubio’s case, Pittard calculated a good return could be provided to shareholders if the company generates between $500 million and $1 billion in annual revenue — compared to the $152.3 million it generated in fiscal 2006.

To fully understand the economics and to validate his niche-player strategy, Pittard not only looked at Rubio’s cost structure, but that of its competitors.

“You need to understand the cost structure of your competitors to successfully position yourself in the marketplace,” Pittard says. “We conducted some limited reverse engineering of everything, including our competitor’s cost structures and their products, so we could understand the cost of the ingredients. We also conducted some mystery shopping to understand who their customers are. In this case, for example, we knew that Taco Bell targets an age range of 14 to 22 and their positioning is around low cost, so our skew is toward a higher income, higher education and more health-conscious customer. Having market data and a knowledge of the competition are both essential in validating your strategy.”

Align the function to the strategy

Pittard says that after conducting research and authoring a strategy, CEOs must implement their plan. To do that successfully, he advocates aligning resources and all of the company’s functions to support the strategy.

“We added 20 people to our food and beverage department, which is the equivalent of the R&D function in most businesses,” Pittard says. “Since we wanted to position ourselves within the targeted market as a value leader, it’s important to invest in developing a product that will support the strategy.”

While spending more money on new product development, Pittard found some savings by reducing advertising costs and then realigning marketing expenditures to garner share within the targeted marketplace.

“It’s a fairly simple back-of-the-envelope type of exercise to look at your return on advertising,” Pittard says. “You simply have to look at the contribution dollars you are spending and what type of lift you need to get to increase brand awareness to see if it’s cost-effective.

“In our case, because we don’t have a huge distribution of stores and because we don’t compete on price, the radio advertising we were doing didn’t make sense because we couldn’t drive enough of the right customers into our locations to justify the expense. We decided to realign our advertising dollars toward local store efforts and local marketing events. To accomplish our goals, we hired local marketing representatives who go out and call on the area businesses. This supports our strategy by taking us right into our targeted demographic, and it’s more cost-effective. We’re also building an online ordering capability, which will enhance our ability to develop the lunchtime business meeting market, which is part of our niche.”

As a way to check back on the soundness of his strategy and the execution, Pittard sets revenue benchmarks for each store and monitors the results.

“To execute a strategy, you need to set milestones for each year that measure your progress and agree as a team on the priorities,” Pittard says. “Then you make certain that the goals cascade down within the organization to all of the staff, align your functions and build on the company’s capabilities to deliver on the strategy, set benchmarks and check your progress.

“In our case, we set a goal of reaching 10 percent of sales in delivered food in each of our stores. This benchmark mirrors our progress toward increasing market share within the lunchtime meeting marketplace. I check on all the numbers each month to see how we’re progressing. You have to stay on top of the progress because if something changes you may need to adjust your strategy.”

Aligning human capital with the strategy

Another element of Pittard’s strategy is to improve Rubio’s profitability by reducing excess organizational capacity. Simply stated, the company has a corporate infrastructure to support more than 160 stores, which represents a fixed cost. More stores can be added without adding incremental costs, which will increase revenues. While some analysts have questioned his strategy and decision to expand given the company’s recent lack of profitability, Pittard maintains that it’s the right move because expansion absorbs excess capacity and drives profitability.

“If you look at our unit economics, we look very good,” Pittard says. “There’s a certain amount you have to pay to attract the caliber of general managers you need to manage the stores, and they can handle more stores. One of the changes that I’ve made is adjusting our compensation plan to better align with our strategies.”

In the past, the field management team was compensated on sales. Now, they are partially tied to sales as well as profits.

“I think that it’s best when the employees are encouraged to think like owners, and paying them like owners helps with that,” Pittard says. “Also, as a CEO, tying performance back to compensation forces you to look at the performance of your staff all across the organization and how that aligns with your strategy.”

In addition to calibrating his compensation to match his strategy, Pittard benchmarks and tracks service levels at the stores to assure that customers return frequently, and he’s developed and installed a staff training and career management program to retain front-line workers, which enhances the customer experience. Satisfied customers are repeat customers, and when they return, they increase sales and store profits through better leverage of marketing dollars and increased revenue-to-overhead ratios.

The quarterly numbers are another key indicator that Pittard can monitor to validate that his strategy, which emphasizes great taste over low price, is on target and garnering increased market share. For the third quarter, which ended Sept. 30, 2007, revenue rose 13.5 percent over the same period in the prior year to $44 million, which was the highest quarterly revenue Rubio’s has reported since going public in 1999. Net income also increased 22 percent to $732,000, from $600,000 for the same quarter last year.

“As we continue to grow with our existing infrastructure and build our capabilities toward executing our strategy, our (general and administrative expense) as a percent to sales decreases, which will improve our profitability,” Pittard says. “But no matter how good the strategy, you have to get the product right, and you have to price it right to be successful. It’s not enough to do it once. You have to make it right over and over again hundreds of time each week because at the end of the day in the customer’s mind, you’re only as good as their last visit.”

HOW TO REACH: Rubio’s Restaurants Inc., www.rubios.com

Sunday, 25 November 2007 19:00

Growth opportunities in Florida

There’s a saying in business: Success comes to those who get there first. That absolutely describes the experience of visionary CEOs and entrepreneurs who have anticipated the growth in the greater Tampa Bay area, established businesses and capitalized on the region’s burgeoning prosperity. But the window of opportunity is far from closed according to Brian Keenan, president and CEO of Fifth Third Bank (Tampa Bay), and he has lots of companies supporting his conclusions.

In a June 2007 survey Moody’s rated Tampa as No. 15 on its vitality index, and in its 2006 Competitive Alternatives Study, conducted among cities with populations exceeding 1.5 million, KPMG rated Tampa as the No. 2 city in the country in terms of having the lowest cost of doing business. In order to maximize the area’s potential through expansion or relocation, CEOs must run some financial forecasts to estimate their return and know how to tap local resources to develop the models.

“Historically, Florida was known for tourism and agriculture, but now Tampa is a leader in high-tech, manufacturing and service industries,” says Keenan. “There’s a deep talent pool in Tampa Bay, but like many places, it’s sill a competitive labor market because we’ve averaged more than 11 percent job growth annually over the last six years.”

Smart Business spoke with Keenan about the greater Tampa Bay marketplace and how CEOs can position their companies for success.

What else is contributing toward Tampa Bay’s growth?

More than 80 million baby boomers will soon be retiring, and many of those retirees, who are currently residing in the Northeast and the Midwest, will head south and east into Florida, following I-75. That migration will create new markets through sheer increased population growth, and the resulting ethnic diversity growth within the region is opening up niche market opportunities. We have a very active local economic development group targeting both company expansion prospects and corporate headquarters relocation prospects within industries, such as life sciences/biomedical, microelectronics, and financial and information services. While there’s been a recent trend toward saturation in some local business sectors, such as start-up restaurants and support centers for financial services, an increase in the presence of larger companies will open doors for many small business owners to play a supporting role.

How can CEOs compete in the local labor market?

The good news is that quality of life is rated very high, and there are more than 138,000 students attending college in the greater Tampa area, many of whom represent tomorrow’s work force. While relocations to the Tampa area are still rising, there are several concerns in that area, such cost of living, taxes and insurance. The price in May 2007 of an existing three-bedroom home in Hillsborough County was $207,000, and that alone helps control wages for small business owners. However, in order to compete for talent and keep that talent on board, CEOs must establish their companies as employers-of-choice within the Tampa Bay area, and achieving that status requires competitive benefit packages.

Local survey data is available to help CEOs assess their competitive position relative to benefit and retirement packages. At Fifth Third, we recognized that turnover is higher in smaller businesses, so we’ve added additional services for those clients offering banking discounts and a personal banker specifically assigned to their company who can assist with advice and financial education for the employees. Offering financial literacy programs, first-time home-buying seminars, and investment and retirement seminars has helped our clients attract and retain employees.

Is it possible to obtain financing for expansion into Tampa Bay given the current lending climate?

There are financing options available despite tighter lending policies. The credit market is tightening; the time to look for credit is not necessarily when you need it. Be proactive, get a strategy in place and plan. We are consistently helping our clients plan for tomorrow, today.

What resources will CEOs need to expand?

In addition to market-specific data, employees and expansion funds, CEOs will need vendor networks and local business relationships to help them succeed, and their financial partner should put them in touch with those resources. Tampa Bay has outstanding data capabilities, and in August 2006, Forbes ranked Tampa as the seventh most wired city in the U.S. Having a strong information technology infrastructure is another vital resource for business expansion. Certainly, I recommend that CEOs quantify expansion opportunities through ROI modelling. The data is available to assess the opportunity and many CEOs might find that launching a new business or expanding an existing one within the greater Tampa Bay area might prove to be very lucrative indeed.

BRIAN KENNAN is a president and CEO of Fifth Third Bank’s Tampa Bay Affiliate. Reach him at (813) 306-2453 or brian.keenan@53.com.