Paul R. Harvey
Statistics tell us that 50 percent of all business productivity in the United States is attributed to information technology (IT). But, most organizations would never guess that 60 percent of all IT projects undertaken don’t meet original expectations, and 80 percent of those failures can be traced to bad business requirements. Business requirements reflect or represent an identified business functionality that’s going to be built into IT or a software application solution.
“Any organization looking to make IT applications a big part of the way they conduct business needs to be concerned with the capture and the identification of business requirements,” says Bill Russell, executive vice president, Allegient. “And the technology team and the business side have to get together and collaborate in the definition of those business requirements.”
Smart Business spoke with Russell about how IT success depends on finding, elaborating, articulating and managing requirements.
Are business requirements about improving processes or creating new ways to deliver products, services or processes?
It’s all that and more. It’s about finding and defining a business function that you want to utilize, the process that’s going to deliver that function and the business rules around that function. Any of those three can be built into software so it can then be automated. That’s how businesses accomplish scale. They could use people to do all of that, but they can’t afford to. So how do you replace people? You take the same thing they do by way of a business function and build that set of functions, processes and rules into software.
Who specifies requirements?
Typically, it’s the subject matter experts (SMEs) from within a business who truly understand the function, workflow and rules. Since SMEs are so constrained by time, they articulate these elements, typically to either outside consultants or internal specialized resources called business analysts, who ensure the information is translated into a standard, consistent set of artifacts to be handed to the technology team, who has to go about designing and building the software.
What approaches are used to find and elaborate business requirements?
The most common approach is for a designated group of resources, including SMEs, technology SMEs, business analysts and sometimes consultants, to collaboratively design or define the business functions, processes and rules. The group can break those down into representative parts and articulate them in a common format. There’s a few different ways to do that. One approach is called the Use Case Model, and another less formal model is called a Business Scenario Model or ‘agile’ method. These are planned methodologies for breaking down business requirements into useable parts that a software architect/team can take and build a technical design and software.
How do requirements come into play?
Business requirements are important at both ends of the process. First, the requirements analysis results go into the definition of what the user interface will look like and into a design model. The technology team then starts to develop a detailed design called an object model that represents all the functionality the team is going to build into the system. Second, if you have requirements, they become the platform or baseline for building and running a set of test scripts after the system is built to make sure the technology team delivered what you wanted.
What are the technology aspects?
You can’t build a quality-based IT application and software solution without business requirements. That’s why so many IT projects fail. There are a number of technology tools available to help guide an organization in how to state its business requirements, how to articulate the requirements and how to maintain and track them. The simplest are desktop tools like Visio charts to model the business processes and spreadsheets to build a feature and rule list. Frankly, those probably are not good enough for a complex IT project. There are more sophisticated tool kits on the market, like IBM’s Rational tool kit or Microsoft’s .NET, whose major function is maintaining business requirements.
What are best practices for managing business requirements?
Managing requirements starts at the very beginning of the process when you have to define them. It’s crucial to have extensive collaboration between the SMEs, the business analysts and the technology team because the better the collaboration, the better the definition, and the better the definition, the better the system is going to be. Once you have defined the requirements, they should be maintained throughout the life of the software application. As you make changes to the system by way of enhancements or a major new functionality, you want to make sure you drive those changes back into your use cases and back into your business requirements or scenarios. That traceability matrix will help you update your testing from the time those changes were made. You have to have consistency from your test case or test scripts, back to development and all the way back to your original business requirements. This is true for the more ‘agile’ style development approaches, as well.
BILL RUSSELL is executive vice president of Allegient in Indianapolis. Reach him at firstname.lastname@example.org or (317) 564-5701.
Sometimes you have to give to get something back. When businesses need to get things done, it’s expected that to accomplish these missions their IT organizations must spend at least some money on technology infrastructure. But is everyone on the same page concerning that spending?
“You’ve got to spend money to get solutions or products to keep things up to date,” says Al Solorzano, practice manager, Agile360. “But do you have a roadmap to ensure that the IT organization’s solutions are in lock step with the business requirements?”
Smart Business spoke with Solorzano about how IT roadmaps can help mitigate the long-running disconnect between businesses and their information technology organizations.
Why is IT budget planning so difficult for so many organizations?
Unless the profitability of your company is completely based upon your Web site, more than likely your IT organization is disconnected from your business organization. The IT organization may know what widgets you make, but not necessarily where the business makes its money. Are you the low-cost leader? Are your widgets that much better than everyone else’s? Meanwhile, business may demand changes to existing technology requirements. IT has to deal with many moving parts as well as try to forecast a moving target.
Why can IT be viewed as a money black hole?
IT managers have been trained and now only deal with keeping their costs low. This leads to solutions that meet the minimum requirements of the business. This also has led to the current state of IT where most organizations spend a majority of their budgets on just ‘keeping the lights on,’ spending very little on projects or technologies that improve processes or increase profitability of the organization. If you only buy the short-term solution that meets the minimum requirements to get you over the hump, you may find that after a year you’ve outgrown this solution, ultimately resulting in exceedingly high costs.
What are some ways to avoid the black hole?
An IT roadmap is crucial. It’s about eliminating poor decisions that result in buying a solution that only meets the minimum requirements without looking to the future, which is what most organizations do. Every IT person knows to ask a vendor about a roadmap to learn how future features will affect the landscape. If IT has a roadmap for your business, they accordingly can start to roadmap the IT infrastructure to meet those requirements. If you’re the low-cost leader, then IT needs to be low cost. There can be no room for lost budgets and projects that don’t come to fruition. If you’re the technology leader, then IT needs to keep improving that process so you stay ahead of the game. IT has to know what the business side is doing to provide the best solutions.
What kinds of events should be considered when developing a roadmap?
An IT roadmap that spells out where the company is going in the next three to five years makes it more efficient for management to approve appropriate IT spending. For example, if you know you’re going to divest the company in half or in five pieces in the next five years, you need to build your IT organization so it can be divested very quickly. If you’re a company in acquisition mode, then you need to buy solutions that will be flexible so, when you bring a company in, you can integrate the entities as fast as possible.
Will this alleviate concerns management has with IT spending?
Absolutely. If you only looked at the total price column, you would never buy a high-end car because it’s too expensive. But when you look at what the total price gives you in return, an expensive model might not be so bad after all. It may have been just what you needed, meeting all of your requirements. Get out of that sticker shock mode. Look at what you require out of IT a robust, yet flexible computing and data environment that meets the needs of the users of today and tomorrow, all while reducing cost and providing a measurable ROI. Such an environment demands a proper amount of planning and budget to deliver on those requirements.
What strategies will help integrate IT and business goals?
Meet with your IT organization and qualified consultants and understand what the ‘widget’ is and how the organization makes money. Assess your current infrastructure to figure out where you are losing time and money. Meet with multiple levels of the business to see how IT can better serve them or your clients. Organize this information and prioritize tasks that decrease your costs or provide you another source of revenue possibly an additional service or new capabilities that allow you to increase prices. Some of these solutions may require the purchase of new technology, while others may mean using what you already have or perhaps just improving the existing process. Then you can extend that same view into the future to create a roadmap for IT. It’s important to review that IT roadmap each time budget comes around. Some things may suddenly become less of a priority, and other solutions that were years away may become this year’s biggest project.
AL SOLORZANO is practice manager at Agile360. He can be reached at email@example.com or (626) 676-1590.
As companies grow, they eventually start to struggle against their own operational models. Most companies are built around a functional organizational approach, with several key individuals who know what they want the business to be. This is a good model at first, but eventually it runs up against two barriers.
“One barrier is that all the knowledge is carried in the heads of that select group of individuals, rarely down on paper, and, therefore, difficult to leverage,” says Bill Russell, executive vice president of Allegient. “Second, functions tend to get siloed over time as they grow, creating pain in the interactions between functions.”
Smart Business spoke with Russell about the importance of process mapping.
If the business is functioning well, should it still map its processes?
The challenge is how to build on that success. Business is typically functionally based, like sales and marketing or operations. But, business processes tend to be cross-function focused. Whether you have a functional or business unit orientation, you still need to understand and map your business processes. It protects against ‘key man syndrome,’ where you stand to lose your undocumented intellectual property. If the company is not doing well, it’s likely it is facing several constraints. A common constraint is that the company’s operations are often represented solely in people and can’t be leveraged. A key way to leverage that knowledge is to better understand your business processes. Then the company can scale mapped documentation by applying technology.
What companies should consider mapping?
Mapping is truly emerging as a focus for every company to document their business processes and leverage them for growth, improved performance and lower costs. It should become a core competency for all mid-size companies and smaller companies that want to grow. If they wish to accelerate their growth, they’ve got to embrace a business process strategy, and mapping is a vehicle to that.
What are the benefits of process mapping?
Establishing a baseline for how the business processes work tells a company how the business actually runs. This baseline provides a platform for improvement and automation. You tend to make much better choices and be more prepared for new software and technology if you truly understand your business processes. Finally, this analysis becomes a great platform for training and growing new resources and new employees.
What process improvements can be found?
The most common is business worker ad hoc behavior or highly inefficient handoffs. Knowledge workers who go off and do their own thing manual steps, meetings and unstructured technology use like e-mail, attachments, etc. typically represent inefficient processes. Other examples are bad handoffs. Most business processes suggest the flow of work between different subject matter experts (SMEs), and those handoffs may be very sloppy and nonstandard.
Can software assist in mapping projects?
Absolutely. The simplest program may be a desktop package from Microsoft called Visio.
It is representative of a class of software called business process modelers. These packages use standard flow-charting procedures to graphically display how a business process is operating. The emerging standard that’s being driven into the industry is called Business Process Modeling Notation (BPMN). Another class of software actually uses the BPMN models, converts them into a business process executable language standard (BPEL), and then can even build software code from them.
Should outside resources be utilized?
Nobody knows how a company is operating better than the people inside it. SMEs have to be involved to identify and help articulate what these business processes are. Unfortunately, SMEs are often too busy running the business. Outside experts can come in to help SMEs translate the intellectual property into a standard format. When you get any group of SMEs together, they will disagree as to how that business process truly operates. Getting to a consensus takes facilitation. Outside experts scale your SMEs and provide neutrality to get at the true way a business process is operating.
How do you start a mapping initiative?
Companies should take their functional organizational chart and try to map against that. Across the top row, they should list all functions like sales, manufacturing, operations, delivery, fulfillment and the rest. Vertically, in column, they should identify the processes that represent the major ways the company operates. Normally, there are five to 10 major business processes that encompass how a company operates. If the company wants to go a step further, it might then grid its technology systems against these functions and process axes, looking for gaps, opportunities for improvements and additional technology needs. Consider external experts to speed up the effort.
BILL RUSSELL is executive vice president of Allegient. Reach him at (317) 564-5701 or firstname.lastname@example.org.
The decision to implement a software package change in your business can be an exhaustive process. When the contract is signed and the selected software provider starts working, the internal team is often worn out and ready to say, “Well, we’re done. Time for the package people to take over.”
In some ways, the work is just beginning. “What a new software package really represents is an organizational change initiative, not just a software package selection process,” says Bill Russell, executive vice president, Allegient.
Smart Business recently spoke with Russell about preparing your company for a new software implementation.
How can a company determine if it’s ready to implement a new software package?
There should be a change readiness framework or package readiness framework. This should include an organizational change management plan or a total project life cycle plan. The initial readiness factors to check include, for example, whether or not there is an executive sponsor, a project manager, and the formation of a steering committee or sponsor committee that is made up of the key stake-holders. Typically, in today’s businesses, the new package won’t stand alone. It affects other business processes and departments that are related to it, and it may even have to interface with them. Finally, it’s extremely important that the company fully understands its current business processes that the package will impact.
How can a business determine if software customization is necessary?
If, by definition, the new software is the future state, then it must be gap analyzed against the current state. Building a classic business process modeling description, in graphical format with text definitions of business functions, is essential. It allows the company to understand the key inputs and outputs of each of its key process steps. Comparing these results to the package’s standard business processes exposes the pieces that don’t match the way the company operates.
At this point the steering committee must make a business decision about whether to accept the way the package works, or if customization is required. Incidentally, if you wait until this point for the package people to do the analysis, they’re going to say, “Well, you need to define your current state, we can do this for $175 per hour.” You’re better off preparing for that gap analysis and discussion before they come in the door.
Is it better to conform or customize?
The axiom for a software package project is, “Do as little customization as possible.” They should be implemented vanilla or right out of the box. In the end, it comes down to the needs of the business versus the cost of the software change or the total cost of ownership. Every time you make a change to the package you are moving away from its standard implementation to more and more of a one-off. There are times when the needs of a business outweigh that, and you may choose to customize, but it should be minimized. You’re better off changing the business process to reflect what the package does, rather than customizing the package. Keep in mind that if the software provider puts a new release out next year and you want to implement that new release, you’ve got to change all of those customizations in order to make the new release work.
How can companies get the most bang for their software buck?
First, it should be viewed as an organizational change initiative, not a software package implementation. A key part of the initiative is training your people in the new ways the process operates. Second, companies should execute a readiness framework because it’s more than just choosing the best package. Third, as much prep work as possible should be accomplished before the selected package provider comes in the door. Finally, do not underestimate the interfaces. If the package must work in conjunction with others, that integration effort isn’t insignificant. The project plan should include an integration layer substratum.
What is involved with testing a package implementation?
Testing should be accomplished from three fundamental needs. People got used to putting in these packages with the mind-set that they have already been tested, so they don’t need to test it. That’s a bad, bad, bad approach. You have to test at the functional, or user, level to determine if the package delivers the business value as promised. The package also should get tested for end-to-end functionality, particularly if it has to integrate with other processes/systems. The third primary focus of testing is for performance, i.e. for response time, reliability, availability and scalability. Many companies are negligent in testing packages in the performance area.
BILL RUSSELL is executive vice president of Allegient in Indianapolis. Reach him at (317) 564-5701 or email@example.com.
Nestled amid the excitement and long hours involved with launching a new company are decisions that could have huge tax consequences at the back end.
It’s never too early to start thinking about succession planning. In fact, some aspects of succession tax planning should begin a full decade before your planned exit, while some decisions, like what type of entity to use, must be made upon the initial formation of the business.
“If you’re operating as a C corporation and are interested in exiting your business, it may be beneficial to first convert your firm to an S corporation,” says Bruce Coblentz, partner, Armanino McKenna LLP in San Ramon. “The catch is that you probably should do this at least 10 years prior to the sale of the business.”
Smart Business spoke with Coblentz about the tax implications of exit strategies.
What is the most important aspect of a business sale?
One of the most important aspects is the current entity status of your company. Namely, whether it is a C corporation or a ‘pass-through entity,' such as a partnership, limited liability company or S corporation.
Many businesses operate as C corporations for a number of reasons. In the past, the array of choices available today did not exist. Also, some businesses are required to operate as C corporations. There exists the possibility of double taxation while operating as a C corporation. Taxes are first paid at the corporation level and again at the shareholder level when dividends or liquidation proceeds are received from the company.
Taxable income of pass-through entities, on the other hand, is generally taxed only on the individual owner’s share of income from the business and not at the entity level.
Will some companies benefit at exit by changing their type of corporation?
For C corporations, a similar double-tax issue potentially arises upon the sale of the business. The C corporation pays tax on the gain on the sale of the assets, then the shareholders pay additional tax when they receive cash upon the liquidation of the corporation.
In contrast, pass-through entities typically only have a single level of tax at the owner level upon the sale of the business. This is obviously more desirable, so you’ll have to consider converting your firm or company to an S corp. Be aware that the IRS has already thought of this, and there are significant potential tax consequences in doing so within a 10-year window, called the recognition period for the Built-In-Gains (BIG) tax.
Alternatively, a stock sale by the C corporation shareholders will avoid these negative tax consequences, and the gain on sale will be taxed at preferential capital gains tax rates. Unfortunately, most buyers are unwilling to purchase the stock of a company because of the potential liabilities involved. There are also typically greater tax benefits to the buyer in an asset purchase.
What tax rates will be encountered at the time of sale?
C corporations do not enjoy the preferential 15 percent capital gains rate, but are taxed on all income at the regular corporation tax rates. With the C corporation, you may have substantial retained earnings represented by the assets of the business, such as cash, accounts receivable, inventory, property, plant and equipment. Once those retained earnings have been converted to cash by selling the assets and paying the corporate-level tax, the owners need to get the after-tax cash out to the owners to enjoy the benefits of the sale. Such a liquidity event will qualify the owners for capital gains tax rates. Alternatively, the corporation could pay out dividends to owners.
Until 2010, the tax rate on dividends is the same as the capital gains tax rate. Pass-through entities and individual owners, however, typically do enjoy the 15 percent preferential rate. In an asset sale, if your pass-through entity has tangible assets, such as equipment, vehicles, office equipment and/or furniture, the gain on sale of these assets is taxed at higher ordinary rates (maximum 35 percent federal tax rate for individuals).
Intangible assets, which include goodwill (the value of a company in excess of its tangible net worth), customer lists, trademarks and intellectual property, and stock in subsidiaries, are generally taxed at the lower capital gains rates of 15 percent. Real property sales may be taxed partially at the lower capital gains rates of 15 and 25 percent, and for much older real estate, partially at ordinary income rates.
With tax implications in mind, what financing options are available for buyers?
In a cash sale, the buyer secures third-party financing upfront to pay the purchase price in full. For an installment sale, the buyer puts some cash into the deal and finances the balance with a loan from the seller. In a stock-for-stock swap, the seller receives stock of the buyer in exchange for the stock of the company being sold.
No matter what type of entity is in place, a well-drafted buy-sell agreement, LLC operating agreement or partnership agreement is strongly recommended.
BRUCE COBLENTZ, CPA, is a partner, Tax Department, at San Ramon-headquartered Armanino McKenna LLP, the largest California-based accounting and consulting firm. Reach him at (925) 790-2600 or firstname.lastname@example.org.
Despite meteorological early-warning systems, hurricanes, flood-producing storms and wind events are unpredictable and often change course, leaving little time for homeowners to prepare. What if the worst happened and your home was destroyed?
“One of the biggest mistakes homeowners make is failing to record the contents of their home,” says Michael Gigliotti, president, HRH Gulf Coast Tampa and Sarasota.
“The other major mistake is failing to keep these documents and crucial insurance agent contact information in a safe, reachable place in the event of a disaster,” adds Wendy Bryant, ACSR, Private Client Group manager, HRH Tampa.
Smart Business spoke with Gigliotti and Bryant about the importance of documenting your possessions and purchasing insurance coverage to best weather any storm.
Why is it crucial that homeowners document their contents?
Bryant: After a catastrophic loss, depending on the age of the item, the insurance companies will usually require receipts. We recommend that homeowners videotape their belongings, jewelry and fine arts, and keep the tape off site. Because of the devastation, confusion and trauma after a catastrophe, homeowners may not remember everything they own. And once the claim is closed, there’s usually no getting any reimbursement for what was omitted.
Gigliotti: The more documentation you have ahead of time, the better off you’ll be at time of loss and the quicker you’ll get paid. It’s important to remember that jewelry, watches and antiques are probably not adequately covered in a normal insurance policy so those items specifically should be scheduled onto the policy. Antique vehicles should also be valued and covered specifically at a stated value.
What’s the difference between hurricane and wind deductibles?
Gigliotti: It’s a big difference. In coastal areas, wind and hurricane coverage is written with a higher deductible. So on a standard homeowner’s policy you’ll have two different types of deductibles. One is your normal homeowner’s deductible, with a second deductible specifically for either wind damage or named hurricane damage. That second deductible ranges from approximately 2 percent to 10 percent of the structure’s value. For example, a $750,000 house with a 5 percent wind deductible is liable for a $38,000 deductible for any type of wind loss.
Bryant: If a homeowner with wind damage has the hurricane deductible, then only the normal policy deductible would apply. It basically means the smaller homeowner’s deductible will apply to every loss except hurricane damage, and this is a tremendous difference. Additionally, if there are multiple hurricanes during the season, the hurricane deductible will apply only once.
How does flood, water and sewer backup coverage come into play?
Bryant: One of the most under-purchased and overlooked type of coverage is the flood insurance for Floridians. The entire state is in a flood zone divided into two categories. There is a 100-year flood area and a 500-year flood area. The 500-year zone is considered the low-risk zone, which in our eyes means nothing, because 30 percent of the floods that happened in the last eight years happened in that area.
Gigliotti: The first issue is purchasing coverage through the National Flood Insurance Program (NFIP), which is in play for the first $250,000 of the home’s valuation. We tell people that if they’ve elected not to buy the NFIP coverage they are basically electing to take a $250,000 deductible on their home. Over that threshold there is very affordable excess flood insurance available to insure the full value of a home. Most people are not aware that flood coverage and water and sewer backup coverage is not provided in the normal homeowners policy. Water and sewer coverage is another important endorsement to your homeowner’s policy.
How can homeowners compare the available insurance carriers?
Gigliotti: Affluent homeowners with combined premiums over $10,000 have access to AM Best Rated carriers like AIG, Chubb, Firemen’s Fund and a newer carrier called Pure Insurance. Homeowners who don’t meet their requirements are left with Citizens, the state insurance program, or a number of Demo Tech rated carriers which are not recognized or rated by AM Best.
How often should homeowner’s policies be reviewed?
Gigliotti: A thorough review should be performed once each year. Due to the higher costs in Florida, it’s important for affluent homeowners to have a broker involved for the purchase of their insurance.
Bryant: A good broker also can assist with the documentation process and offer advice with respect to the right limits for the value of the house. These limits should be kept up to date due to the increased costs of construction that rise dramatically in the wake of a major catastrophe.
MICHAEL GIGLIOTTI is president, HRH Gulf Coast Tampa and Sarasota. Reach him at (813) 261-7969 or Michael.email@example.com.
WENDY BRYANT, ACSR, is Private Client Group manager, HRH Tampa. Reach her at (813) 864-2746 or firstname.lastname@example.org.
Is tax provision work an exact science? “A tax provision is an estimate of tax and not an exact science, but it seems to be moving more toward an exact science in an area that’s almost impossible to fully predict,” says David Sordello, CPA, tax partner, Armanino McKenna LLP. “Meanwhile, companies are struggling with these provisions in a tax world that continues to grow more complex as business becomes more global.”
Smart Business spoke with Sordello about how the new complexities of tax provision work are placing a burden on companies and prompting big changes in their tax departments.
How can the new tax environment ensnare companies?
Two big areas are causing problems. First, as companies grow into more tax jurisdictions, they’re forced to deal with doing annual projections and estimates to accrue taxes for federal, state and many international jurisdictions. This requires the right detail information and knowledge of many jurisdictions’ tax rules and laws. Additionally, they must have proper third-party arrangements with their subsidiaries to properly pay tax in foreign jurisdictions when the company does business internationally.
Second, companies historically relied on their accounting firm’s advice to help them book items and find the right answers. Today, accounting firms that perform corporate audits are essentially handcuffed by the rules around Sarbanes-Oxley and the Auditor Independence Act. It’s now up to management to have all the processes and resources in place to properly account for taxes.
Companies are being forced to reallocate their limited resources from tax return preparation and planning into the tax provision area. It seems more and more that the role of a tax professional is no longer a matter of minimizing taxes; it’s now a matter of properly accounting for taxes for financial statement purposes.
How are companies working through these issues?
Companies have been hiring additional resources for the skills to make these accruals, and to make sure that management has the tools in place to calculate these estimates and fulfill the requirements that the auditors will address.
Many companies simply do not have the bandwidth to accomplish the necessary tax provision work and want a third party to review what they’ve done internally from a compliance and SOX perspective to make sure it’s right. They need to make sure they’ve gone through enough internal processes to be able to represent that they have done all the steps, and that they have enough intellect and knowledge to properly represent to the auditors that they’ve done their job in making this accrual. I spend about 90 percent of my time helping companies think through all of the issues and to put all of the documentation in place, while working with the audit firms to get the client through this quarterly process.
How are 123R and FIN 48 impacting the tax provision process?
It seems like every year there has been a new wrinkle on how the Financial Accounting Standards Board (FASB) or IRS is making the provision process more complicated. Two years ago, it was the adoption of 123R that significantly complicated stock option accounting, and the tax benefits of the related option deductions.
This year brought us FIN 48, the new rules for accounting for uncertainty in income taxes, which was formerly addressed by FAS 5 (accounting for contingencies). The accounting firms themselves are dealing with this for the first time, making the process even harder for companies that need advice.
Why should companies hire internally or seek outside resources?
CFOs should be aware of FIN 48 and its implications to their companies. Are they meeting all of the disclosure rules? What are the ramifications that are going to impact their effective tax rate and earnings per share? Do they understand these issues and can they articulate that to their Board, their auditors and analysts? The path to that understanding is through hiring the internal resources, outsourcing the function or a combination of both.
DAVID SORDELLO, CPA, is a tax partner with Armanino McKenna LLP in San Jose. Reach him at DavidS@amllp.com or (925) 790-6403.
Surprisingly, only a small percentage of employers offer paid or voluntary disability programs for their employees, despite statistics that show nearly half of all personal bankruptcies are the direct result of a major illness or injury.
“Disability insurance is not as visible or as important to employers and employees as health insurance or dental insurance,” says Tina Antram, vice president, Hilb Rogal & Hobbs, Tampa. “They believe other things are going to protect them in the event they are disabled, and they are wrong.”
Smart Business recently spoke with Antram and Dawn Bowers-Card, Employee Benefits Practice leader, Hilb Rogal & Hobbs, Sarasota, about why disability insurance is an important but often untapped safety net that can help control costs and foster employee loyalty.
Why is disability insurance an important issue?
Antram: While many people think that injury is the leading cause of disability, the reality is it is illness. That fact is made more prevalent by two significant demographic factors: obesity and aging.
According to the Society of Actuaries, a 35-year-old person has a 50 percent chance of being unable to work for more than three months before the age of 65. In addition, the National Safety Council reported in 2004 that two-thirds of disabling injuries suffered by workers in 2003 occurred off the job.
Bowers-Card: Today’s advanced medical treatment promotes survival which increases the incidence of disability versus death. Think about cancer, heart attack or stroke; what used to kill us now disables us.
Financially, statistics show that people are not prepared to deal with a disability and the loss of income associated with it. According to an article in Health Affairs, 46 percent of bankruptcies in 2001 were caused by a major medical illness or injury.
Meanwhile, 53 percent to 79 percent of Americans live paycheck to paycheck and when coupled with the statistic that nearly one in three Americans will suffer a serious disability between ages 35 and 65, it becomes a staggering financial scenario. These facts clearly support the need for disability insurance, but the issue is overcoming resistance. Most people think they don’t need it and believe ‘it won’t happen to me.’
What makes disability insurance a good value for employees?
Antram: The cost is inexpensive compared to the value. According to a 2005 JHA market survey, the average cost for short-term disability was $192 per year and $228 per year for long-term disability coverage. These are averages and many variables apply in determining the actual cost of an individual’s coverage. However, it illustrates the relatively inexpensive nature of this type of insurance.
Bowers-Card: If an employer sponsors a group disability plan paid for either by the company or by the employee it is advantageous for the employee to purchase that policy. The employer-sponsored plan will offer group pricing and will not require evidence of good health or income verification. Individual policies are available but can be quite expensive and a person must be in excellent health and financially sound when applying for coverage to qualify.
The rising cost of health care puts pressure on ancillary lines of coverage like disability when employers decide what coverage to offer in their programs. There are not many people in the work force that could describe their income as ancillary and disability can be offered on a voluntary employee-pay-all basis. People tend to think they will fall back on Social Security Disability (SSDI) if they become disabled. The reality is that it is very hard to qualify for SSDI due to long elimination periods and a very strict definition for disability.
Why is disability insurance a good value for employers?
Antram: It can help attract and retain good employees even serve as a reward to long-term employees. It also demonstrates an employer’s concern about their employees’ well-being and financial security, which increases employee loyalty and has a positive impact on morale. In today’s tight labor market, this impact is something employers should not underestimate.
In addition, when someone is disabled, they generally want to return to work. Disability insurance has provisions and incentives, for both the employer and employee, to help them return to work. This can be a financial savings to the employer in the indirect costs related to disability that are estimated to be 8 percent of payroll.
Bowers-Card: It can also assist with presenteeism issues (when an employee is at work but unable to work at full capacity due to physical impairment or mental distraction) and the marginally disabled. With the security of a disability benefit, employees feel that they can take time off of work for treatment or rehabilitation and when they return they will be more productive.
Disability coverage may also potentially lower the incidence of some workers’ compensation claims because employees have appropriate coverage for off the job injuries resulting in their inability to work.
TINA ANTRAM, GBDS, is vice president, Hilb Rogal & Hobbs, Tampa. Reach her at (813) 261-7979 or email@example.com. DAWN BOWERS-CARD, GBDS, is Employee Benefits Practice leader, Hilb Rogal & Hobbs, Sarasota. Reach her at (941) 554-3130 or firstname.lastname@example.org.
Hilb Rogal & Hobbs, Sarasota
M/A preparation may seem like a monumental and consuming project, but many of the core concepts involved are essentially best practices that all companies should have in place to maximize profit potential.
“Many of the ways that an inquirer will analyze a prospective target’s business aren’t that different from what the target should be doing all along,” says Tom Gard, partner in charge, Armanino McKenna LLP. “Maximizing your profit potential on an ongoing basis will increase the sale price of any future M/A deal.”
Smart Business spoke with Gard about how focusing on optimal business performance can help to put your business on track for a beneficial M/A outcome.
What are three preparation guidelines for a successful M/A?
First, you’ll need to attract a buyer. Your information has to be presented to convey a story.
Second, this story has to be supportable by facts. You might tell a story that sales are going to grow by 20 percent, but if it’s not a plausible story, the buyer won’t listen. Prepare the facts about where the company is right now based on current operating results.
Third, you should be critically evaluating your operation by product line and making the changes necessary to improve overall profitability whether there’s an M/A deal or not.
How do accounting practices come into play?
Economics will always drive whether or not the proposed merger or acquisition is a good strategic buy. However, accounting practices come into play when the purchaser starts analyzing the numbers. If things are not accounted for correctly or are not presented in a concise manner, the prospect may start to lose faith or question the numbers. If the numbers are straightforward and the reports are meaningful with no indications of any unusual accounting treatments, the buyer is more likely to be attracted.
When should a company seek assistance from outside resources?
Planning for an M/A deal should begin at least two to three years in advance. Companies can certainly benefit by drafting an experienced accounting firm early in the process that is familiar with how M/A deals are structured. Most CPAs can perform a critical evaluation of the historical numbers and help ensure that the company is correctly positioned prior to going into the market.
What categories can skew an M/A proposal, and how can they be recast?
Private companies often maintain substantial discretionary expenses. For example, a company may employ certain family members, offer extra-rich medical benefits plans or provide a large number of company vehicles. The prospective purchaser may choose to streamline these operations if they typically are not the industry norm.
This doesn’t mean that a company should immediately eliminate these discretionary categories, but I advise my clients that these items need to be isolated and backed out of the numbers so the core profitability will look that much stronger.
How are accounting results best organized for critical analysis?
The buyer likely will request to see results of operation by distinct product lines or distinct divisions. For example, a truck dealership could present the numbers for truck sales, parts sales, service sales and other product lines. The buyer will want to understand what lines are actually driving the business, and which lines might be a drag on future profitability.
Additionally, prospective buyers will want to know how the company arrived at its current form. You’ll need to prepare and provide many documents, including basics like articles of incorporation, minutes, capitalization tables and other statistics. Management should make sure it can run reports like these easily, even if not preparing for an M/A. Compliance documents, including four to five years of audited financial statements, tax returns and letters of recommendation from auditors or internal financials if not audited should also be prepared and organized for analysis.
How can negative results be mitigated before approaching a potential buyer?
It’s rare when you find an organization that is running on all cylinders, and any legitimate buyer will drill down to the problem areas. This is where the critical analysis of your product lines comes into play. Once an area of concern is identified, a plan of action can be designed that illustrates how this lagging area can be turned to the benefit of the purchaser. You have to tell the story to the buyer about how this problem can be overcome and capitalized upon.
TOM GARD is partner in charge of Armanino McKenna LLP’s Audit Department in San Ramon. Reach him at (925) 790-2600 or email@example.com.
When closing on property, hiding somewhere in a small forest of paper is an important contract that allows for owner’s title insurance coverage that is typically paid for by the seller.
Surrounded by a team of professionals ranging from realtors, attorneys, title company representatives and loan specialists, most investors feel comfortable that due diligence by all of these parties will guarantee a positive outcome. This is usually the case. But what happens when the investor later improves or develops the property, or transfers the title to a different entity?
“It’s a problem that we’re seeing more and more,” says Kent Ihrig, partner and chair, Real Estate Practice Group, Shu-maker, Loop & Kendrick LLP. “Many property owners don’t realize that the title coverage they received at closing doesn’t protect a new entity or a new owner.”
Smart Business spoke with Ihrig about related party transactions and why they may compel a property owner to revisit their original title insurance policy.
What related party transactions could adversely affect a titleholder?
Many people purchase property in their own name, individually, and later decide to develop it, bring in an investor, set up an LLC, or transfer it in another manner perhaps to a family member. Conversely, an investor might dissolve or distribute the property from an LLC or a corporation.
Often, owners do not consider that their original owner’s title insurance policy does not follow them to the new entity. It protects them while they own the property, but it does not protect the new entity or the new owner. There may be some basis for the new owner, including their own entity, to go back against them on a breach of a title warranty and thereby make a claim on their policy. However, the new owner has no direct protection from the title insurer.
How does title insurance mitigate the effects of these related party transactions?
The owner’s policy of title insurance provided by the seller at the time of sale ensures that the title is indeed vested in the owner, and it also ensures that it’s not subjected to any liens other than those listed in the policy. Hazard insurance insures against something that may happen in the future while title insurance is always looking at the past.
Title insurance is only insuring the title and the property up to the date it was acquired. So if something that arose in the past or something that the title company missed like a mortgage that was never satisfied causes someone to start fore-closure proceedings against you, you could go back against your title insurance.
Additionally, when owners quit-claim their interest in a property to another entity, or a son or daughter, perhaps, the title coverage doesn’t carry forward to the new owner. This creates financial exposure in a number of areas, especially if the property’s value has increased significantly from the original purchase price listed on the owner’s title insurance policy.
Why should property development or improvements, or refinancing, prompt a title insurance review?
Typically, when you buy property, you obtain title insurance for the purchase price. If your property appreciates in value or you develop or improve the property so that it causes an increase in the value, unless you purchase an endorsement to your policy at the time you increase the value, you’re not covered on that increased value. If there is a title claim and the owner has not obtained an increased amount of title insurance, he or she is confined within the limits of the original policy. This could be a costly mistake. For example, when an investor purchases a vacant or undeveloped beachfront property for $1 million and later develops it, bringing the value up to $4 million, the original owner’s title insurance policy for only $1 million leaves a large area of exposure. If a title claim occurs, or if there was a total failure of the title where the title was never vested the way the title company said it was the title insurance policy would only pay up to $1 million, the original limit of the policy.
Can a thorough title search replace owner’s title insurance?
No. A pure title search does not replace or provide the same protection as a paid title insurance policy and regular endorsement upgrades. In a rising market, owners should consider revisiting their title insurance policy every two to three years, or about every five to six years in a stable market.
Can Florida property-owners select from different title insurance providers?
Yes. Title insurance providers are private insurers. Florida’s Office of Insurance regulates their products and rates. There is some competition. Many title insurers offer what’s known as a Butler Rebate, where they rebate a portion of the agent’s premium to the purchaser of the policy. While title insurance prices are minimum promulgated rates set by the state, the agent’s portion of the premium is negotiable, allowing for competition between agents.
KENT IHRIG is a partner in the Real Estate and Corporate Practice groups with Shumaker, Loop & Kendrick LLP in Tampa. Reach him at (813) 227-2354 or firstname.lastname@example.org.