Following a landmark decision in 1998 by the Federal Circuit Court of Appeals, the business method patent was officially born. As its name suggests, a business method patent grants its holder exclusive rights to a particular way of doing business. Since inception, however, there has been an on-going debate as to the extent such patents should be granted especially when the solution doesn’t involve the use of technology.
It can take as long as 54 months to go through the business method patent approval process and, at one point, the U.S. Patent and Trademark Office (USPTO) was only approving 11 percent of the applications it received, says Richard E. Campbell, partner and head of the Patent Prosecution and Counseling Group at Procopio, Cory, Hargreaves & Savitch LLP. While the current business method patent approval rate is now up to 20 percent, CEOs still need to be judicious about what types of business processes they submit for approval.
Complicating matters further is the fact that so many businesses today operate, or plan to operate, globally, so protecting the output that results from your firm’s intellectual prowess on a worldwide basis will take substantial investments of time and resources. However, if successful, patents absolutely equate to increased company value.
“The term ‘business method patent’ is more misleading than helpful,” says Campbell. “From a patent standpoint, companies should focus on what their employees are creating and whether it is cost effective to obtain patent protection for those innovations.”
Smart Business spoke with Campbell about what CEOs should consider before applying for a business method patent.
What business methods are patentable?
Businesses that employ creative people who are designing solutions to problems should consider business method patent protection for their unique ideas and innovations. Companies that hire engineers, information technologists or other technical professionals should conduct regular reviews of newly created solutions to make certain they aren’t overlooking a valuable competitive advantage that they don’t want to make available to competing firms. Sometimes the term ‘invention’ causes people to think that patenting is only applicable to inventions such as Thomas Edison’s light bulb, which simply isn’t true. To uncover all of the potential patentable business processes in your company, ask yourself: What problem has my team solved and what competitive advantages has it created?
For example, Amazon.com devised a method for expediting online orders, known as the ‘One-Click’ system. The method allows a repeat customer to bypass address and credit card data entry forms, and they were granted a patent for this process in 1999. That system solved the customer problem of repeating data entry and created a competitive advantage by delivering a better shopping experience.
What evaluation criteria should CEOs use to decide if applying for a business method patent makes sense?
You should definitely do a cost-benefit analysis and you should consider how valuable the solution is to your business. Going through the patenting process can be expensive and the cost goes up depending upon the complexity of the application and the number of countries where you’ll need to apply. Filing the patent application should be completed before rights are lost through public disclosures or sales activity. Ask yourself how damaging it would be if your competitor had the same process. Ask yourself how much better off you are if you have exclusive rights to the process or system. Keep in mind that having patents and patent applications definitely adds value to your company, and early stage firms often garner higher valuations because they have patents and patent applications on file.
Must technology always be a factor?
Generally speaking, yes. The process or business methods that have been patented, particularly outside of the U.S., have been driven by technology or included a technology component. In Europe, for example, you can’t get a patent on business processes that solve an administrative problem. Although, there have been processes that were patented that focused on creating a unique user experience, such as an online catalogue experience. Additionally, business methods have been patented in the areas of financial models, data analysis, tracking and measurement, system and process automation, software implemented solutions, and many other areas.
What’s the best advice for CEOs to assure success with the business method patent application process?
Success is a function of the creativity of your team and your attorney’s skill and experience. Identify potential areas for protection by identifying what problems your team has solved and what business advantages it has created. Analyze the potential value of each item so you can perform a cost-benefit analysis. Not all ideas are worth protecting. However, do not undervalue patent applications directed to what you think are business methods. They are often protectable, and they can be very valuable.
RICHARD E. CAMPBELL is a partner and head of the Patent Prosecution and Counseling Group at Procopio, Cory, Hargreaves & Savitch LLP. Reach him at email@example.com or (619) 515-3289.
Employees are more effective when they understand the business and how their individual performance contributes to achieving the company’s objectives. That’s the findings of a recently updated communication study conducted by Watson Wyatt Worldwide. The goal of the study was to identify which communication practices deliver the best return on investment (ROI). Among the 335 participants surveyed, 60 percent worked in global organizations. Given the trend toward globally diverse companies, executives must now communicate across a broad spectrum of culturally diverse employees to drive higher corporate returns.
“Organizations are more global than they have ever been,” says Lisa O’Driscoll, San Francisco’s communications practice leader with Watson Wyatt Worldwide. “The communication effectiveness of a global company is often dependent on the company’s ability to understand the different cultural contexts and reference points within the employee population.”
Smart Business spoke with O’Driscoll about how executives can communicate effectively across a culturally diverse staff.
How does executive communication play a role in engaging employees and driving ROI?
Despite conventional wisdom that immediate supervisors play a role in driving retention and engagement, strong senior leaders who communicate effectively and frequently are a more important factor. We’ve found that highly engaged employees receive communication from senior management far more frequently than less-engaged employees.
How can executives communicate effectively across a global organization?
No matter what their location across the globe, committed employees are proud to work for their companies and motivated to help drive success. Commitment is essential to retaining high-quality employees and delivering long-term financial success, but commitment alone is not enough. Employees also need focus and direction, something that Watson Wyatt calls ‘line of sight.’ Simply stated, creating line of sight between executives and employees means communicating in ways that allow employees to understand the organization’s business goals, the steps that must be taken to achieve those goals and how they can contribute to achieving these goals.
How can CEOs create a line-of-sight communications plan?
For U.S. companies, communication is often northern-America-centric, so executives must adjust by starting the conversation with an employee value proposition tailored to all employees globally, not just those in the home country. Senior management and mid-management should trained on effective communication techniques and managing multicultural and multi-country teams. A global communication strategy should align the firm's business objectives with the employee value proposition while providing the platform for localization that reflect different cultures and local business conditions.
In all cases, companies need to develop a sustainable communications strategy that supports their mission, aligns employees with the business strategy and allows them to understand their role.
What elements comprise an effective line-of-sight communications plan?
First, no one strategy fits all companies, so each needs to decide what type of company it wants to be and how that supports its external brand and strategy. One company may be comfortable being a U.S.-based company with offices abroad, while another organization may want to be a true global organization with country heads running different business units.
In all cases, companies need to develop a communications strategy that supports their mission, is sustainable, aligns employees with the business strategy and allows them to understand their role.
What are the best tools for effective global communication?
Global communication requires the use of several tools. For example, many companies have a large dependence on e-mail. While e-mail is effective, it’s not the same as face-to-face communication between an executive and employees. In some cases, employees are receiving thousands of messages a day, so naturally it’s easy to see why e-mail can lose its effectiveness. It’s also hard to communicate a strong sense of leadership through e-mail. To maximize time and efficiency, new technology can help executives engage their employees through more personal communication. Blogs, podcasts, webcasts and teleconferences all have their place as part of an effective communication strategy. In considering tools, companies should consider company culture, local culture and, of course, the content of the communication.
What ROI increases can a CEO expect from establishing an effective communications plan?
Companies with highly effective communications plans had a 57 percent higher return to shareholders and a 19.4 percent overall increase in market premium during the five-year study period. During that same time, companies with effective communications plans were 20 percent more likely to report lower turnover rates than their competitors without a plan. Our statistics at Watson Wyatt show that the cost of turnover is roughly 48 percent to 61 percent of the annual wages for that position. Many companies brag about employee loyalty and their low turnover rates. Our study shows that committed employees actually drive shareholder return and take employee loyalty to a whole new level.
LISA O’DRISCOLL is the San Francisco communications practice leader at Watson Wyatt Worldwide. Reach her at (415) 733-4304 or firstname.lastname@example.org.
When Dana Kammersgard added CEO to his title in March 2006, there were plenty of challenges to overcome.
Besides lacking experience in the governance aspects of being a small public company, his chief financial officer resigned. And that wasn’t all.
“We had a class-action lawsuit alleging securities fraud filed against us, and in April 2006, a large customer announced that they were awarding a significant piece of business to a competitor,” Kammersgard says. “Over the course of my first five months in the CEO’s chair, I got five year’s worth of experience.”
Kammersgard had served as both president and chief technical officer of Dot Hill Systems Corp. prior to assuming the CEO’s chair following the retirement of his partner and his fellow co-founder of Artecon, a predecessor company to Dot Hill.
While some CEO responsibilities were new to Kammersgard, managing through the extreme competition in the technology storage business was not. There’s been considerable consolidation of firms within the industry, and margins in the business tend to be thin while revenue growth is slow because of lengthy selling cycles.
Although the company was profitable from 2003 through 2005, Dot Hill’s bottom line reversed direction, and the company went into the red just as Kammersgard took the helm.
He says that he had no choice but to re-position Dot Hill in order for the firm to become profitable again. He calls his quest “the quiet revolution” because the company didn’t need to be rebuilt, just refocused.
To accomplish the initial steps, Kammersgard prioritized attracting new and different customers, acquiring a new senior leadership team capable of competing in a volume-driven business and maintaining the firm’s low-cost operating model while improving margins, with the goal of once again delivering a profit for shareholders.
In 2002, after a selling cycle that lasted 18 months, Dot Hill was awarded a new contract from existing customer Sun Microsystems that was eventually estimated to be worth $10 million to $30 million in annual revenue to the firm. With so many eggs in one basket, the high-risk, high-rewards business of enterprise customer relationships had a roller-coaster effect on the entire company when the deal was won, and then subsequently lost.
“Having the benefit of hindsight over the past year, there’s nothing I would do differently now,” Kammersgard says. “There’s an entire generation of storage companies that failed to win a big customer and didn’t survive. You don’t have any financial viability and you aren’t a player in this business unless you win a big customer.
“So winning Sun Microsystems was absolutely the right thing to do, taking 18 to 24 months to make the business partnership successful was absolutely the right thing to do, but it’s the nature of the beast that things change. So having one customer make up such a large part of our portfolio of business is no longer absolutely the right thing to do.”
At its peak, Sun Microsystems was 88 percent of Dot Hill’s revenue. Today, it is 77 percent. Kammersgard says that he knew he would always need large customers to achieve market share and brand prowess, but diversifying Dot Hill’s customer base would leave the firm less vulnerable in the event of customer loss. In addition, securing more second- and third-tier customers would provide the added benefit of shorter and less complex selling cycles and higher margins.
In order to demonstrate to his team that winning new revenue is vital to repositioning the firm, Kammersgard says that he spends 30 to 40 percent of his time out on the road in front of customers. Having face-to-face time with customers allows you to build client relationships, but it also affords you a better understanding of their needs.
In addition, all of his executive team spend extensive time with customers. Kammersgard credits much of the firm’s success in adding 14 new original equipment manufacturer customers during the past year to listening to customers’ suggestions, focusing on solving their problems and the teamwork of his new senior leadership team.
He says that his best practice is to assemble his management team following customer visits to download information and to create a pipeline of customer feedback and ideas.
In fact, it was a customer’s suggestion that Kammersgard says resulted in a decision that paid big dividends.
“We had a customer who demanded that we move our manufacturing offshore to China,” Kammersgard says. “I had always been predisposed to manufacture domestically, but the customer convinced me to outsource. The decision to offshore our manufacturing has resulted in better margins, as well as better control over our costs, and we’ve been able to develop a new client offering in the contract manufacturing space.
“We’ve also been able to secure an additional new strategic customer relationship. Over time, we believe we’ll be able to leverage this new capability into additional new client agreements, and it will give us better control of our costs and profits. None of that would have happened, if I hadn’t listened to our customer.”
Focusing on the customer
While losing a major contract was a blow, Kammersgard says that he has been able to salvage the strategic engagement model that was designed for the Sun Microsystems contract implementation and leverage the model with the firm’s new OEM customers. That change has resulted in faster new contract implementations and realizing additional revenue more quickly.
“Instead of just signing the contract with a new customer and walking away, we developed a holistic approach to working with our new OEM customers,” Kammersgard says. “We have a peer-to-peer relationship for every aspect of sales and marketing. We make joint sales calls together, we work trade shows together, and we develop case studies together. What we found is that we can do a much better job of selling our products because we know our products better than our partners do. So we are right there, side by side with our customer’s sales representative, presenting to the end user. This has resulted in a much faster revenue ramp.”
Kammersgard says that in the past, Dot Hill was more focused on developing new technology and believed that engineering could be the driving force behind the firm’s success. Today, he says that he has learned that developing new technology is a requirement for business achievement but not necessarily a differentiator. Without customers, even the best technology will not guarantee success.
“I used to think that once we made the sale, we were done,” Kammersgard says. “What I’ve learned is that you have to put in even more effort once you’ve received a signed contract in order to get the most from the opportunity.”
The power of teamwork
Kammersgard says Dot Hill is like a 23-year-old start-up. “We’re quick and agile, and we’re not paranoid like a company that’s been around a long time, but we have the advantage of having more seed money available to us,” he says.
“To foster that type of culture, we need to hire people who have the right personality for our firm, which is low on politics and high on inclusion.”
Kammersgard says that having an agile company is the right posture for a firm in such a competitive industry, where success is often driven by the need to make technological changes quickly while rapidly adapting to customer suggestions and requirements.
With thin margins, the company must also run a high-performance environment where everyone has to stretch because there are fewer people to do the work.
He says the key is having a senior management team that is selected for its high bandwidth and the ability to work as a cohesive team. Since taking the CEO position, Kammersgard has hired a new CFO, a new executive vice president of operations and a new senior vice president of engineering. Finding the right people, in most cases, required starting with a large number of candidates.
“When we need to hire a senior executive, we’ll do a nationwide search, and we may start with as many as 30 to 50 candidates,” Kammersgard says. “We’ll do lots of interviews, and everyone on the team is involved. Having interviews with so many different team members is good for us and for the candidate so both sides can assess the fit. Eventually, we’ll narrow the choice down to two or three candidates that we think will fit in to our environment and from there, I’ll make the final selection.
“We also need great teamwork to get the most from such a small team, and we needed to integrate new executives this past year and build our executive team,” he says. “So we hired an outside facilitator to help with team development, and we go on an off-site team-building excursion every year like a river-rafting trip. The adversity that we’ve faced has also helped develop our team, and now, I think we’re stronger than ever.”
Kammersgard says that he relies on cross-functional teamwork among managers and staff members to help drive productivity, so he requires everyone on the team to know each other’s jobs. That requirement has helped raise the bar on productivity, which helps maintain a low cost-to-sales ratio.
He says that he’s learned major lessons from making several key new hires to Dot Hill’s management team since becoming CEO.
“Increasing sales is all about having the right team with the right product to sell,” Kammersgard says. “We have a phenomenal head of sales and marketing who has really been responsible for our plan to acquire new OEM customers and our change in focus away from engineering to customers, but we almost didn’t hire him. We had made an acquisition, and we had already decided to keep our existing sales VP when we met with Phil, who was with the company we were acquiring. After listening to Phil present his business plan, I started thinking that maybe we were keeping the wrong guy. What I learned from that scenario is to always keep an open mind about these kinds of things; if there’s a better candidate out there, then you need to make a move.”
Prior to becoming the chief executive officer, Kammersgard had also been acting as the chief operating officer for Dot Hill in addition to his formal role as president of the firm. Initially, he tried to continue performing all of his former duties along with his new CEO responsibilities, but he soon discovered that he couldn’t be both tactical and strategic at the same time without something suffering.
“When I hired new heads of engineering and operations and could finally focus on the CEO role, I was surprised to find how much I wasn’t getting done,” Kammersgard says. “I’ve learned that you can’t have success as a CEO without having the right team around you and that when you try to do everything yourself, you leave gaps that don’t get covered.”
Under Kammersgard’s leadership, much has been achieved in his quest to reposition Dot Hill, but he’s the first to admit that there’s more work to be done. Dot Hill’s net revenue was $239 million in 2006, the same as it was in 2004, and many of the new customers are still developing a revenue stream. Following a lengthy and expensive investigation, although not settled, the firm has been able to put the class-action lawsuit behind it, and Kammersgard says that he feels positive about the future under his new senior leadership team.
“Although we’ve had a relatively volatile 2007, we’re making good progress, and there’s a lot of positive momentum,” Kammersgard says. “There’s stuff that happens that you just can’t control. When you’re in the trenches working every day, it’s hard to look up and see the progress.”
HOW TO REACH: Dot Hill Systems Corp., www.dothill.com
Each year, more than 500,000 people in the U.S. are treated for burn trauma, according to the Web site of the American Burn Association (ABA). Work-related accidents, car crashes and home fires are frequent causes of burns that can result in cosmetic damage, loss of physical function and emotional scarring. More than 60 percent of burn patients are treated in one of the country’s 125 specialized burn treatment centers, according to the ABA.
“Burns are an equal-opportunity offender,” says Dr. Peter Grossman, co-director of the Grossman Burn Center at Western Medical Center Santa Ana. “In a split second, people’s lives are changed. Our goal at the burn center is to return patients to their pre-injury status as quickly as possible and to make certain that the treatment isn’t as bad as or worse than the initial injury itself.”
Smart Business spoke with Grossman about the unique nature of burns, and how Orange County executives benefit from the presence of a specialized burn center.
Why are burns a unique trauma?
First of all, they are a progressive injury. After the initial trauma occurs, the tissue damage can actually worsen over the next few days, so it’s important to take some initial treatment steps and then continue to evaluate the degree of the injury before deciding on a complete course of treatment. Also, the body typically wants to overheal a burn. This overhealing process creates excess scar tissue, so it’s important to begin treatment with a cosmetic outcome in mind and to control how much scar tissue is created in the process.
Second, whether we like it or not, appearance is important in our society and the physical scarring that can accompany a burn can be socially ostracizing for a patient. Burn victims often develop post-traumatic stress disorder and they need support in coping with the fact that they may have experienced a life-changing event.
Third, burn treatment may take years or even decades in order to completely restore function and to reconstruct the affected areas. It is helpful if the patient can stay with the same physician over the course of the entire treatment period.
What is unique about the specialized care in a burn center?
Burns often are treated by general surgeons who are focused on healing the wounds and restoring function. Subsequently, they release the patient to a plastic surgeon for cosmetic restoration. When plastic surgeons see a patient who has been through the functional restoration process independently, our hands often are tied because the damage caused by not incorporating cosmetic restoration with functional restoration has already been done.
When general surgeons remove skin to complete a graft, they often remove the healthy tissue at a deeper level than a plastic surgeon will. This can cause more pain and scarring at the removal site than is necessary and we don’t want to create a wound to heal a wound.
We bring in a psychologist from the onset and we engage multiple specialists as needed, using a team-based approach to the treatment. Our philosophy is to treat the whole patient. We believe that we achieve both better and faster results when the medical professionals approach patient treatment on a cohesive basis.
One of the greatest advances in burn care is not as much technological as it is philosophical. We now know that early removal of the burned skin and covering it with a graft or replacement tissue decreases bacteria and restores healthy blood flow to the area, which increases the positive outcomes. To achieve this, we use an operating room.
Is burn treatment a surgical procedure?
In burn centers, we take a very aggressive approach to treatment. It is more comfortable for the patient to have the burned skin removed under general anesthesia. Because we are a specialized burn center, we don’t have to compete for operating room time and we also find that using a surgical approach actually shortens hospital stays and assists with cost management.
How does having a burn center benefit local businesses and the community?
Because so many burns result from work-related injuries, business professionals can achieve peace of mind knowing that their injured employees will receive state-of-the-art care. Having a specialized local burn center reduces medical costs for employers and it is often a consideration for prospective employees when they think about relocation to the county. Burn centers used to have a reputation as dark and dreary places, now we help patients return as close as possible to their complete pre-injury status as quickly as we can.
DR. PETER GROSSMAN is co-director of the Grossman Burn Center at Western Medical Center Santa Ana. He is certified by the American Board of Plastic Surgery. Reach him at (714) 956-2876. For more information, visit www.westernmedicalcenter.com/ HospitalServices/GrossmanBurnCenter.
In January 2004, Doug Hutcheson accepted a promotion to CFO and executive vice president of Leap Wireless International Inc., just three days before the company filed for bankruptcy.
What makes the move even more unusual is that Hutcheson didn’t have a background in financial management.
Many of the company’s problems were tied to less-than-advantageous financing agreements requiring aggressive customer acquisition thresholds, which, in turn, led to disproportionately high expense levels.
Hutcheson says that someone needed to step up to the challenge.
“I had the industry background and understood the business model,” says Hutcheson. “The company needed someone to complete the job, or it was likely that the continued operation of the business would be in jeopardy. It wasn’t easy, but when the music stopped, there was only one right answer.
“I think that sometimes you have to do what is right, not necessarily what is easy. That’s how I feel about my decision to take the position here at Leap Wireless. It would have been easy to say no; the right thing was to say yes.”
The company emerged from bankruptcy, and in January 2005, Hutcheson was named president and CEO.
Hutcheson says that he found many things to salvage at Leap Wireless, including a unique niche in the marketplace: Providing pre-paid wireless services to demographically underserved customers a business model that has so much potential, Hutcheson refers to it as “pixie dust.”
He says he kept the same basic model and strove for cost-efficiency, value for customers and a strategic investment model designed to continue the needed expansion at a digestible and affordable pace.
Rebuilding a company
“We had excellent customer data; there were nice trend lines and good numbers on new customer acquisition,” says Hutcheson.
“The data spoke to where the strengths were. However, you had to be a keen observer and accept that the people issues would have to be right in order to achieve financial success.”
Repositioning the company as a low-cost provider and solving the people problems would come through a companywide restructuring that eliminated $140 million in annual operating expenses during the next four quarters. To accomplish the goal, Hutcheson used both an internal and external team that reviewed every item on the expense lines. He listened to all of their recommendations as to where to make cuts and used data and a stepped-process for implementation. “Restructuring greatly accelerates the number of difficult decisions you have to make,” says Hutcheson. “You don’t know that every recommendation you are given is right. I make evidence-based decisions and look at the hard data first. Intuition is the last element I consider, and I use that to apply velocity to the process.”
He says he breaks down most major decisions into smaller ones, takes them sequentially and waits to assess the impact before making more. “You have two choices as a CEO when you have to cut back 30 percent in operating expenses,” says Hutcheson. “You can cut the entire 30 percent from one area, or you can break it down and take 25 percent from smaller line items. I don’t like to eliminate entire functions because I think that it rips the company apart.”
The bankruptcy aided Hutcheson in his turnaround efforts by providing the opportunity to renegotiate the troublesome financial agreement covenants. The financial benefit was that related costs dropped 50 percent over the next three quarters.
The reorganization reduced the employee count from 2,300 to 1,200. Hutcheson says that he was able to keep the remaining core group of personnel intact through the difficult days of the restructuring process by providing them a great deal of information about what was happening and continuing to assure them that turning the company around was an achievable goal.
Armed with a reduced cost structure, Hutcheson began to focus on returning to growth by rebuilding a senior management team to help take the company forward. He augmented the retained group of 17 leaders by hiring eight new senior managers from outside Leap Wireless.
“I looked for people who had a general management philosophy, so they can relate their functional expertise back to the overall needs of the business,” says Hutcheson. “I also looked for people from outside the industry because I wanted to break old habits. Lastly, this business runs on the details, so I wanted people who were willing to really understand what happens on the front lines.” To assess the candidates, Hutcheson spent time asking them about their experiences and philosophies, looking for a match. He says that the group ended up being exceptionally strong, and he has learned that a CEO’s success lies in the ability to manage strong people.
“I think that the way to manage strong people is to give them clear goals and expectations, give them what they need to do the job and let them go to it,” says Hutcheson. “The secret is to give them the latitude and to keep them busy. People are either clamoring to get control, or hoping someone else will take it. When everyone is very busy, they aren’t worried about getting control because they can’t take on any more responsibility and they aren’t getting in each other’s way.”
Part of Hutcheson’s profit formula calls for alternating periods of investment and the addition of new markets with periods of new customer and market assimilation.
This disciplined approach has enabled Leap Wireless to continue to expand while maintaining a low-cost infrastructure. Hutcheson says that by not pushing the company beyond its limits, he can stretch the bandwidth of the firm’s management infrastructure, but not to the breaking point.
He has also implemented a more planned, organized approach to growth.
“In February 2005, we won $285 million in new market licenses,” says Hutcheson. “Everybody wanted to just jump in and start doing things, so I pulled everyone back. Now we take 60 to 90 days to draft our business plan when we go to open a new market.”
Hutcheson says that his growth plans contain clear, time-bound goals of what has to be achieved, and they are specific in assigning responsibility for results to individual staff members. “I like to be specific about doing things the right way, not the easy way, because people will play to the edge of the box,” says Hutcheson. “As an example, you can’t just say, ‘Go sign 5,000 subscribers.’ You have to specify the cost for getting the 5,000 subscribers. The business plan defines the risk that the corporation is willing to take.”
Hutcheson completes his business plan by outlining the resources that will be provided to the staff to accomplish the task, then checks in frequently to get a sense for progress and to hold people accountable for the results. Lastly, he takes the time to thank people for their efforts and to let them know they are appreciated. “I think that you can’t ever thank people enough for what they do,” says Hutcheson. “I try to spend more energy on what’s right than wrong, because people respond to positive comments.”
Growth will continue to be part of the expectation from Leap Wireless’ shareholders because there are numerous untapped markets left to be conquered. Wireless spectrum acquisitions are awarded based upon a competitive bidding process that requires a “win” in order to expand into the market, but under Hutcheson’s watch, that win no longer comes with an “at any cost” mentality, and the firm is no longer making decisions based upon capital market pressures.
The overhead reduction efforts initiated by Hutcheson give Leap Wireless the lowest operating cost per customer in the telecommunications industry, driving success in the bidding wars. When combined with alternating periods of investment, profits have ensued, and Hutcheson has been able to finance new market acquisitions through a combination of cash and borrowing, keeping the debt load lower than in the years preceding the bankruptcy. Revenue has increased from $914 million in 2005 to $1.1 billion in 2006.
In addition, lenders are more confident in the model, so he’s been able to garner more favorable terms, reducing financing costs even further.
While Hutcheson kept the “pixie dust” that was the original business plan, he says that a big part of the firm’s financial success is tied to operational simplicity. Credit is not an issue because customers pre-pay, and the company doesn’t finance hardware for customers through long-term contracts.
In addition, Hutcheson remastered Leap’s footprint optimization plan through demographic analysis and by keeping the model simple and profitable. “We continue to find new ways to help customers pay for the service, which enables us to expand our reach, and we look for certain demographics in any new prospective service area, such as ethnic diversity of the population, the employment prospects for the area and the quality of our coverage,” says Hutcheson.
He relies on focus groups to determine additional services customers want, and following his theory of planned implementation, he always pilots any new program before offering it on nationally. Balancing customer demand for new services with a planned growth approach leads to some of his most difficult decisions.
“These are the hard decisions, and anyone that says they aren’t hard just does not understand,” says Hutcheson. “There are things that our competitors offer that our customers want, and we cannot offer those things and maintain our model not offering first-class seating on Southwest Airlines is an example of that type of decision. We are positioned as a value leader. “If we can bring it to the industry as a value leader, we go front and center. If we cannot do it cost-effectively, we pass. However, what cannot be done today can, in many cases, be done in the future as the company develops, gets better technology, or develops better relationships. Many things can be solved if you have a long enough timeline.”
HOW TO REACH: Leap Wireless International Inc., www.leapwireless.com
For CEOs, it seems as if requests for new phone systems, computers, copiers and networking equipment are an everyday occurrence. Certainly, a continuous investment in office and communications equipment is necessary in order for a company to remain competitive.
How to finance capital equipment can be a major decision for CEOs. Many choose leasing as a preferred method. Each leasing company has its own lease agreement. So knowing the most advantageous terms in a lease agreement is vital when it comes time for the CEO’s selection.
“Equipment leasing can be an attractive and flexible alternative means for a business to acquire equipment rather than paying cash or borrowing money,” says Sandra L. Shippey, partner with Procopio, Cory, Hargreaves & Savitch LLP. “There are some pluses and minuses in lease agreements that CEOs should be aware of before they sign on the dotted line.”
Smart Business spoke with Shippey about the advantages of leasing and what CEOs should know before signing a lease agreement.
What type of contract is an equipment lease?
An equipment lease is generally a ‘net’ lease where the lessee agrees to lease the equipment from the lessor for a noncancelable fixed term of years, and the lessee must pay rent, taxes and insurance and agree to maintain the equipment throughout the lease term. At the end of the lease, the lessee either returns the equipment to the lessor in the condition required by the lease, purchases the equipment pursuant to a purchase option contained in the lease, or renews the lease for an additional term.
What are the advantages of leasing equipment versus purchase or direct financing?
- Preserves working capital: Generally, lease financing is 100 percent financing, so there is often no down payment required from the lessee, which will result in the lessee preserving working capital. This is particularly beneficial to emerging companies that want to conserve their limited cash resources.
- Lower rates: Often, the lessee will pay lower rates for a lease than a loan because the lessor, as the owner of the equipment, will be able to take advantage of accelerated depreciation tax benefits and pass on at least some of the tax savings from those tax benefits to the lessee in the form of reduced rent. Again, this will help a business conserve its working capital through the life of the lease.
- Fewer covenants: Generally, loan transactions contain significant restrictions on management’s decisions and contain financial and other restrictive covenants on the business itself. Usually, but not always, equipment leases contain less restrictive business and financial covenants.
- Flexibility in structure: An equipment lessor can provide many different types of leasing structures that will provide flexibility to a potential lessee such as reduced lease payments in the early years with higher lease payments in later years as the business grows to increase cash flow; options to upgrade the equipment during the lease term; different purchase options from mid-term early purchase options to end-of-term purchase options at a price equal to the equipment’s fair market value or a predetermined fixed amount; and renewal options.
What should CEOs be aware of when reviewing a lease agreement?
Usually, a lease proposal or term sheet will be provided by a potential lessor that describes the basic structure of the lease that will be documented in more detail in the actual equipment lease agreement.
Lessees should be particularly aware of the following issues that are generally negotiable.
First, review the proposed structure including the lease term, rental payment amount, amount of casualty and termination values, and minimum insurance requirements so that the structure adequately meets your business requirements.
Second, note whether any purchase options or renewal options are offered and whether you might want to put any limits on fair market value purchase options and renewal options.
Third, see if any business or financial covenants will be applicable so you can determine whether they will be acceptable from a business perspective.
Fourth, notice if any tax indemnification will be required from you.
Fifth, see if you are allowed to self-insure against any risks, which is important if this is currently part of your strategy.
Finally, find out the required return conditions for the equipment and whether they are acceptable from a business standpoint.
With such a competitive market, it may be possible for CEOs to negotiate successfully on many of these points and achieve the best terms for their business.
Studies have shown that for every dollar a CEO spends on employee wellness programs, the company receives $2 to $3 in return. Not only is the tangible ROI favorable, but so are the intangible benefits, and the average monthly cost can range from zero to a minimal $2 to $4 per employee. This is great news, considering that group health insurance premiums have been increasing an average of 15 percent per year and the work force is aging and staying on the job much longer.
Employees who are healthy have better attitudes and are more engaged in their work factors that most employment experts say leads to greater productivity. Today’s technology allows more employees to be reached by wellness programs, and accompanying the increased reach is program cost-effectiveness.
“There are three main factors that are driving the rise in health care costs: the aging population, medical technology advances and greater availability of prescription drugs,” says Brenda Fagan Johnson, employee benefits specialist with Westland Insurance Brokers. “One way that an employer can impact the rising cost of health insurance is by having healthier employees.”
Smart Business spoke with Johnson about the evolution of employee wellness programs and how CEOs can benefit from initiating a program.
What types of employee wellness programs are available?
Wellness programs are frequently available through your group health insurance plans. They offer newsletters and on-site health fairs, as well as brown bag lunch-and-learn sessions, for employees. Online wellness programs offer educational tools and health risk-assessment information. They often include a 24-hour nurse hotline offering advice in one-on-one sessions. Coaching programs that assist employees with goal-setting and then give them support as they work to achieve their goals are available via telephone.
There’s also something for every company’s budget. CEOs can create low- and no-cost programs that can be an adjunct to an insurer’s employee wellness program or as a standalone entity. Those options include organizing wellness committees and participating in community-based walk/run events. Many of the wellness materials are free through your health plan or other government-sponsored programs. Your committee can help to secure and distribute these materials and organize your events.
What are the benefits of an employee wellness program?
The definition of wellness is the condition of being healthy or sound as a result of diet and exercise. The data on the impact of employee wellness programs shows reduced absenteeism; lower worker’s compensation costs; lower costs of health care claims and disability claims; and improved employee morale. All of these contribute to a good working environment, low employee turnover and higher productivity.
Studies have shown that it takes about $45,000 on average to hire and train a new mid-level worker. Employee wellness programs help position companies as an employer of choice, which will both attract new workers and retain the ones you have. About 65 percent of the American population is overweight. Smoking contributes greatly to heart disease and cancer. Employee wellness programs create a culture of ‘healthfulness’ and support from fellow employees for losing weight and quitting smoking.
Today’s work environment can be very stressful, so addressing good mental health as a component of a wellness plan is vital. An Employee Assistance Plan (EAP) is made up of short-term crisis counseling for family issues, legal problems, debt resolution and a full array of resources for everyday challenges that can hinder employees from focusing on work. The cost of an EAP plan is about $2 per employee per month.
How can a CEO influence employee wellness?
Leading by example and executive sponsorship are the keys to any program’s success and an attitude shift among workers. CEOs can emphasize the importance of employee health by attending committee meetings and events and even suggesting healthy choices in the employee cafeteria or a change to heart-healthy snacks in the vending machine. CEOs can further demonstrate their support by offering incentives to employees who set wellness goals for themselves and achieve them.
I had one client who installed an on-site gym, but often the wellness committee can organize lunchtime walks or perhaps negotiate a company discount at a local gym as low-cost alternatives. In any case, it is important to stay with the program, because the results are realized over time as are the long-term benefits for the employees and the company.
What role can my insurance broker play?
Your broker will have a variety of plans for you to choose from, including those available through your health insurance carrier or as standalone programs. It can also provide you with information about free sources of information about employee wellness.
BRENDA FAGAN JOHNSON is an employee benefits specialist with Westland Insurance Brokers. Reach her at (619) 641-3234 or email@example.com.
Technological advances have allowed procedures that were formerly conducted exclusively at teaching hospitals to be performed at local community hospitals, providing many benefits to patients, their families and employers.
The endovascular stent graft procedure, used primarily to treat abdominal aortic aneurysms and thoracic aortic aneurysms, is an example of a minimally invasive procedure that extends life and replaces the maximally invasive surgery that was formerly used to treat these fairly common occurrences.
Not only does “localization of the procedure” make it more readily available to those who need it, there’s reduced recovery time and a lower risk of side effects associated with the surgery. All of that translates to lower costs in the form of reduced hospital stays, shorter disability periods and lower medical bills, says Dr. John Eugene, chair of cardiac surgery at Western Medical Center Anaheim.
“Because a patient often needs this surgery later in life, many were too ill to undergo the procedure when it was conventional surgery,” says Eugene. “Now we are able to treat more patients and extend their lives.”
Smart Business spoke with Eugene about the endovascular stent procedure and how it benefits patients.
Who is at risk for an aneurysm?
An aneurysm is a sac formed by the dilation of the wall of an artery, a vein, or the heart. Aneurysms can occur in the aorta either in the abdomen (abdominal aortic aneurysm or AAA) or in the thorax (thoracic aortic aneurysm).
Those at greatest risk are males older than 60 years, people with an immediate relative who has had AAA, people with high blood pressure and smokers.
What is an endovascular stent graph?
An endovascular stent graft is a tube composed of fabric supported by a metal mesh called a stent. It can be used for a variety of conditions involving the blood vessels, but most commonly to reinforce a weak spot in an artery called an aneurysm. Over time, blood pressure and other factors can cause this weak area to bulge like a balloon and eventually enlarge and rupture. The stent graft seals tightly with your artery above and below the aneurysm. The graft, which is stronger than the weakened artery, allows blood to pass through it without pushing on the bulge.
What does the procedure involve and why is it less invasive?
Aortic aneurysms are potentially serious health problems since a burst aorta results in massive internal bleeding that can be fatal unless treated rapidly by an experienced emergency medical team. Endovascular stent graft repair is designed to help prevent an aneurysm from bursting. The term ‘endovascular’ means ‘inside blood vessels.’ To perform endovascular procedures, vascular surgeons use special technologies and instruments.
These procedures require only a small incision or puncture in an artery or vein. Through these punctures, a vascular surgeon inserts long thin tubes, called catheters, which carry the devices through your blood vessels to the location of the aneurysm. Generally, endovascular treatments allow you to leave the hospital sooner and recover more quickly, with less pain and a lower risk of complications (including death) than traditional surgery, because the incisions are smaller.
Sometimes traditional surgery is required if the shape or the location of the aneurysm is not favorable for an endovascular treatment.
How should I select a surgeon?
It is important to select a cardiovascular surgeon who has a great deal of experience with the procedure. With greater experience, competency increases and complication rates decrease. All medical centers benchmark their outcomes, so be certain to ask about the center’s and the cardiovascular surgeon’s performance. Also, write down all of your questions, so you remember to ask them when you visit the surgeon for your consultation.
The cardiovascular surgeon should be willing to discuss every detail of the surgery with you. There are great sources of information available to help patients understand their options, the procedures and any risks.
How does having the availability of this procedure here in Orange County benefit the community?
Prior to this procedure becoming available locally, many patients had to travel to find hospitals that could accommodate them. The waiting lists were long. Also, the cardiovascular surgeons were located by the facilities, so travel was required for follow-up visits, and in the event of an emergency no local physician was available who was trained to provide treatment.
DR. JOHN EUGENE is chair of cardiac surgery at Western Medical Center Anaheim. For more information about cardiothoracic surgery at Western Medical Center Anaheim, phone (714) 502-2668, e-mail firstname.lastname@example.org or visit the Web site www.westernmedanaheim.com.
As the U.S. economy continues its shift from the manufacturing sector to services and the information age, a new commodity has emerged: intellectual property. Initially, most intellectual property was employed by its owner for internal use. Now, licensing of intellectual property to others has become a huge generator of income for a vast number of U.S. businesses.
The global intellectual property licensing market is estimated to be worth hundreds of billions of dollars annually. By some measures, the value of U.S. intellectual property licenses abroad is now comparable to that generated by the export of goods.
“In addition to using licensing as a revenue generator, licensing of intellectual property from others is an essential element of virtually all businesses’ strategic plans,” says Jacob C. Reinbolt, partner and member of the Intellectual Property Team at Procopio, Cory, Hargreaves & Savitch LLP. “Those who license most effectively both in and out will have a far greater chance of succeeding than their competitors who do not license effectively.”
Smart Business spoke with Reinbolt about what CEOs should know regarding the licensing of intellectual property.
What should CEOs know about licensing intellectual property?
Licensing is an extremely effective tool because of its infinite flexibility compared to the purchase or a sale of intellectual property. However, that same flexibility can be a double-edged sword if the license agreement isn’t structured properly.
Most businesses license both ‘in’ and ‘out.’ A good example of ‘licensing in’ is a software application. The software company grants you the rights to use its software in the manner that it specifies, but it retains ownership of the intellectual property that continues to generate revenue for them. When you sell a widget to another business, that business is free to use the widget in any manner it wishes, with no restrictions. If you ‘license out’ the rights to use that widget through a license agreement, it may limit when, where and how that business can use the widget, or only grant the rights for a specific period of time.
Whether a CEO is ‘licensing in’ or ‘out,’ the terms of the license agreement are important.
What are the different forms of license agreements and what are the issues to be aware of with each of them?
The first is the patent license. The most common problem with patent licenses is the failure to recognize that a patent does not grant the patent owner the right to make anything. Rather, it grants the right to exclude others from making, using or selling the invention.
The second is the trademark license; its main problem is that the licensor must maintain quality control over the product or service sold by the licensee, but may not go so far as to create a franchise by specifying a manner of doing business. For example, if you own the service mark ‘Sunny Tanning Salons’ and license the right to use that mark for a salon, you can specify the minimum quality level for the tanning services tans that don’t fade for a week but not that the walls in the salon have to be yellow.
The third is the copyright license. Copyrights are unique because they include six different rights within the copyright itself. By not anticipating their future needs, the licensee may not get all of the rights that they require. For instance, the New York Times licensed articles from writers for print publications but then later published them electronically. The newspaper didn’t anticipate the evolution of electronic media when it acquired the pieces and thus never obtained the right to republish the works in that manner. It was sued and lost.
The fourth are trade secret licenses, which are critically important because trade secret protection can be perpetual. The catch is that the licensor must take reasonable efforts to maintain the confidentiality of the trade secret. A good example is the Coca-Cola formula. Had it been protected by a patent, the protection would have expired and the recipe divulged. By using trade secret licenses, Coke has managed to protect the recipe for over 100 years.
What are the top five clauses to include in license agreements?
- Representations and warranties: because the licensee needs to be sure the licensor has the right to grant the licensed element.
- Scope: it’s important because it covers territory, manner of usage and distribution.
- Delivery and acceptance: to ensure that what you are getting actually works.
- Modifications and enhancements: to ensure that the licensee remains competitive, such as having the right to receive upgrades.
- Limitation of liability: it’s important to put a cap on your potential exposure.
Protection of the licensed intellectual property is also extremely important, particularly if any trade secret information is involved.
JACOB C. REINBOLT is a partner and a member of the Intellectual Property Team at Procopio, Cory, Hargreaves & Savitch LLP. Reach him at JCR@procopio.com or (619) 525-3868.
While the need for executive protection is universally recognized in publicly traded companies, CEOs of closely-held companies often fail to understand that they have some of the same exposures as their counterparts in public firms. Directors and officers in closely held corporations can be sued for unfair competition, restraint of trade, wrongful termination or harassment says Royce Sheetz, a commercial insurance broker with Westland Insurance Brokers. They may have personal liability whether the claimants are relatives, shareholders or investors.
The best time for CEOs of private firms to seek and secure protection is sooner rather than later, because as the time nears for a sale or an IPO, it may become too expensive or difficult to secure the coverage that you need.
“With all insurance, it is easier to secure coverage if you have a documented history,” says Sheetz. “As companies approach a financial event such as bringing in outside investors, an IPO, or even the sale of the company, they will find it much easier to find adequate limits at an affordable premium if they already have a track record. Fortunately, there have been changes in coverage and availability that make securing the insurance more affordable from the outset.”
Smart Business spoke with Sheetz about how CEOs can benefit from the recent changes in executive insurance protection.
What are the policy form changes that CEOs should be aware of?
There has been an increase in flexibility when purchasing coverage that simulates a ‘cafeteria plan’ in employee benefits insurance. This enables a CEO to combine a number of different coverages in one policy under a single liability limit. Here are the types of coverage that are available and a brief description of their protection.
- Directors and Officers Liability (D&O) - The directors and officers of a company make operating decisions every day, and those decisions could ultimately result in litigation by other businesses for wrongful business practices such as fraud or unfair competition. Also, D&O provides protection in the event investors sue the executives if they don’t get the return that they anticipated.
- Employment Practices Liability Insurance (EPLI) - Employment-related offenses include wrongful termination, harassment (sexual and otherwise), discrimination, failure to promote, even failure to hire.
- Fiduciary Liability - This provides coverage should employees (or former employees) sue the company because the pension and or retirement plan didn’t perform up to expectations. The Enron situation of several years ago is the most obvious example of the need for this coverage, but any company with any kind of retirement plan (401[k], profit-sharing, etc.) has this exposure.
- Internet Liability - Any company that uses e-mail or has its own Web site has exposures in this area.
- Errors and Omissions (E&O) - This is professional liability for those companies that might need it such as computer technology firms.
- Crime Provides expanded crime coverage, such as employee theft or unauthorized credit card usage, which may not be available in a standard business package insurance policy.
- Kidnap and Ransom (K&R) - Because it provides coverage should you or your employees be the victim of a kidnapping or some other form of extortion, this is very important if a company has employees traveling internationally.
How have these policy changes affected premiums?
There have been two very positive changes. First, there are more carriers offering coverage, so pricing is more competitive. Also, when these coverages were purchased a la carte, each policy was subject to its own minimum premium, which could have been $2,500 to $5,000. Now with only one policy, there’s only one minimum premium charge for all of the coverages you select.
Buying the insurance when your risk is lower will also help keep your premiums more affordable over time. It’s like buying auto insurance: it’s harder to secure and more expensive if you wait until you have an accident.
What factors should CEOs consider when purchasing executive protection coverage?
It’s important to consider your business plan and any upcoming changes such as bringing in outside investors, new product development, adding a location or increased hiring. All of these events increase your exposure, so it’s better to contemplate them in advance when you are making your purchase so you can select higher limits from the outset.
What role should my broker play?
In order to partner with your broker successfully, it is important to share all anticipated changes in your business. The application for coverage will ask about plans that will increase exposure and your broker will have the best advice about how to secure the coverage you need well in advance of the event.
ROYCE SHEETZ is a commercial insurance broker with Westland Insurance Brokers. Reach him at (619) 584-6400 ext. 3261 or email@example.com.