It’s no fluke that accountability is on the list of Gen-Probe Inc.’s core values. It’s on the list because Hank Nordhoff, chairman, president and CEO of the company, put it there.
If you ask Nordhoff why he’s succeeding in the business of developing, manufacturing and marketing molecular diagnostic tests, which is known as an investment-laden and failure-prone industry, he’ll tell you that it’s because of the performance of his employees.
“It can be a tough culture to bring, but you have to let people know if they’re messing up,” Nordhoff says. “You have to have those frank talks because you can’t accept mediocrity.”
Average is neither part of Nordhoff’s vocabulary nor a description of the financial results on the firm’s balance sheet. What makes Nordhoff’s financial performance so unique is that he’s investing 25 percent of the firm’s revenue in research and development, which is roughly double the average investment by peer firms in the industry, while simultaneously delivering top- and bottom-line growth.
Gen-Probe has increased annual revenue from $155 million in 2002 to $354 million in 2006 and full-year results for 2006 also show that the firm returned 17 percent of its revenue in profit, which beats many of its much larger competitors.
Since assuming the CEO position in July 1994, Nordhoff has taken on the giants in the industry, such as Abbott and Becton Dickinson, and delivered value to customers and a strong return to shareholders through execution and a low failure rate on new product approvals. Nordhoff credits all of those achievements to a company culture that fosters exceptional employee performance.
Nordhoff ties employee performance directly to financial rewards. It starts with stock options being given to everyone in the company but goes even further than that.
“We also offer both individual and team bonuses that are performance-based,” Nordhoff says. “There are three bonus tiers. The employee can receive a great bonus, an average bonus or zero bonus based upon how they perform. I like to set the total compensation for employees who are exceeding expectations at just above the market average for similar industry positions because I expect greater things from them.”
He establishes team performance benchmarks for each business unit because when each group achieves its goals, it contributes to the success of the entire organization. For example, in the R&D unit, Nordhoff sets expectations around delivering new products by a specified date and within the allocated budget. Performance expectations within the department trickle down to each individual team member who can earn bonuses based upon his or her solitary contribution to the departmental goal.
Nordhoff says that using variable compensation to drive performance is just one of the incentives that he relies on to keep employees motivated. Besides a pleasant work atmosphere, the company provides a subsidized cafeteria and a workout room.
“It keeps the employees on the property at lunch, and they stay focused on work because they aren’t running out for fast food,” Nordhoff says.
Employees who frequent the company cafeteria might find great bargain prices on lunch, and they might also find themselves in a one-on-one coaching session with Nordhoff.
It’s one of the many ways he keeps tabs on what’s going on in the company and allows him to help people succeed.
Nordhoff says that merely wandering around and shaking hands won’t give a CEO enough of a true feel for the work environment and the pulse of the employees. He says that he prefers to hang around the cafeteria and the hallways hoping to catch up with some employees he hasn’t seen in awhile, just so he can have an extended conversation with them. Demanding greater employee performance goes hand in hand with offering a superior work environment and coaching for improved performance, so he checks in with employees frequently and offers them advice.
Finding people who fit in to his high-performance, high-accountability culture isn’t easy. Nordhoff uses a bounty program, paying a referral bonus when current employees refer friends and acquaintances who fit the firm’s environment. In addition, he focuses on a selection process designed to weed out those prospective employees who can’t hack the performance requirements.
“We do lots of interviews with prospective candidates because we want to see if they have tough enough skin for our culture,” Nordhoff says. “We really put candidates through the ringer because we want to see if they know their stuff. We don’t have a single culture in the company. Each business unit has their own uniqueness so we want to expose candidates to that so they can understand each team’s personality and assess the fit for themselves.”
Learning from failure
As one of the smaller firms in the industry, Nordhoff says that failing to get Food and Drug Administration approval for the vast majority of its new products is a luxury that Gen-Probe simply cannot afford. However, no company gets 100 percent approval ratings in the medical research field.
In order to avoid costly errors, Nordhoff has installed a system that creates learning opportunities from failures. The management teams from the various departments that were involved in the project and the members of the executive committee meet when a new product fails to get approval. They dissect the results, understanding what caused the failure and exposing what they can learn from their mistakes.
“I started the practice of holding post-mortems with the appropriate managers of the business units if a new product fails at some point in the development or approval process,” Nordhoff says. “The idea is that we need to learn from our mistakes so we can focus on what we should have done and what we will do differently next time.
“I tell everybody this isn’t about finger-pointing, and it’s not personal, we messed up, we need to learn from it so we can do better next time. As a matter of fact, if anybody tries to throw blame on someone else during the session, I kick them out. We don’t want to dwell on our failures, but you’ve got to do it you’ve got to learn from your mistakes.”
Nordhoff credits the post-mortem process with improving the firm’s success rates and achieving a higher-than-average return on its substantial R&D budget. He also keeps a close eye on projects by following their progress via a detailed timeline and by requiring his managers to submit monthly progress reports, so he can look for early warning signals that a project may be in trouble. However, the cultural tone that Nordhoff sets in the organization requires managers to communicate all information to him good or bad and that openness in communication is what he relies on to avoid surprises.
“People really have to feel free to tell the CEO what’s happening; they can’t sugarcoat it,” Nordhoff says. “As a matter of fact, if they do sugarcoat it, you have to let them go. I don’t want to hear that everything is going great, only to hear later, that there’s a big problem. As the CEO, you really have to learn not to shoot the messenger or you will end up shooting yourself.”
Much of Gen-Probe’s financial success results from garnering a 70 percent gross profit for the diagnostic medical tests that the firm markets, which is nearly double the gross profit of other firms in the space.
Delivering near-term profit increases has not only been good for investors and employee stockholders, Nordhoff reinvests some of the firm’s profits in R&D, which reduces the need to borrow and the cost of debt. He attributes the above-average margins to product superiority, which creates customer value and the improved performance of Gen-Probe’s sales team.
Nordhoff says that initially, it was tough to persuade the sales team to be less-focused on market share and to convince them that they could sell the testing products at nearly double the going industry rate.
He provided the sales team with the necessary data confirming that the firm’s medical diagnostic tests produced fewer failures than those offered by competitors. Fewer failures would mean savings in total costs and time for customers, but the team remained reluctant to approach customers with such a large price increase. It was finally Nordhoff’s performance challenges that convinced the sales team to try selling the product at a premium price.
“We were selling the tests at half of the price that we’re getting now,” Nordhoff says. “So I challenged the sales team to go out and get the higher prices,” Nordhoff says. “They were reluctant at first, but I told them that they were better than that. When I told the sales team that they were capable of achieving more and when they started actually generating more sales at the higher prices, they were elated. As the CEO, you have to challenge your people because people need to be challenged. I couldn’t accept that we weren’t going to get the higher rates, so I challenged the sales team to achieve at a higher level. Now, I approve all pricing to make sure that we’re getting the best margins possible.”
When he’s not coaching the sales team or hanging out in the cafeteria in search of an impromptu coaching session with some of the firm’s 1,000 employees, Nordhoff is soliciting anonymous employee feedback and third-party opinions as to Gen-Probe’s status as an employer of choice. The information provides him with honest opinions and opportunities to improve the culture and the work environment.
Formal employee climate surveys are taken among the staff every other year. Nordhoff received feedback via one of the surveys that the employees wanted additional tools to help them achieve at the performance levels he was expecting. In particular, they wanted more training and development programs. As a result of the information he received, Nordhoff developed formal employee education and mentoring programs that augment the culture.
“As a result of the survey, we really stepped up our training programs,” Nordhoff says. “We teach soft skills so our management team can be adept at having performance conversations with their staff, and we teach them how to set performance measures and objectives. Providing helpful feedback to employees about their strengths and weaknesses is part of what we believe in, so we want to train our managers how to conduct an effective feedback session.”
The firm has also received external recognition for its work environment. In 2003, the company was awarded the Workplace Excellence Award by the San Diego Union-Tribune, and in 2005, the company was named as a finalist for an award given by the San Diego Business Journal recognizing Gen-Probe as one of “The Best Companies to Work For.” Those report cards tell Nordhoff that he’s on the right cultural path and the balance sheet confirms it.
“In order to be successful as a CEO, you really need to get the best people that you can, not necessarily the smartest people, but the best people and then give them a shot,” Nordhoff says. “You need to treat people as though they are your most valuable asset because they are.”
HOW TO REACH: Gen-Probe Inc., www.gen-probe.com
Escalation in the hourly rates charged by attorneys, experts and court reporters has driven the cost of litigation up. This makes the need for pragmatic decision making by CEOs vital especially when it comes to deciding if “having your day in court” is the best way to handle business disputes.
Using an average cost of $400 per hour for attorneys’ fees and the customary charges for court reporting services, a oneday deposition taken from a single witness in preparation for trial can cost $5,000. While the trial itself may only last a few days, most of the costs associated with going to court revolve around all of the discovery and preparation needed to actually bring the case to trial.
“It’s vital for CEOs and other executives to really conduct a thorough cost-benefit analysis before deciding if they want to litigate a matter, and they need to have a cost estimate based upon winning or losing the case,” says Richard A. Heller, partner with Procopio, Cory, Hargreaves & Savitch LLP.
Smart Business spoke with Heller about how CEOs can manage these costs.
What makes litigation expensive?
Clients have played a role in attorney rate increases. While clients don’t want to be charged above-market hourly rates, they often correlate an attorney’s capability with the rates he or she charges. This assumption may not be accurate and it could result in overpaying for attorneys’ fees. I also recommend a process that I call reverse engineering the litigation budget. Before deciding if you want to take a case to trial, request a full disclosure of all immediate and long term litigation costs. While trials aren’t cookie cutter, you should be able to get a fair estimate of the total cost from your attorney, so you can make a pragmatic business decision.
What is the client’s role in managing litigation costs?
The client needs to be engaged and maintain a proactive posture from the outset.
Inquire about the outcome of various steps in the litigation process, such as the result of hearings conducted on pre-trial motions. E-mail is a cost-effective way to get updates about the status of your case, and staying involved keeps attorneys on their toes. Also, while you don’t want to nit pick invoices, you certainly want to review them. Look at the trends and keep a running tabulation of the total costs of projects so you can continue to track actual expense versus budget. Also, note how many attorneys are billing on the matter. Each time you bring in a new lawyer, he or she needs to get up to speed on the case, which generates billable hours.
Is mediation an effective alternative to litigation?
I have observed that clients frequently have the notion that if they propose mediation to settle a matter that it’s a sign of weakness. As a 32-year litigator, I don’t see it that way. When used at the right time, mediation can be a cost-effective solution to disputes. The key is proposing mediation when you have conducted enough relevant discovery to begin to project an outcome for the case and to allow both sides a clear understanding of the issues, but before the cost of conducting full discovery is incurred. It also allows diversion of funds earmarked for trial costs to be used toward settlement of the matter. The thing to remember about mediation is that the process itself doesn’t decide who was right and who was wrong, and participation is purely voluntary. This is where pragmatic decision making comes into play, because success is not always about being right it’s about how little you have to pay.
When should arbitration be used as an alternative to trial?
Arbitration used to be considered the cheaper, faster alternative to trials, but today that may be changing. Arbitrators are independent judges who can make rulings as to who wins or loses the case, but those rulings do not have to follow the law and they cannot be appealed. In addition, more discovery is allowed in arbitration these days, which doesn’t do much to reduce litigation costs. And arbitrators can charge up to $1,000 per hour.
Aren’t litigation costs paid by the losing party?
Frequently disputes occur over issues governed by business contracts, and unless the contract contained a provision stipulating that the winning party can recover attorney’s fees, you will be unable to do so in California. Clients sometimes mistakenly think that it’s better not to settle a case because if they prevail, they’ll recover attorney’s fees. Knowing if it will be possible to recover attorney’s fees is all part of doing your homework and should be part of your cost benefit analysis before deciding if you should take a case to trial. More facts and less emotion make for good litigation decisions and better managed costs.
RICHARD A. HELLER is a partner with Procopio, Cory, Hargreaves & Savitch LLP. Reach him at (760)496-0774 or firstname.lastname@example.org.
Companies seeking to lease a corporate facility justifiably spend a great deal of time and focus with a qualified broker hammering out location, rent, term and other primary business points. Many executives mistakenly feel that once the key deal points are covered in a letter of intent or otherwise, the rest of the lease document is mere “legalese” or “boilerplate.”
That kind of thinking will get you burned. The lease agreement has been carefully drafted and refined by the landlord’s attorneys. Consequently, the overwhelming majority of the terms contained in the lease are heavily weighted in the landlord’s favor. These terms often include critical provisions such as the method for calculating triple-net pass-through charges. At the very least, having the lease agreement closely reviewed by qualified legal counsel will help level the playing field between the tenant and the landlord.
“The tenant and the landlord often have totally different views about the intent of the initial draft lease document,” says Tom Turner, managing partner with Procopio, Cory, Hargreaves & Savitch LLP and a long-time commercial leasing expert. “The landlord typically expects the tenant to use the document as a starting point for negotiations. The tenant often assumes that boilerplate leases are all about the same so the detailed terms aren’t worth negotiating. This assumption can leave the tenant extremely vulnerable.”
Smart Business spoke with Turner about the negotiable elements generally contained in “standard” lease agreements.
What are some negotiable financial terms contained in boilerplate leases?
Provisions regarding the pass-through of triple-net operating expenses should be reviewed carefully, because the language often shifts the majority if not all of the operational expense responsibility to the tenant. The lease should expressly exclude numerous inappropriate expenses from the pass-through calculation. In addition, the tenant should have the unfettered right to conduct an audit of the costs after the fact. It is important that the audit not be restricted as to when it is performed, what time period it covers or who the tenant chooses to conduct it. Many other financial components, such as late charges and holdover rent, security deposits and other credit enhancements, are often presented by the landlord as ‘standard,’ but are in reality very much negotiable.
Are lease expansion and termination provisions negotiable?
The right to extend or terminate the lease or to shrink or expand the space are negotiable areas that are often overlooked.
It is not unusual for a lease agreement to have a heading titled ‘Option to Extend,’ but in reality provide the tenant with little more than an option to negotiate. This really isn’t a tenant benefit at all. The tenant needs to work carefully through the lease language to make certain that these are truly enforceable rights that are also workable from a practical perspective.
As an example, if you think your business may be growing, you may want the right of first refusal on any adjacent space that becomes available, on pre-established terms. Moves under any circumstances are costly, so by anticipating growth, you can eliminate much of the cost of expansion by simply adding on rather than relocating. But if you are not careful about the detailed language of the lease, you may end up with a worthless right to sit down and talk with the landlord.
Why are boilerplate relocation provisions problematic?
In the event of disasters, such as floods, fires or earthquakes, the lease typically allows the landlord to evict tenants or move them to an alternate location of the landlord’s choosing. You can bet these provisions are overwhelmingly favorable to the landlord, so it’s important to spend the effort to assure they are fair and reasonable.
Also, it isn’t uncommon to find a hidden provision near the end of a standard form lease that gives the landlord the right to actually relocate the tenant to other premises, almost on an unrestricted basis. Usually, if you push back, this provision will simply be deleted; at a bare minimum, should relocation be required, the tenant should have the right to acceptable comparable space and be completely reimbursed for all related expenses.
What eviction provisions should tenants watch out for?
I have seen landlords actually searching out a basis to put a tenant into a technical default, in order to give them the boot in favor of a more attractive deal. As an example, the landlord requests that you deliver an estoppel certificate and subsequently evicts you, without recourse, if you deliver the certificate a day late. As the tenant, you want to retain the right to be notified of any default and a specific time frame to cure it before you can be evicted.
By closely reviewing the entire lease document before signing it, the tenant can gain important leverage by negotiating all of the terms and conditions up front, when the landlord and the brokers are eager to get the deal done.
TOM TURNER is a commercial real estate attorney and the managing partner with Procopio, Cory, Hargreaves & Savitch LLP. Reach him at email@example.com or (619) 515-3276.
Most CEOs purchase insurance coverage believing that it will protect their business from risk. The reality is that buying insurance merely transfers the potential for economic loss to an insurance carrier. To truly reduce the possibility of financial loss, the core culture must include an effective risk management program.
Over the past 60 years, risk management has become a sophisticated discipline. Today’s best-in-class risk management programs help keep workers safe and on the job, and define accountabilities for results and ways to measure them.
“The total cost of risk (TCOR) includes, but is not limited to, insurance premiums, retained losses, the indirect cost of losses, outside services and risk management administration costs,” says William A. (Bill) Werber, a Certified Risk Manager (CRM) with Westland Insurance Brokers. “The indirect costs of a loss, such as training time, overtime, lost productivity, opportunity costs, lost customers and management time dealing with claims, increase the direct loss by two to five times, and that directly impacts after-tax profit. Truly controlling the cost means stopping the losses from occurring and aggressively managing those losses that do occur.”
Smart Business spoke with Werber about how CEOs can design and implement an effective risk management program.
What defines the risk management process?
Risk management is the practice of protecting an organization from financial damage by identifying, analyzing and controlling risk at the lowest possible long-term cost. The phases of the risk management process contemplate the identification of risk, then analyze and quantify the exposures based on the potential for economic loss. Then select effective risk management techniques for controlling and financing the risks, implement the selected techniques and continuously monitor the results.
The process itself has value because it causes managers to be focused on the continuing dynamic process. Insurance premiums will go up and down as part of the cyclical nature of the insurance business, which is naturally tied to the stock market. Workers’ compensation costs are directly tied to your experience, so regardless of what happens with rates, you can exercise greater control over your costs by reducing your losses and subsequently your experience modification factor.
What constitutes an effective risk management program?
Many components individually may produce some results, but the synergistic combination of the important elements of a best-in-class risk management program will produce dramatic results.
- Establish a corporate culture that highlights safety accountability as a core value and a way of doing business. It is unacceptable to get hurt on the job or crash a company vehicle.
- Initiate a well-defined process around incident and injury reporting that places clear accountabilities for managers and employees alike and includes the necessary protocols and forms.
- Establish and communicate an effective ‘return-to-same’ work policy coordinated with medical treatment and work restrictions.
- Train supervisors and employees in incident and injury prevention and what to do when they happen. Injured employees often seek attorneys because they don’t know what to expect.
- Develop and implement an incentive program that rewards supervisors and employees for working safely. Carefully done well it will produce excellent results.
What risk management factors should be tracked and monitored?
CEOs should develop a ‘vital signs report’ of key risk management indicators. Measure your results what gets measured gets managed. Monthly track your data and weekly manage your claims-loss ratios, loss frequency and severity, employees with multiple injuries and, most importantly, the status and strategy to get an employee back to work and well.
In the experience modification calculation and also in real life, claim frequency will breed severity. It is important to focus on the small claims and near misses to prevent the large ones.
Finally, hold everyone accountable.
How much money will a quantified risk management program save?
Two janitorial clients in a tough risk management business have reduced their workers’ compensation costs by 50 percent to 60 percent. Another client in the vending industry embraced effective components of a risk management program, improved its excellent core culture, and the result has saved hundreds of thousands of dollars.
In the long run, CEOs will see dramatic financial benefits from embracing an immediate and long-term risk management culture.
Probate proceedings, estate taxes, business succession planning, and decisions regarding the care and education of minor children are just a few of the issues that family members might have to deal with, devoid of your input, should you die or become disabled without an estate plan.
Setting aside the time to discuss the subject with your family and then drafting a written plan can provide peace of mind for everyone involved.
Individuals with a total net worth of $100,000 or more should have an estate plan, says Eric Lodge, partner and head of the Trusts, Estates and Probate Practice Group with Procopio, Cory, Hargreaves & Savitch LLP. Life insurance and equity are two great causes for advance planning.
“Without estate planning documents such as wills and trusts, executives lose control over the situation, as does their family, because the legal system will step in and presume what might have been intended,” says Lodge.
Smart Business spoke with Lodge about what executives should know about estate planning and the steps they should take to put their affairs in order.
What is estate planning?
Estate planning is the process of working with clients to make choices about how their estate and personal affairs will be administered in the event of their death or disability. An estate planning attorney will incorporate tax savings techniques and help executives specify how they want their assets distributed and even how they would like their remains handled.
What are the essential elements of a coherent estate plan?
Usually, the centerpiece of the estate plan is the living trust document. It directs who will manage the estate and how the assets are to be utilized. Within the document, you can provide for a spouse and include specialized provisions for dealing with the financial needs of those caring for your minor children. Also, an estate planning attorney usually prepares a will that provides for the disposition of any assets that are outside of the trust and nominates guardians for minor children. The process itself has value because couples can decide their children’s guardians and they can discuss the responsibility with prospective guardians in advance of the need.
Powers of attorney over both financial matters and directives for medical wishes will allow a representative that you name to act on your wishes if you are unable to do that for yourself.
In the event that there might be significant estate tax issues, an estate planner can employ more sophisticated techniques such as irrevocable life insurance trusts, qualified real property trusts and charitable giving.
What are the most frequently overlooked items when developing an estate plan?
Retirement plans, including IRAs and ERISA-regulated pension plans, and life insurance are not automatically governed by the trust document. They have their own beneficiaries, so it’s important to update them to be consistent with the overall estate plan. Also, estate planners cannot effectively do their job in a vacuum, so it’s important to present the total picture of your wealth when planning. We like to send out a questionnaire in advance so the clients can come to the initial estate planning session prepared with all of their information.
Business owners frequently overlook the need for succession planning. This is an important part of the estate plan, which includes dealing with the continuance of the business after your death or disability and providing the necessary funds to replace you or to make other siblings ‘whole’ if the business is left to just one child.
What is the status of estate tax law reform?
The law provides that the first $2 million is exempt from estate tax and an unlimited amount can be left to a surviving spouse. In 2009 the threshold on non-spousal inheritance increases to $3.5 million. In 2010 the estate tax is repealed altogether, and then in 2011 it returns with a $1 million tax-free limit.
Most experts are fairly confident that before 2010 the repeal will be eliminated, which means that estate taxes are probably here to stay. My advice is to stay in touch with your estate planning attorney because the current federal estate tax rate is 45 percent, and minimizing this tax consequence might require revising the language and provisions in your trust document, depending upon what happens.
ERIC LODGE is partner and head of the Trusts, Estates and Probate Practice Group with Procopio, Cory, Hargreaves & Savitch LLP. Reach him at firstname.lastname@example.org or (760) 931-9700. For more information, visit www.procopio.com.
At first glance, that all seems like great news for CEOs. Upon closer examination a familiar problem may be re-emerging. New insurance carriers frequently offer lower rates to initially attract new customers, but if their motive is to make a quick profit and run, or if they lack the sufficient resources to handle the complexities of workers’ compensation in California, the cyclical nature of the industry may find them leaving as quickly as they came.
“The last time we had a soft market for workers’ comp coverage in California, when the cycle ended and the claims started hitting, many of the carriers became insolvent or left the state all together taking their clients’ experience rating data with them,” says Pat Reilly, commercial insurance broker with Westland Insurance Brokers. “Costs escalated because it was a nightmare closing claims with carriers that became insolvent.”
Smart Business spoke with Reilly about how CEOs can benefit from the current soft market and not repeat past mistakes.
How has workers’ comp reform affected the market for insurance coverage?
Reform has made it easier to control the cost of a workers’ comp claim. There have been benefits from structural changes such as new calculations for permanent disability and changed parameters around the litigation of claims and in settlement structures. It takes as long as two to three years for the effects of reform to be realized, but when combined with very proactive and aggressive loss-prevention efforts by clients, the results are finally here. This is attracting new players to the coverage market.
At least 12 new carriers are trying to establish a California presence. In some cases, these new insurance carriers are simply marketing extensions of insurance companies that exist only on paper. I would estimate that at least 10 percent do not have fully functioning claims departments or loss-control units, so they are set up to sell the business but not to service it.
Why be concerned about purchasing coverage through one of these carriers?
The last time we had a soft market, many carriers were writing coverage. But when the conditions changed, they left the state without filing modification experience data for their clients with the state bureau. I acquired one new client when this happened and it had been running an 80 percent ‘mod,’ which translates to a 20 percent discount from standard rates. When its carrier defaulted, there was no way to document the modification, so the coverage reverted back to full rates. The short-term savings from the less-expensive carrier was quickly negated by the cost of coverage at a ‘zero mod.’
What factors should CEOs consider when selecting a workers’ compensation insurer?
First, the carrier should be ‘A’ rated so you know it is financially stable. Preferably, it has experience in California through both up and down cycles. This demonstrates the company’s commitment to the market and its ability to withstand the natural swings associated with workers’ comp.
Second, it should have local claims and loss-control functions staffed by a team that understands all of the regulations surrounding workers’ comp in California. Defending claims and conducting surveil-lance in cases of suspected fraud are all highly regulated activities here. If these things are not done correctly, you can quickly see claim pay-outs escalate, which will chip away at any short-term premium savings. Or, if you end up hiring a loss-control expert because the insurance company doesn’t have a local representative, you also won’t realize the savings you had anticipated.
Third, do you homework before switching insurance companies and check references by asking to speak with clients who use the company’s claims and loss-control services and who have been with the carrier for a few years.
What role should my insurance broker play in helping with carrier selection?
Your broker should be able to provide a substantial list of ‘A’ rated insurance companies for you to choose from, and it should be able to supply references of other long-term clients it has placed with the carrier.
It’s a soft market for all carriers, including the ‘A’ rated ones. Now more than ever, brokers should be able to help CEOs realize value for their insurance dollar. In some cases, value might include a premium reduction, while in other cases value might be achieved by taking this opportunity to upgrade your insurance carrier. There has never been a better time to find workers’ compensation value in California.
The report goes on to state that while fraud happens in all businesses, among firms that used preventive measures such as fraud-prevention training, surprise internal audits and an anonymous tip line for reporting suspected fraud, the dollar amount of the average loss was less than half than firms without the measures.
“Occupational fraud is hard to detect because, by its very nature, the act itself is concealed,” says Patrick Ross, principal with the Audit and Business Advisory Services Group of Haskell & White LLP. “Having the proper anti-fraud controls to prevent, deter and detect fraud based on the specific risks of your business is important in reducing potential losses.”
Smart Business spoke with Ross about how CEOs can take action and set the right tone to help prevent occupational fraud.
How common is occupational fraud?
Given the numbers reported by ACFE, it is much more common than many people think. Many times, it goes unreported in an effort to avoid bad publicity, or executives do not want to deal with the effort involved in prosecuting the crime. Also, because there is no universal definition of fraud, knowing when it occurs is typically not a black-and-white issue. If the boss takes a few inventory samples from the warehouse, is that fraud? Or what about doing personal work on company time? It can be hard to prevent occupational fraud unless the company has clearly communicated what is expected of its employees.
Why is fraud hard to detect?
The average length of time that occupational fraud goes on before being detected is 18 months, and frauds are often committed by trusted employees. An important element of fraud is the need to cover up the act. Also, because so many more business transactions are electronic today, there is less of a paper trail that can be followed. For some frauds, the extent of losses cannot even be determined.
Given the rapid changes in business, CEOs need to make sure their fraud-prevention process changes with their business in order to keep fraud from happening. It’s like a water leak in your house; it may start out small but if you ignore it over time, look out.
What steps can CEOs take to help prevent fraud?
First, conduct a risk analysis of your business looking for potential vulnerabilities. For example, if you run a cash business, look for ways that the cash could be siphoned off without your knowledge and make sure that job responsibilities are properly segregated. Review your controls with fraud prevention in mind and then actually test those controls to make certain that they are working. Conducting random audits is important; the surprise element embedded in the process can help deter potential fraud.
Second, the CEO should establish an investigation plan before needing it. The plan usually involves your corporate attorney, internal auditors or if you don’t have the necessary internal resources hiring an external certified fraud examiner.
What role should CEOs play in fraud prevention?
It is important to define what constitutes fraud and publicly state that it will not be tolerated. To deliver this message, the company should have a defined code of ethics. CEOs should set the tone from the top and lead by example because employees take cues from senior management in terms of what’s appropriate. For example, if the boss uses company vehicles for personal use, then is it OK for me to do the same? There are three elements that need to be present for fraud to take place: (1) the opportunity to commit fraud; (2) the rationalization on the part of the perpetrator that it is ‘OK’ to commit the acts and (3) perceived pressure by the perpetrator such as personal financial need. CEOs can play a major role in eliminating two of the three elements.
What actions should CEOs take if they suspect occupational fraud has occurred?
The first step would be to follow your investigation plan. Not following certain procedures of forensic investigation or not taking the proper legal steps could lead to a fraud perpetrator not being held accountable. When fraud is suspected, emotions often come into play, so it is best to let the professionals handle this. CEOs should be supportive of the investigation process and be prepared to take any necessary disciplinary action including termination and pursuing criminal or civil legal action.
PATRICK ROSS is a principal with the Audit and Business Advisory Services Group of Haskell & White LLP. He has more than 13 years experience in public accounting in Orange County. Reach him at (949) 450-6362 or email@example.com. For more information visit www.hwcpa.com.
One concept that is gaining popularity among CEOs is outsourcing some of the human resources functions. By removing purely administrative functions, the remaining staff can spend more time on human capital strategies and hopefully support a greater number of company employees without adding to their own staff.
“There are many reasons behind the outsourcing movement,” says Christoph Jenkinson, senior solutions specialist for the Employee Service Delivery Practice at Watson Wyatt Worldwide. “The globalization of many companies along with the need to comply with increasing regulations is bogging down many HR departments. Outsourcing is a solution to the challenge.”
Smart Business spoke with Jenkinson about the solutions created through HR outsourcing and how CEOs can lead the change.
Why are more CEOs outsourcing human resources functions?
They understand that the transactional portions of the human resources functions bring little strategic value to the organization. As the global war for talent heats up, CEOs want more creative energy and accountability for human capital plans to emanate from HR. CEOs want HR to develop and oversee policies, develop strategies, and be drivers of employee satisfaction. Payroll processing, for example, requires little creativity, so it often makes sense to outsource it. Within human resources, many of the sub-units have operated in silos, and that has created process redundancies and duplicate costs.
Also, outsourcing as a business concept has matured and so has executive management’s confidence in it. Originally, the concept was applied to noncore, noncritical functions. Now, business leaders have seen that success can be achieved by outsourcing noncore but critical functions such as payroll and time-card processing.
What HR functions are being outsourced?
I mention payroll because there have always been numerous providers of outsourced payroll processing, and they work efficiently and cost effectively. One of the barriers to outsourcing this company-wide has been the increased globalization of companies and their work forces. We are now starting to see an emergence of universal pay plans, and the world seems to be adopting a general payroll standard with slight variations for each country. Following that trend, we are starting to see payroll processing suppliers go global.
In the past, there was also a mindset that global payroll processing was complicated, so many managers were ‘hands-off’ and left payroll processing to each country leader. With Sarbanes-Oxley compliance requirements, it is important to know what is going on everywhere with payroll and take accountability.
Can employee benefits be outsourced successfully?
The outsourcing of employee benefits is gaining popularity among CEOs. The increased regulations imposed under the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Health Information Privacy Act (HIPAA), for example, mean that human resources must constantly stay up with the changing laws and keep the company in compliance.
Small or medium-size firms can often reduce their costs when insurance coverage is purchased through a third party, such as a staff leasing firm, by leveraging their buying power. Even in the cases where outsourcing is cost-neutral, there are other advantages to outsourcing the administration of benefit programs and the burdensome legal compliance activities.
What should CEOs do to lead outsourcing change?
Senior executives must be involved in the decision to outsource and be on board with the change. CEOs should be involved in taking the steps that generally comprise an outsourcing decision roadmap, like defining business and functional requirements, defining decision criteria, preparing an RFP, developing a vendor evaluation tool and conducting due diligence.
It is important to know what adds value to your organization and to have a vision of where you want to see HR spend its time and energies. While payroll and benefits are the most commonly outsourced functions, the outsourcing of many other HR functions such as full recruitment outsourcing and technology outsourcing is starting to emerge. Through greater scalability and by affording the time for HR to focus on becoming a strategic partner to business unit leaders, the outsourcing of human resources functions is gaining traction among CEOs.
CHRISTOPH JENKINSON is senior solutions specialist for the Employee Service Delivery Consulting Practice at Watson Wyatt‘s San Francisco office. Reach him at (415) 733-4144 or firstname.lastname@example.org.
Gerald Dinkel fights a war on two fronts every day.
He was hired into Cubic Defense Applications in 2000 and moved into the president and CEO position six months later, just as the defense division of Cubic Corp. was finishing an unprofitable year.
While his firm assists combat efforts by providing training systems, integrated services and communications products to U.S. military forces and allied nations, it was losing its own battle with the bottom line.
“The way I would characterize it is that we had multidimensional problems,” says Dinkel. “We had just lost money on a major contract, and once I was here, it became apparent to me that we had poor relationships with our customers. There were lots of historical events that pointed to a lack of focus on our customers, and we had recently lost a number of contracts to the competition.”
Dinkel began his discovery process by spending time with staff, evaluating people and the culture, and looking for the hidden reasons behind the recent lack of growth and loss of contracts. He also gathered information by speaking with the firm’s customers.
Dinkel is an engineer by trade, so after assessing the challenges, he drafted his battle plan in a systematic and organized fashion. Moving Cubic Defense Applications back to financial health would require a cultural shift, a more aggressive posture in developing new technology and better customer relationships.
Developing a passion for customers
One of Dinkel’s early assessments was that the corporate culture didn’t value customers. So in addition to looking at the management structure and leadership team, he immediately launched a parallel mission to change the attitude of employees. “Without customers, we don’t have any business, and we need them more than they need us,” says Dinkel. “Relationships with customers are vital. It may not get you the business if you don’t have the lowest price, but that relationship can break a tie.”
To transfer his vision of improved customer relationships to the staff, Dinkel spent time in one-on-one sessions with managers, expressing his desire for change. He also made examples out of those who didn’t want to follow the new direction. The competition was growing and profitable, and Dinkel began to surmise that his company had stayed with its current technology solutions too long. “In order to be successful, we needed to achieve things that had not been done before,” says Dinkel. “We were going to be creating and delivering services for the first time, and in that process, you can sometimes have difficulty with delivery. If you have a problem and you have the customer working with you, they will help you solve that problem rather than leaving you.”
To navigate change, Dinkel relied heavily on moving people to new roles and on his ability to be a persuasive and effective leader. Most of the staff he started with is still with the organization but in different positions.
As he evaluated people and made his decisions, an openness to change became his litmus test.
“As a CEO, you have to have confidence in your judgment when it comes to people,” says Dinkel. “I looked at people’s attitudes. Some are open to change, and some are just not flexible and don’t want to be bothered with it.”
Because he didn’t know the staff yet, Dinkel sought internal opinions about who would be the best candidate to become project manager over the troublesome contract that had produced a bottom-line loss and an unhappy customer the prior year. Again and again, the same name kept coming up. “I wanted a project manager who understood the technology and could turn the customer situation around by fulfilling the contract through tremendous attention to detail,” says Dinkel.
With that change, he moved a major item off of his to-do list, and the contract has since been profitable.
“There was some pent-up demand among some of the staff to be more entrepreneurial and creative, so I was able to unleash that,” says Dinkel. “I also brought in people that I had known from prior assignments.”
Dinkel acknowledges that incorporating leaders who have prior relationships with the CEO can be a double-edged sword.
“I know that they are perceived by others to be ‘FOGs,’” friends of Gerry, says Dinkel. “They actually have more pressure on them because if they fail, I fail. In the end, I will be judged on whether the people I brought in actually make the organization better.
“Sometimes, you have to change the people in order to change the culture because cultures don’t change overnight, and as the CEO, that culture will outlive you. Before, it had become an intimidating, closed type of culture. Now, we have a fairly open culture.”
Prior to Dinkel’s arrival, Cubic Defense Applications was organized into five operating units, each headed by its own president and CEO. Dinkel says that the groups were working in silos, and many operating functions were redundant.
His vision was for three divisions, organized by function, which allowed for greater sharing of information and focus on the customer. Dinkel eliminated the top positions and took the parts of each unit that were similar, such as engineering, and consolidated them. He says that although there are pluses and minuses to organizing along a matrix structure, in this case, it was the right way to improve performance, creativity and speed to market.
Matrix structures are common in organizations that utilize project management, blending a conventional vertical hierarchy for reporting with a traditional horizontal project management structure that encourages cross-communication and accountability. “I like a matrix structure because it gives you checks and balances and eliminates redundancies, while encouraging peer-to-peer challenges,” says Dinkel. “We had also become very tactical, and my goal was to move us to a more strategic posture. In order to achieve that, we had to break down the silos and the fiefdoms.”
The focus on three functional areas and the elimination of silos drove innovation and increased the volume and pace of new technology developments and releases. That move drove new sales to existing clients and repositioned the company from follower to leader. “Recently, I thought that our business development people were becoming too short-term-oriented,” says Dinkel. “So I moved them into one centralized organization away from the business units. They still have a relationship with the business unit, but they have a separate reporting structure.”
Dinkel says some of his staff laud his ability to anticipate future market demand, likening him to Wayne Gretzky, who described his prowess in hockey by saying, “I skate to where the puck is going to be, not where it has been.”
Dinkel attributes his vision to unleashing internal creativity through management changes, the matrix structure and spending time in front of customers. “The Department of Defense actually publishes forward-looking information which helps to anticipate the new technology needs,” says Dinkel. “I also spend a great deal of time in front of customers. In particular, the international customers value a personal visit from the CEO, and they will share with you where they are headed.”
Annually, he takes his management team off-site to look at long-term strategic planning by reviewing the data in anticipation of emerging customer needs.
The increased rate of new technology releases has positively impacted both the top and bottom lines. In 2006, CDA had revenue of $563 million, an increase of more than $100 million over 2004.
One of Dinkel’s final changes involved moving CDA to become a high-performance organization.
He implemented the principles of Capability Maturity Model Integration (CMMI), a process improvement approach that also plays a role in generating new business. “One of the reasons that it was important for us to become CMMI-certified is because the customers demanded it,” says Dinkel. “There are certain things that you can’t bid unless you have that certification, and as a mid-tier supplier [a defense contractor with revenue up to $1 billion], we needed to demonstrate that we were a high-performance organization.”
Dinkel says that often, CEOs assign process improvement initiatives to staff. In this case, he embedded the responsibility with his line managers, a move that he says placed the accountability for improving productivity and results directly with those most responsible for the outcome.
He named the initiative “competitive superiority” to serve as a constant reminder to the team of the real outcome they hoped to achieve through the process. “I really don’t like the term ‘total quality management’ because I think it became a buzz word overnight, and it really doesn’t describe the outcome that you are trying to achieve,” says Dinkel. “I wanted to put the onus on the functional organizational team to make these improvements. There is a cost associated with always bailing out a project, and I wanted people to see that job security is not achieved by running a continuous series of fire drills. The result has been that projects are running more predictably, there’s been a reduction in cost, and we’ve been more consistent in executing our plans with fewer errors.”
While there has been much improvement at CDA under Dinkel’s leadership, he is still refining the processes and says he needs to stay one step ahead because the business of defense is constantly changing. “I came here because it was a fairly diversified company, and I have no loss of enthusiasm for the opportunity,” says Dinkel. “I’ve had the chance to establish my own management culture and to build a team. I think the success that I’ve had goes back to the people I admire; you build a team and then you say, here’s what we’ve got to do. “In my view, the main ingredients for success were already here; the organization rose to the occasion.”
HOW TO REACH: Cubic Defense Applications, www.cubic.com
The U.S. Securities and Exchange Commission (SEC) has proposed changes to the current requirements imposed on management by the Sarbanes-Oxley Act (SOX) relating to the assessment, documentation and testing of a public company’s internal control over financial reporting. The Public Company Accounting Oversight Board (PCAOB), likewise, is reassessing the auditors’ responsibilities on auditing such information.
On Dec. 13, 2006, the SEC issued proposed interpretive management guidance relating to the internal control of financial reporting. A few days later, on Dec. 19, the PCAOB issued, for public comment, a proposed revised auditing standard relating to the auditing internal controls over financial reporting. Each item is open for public comment for 60 days.
“Staying informed on the latest developments in corporate governance is vitally important to CEOs,” says John Poth, partner in the Audit and Business Advisory Services Department with Haskell & White LLP.
Smart Business spoke with Poth about why these changes are good news for CEOs.
What are the purposes of the new proposals?
The desire is to ‘right-size’ both requirements to obtain the intended benefits of each without requiring unnecessary work or costs. The SEC and PCAOB hope to establish new requirements for each that are less time-consuming and are scalable to smaller public companies, as well as large accelerated filers.
Why are these changes occurring now?
These proposals are in response to the first two years of the SOX requirement that public company management document the internal controls over financial reporting and the requirement that auditors audit this information and feedback received by the SEC and PCAOB relating to the requirements.
Can you briefly summarize each of these lengthy proposals?
The new SEC-proposed guidance to management is based upon two key principles. First, management should evaluate the design of the implemented controls and determine if there is a reasonable possibility of a material misstatement in the financial statements that would not be prevented or detected in a timely manner. Second, management should collect and test evidence that the controls in place are indeed working, based on the company’s assessment of the risk associated with those controls.
It emphasizes that management should use a top-down, risk-based, principles-based, flexible approach. Smaller public companies can tailor their evaluation of internal controls to fit their size and complexity while also meeting the needs of larger accelerated filers.
The SEC proposal provides guidance in four key areas: identification of financial reporting risk and controls implemented to address those risks; evaluating the operational effectiveness of those controls; reporting the overall results of management’s evaluation; and necessary documentation.
The PCAOB-proposed new auditing standard would focus the auditor on matters that are most important to internal control, eliminate unnecessary procedures, and make the audit more suited for smaller and less complex companies.
Some of the proposal’s key elements are emphasizing the risk assessment process; directing the auditor to the most important controls; clarifying the role of materiality; removing the audit requirement to evaluate management’s process; and permitting the consideration of knowledge obtained during previous audits.
What are the intended benefits to public companies from these changes?
If these proposals are approved, they should have the impact of focusing both management and auditors on material items rather than time and expense on items considered not reasonably possible of resulting in a material error in the financial statements. In addition, it is intended to help smaller public companies implement SOX without such a strong perception of an unfair burden. The intent is to reduce time and cost.
How much time and expense will be saved?
The answer to this depends on where a company is in the process.
For smaller companies that are not yet subject to the 404 requirement, it merely defines what needs to be accomplished in the process which will still likely be costly, but less than it would have been before the proposed revision to the requirements.
For companies already subject to SOX 404, this is going to depend on the approach taken in the past by both management and the auditor and the new requirement that only certain key controls need now be considered. Once these proposals pass, assuming they do, key management personnel need to meet and determine what is needed and then consider appropriate meetings with auditors and other outside advisers to discuss the issue.
JOHN POTH is a partner in the Audit and Business Advisory Services Department with Haskell & White LLP. Reach him at (949) 450-6390 or email@example.com.