Leslie Stevens-Huffman

Monday, 26 March 2007 20:00

Distress call

It could only be described as a giant leap of faith.

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.”

Disciplined expansion
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.”

Operational simplicity
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

Wednesday, 28 February 2007 19:00

The benefits of equipment leasing

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.

SANDRA L. SHIPPEY is a partner in the law firm of Procopio, Cory, Hargreaves & Savitch LLP. Reach her at (619) 515-3226 or sls@procopio.com. For more information, visit www.procopio.com.

Wednesday, 28 February 2007 19:00

Bottom-line health

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 bfagan@westlandib.com.

Wednesday, 28 February 2007 19:00

Saving lives

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 wmcahearts@ihhioc.com or visit the Web site www.westernmedanaheim.com.

Wednesday, 31 January 2007 19:00

Strategic licensing of intellectual property

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?

  1. Representations and warranties: because the licensee needs to be sure the licensor has the right to grant the licensed element.

  2. Scope: it’s important because it covers territory, manner of usage and distribution.

  3. Delivery and acceptance: to ensure that what you are getting actually works.

  4. Modifications and enhancements: to ensure that the licensee remains competitive, such as having the right to receive upgrades.

  5. 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.

Wednesday, 31 January 2007 19:00

Executive protection

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 rsheetz@westlandib.com.

Sunday, 31 December 2006 19:00

Finding treatment for trauma

At any time, CEOs and corporate employees may find themselves in need of a trauma center. On an annual basis, the three trauma centers in Orange County treat between 4,000 to 5,000 patients, mostly as a result of blunt traumas such as car accidents or falls.

The difference between life and death following a trauma is time. Survival often rests on how quickly the patient can be seen by a physician and receives the necessary specialized help. Enter the role of the trauma center, which differs greatly from the standard emergency room.

“You can’t go to just any hospital following an accident,” says Frank Nastanski, M.D., associate director of trauma at Western Medical Center Santa Ana. “Its general surgeon might need to be summoned from home, and an hour may be too long to wait for a patient with a bleeding spleen.”

“We are part of a community safety net, and we save lives,” says Humberto Sauri, M.D., medical director of trauma at Western Medical Center Santa Ana.

Smart Business spoke with Nastanski and Sauri about why access to a trauma center is vital and how it saves lives.

What makes a trauma center different from a standard emergency room?
Trauma centers have operating rooms that are set-up for immediate use. They are staffed with operating room teams, including an anesthesiologist and a trauma surgeon who are on duty 24 hours a day seven days a week. We also have specialists on call who can handle any type of emergency situation. These include plastic surgeons, neurosurgeons, replant specialists, pediatricians, urologists and pulmonary cardiologists. Our nursing staff is also certified for trauma, and we have the equipment and the necessary supplies available to treat for trauma, such as blood for transfusions.

In addition to trauma certification, as the professional staff treats more patients, they gain experience and the outcomes are better. Trauma centers have that experience because they are fully dedicated to trauma; they don’t dabble in it. In addition, they are required to take extra educational units every year in trauma treatment.

How are trauma centers certified?
Orange County was one of the first places in the country to have an organized trauma system. The accrediting body, the American College of Surgeons, which conducts an annual two-day site review, has certified Western Medical Center in Santa Ana as a Level II trauma center.

How can CEOs benefit from the trauma center?
The presence of a trauma center is great security for employees. Because we are centrally located in Santa Ana, we rarely need to airlift anyone to the trauma center, which saves time, money and lives.

Most paramedics treat patients and triage them at the scene, but they need to have somewhere to take them. We have a better than accepted survival rate, and prospective employees will take the presence of a trauma center into consideration when deciding to relocate to Orange County.

Recently, we treated a construction worker who had fallen 40 feet while working on a new supermarket. We were able to save his life. If that same accident had happened somewhere else in the country where the resources of a trauma center were not available, the outcome might not have been as positive. Workers who are injured on the job are also brought into the trauma center, and that contributes to great piece of mind for CEOs.

Even though trauma centers see critically injured people, we are able to save lives because we are trained and staffed to handle any type of injury. You never know when it could be you, a family member or an employee that requires the services of a trauma center.

FRANK NASTANSKI, M.D., is associate medical director of trauma at Western Medical Center Santa Ana.

HUMBERTO SAURI, M.D., is medical director of trauma at Western Medical Center Santa Ana. For more information visit www.westernmedicalcenter.com/HospitalServices/DesignatedTraumaCenter.

Sunday, 31 December 2006 19:00

Family incentive trusts

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

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

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

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

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

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

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

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

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

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

What measures can I take to make certain the FIT is flexible enough to handle unforeseen circumstances?
When an FIT is created as an irrevocable trust, it has a safety net built in, because the assets in the trust are not considered as assets of the beneficiary and generally cannot be attached by creditors or subject to division through a divorce decree.

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

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

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

Friday, 24 November 2006 19:00

Avoiding construction headaches

Building relocations and renovations are a part of doing business, and one that CEOs know can negatively impact the bottom line if they are not executed properly. Managing the process looks like a part-time assignment for an internal employee, but the management team quickly gets caught up in construction meetings, reviewing bids and trying to solve complicated issues.

“The design and construction process is very complicated, costly and risky,” says Kirt Gilliland, senior vice president of project management and principal for Irving Hughes.

“Escalating construction costs, shortages of manpower and longer lead times on materials are making this process even more challenging. Add that to the contention with the landlord when remodeling an existing space or handling code upgrades, and the process is overwhelming to the inexperienced person.”

Smart Business spoke with Gilliland about what CEOs should know about outsourcing construction project management.

Why should a CEO hire a professional construction project manager?

For most companies, construction projects don’t happen with frequency, and when they do, managing the project is not a core competency. The build-out process accounts for as much as 20 percent of the total lease consideration, and most tenant improvement projects managed by nonfacility internal staff end up with cost overruns and delays that could have been avoided through proper planning provided by an experienced project manager.

What should a CEO consider in selecting the right project manager?

First, select a project manager who has experience with similar projects.

Second, the project manager should represent the tenant. Conflicts arise when a tenant uses the landlord’s project manager. Items that should have been a landlord cost end up on the tenant’s side of the ledger. A landlord might push code upgrades or costs to replace obsolete building systems through as a tenant improvement cost, which — when properly negotiated — should be the landlord’s expense. My job is to play sheriff to make sure that the lease we negotiated is enforced to the benefit of our tenant client.

Third, hire a project manager that works on a team-building approach. Some project managers control with an iron fist, creating a very adversarial and disruptive environment; others are just note-takers, lacking the leadership skills and the required construction knowledge.

What types of duties will the project manager perform?

The design and construction process involves as many as 10 team members. The project manager will recommend appropriate consultants and secure their bids and contracts. Next, they lead the consulting team through the design and construction process using the project schedule and the budget as a baseline. The project manager makes sure the contractor is using the correct management tools to track the schedule and budget, and physically inspects the construction progress to ensure conformance to the specifications.

Why are construction costs escalating?

Construction costs have been climbing steadily over the last three to four years at a rate of 1 percent per month due to an increased demand for materials both overseas and domestically. Increased residential building has also driven up labor costs. When combined with materials increases, that equates to a 50 percent increase in construction costs. Standard tenant improvements that used to cost $40 per square foot now cost at least $60. Tenants looking to move into new buildings should engage a project manager to lead the due diligence process, and they should price out the tenant improvements prior to beginning lease negotiations.

How are these increased construction costs changing tenant behavior in the market?

The only tenants relocating are those that have dramatic changes in their square footage requirements. Even when a company does move, there is plentiful second-generation space and sublease space that needs minor remodeling, saving the costs of new construction. Most of our clients are passing on the new buildings that cost $3.50 per square foot to $3.75 per square foot in the central county region, as there are better alternatives that don’t require the out-of-pocket expense incurred from tenant improvement cost overruns.

What can tenants do to better manage their improvement costs?

It is critical to have enough time to assemble a team of professional consultants and design a cost effective project. By planning properly, they will maximize any existing tenant improvements and allow the general contractor to obtain multiple subcontractor bids, while building the project at a reasonable pace.

KIRT GILLILAND is senior vice president of project management and principal for Irving Hughes. Reach him at (619) 238-1518 or kirtg@irvinghughes.com.

Friday, 24 November 2006 19:00

Surgical weight reduction

Grabbing a quick bite at the airport, dinner meetings and long work days can leave little time for executives to practice a healthy lifestyle. However, even the U.S. Surgeon General is quick to point out that obesity is preventable.

Diabetes, high blood pressure, high cholesterol, asthma, headaches and sleep apnea are just a few of the medical problems associated with obesity. But David Oliak, M.D., medical director of the Chapman Center for Obesity, says that he frequently hears overweight executives complain about fatigue and shortness of breath, and those types of problems can eventually affect job performance.

“I treated one executive who weighed close to 400 pounds and just couldn’t get through his days. Now it has been two years since his surgery, and his life has been transformed,” says Oliak.

While bariatric surgery itself is not new, the procedure has evolved — along with the knowledge of what helps a patient achieve long-term weight reduction.

Smart Business spoke with Oliak about what executives should know before considering bariatric surgery.

Who is a candidate for bariatric surgery?

Every day for the last 20 years, more than 4,000 people in the U.S. have become obese. Accompanying this trend, we have seen an increase in the number of patients for whom traditional weight-loss methods have not been effective. While maintaining a proper diet and exercise are still the preferred methods of treating obesity, when those methods are not successful, sometimes the medical conditions caused by obesity can pose greater health risks to the patient than the surgery itself.

Originally, when gastric bypass surgery was first introduced, the standard was that people 100 or more pounds overweight were considered obese and surgical candidates.

Now, we use a combination of factors and a total evaluation of the patient’s health in order to see if surgery might be the right choice. This risk profile — which was developed by the National Institute of Health — takes into account the patient’s body mass index (BMI) and any personal medical problems. Surgery sometimes is recommended when a patient’s BMI is lower but other conditions are present.

Are bariatric surgeries becoming more common?

Yes. With both increased demand and the change to laparoscopic procedures, more facilities have started to offer both gastric bypass surgery and the lap-band operation.

However, the increased surgical frequency has not always produced positive results. In some cases, patients have not been able to sustain their weight loss, and there is a learning curve for surgeons that accompany the change to the laparoscopic procedure.

What should I consider when choosing a surgeon?

It is important to ask how much experience the surgeon has performing the operation. It is a difficult procedure that requires the work of two surgeons and has an extensive learning curve. A surgeon is not proficient until he or she has completed 75 to 100 operations.

A recent study examined cases where the mortality rate was four times the norm for the procedure. It found that all of the excess mortality occurred when the surgeon had performed fewer than 20 operations.

All physicians should be benchmarking their results and demonstrating their outcomes, such as the types of complications and frequency. You should ask for these numbers and review them before making a decision.

What are the other program elements that correlate to success?

The American Society for Bariatric Surgery has set the criteria for a surgical center to qualify as a Center of Excellence. Because the surgery is a tool for weight loss — not a cure — it is important to have a program that includes patient education and support, so that weight loss can be maintained over time. Approximately one year after surgery, the body adapts. Then, only good habits will maintain the weight loss. That is why a Center of Excellence must offer a comprehensive program that includes both pre-operative and post-operative counseling.

What are some of the reasons to consider the surgery?

After gastric bypass surgery, 80 percent to 85 percent of the patients with Type 2 diabetes no longer require insulin; in fact, losing weight often eliminates the need for certain medications altogether. The laparoscopic procedures are less invasive and easier to recover from, and the average patient loses approximately 70 percent to 75 percent of his or her excess weight within one to two years after surgery.

Losing weight is not only good for your physical health, it is good for your emotional health as well. I performed surgery on one executive, and — a year-and-a-half later — not only had she lost almost 150 pounds, she felt so much better that she actually walked an entire marathon.

DAVID OLIAK, M.D., is medical director of the Chapman Center for Obesity. Reach him at (800) 554-9544. Web site contact info is www.chapmanmedicalcenter.com/Weightloss and www.droliak.com.