Meredyth McKenzie

Growth comes in many different shapes and sizes and can be accomplished several ways: through mergers and acquisitions, by enhancing existing products and services or innovating new ones, or by extending market share.

The key is paying attention to the three main drivers of growth — customer satisfaction, good products and services, and pricing. Doing so can help your business overcome hurdles and be successful, but ignoring them can lead to problems down the road.

“Bottom line, you’re not going to grow fast or profitably if you don’t pay attention to these drivers,” says Jim Lane, director of GBQ Redbank Advisors.

Smart Business spoke with Lane about how to use these drivers to increase growth.

How can you overcome some of the challenges of not growing automatically?

The first problem is disaffected customers. Customers are under a lot of pressure to reduce their costs. Plus, they’re scrambling against competitors to grow, so they take it out on vendors. They ask for deeper discounts, tend to be grouchier about problems and try to force solutions. This is all costly and, eventually, if not handled properly, results in defection of customers.

Products and services that are not well thought out or appreciated by the market will be a big drain on profits. If you can’t sell what you have to the first customer, selling to the second won’t be any easier. It’s a big warning sign if you need to educate the market on your product just so they can understand it. You’ll end up spending a lot of resources to get your idea across. You have to listen to what the market is saying.

Pricing below cost is also a barrier. It may grow revenue in the short-term, but it ends up weakening your financials because you’re mortgaging all assets and converting them into costs that you’re selling. Instead of getting stronger with each sale when you sell profitably, you’re getting weaker. Eventually you will not be able to invest when shocks come along. If you sell profitably, you have reserves on hand to handle these shocks and are not forced to discard a lot of human resources that you have invested in.

How can you use customer service to drive growth?

There’s some research done by the Association for Customer Service at the University of Michigan. It produced the American Customer Service Index, which surveyed 65,000 people in 200 companies across 40 industries and ranked them according to customer satisfaction levels. It sorted these 200 companies, which are a sample out of the Standard & Poor’s 500, into strong firms from a customer satisfaction perspective. If you create an investment portfolio out of these winning firms, and compare them to the average performance of S&P 500 companies, you’ll find that they grow their market share value over three times as much as the S&P 500 does. That’s compelling information. It seems obvious, but making your customers happy really has an impact on your growth and revenue. That’s a huge driver of profitable growth.

How does innovation affect profitable growth?

You’re creating something new that hasn’t been done before when you have an innovative product or service. Right off the bat you’re going to have better control over pricing than you would in a market where the product set is known and well understood. There are no substitutions with an innovative product — it’s the first of its kind, so people have to come to you to get it. This gives you a great deal of pricing freedom. You still have to stay within the bounds of the customer’s perceived value of the product, but you can charge up to that perceived value and not have pricing be an issue. It also serves as a differentiator. You won’t have any competition or competitive bids, since it’s the first of its kind. Innovation creates greater satisfaction, particularly when you combine it with listening to customers. Customers will be more pleased with new and improved product sets if you listen to them.

How can you develop a strategy to combine all three approaches, and what benefits will that produce?

It starts with listening to customers and developing listening skills across the organization. It should even extend outside the organization. Sales or customer service people tend to listen to customers with company ears. They understand the problem much better than the customer does and tend to translate naïve language the customer uses into more sophisticated, technical language to describe the situation. They end up inserting their own bias.

It’s impossible to get away from this once you’ve been inside a company. You should have someone outside do the listening — someone who doesn’t understand the product or situation but understands customers. He or she writes down everything he or she hears, and can compare notes across customers. Customers tend to gravitate toward the same terms to describe similar situations. You can catch those trends across surveys and see what customers love that you should develop more, and what they don’t love that you should discontinue or change. That’s where it needs to start — listening to the customer with unbiased ears.

Then you need to act on what you heard and innovate your products and services toward customers. Eliminate things that are less effective, improve the cost structure and create a value proposition that would solve your customers’ problems. This gets you into an innovative product set that will be attractive to customers and produce better pricing. Customers will continue coming back and will refer new customers, who are already one step ahead in the trust cycle. You have to get customers to trust you before they buy from you, but if they’ve already bought from you or been referred, they’ve gone through a lot of the trust through proxy. It can also reduce competition. When customers love you and your innovative products, they’re not looking for anyone else.

Jim Lane is the director of GBQ Redbank Advisors, GBQ Partners LLC. Reach him at (614) 947-5257 or jlane@gbq.com.

Tuesday, 23 February 2010 19:00

Tax payback

Many states are looking for ways to obtain additional revenue during the recession without having to raise taxes. Tax amnesty programs offer a way for states to collect a large amount of past-due tax liabilities from companies in a short period of time. Participating companies owe back taxes, haven’t filed in that state, or know they owe some kind of money but have just been waiting for whatever reason.

While Ohio is not currently undergoing a program, you may be subject to these payments if you owe back taxes for business locations in states currently undergoing amnesty programs (Pennsylvania, New York and possibly Illinois).

“This offers taxpayers a limited opportunity to pay back taxes,” says Matthew Stamp, the director of state and local tax services with GBQ Partners LLC. “The state usually offers some break on interests or penalties or on the period of time you have to file. So you can alleviate that tax liability without any further issues from the state.”

Smart Business spoke with Stamp about the benefits and risks of state tax amnesty programs and how these differ from other tax payback programs.

What are the benefits and risks of state tax amnesty programs?

Penalties and interest charges can be significant and carry heavy burdens. These programs allow taxpayers to reduce the actual money paid, as if they’ve been filing all along. You’re allowed to close certain periods and move forward and file in the state without any further repercussions after you’ve paid under the amnesty program.

You need to be careful though, because you’re putting yourself out there to the state with this program. The state could impose taxes, interests and penalties if you don’t comply with all program requirements, have missed some bit of information or fall out of the program for prior periods. This could end up costing you a significant amount of money.

What key things do companies and taxpayers need to understand about state tax amnesty programs?

You need to weigh your options and analyze the dollar amounts at stake. You also need to understand if the state already has a voluntary disclosure program running, because there are differences between these and amnesty programs. You need to be able to weigh the risks and benefits of these programs, and if the voluntary disclosure program will be suspended while the amnesty program is taking place. You also need to understand what will happen if you don’t come forward under the program, how aggressive any audits will be, and if there will be harsher penalty and interest charges.

How do you qualify to participate, and what should be done before applying?

Most programs apply to taxpayers who have both failed to file a return or underreported taxes, so you have to first make sure you qualify and you understand all program requirements. You should calculate your liability and look at the different positions you’ve taken, including what type of taxes you’ve filed for in the past and if you’re filing for all of the right taxes.

A taxpayer must pay the entire amount of taxes, plus some or all of the interest due by the program’s expiration date in order to qualify. Taxpayers may also be required to sign a settlement agreement and agree to file all future tax returns and pay future tax liabilities in a timely fashion. Any audit notice received prior to entering an amnesty program may or may not eliminate a taxpayer’s eligibility, because each program is different.

Failure to comply with all program requirements could lead to the rescinding of all program benefits and protections. Some states impose harsher penalties if a taxpayer is subsequently identified and did not take advantage of the amnesty program.

What is a voluntary disclosure program?

Voluntary disclosure programs will typically have varying look-back periods or the amount of years of past-due tax liability that must be paid once in the program. Any tax liability outside of the look-back period is forgiven.

Typical requirements under a state’s voluntary disclosure program can include any of the following:

  • No previous contact with the Department of Taxation or any of its agents
  • Willingness to pay all outstanding tax liabilities
  • Cannot have previously registered with the state for taxes you wish to pay under the program
  • Cannot be under criminal investigation or under audit
  • Must not have already received a bill for outstanding tax liabilities

What are some of the differences between voluntary disclosure programs and state tax amnesty programs?

The main differences include a shorter window of opportunity and waiver of penalties and interest for amnesty programs. Amnesty programs also usually require the waiver of any tax appeal rights and have significant look-back periods. The look-back periods in voluntary disclosure programs are usually limited.

Sometimes the voluntary disclosure program is suspended while an amnesty program is taking place. The voluntary disclosure program may give you fewer benefits related to interest and penalty abatements than you would have with a state amnesty program. Every state is different, but a lot of times you’ll get different rate benefits, and an amnesty may provide better abatements than a voluntary disclosure program. You need to understand the benefits and differences between these two programs and determine which one is right for you.

Matthew Stamp is the director of state and local tax services at GBQ Partners LLC. Reach him at mstamp@gbq.com or (614) 947-5302.

Tuesday, 23 February 2010 19:00

Ohio Employee Health Partnership on MCOs

Managed care organizations have done a lot of work over the last several years to speed up processes in the workers’ compensation system.

Stakeholders from several groups, including the Bureau of Workers’ Compensation, The Kilbourne Co. and the MCO League of Ohio studied 10 years of data from previous health organizations to develop areas of improvement. Twelve major objectives were developed from this, but five were seen as the most important for MCOs to focus on.

These objectives include providing injured workers with more timely and efficient access to quality care, reducing disability days, returning injured employees to work more efficiently and effectively, reducing overall claims costs, speeding up the payment process for providers, and increasing the satisfaction of services for employers and injured workers.

“These items all focus on timing, efficiency and quality care for injured workers,” says Karen Conger, CEO of Ohio Employee Health Partnership. “This will result in reduced missed days and indemnity payments, because that’s where your costs lie. You’re not only treating the injury, but also managing the time away from work, or time an injured worker is on modified duty. This all adds to your premium cost.”

Smart Business spoke with Conger about how MCOs have made improvements under these objectives.

How have MCOs provided injured workers with timely access to quality care?

MCOs have reduced the filing time between when an injury happens and when it’s reported. This was an average of 62.1 days before the study and was down to an average of 19.3 days in 2006. This means injuries are being reported and adjudicated sooner. Treatment is then authorized sooner, so injured workers have more timely access to medical services.

One of the most important goals is to have fewer disability days for injured workers. It’s all about looking at those lost time days and reducing that number so injured workers are back to work. Injured workers have returned to employment in 8.9 days, as opposed to 19 days before 1998. Ninety-two percent of injured workers have gone back to work safely within 60 days of filing a claim.

How have MCOs reduced overall claim costs and the number of claims being filed?

MCOs have been able to reduce claim costs by 73 percent through effective return-to-work strategies and requesting appropriate treatment options. An average claim was $8,188 in 1995 and down to $2,183 in 2003.

The number of claims has gone down over the years in the U.S., but it’s hard to say if the managed care process has helped weed out any questionable claims. This reduction could come from a variety of areas, including less manufacturing or healthier workers. But one of the ways MCOs can help keep claims down is by promoting a safe workplace and working with employers on safety to make sure injuries never happen.

How have MCOs helped speed up the payment process for providers?

This happened in two ways. The first was by reducing the lag time, or time between the date of injury and reported date. This gives you more time to pay the bill because you know you have an allowed claim. If you didn’t know about a claim for 60 days, that’s lost time when you could have paid it and sped up the process.

Strict benchmarks were also set to speed up this process. The lag time has been reduced by 51 percent, and 98 percent of bills today are now paid by MCOs within 30 days of receipt. Knowing about the injury quicker, getting the treatment approved quicker and getting the claim allowed quicker can allow a company to pay the bill quicker. It all wraps together.

How have MCOs increased overall satisfaction, and how can this success be measured?

A 2007 report card showed satisfaction levels at 4.28 for employers and 3.93 for injured workers on a scale of 1 to 5. By using an MCO, employers have someone to talk to and employees have medical experts to work with. MCOs also give employers another partner in return-to-work programs and a liaison between providers. Satisfaction increases as you see claim costs and premiums decrease.

Injured workers are getting treatment sooner because claims are being reported and filed sooner. So they’re not sitting around for days or weeks, waiting for treatments to be approved. This can lead to a better quality of life for them, reduce their lost time wages and get them back on the job safely, so they can continue taking care of their families.

These improvements have offered a net savings in excess of $1.78 billion from 1997 to 2006. This lowers reserves for employers, which is a big calculation of the premium.

Do you foresee any future improvements to the system?

We are constantly looking for ways to improve. Future improvements may deal with decreasing provider payment time as the health care industry moves from paper to electronic systems. These electronic systems may help improve filing times and other issues in the workers’ comp area. It also may help in the cost savings. But as things become more and more electronic, and more health care providers are using electronic systems, these will lead to more improvements for MCOs.

Karen Conger is the CEO of Ohio Employee Health Partnership.

Tuesday, 26 January 2010 19:00

Playing by the rules

Although the Internal Revenue Code Sections 409A and 162(m) rules are not new, they continue to raise important issues that companies and their employees must be aware of.

Section 409A imposes limits upon plans and agreements of public or private companies that include deferred compensation that ensure “participating employees do not have complete control over determining when income will be recognized for income tax purposes,” says Daniel N. Janich, an officer in the employee benefits practice group in the Chicago office of Greensfelder, Hemker & Gale, PC.

Section 162(m) limits the deductibility of compensation for a public company’s CEO or three other most highly compensated officers (other than the principal financial officer) for a given taxable year to $1 million. Janich says that Section 162(m) “essentially caps the total amount of compensation guaranteed to be paid to the public company’s top executives.”

Recently, the IRS ruled that employment agreements, equity and other incentive plans that permit payments when such officers terminate “without cause” or “for good reason,” or who retire, may no longer be considered “performance-based compensation” that is excluded from Section 162(m)’s limitations.

Smart Business spoke with Janich about what you need to know about these rules and how to make sure your company is following them.

What key things do business owners need to understand about these rules?

With regard to Section 409A, business owners and employees must understand this rule applies in a broad set of factual circumstances. The penalties for a violation will impact the employee, not the company; therefore, it is the employee who must be certain that his or her deferred compensation benefit fully complies with 409A. A 409A violation results in tax penalties, accelerated recognition of income and interest charges.

Section 162(m) is more limited in scope than Section 409A, applying only to a handful of top paid executives of public companies. Unlike in the past, when terminating executives were permitted to waive their performance goals and still receive their incentive compensation benefit as performance-based compensation excluded from Section 162(m)’s deduction limits, the IRS has recently pronounced that such payments will no longer be treated as performance-based compensation if triggered solely by an involuntary termination or retirement.

This position has caused many public companies to restructure their plans and agreements to comply with this interpretation of Section 162(m).

What are the risks and benefits of these rules?

The main risk is posed by a failure to understand how and when these rules apply, which will lead to costly violations. The principal benefit of Section 409A is that it provides a bright line on the operation of deferrals in such plans. The major benefit of the IRS position on Section 162(m)’s application to equity and incentive awards is greater clarity as to how and when such compensation will be deemed performance-based.

These benefits may be outweighed by the added layer of complexity and administrative expense associated with compliance with these rules.

How can a company make changes to comply with these rules?

Any company providing a form of deferred compensation or incentive plan benefit should work with competent legal counsel who is familiar with these rules and their application. Experienced legal counsel should be routinely consulted before new deferred compensation plans or agreements are implemented to confirm compliance with these rules, insofar as the failure to comply will most certainly result in unhappy employees.

Although the consequences of violating Section 409A will generally be felt by the employee, the company may also be subject to a tax penalty arising from a failure to withhold income due to the acceleration of income recognition that a violation entails.

Under Section 162(m), the company is the one that would suffer the most significant consequences of a violation. The restructuring of plans and agreements to comply with Section 162(m) requirements may result in some loss of flexibility in fashioning a suitable payout arrangement for the top-paid executives.

How can you make sure you and your employees don’t overstep these rules?

The problem is that many employees and executives are not familiar with these rules, even though they are the recipients of significant amounts of income that are subject to them. Of course, this is less of a problem for Section 162(m) than it is for Section 409A.

For example, in the case for severance plans, an inadvertent 409A violation may occur simply because the length of the payment schedule causes the severance to be treated as deferred compensation. Many former employees signing off on separation packages without the benefit of competent legal advice on 409A issues may not realize the income tax ramifications until it is too late to do anything about it.

Employees and employers alike must become familiar with these rules. Employee benefits counsel can and should assist in the educational process through in-house seminars and other training programs for human resource personnel.

By becoming familiar with these rules, as well as with the common scenarios when they typically arise, human resource personnel can meaningfully assist employees. Although these tax rules may be complicated, a basic understanding of when and how they apply can be achieved with the right kind of program in place.

Daniel N. Janich is an officer in the employee benefits practice group in the Chicago office of Greensfelder, Hemker & Gale, PC. Reach him at (312) 419-9090 or dnj@greensfelder.com.

Tuesday, 26 January 2010 19:00

Lease strategies

Even after downsizing, many companies still find themselves stuck as tenants leasing more space than needed or with rents they can no longer afford to pay. These companies then run the risk of going into default on the lease or possible eviction from the space. They could also lose any security deposits or find themselves owing money as the result of the landlords’ draw of letters of credit if they cannot keep promises under the lease.

It’s a loss for the landlords, too, if the tenants default, since landlords of vacant spaces are not receiving the income needed to pay debt service owed to their lenders or to pay operating expenses for the property.

“Many tenants took on space needed at the outset of the lease without foresight that they would downsize in the current economic climate,” says Juliana Stamato, real estate attorney with Theodora Oringher Miller & Richman PC. “Tenants then find themselves paying rent on space that is no longer needed or paying above market rent in the face of declining revenues.”

Smart Business spoke with Stamato about the different options and strategies that tenants and landlords can utilize to cope with these challenges.

What options do tenants have if they are leasing too much space?

Tenants can consider moving out of the premises and assigning the entire lease to a new tenant or subletting some of the space. Tenants should review the lease to determine whether the lease permits assignments and subleasing. Most commercial leases require the landlord’s consent for assignments and subleases, and many leases list criteria that must be satisfied in order to obtain the landlord’s consent, such as establishing that the proposed new tenant has the financial strength to honor the lease obligations. Tenants will need to allow plenty of time for finding a new tenant or subtenant and obtaining the landlord’s consent.

How can you find a tenant or subtenant for your space?

You should meet with your broker and explore current market conditions and possible candidates for the space. If you are paying above market rent, you will need to be prepared to lower the rent for your new tenant or subtenant and pay the difference to the landlord. You also need to assess the desirability of the space. For example, it may be difficult to find a new tenant or subtenant if your premises have highly specialized tenant improvements that need to be changed, if parking is an issue or if there is too little time remaining on the lease. Or perhaps the configuration of your leased premises doesn’t work for subleasing. If you can’t find a new tenant or subtenant, another option is to try to restructure or modify the lease.

What if you don’t have excess space, but you are struggling to pay your rent?

You can propose to the landlord that the lease be restructured and modified to lower your rent.

If you are a tenant seeking a lease restructure, what are some things to consider?

You will need to develop a strategy for convincing the landlord that the landlord is better off keeping you as a tenant and restructuring or modifying the lease. You should be prepared to communicate honestly with the landlord about your financial position and plans and to share financial information. You should present the landlord with a business plan that demonstrates that you will be able to comply with the restructured or modified lease for the entire term.

If you are the landlord, how do you respond to a tenant’s request for lease concessions?

You have to weigh the benefits of keeping the tenant with lease concessions against the costs of finding a new one. You have to consider the effects of a tenant bankruptcy, including the cap on damages that you can recover from a bankrupt tenant as well as brokers’ commissions and tenant improvements for a new tenant. If you proceed with a lease restructure, you should first verify the tenant’s financial condition and consider whether its business projections are realistic. You should consider increasing the security deposit, obtaining a letter of credit or a personal guaranty and extending the lease term. You can add a provision to the restructured lease that would allow you to recapture all of the rent and other concessions if the tenant should default. You also may want to require the tenant to pay your legal fees for the lease restructure so that your tenant does not drag out the negotiation process. And don’t forget to check your loan documents to see if your lender has the right to approve the lease modification.

What steps can be taken to make sure both parties’ needs are met when negotiating the lease restructure?

Circumstances vary. Typically the landlord will want a written agreement with the tenant at the outset, stating that the old lease terms will remain in effect until a lease amendment is signed. The tenant should work with an attorney early to ensure that the parties reach agreement on lease restructure as soon as possible and the modification terms adequately protect the tenant and give the tenant breathing room to continue its business in the space.

Juliana Stamato is a real estate attorney at Theodora Oringher Miller & Richman PC. She has extensive experience in leases and loans, including workouts. Reach her at (310) 788-3526 or jstamato@tocounsel.com.

Saturday, 26 December 2009 19:00

Going green

Building to Leadership in Energy and Environmental Design (LEED) standards can lower your operating costs, earn tax credits and incentives, reduce your carbon footprint and enhance your reputation.

LEED is a third-party green building certification system developed by the U.S. Green Building Council to make buildings more environmentally friendly. Although it may be required in certain jurisdictions, LEED serves as the voluntary national standard for building sustainable buildings. LEED aims to identify and implement nationally recognizable green building strategies and performance criteria for the design, construction and operation of sustainable buildings.

“LEED and sustainable construction have become more than just a trend,” says Cristina E. Spicer, LEED AP, associate in the real estate group at Greensfelder, Hemker & Gale, P.C. “LEED buildings penetrate all aspects of our personal and professional lives. You need to be aware of changes in the building industry so you’re not left behind.”

Smart Business spoke with Spicer about what you should know about LEED certification and the risks and benefits of building to LEED standards.

What key things should a business leader know about LEED?

LEED is administered by a third party, which is under no obligation to certify a particular project or to a particular standard. It’s crucial that you have adequate protection and properly allocate risks through well-drafted contracts and obtain adequate insurance for the project. Also, be aware of the financial resources available so you can maximize the bottom line. Building to LEED standards can cost from 0.5 percent to 10 percent more than traditional construction projects, so it’s crucial to be aware of the benefits to offset costs.

What are the risks and benefits of building to LEED standards?

There are more green and sustainable products available now, but there is a risk that these will not work as intended. Address all warranty issues on the front end to make sure risks are properly allocated. There are legal risks, such as knowing when LEED is required or what to include in a contract, such as defining the parties’ expectations, the standards sought, the parties responsible for administering the LEED certification process, warranties and representations of the parties, and legal remedies for foreseen and unforeseen consequences, such as failure to achieve a certain level of LEED certification. The financial bottom line also becomes a risk that increases if the project’s goals and anticipated performance are not clearly stated and pursued from the beginning. The decision to build green or LEED should be made as early as possible to avoid costly changes during design and construction.

However, the benefits are numerous. The USGBC estimates, on average, operating costs decrease 8 to 9 percent, building values increase 7.5 percent, return on investment increases 6.6 percent and occupancy ratios increase 3.5 percent. There are also tax credits, deductions, grants, exemptions and accelerated depreciation schedules, which can be coupled with other financing options and traditional tax credits to maximize your financial benefits. There are also environmental benefits, such as improving indoor air quality, and intangible benefits, such as reputation, improved absenteeism and occupants’ health and well-being. You will reap more benefits the longer you hold on to the building.

What recent changes have been made to LEED?

LEED v3 (2009) established many changes, including the introduction of regional priority credits. Before, there was no differentiation between where a building was constructed and the environmental issues in that location.

The LEED certification levels and processes have stayed the same, but the number of points needed to achieve each level has changed to a 100-point system. The levels are Certified, 40-49 points; Silver, 50-59 points; Gold, 60-79 points; and Platinum, 80 and above. There are 110 available points if you add the four regional credits and six innovative design credits.

The professional accreditation process also changed. Before, there was only one test under which people were accredited as LEED APs, and no experience was required. Now, three tracks have been created — LEED Green Associate, LEED AP and LEED Fellow — which allow people with significant experience to distinguish themselves.

What is included in the certification process?

The entire certification process is channeled through the Green Building Certification Institute (GBCI), so you need to work with someone experienced in the certification process to avoid unnecessary time and money spent on learning how the process works. There are five steps to certify a project: registering the project, preparing the application, submitting the application and documentation, having the application reviewed by GBCI and having the project certified.

An appeal process is available for points (also known as credits) denied by GBCI. Careful selection of the credits sought is vital to certification to avoid later appealing denied credits. Have knowledgeable people help you understand the requirements for each rating system’s prerequisites and credits and use all resources available. Your team should include designers, architects and legal counsel to help you make design and construction decisions early in the process to maximize financial resources and to advise you on the legal issues.

What does the future of LEED look like?

By 2010, industry analysts estimate that approximately 10 percent of commercial construction costs will be allocated to LEED and green projects. We are also seeing discussions by local governments to require LEED for private projects. LEED will take center stage as the discussion on the energy crisis, global warming and the search for alternative fuel sources continues.

Cristina E. Spicer, LEED AP, is an associate in the real estate group at Greensfelder, Hemker & Gale, P.C. Reach her at (314) 335-6827 or cs@greensfelder.com.

Saturday, 26 December 2009 19:00

The cost of business

John Lisowski

The recession has forced many companies to take a hard look at ways to save money as sales continue to decline or remain stagnant. One place to look at cutting costs is in supply chain processes, which consist of materials and information exchanges.

The supply chain looks at everything from the acquisition of raw materials to delivery of finished goods and purchase by or delivery to end users. All vendors, service providers and customers are links in the supply chain.

The supply chain is made up of several elements, but there are core factors, including network optimization and transportation, that help reduce the cost of goods sold.

“You can run the risk of not minimizing your costs to produce products by not analyzing your supply chain,” says John M. Lisowski, the industrial brokerage manager of the Global Supply Chain Solutions Group at Grant Street Associates, Inc. “This will then decrease your overall profitability.”

Smart Business spoke with Lisowski about how to analyze your supply chain and ways to cut costs.

What is the most strategic aspect of a supply chain, and how does it work?

The most strategic aspect is network optimization. Supply chain effectiveness relies on the ease with which goods and information flow from suppliers to production to distribution to the end customers. In the past, real estate location was not viewed as an important factor in optimizing your network strategy, but it does play an integral role in an effective network. The easier it is to transfer goods from one process to another, the greater the opportunity to save time and money. Real estate involves anything from the location of the supplier, the production facility, the distribution center or the end user. Any of these locations plays an important role in the network’s overall efficiency.

You can identify effectiveness by closely analyzing the flow of goods and information through the process. This is done through an in-depth analysis or study by unbiased, third-party, trained professional consultants. Depending on what you consider to be an integral part of your infrastructure, you may want to do a network optimization analysis. This takes a look at the entire supply chain, including suppliers, real estate, shippers and customers. It will also review all aspects of the network to see if efficiency is at its peak or if corrective measures need to be taken.

What are other ways to help cut costs?

An inventory optimization study is one option for existing facilities. There are also several studies to perform if you are considering building a new facility. These include site selection analysis, incentives analysis and negotiations, work force profiling, supply chain execution system analysis, or distribution or manufacturing facility design.

Are the cost and time of moving goods from one process to the other important factors?

The cost of transporting goods has always had an effect on the cost of goods sold. In the past, when fuel costs were relatively inexpensive and supply was abundant, transportation of goods was a minor contribution to the overall cost of goods sold. But the percentage amount that transportation contributes has dramatically increased due to the drastic rise in oil prices. This plays a significant role in optimizing your network and managing your cost of goods sold. Leading economists believe that this cost factor will continue to rise in the future.

How can you minimize the increasing cost of transportation?

Companies generally do not have a direct influence on the whims of the oil market, but can minimize costs through a transportation diagnostic analysis. There are different transportation models for companies, including operating your own fleet of trucks or using a common carrier or third-party logistics provider. No matter which route you choose, an in-depth analysis should be completed every few years to assess whether or not you are effectively controlling transportation costs.

An analysis should include these questions:

  • Is running your own fleet the most cost-effective choice for your transportation needs?
  • Is the use of a common carrier or 3PL more cost-effective in the overall scheme?
  • Is the 3PL adhering to contract terms and performing at an acceptable level or better than other 3PLs or common carriers?

What can single facility operators do to control costs?

Single-facility operators are still affected by the supply chain process, in relation to their suppliers’ network and general transportation services. Both single-facility and multifacility operators can analyze their individual warehouse and manufacturing operations through a warehouse and manufacturing audit and assessment. This will help you determine whether you are effectively operating your business as well as if your current manufacturing process is performing at optimal levels. You can also determine if you are occupying too much or too little space and if your receiving/production/distribution process is as efficient as it can be.

What are the benefits of analyzing your supply chain?

The analysis will serve as a guideline to help peak performance. It will also help reduce and contain your costs, which will, in turn, increase profits. Profitability of a company is determined by what it costs to produce the products, or cost of goods sold. The less it costs, the more profitable you are.

John M. Lisowski is the industrial brokerage manager of the Global Supply Chain Solutions Group at Grant Street Associates, Inc. Reach Lisowski at (412) 391-1745 or jlisowski@gsa-cw.com. Grant Street Associates, Inc. is a full-service commercial real estate firm and a member of the Cushman & Wakefield Alliance. The firm has provided tenant and agency representation, investment sales services and business consulting to its clients since 1993.

Saturday, 26 December 2009 19:00

Risk protection

Every real estate transaction comes with financial and business risks. But if the property being bought, sold or redeveloped is contaminated — or there is even the possibility of contamination at the site — that creates even more risks.

But while there are risks associated with contaminated properties, that doesn’t necessarily mean that the transaction should be abandoned. Instead, learning to mitigate and manage those risks will help make the transaction successful.

“Business owners should align themselves with good counsel and develop relationships with numerous advisers,” says Kenn Anderson, director of Aon Environmental Services Group, a division of Aon Risk Services Central, Inc. “The first is a lawyer well versed in real estate and contaminated property transactions. They should also be getting advice from an environmental consultant and consider transferring certain risks to an insurance company through environmental insurance.”

Smart Business spoke with Anderson about how to prepare for the risks associated with contaminated property and how to assess the benefits of environmental insurance.

What risks are associated with contaminated or potentially contaminated property?

The first and biggest risk is the fear of the unknown. Environmental consultants are well versed in looking at potential risks related to unknown or suspected contamination.

But when it comes to paying for and transacting the property, that risk of the unknown becomes more evident. Business owners might be worried about unknown contamination on the property or contamination already identified that turns out to be worse than originally thought. There are also possible risks and impacts after the transaction and cleanup have taken place. Third parties, such as neighbors or future occupants, could allege bodily injury or property damage related to the contamination.

What is environmental insurance, and how does it work?

There are two areas of environmental insurance used when transacting property. The first is the cost-cap, or stop-loss policy, which puts a ceiling on the actual cleanup costs of a site. It also helps against negligible risk — a risk that a business thought it could manage within the transaction dollars but then the cost for something such as a property cleanup got out of hand. This insurance typically costs between 10 and 25 percent of the limit that is purchased. So if someone buys a $1 million limit, it would cost between $100,000 and $250,000. While this is more expensive, parameters can be put around it, especially in larger transactions.

The second type, and one that is used most often, is environmental liability insurance. This is also referred to as pollution legal liability insurance, or environmental impairment liability insurance, which protects the buyer, seller or both parties against unknown risks in a transaction. This could be site cleanup related to a pre-existing condition, an unknown contamination, or new or future pollution conditions. Third-party claims for bodily injuries and property damages are also covered.

There is no typical cost for environmental liability insurance because it is usually based on the type of site, the length of coverage and the limits of liability purchased. Heavy industrial sites that are being transacted into another type of site, such as residential or mixed use, require more expensive premiums than if the site is going from heavy industrial to heavy industrial.

If the policy covers both the buyer and seller, one party will purchase it, while the other will be a named insured on the policy. A separate, side agreement is typically used to identify things such who pays what portion of the premium and who pays the deductible in the event of a loss.

Should a business owner purchase environmental insurance for any transaction dealing with contaminated or potentially contaminated property?

Business owners should look at it in all cases and at least evaluate the use of it, but it shouldn’t be purchased in every situation. It is a matter of looking at someone’s risk appetite, as well as the amount of the premium for the overall coverage being offered. It just doesn’t make sense in some transactions. The premium shouldn’t be compared to the purchase price or selling price of the property, but it should be determined if it makes sense for the individual deal.

Environmental liability policies can be purchased for up to 10 years of coverage, so if the buyer or seller is risk-averse, he or she needs to look at the premium being charged to determine if the insurance would make sense.

What are the benefits of preparing for issues related to contaminated property?

Environmental insurance has become a fairly practical tool for contaminated properties over the last 15 years. There has been an increase in frequency with real estate firms using the tool, and lawyers are becoming well versed in how to use this insurance to mitigate risks.

It helps bring certainty where there is often a great deal of uncertainty and mitigates some of those uncertainties for the buyer or seller. It could also bring certainty regarding financing or equity, or help answer some questions upfront. Environmental insurance can also help strengthen the sale price of a piece of property.

In addition, a lot of the timing with the transaction can be expedited by preparing for these issues. The process used to be very drawn out, and a lot of time was spent on negotiating environmental indemnities and buy/sell agreements in the transaction.

Today, business owners can expedite the process by employing legal counsel to make sure that those contracts are well negotiated and identifying some of the risks that are readily insurable and removing them from the table.

Kenn Anderson is director of Aon Environmental Services Group, a division of Aon Risk Services Central, Inc. Reach him at (312) 381-4226 or kenn.anderson@aon.com.

Saturday, 26 December 2009 19:00

Developing a road map

The beginning of the year gives you a chance to reflect on what your company did over the past year and what it wants to accomplish in the coming year. You may be looking at shifting your focus from internal matters, such as cost-saving measures, to external matters, such as building client relationships.

Taking the time to set goals and priorities for the coming year can help your company have a stronger focus and give you a sense of direction.

“You generally don’t get in your car and drive without knowing where you’re going,” says Darci Congrove, CPA, managing director with GBQ Partners LLC.

Successful businesses know exactly what they’re trying to accomplish, where they’re going and when they hope to get there, says Congrove, and they have a plan to help them stay on track.

Smart Business spoke with Congrove about how to set goals and priorities and how to get employees on board to achieving these items.

What risks do you face by not establishing priorities and goals each year?

You continue to do what you’ve always done, which generally leads to the same results. Complacency is one of the first steps to killing an entrepreneurial spirit and leads to mediocrity. Mediocre businesses generally don’t thrive or even survive. Setting goals and being forward-focused is a necessity to staying competitive.

How do you develop goals and priorities and turn them into actionable steps?

Begin with the end in mind. Goal and priority setting can be extremely overwhelming when you think of all the big things that need to be done. Break big goals into action steps and small pieces, set milestones, and then celebrate those along the way. It’s not fun to wait two years to decide if you’ve accomplished something or not.

Figure out where you want to go, what you need to do to get there, how long it will take, who can do it, what the steps are, and by when you want to accomplish it. You have to be realistic about the pace of your goal setting. A lot of times, businesses will choose an artificial timeline, and a lot of times, big goals or changes often take more than one calendar year. You need to decide if these are short- or long-term goals and set a realistic time frame to achieve them.

How can you get employees on board with goals and priorities and use their feedback to implement change throughout the company?

Make employees part of the process. Share the plan in draft form, ask for feedback and actually listen to it. Assign tasks to employees at all levels, so people see the alignment of what their efforts will do in terms of accomplishing goals. Don’t throw out goals as if only the management team is responsible for them. You’re more likely to achieve the goal if you can get ownership throughout the company.

Your changes need to make sense. A lot of times, businesses change just for the sake of change. Employees need to understand that changes are in everyone’s best interest, not just in management’s or ownership’s best interest. You also need to be systematic. Focus on a few things at a time and get them right so employees know you’re moving forward together.

Communicate success and reinforce the message to all employees so they believe in the change. Listen to input when you ask for it, and demonstrate to employees that you’ve actually done something with the input. The worst thing is to ask for input and ignore it.

How can you make sure your goals are working, and what do you do if they’re wrong?

Be honest and open if you’ve chosen the wrong goals. If things are off track or not accomplished, maybe the goal wasn’t right in the first place. Go back to the beginning and get everyone pointed in the right direction. Maybe you need to take a different path or start somewhere different, or maybe you just need to do something totally different. Go through the systematic process and break it into those chunks — where, why, who and when — and then recommunicate the new goal.

This can be a challenge, because goals often are not adjusted as situations, facts and people change. You then have goals that are not accomplished by the end of the year. There should be a process in place to catch the goal when it goes off track and reset it. Otherwise employees will know a goal hasn’t been accomplished, and will feel like they’ve failed.

You have to make failure a learning experience so that everyone feels like the issue has been addressed and the company took a different direction for good reason. Employees need to know the reasons behind key decisions. It’s hard to feel part of the solution or team if you don’t know why decisions are being made.

How can you make sure you are following these goals and lead the company to reach the goals?

Be consistent and set a good example from the top down. Create an environment where everybody feels accountable for the goal, not just some employees while others watch from the sidelines.

Quantify the impact of achieving goals, either by measuring profit improvement, looking at cultural changes or determining strategic outcomes.

If you achieve the goals this year, where will the company be at the end of the year? What will it do for the business, employees and owners? You need to be results-oriented and focused on change, and then delegate and empower others to actually take care of the small steps along the way. Talk to employees about results the goals will produce and what they will do for the business, which will motivate everyone to accomplish the goals.

Darci Congrove, CPA, is managing director at GBQ Partners LLC. Reach her at (614) 947-5224 or dcongrove@gbq.com.

Wednesday, 25 November 2009 19:00

Healthy status

Getting your employees involved in their health care can help establish a healthier workplace and also save on health care costs. One way to encourage involvement is through the completion of health risk assessments.

This tool asks employees a series of questions regarding their current health status, risk factors, and prior and family history. It can then be used to develop a specific care management model for that employee around their health issues, such as stress management, weight loss, smoking cessation and certain diseases.

“It’s used as a wonderful baseline to develop a care management plan for your employees,” says Kirk Cianciolo, D.O. MBA, senior vice president and chief medical officer with AvMed Health Plans. “The unfortunate part is that there is only a small percentage of people who actually take the time to fill it out.”

Smart Business spoke with Cianciolo about how to make a health risk assessment an integral part of your health plan and encourage employees to complete it.

How can you make a health risk assessment an integral part of your health plan and encourage employees to complete this form?

It should be provided in as many modalities as possible. It can be done through the Internet, over the phone or through hard copy in the mail. Larger employer groups may want to consider installing kiosks in their buildings where employees can complete the form. It’s all about offering as many different modalities as possible, so you cover the spectrum of employees and their individual comfort levels.

The assessment can then be used to develop a care management plan for each employee and used in future health care. For example, let’s say you find someone who has the indications of diabetes, such as frequent urination and headaches. The health care provider would have a case manager call that patient and gather some more information, then collaborate with the family doctor or even arrange for a doctor visit with that member. Health plans are really engaging and collaborating with that member and physician to develop that care plan together.

How often should health risk assessments be completed?

You should complete the assessment at least once to be able to establish a baseline. Employees are encouraged to continue to update it in case there is a change with any medical information. These changes can then be updated in the health provider’s database. At a minimum it should be completed at least twice a year.

This information is then used in a predictive modeling tool to determine which members might need help with their case or disease management. For instance, the provider may find a 50-year-old male who hasn’t had a colonoscopy. The provider would reach out to him and tell him that it’s time for the test. This information is used to develop preventive care plans and also remind employees about preventive care tests and procedures.

How do you handle employees who do not want to share this type of information with you?

This is a concern a lot of employers have, because you can’t force someone to take the assessment. Employees are concerned about who will get the information and in what way it will be used. Health plans will install multiple firewalls and password protections if you are completing the assessment online, so the information is secure. It will then be put into the health plan’s database, which is confidential.

Protections are also in place through privacy acts if the assessment is filled out over the phone or through a hard copy. But these means are certainly more risky. Employees just want to know what will be done with this information, but there’s no other intent than just to discover their current health status.

How can recognition and rewards play a role in getting employees to complete health risk assessments?

Recognition is very important to employees. You should provide some sort of incentive or reward for employees who fill out the health risk assessment. You may want to provide incentives in the form of premium reductions or additional funding of health savings accounts.

There’s no real silver bullet of recognition or else there would be 100 percent participation across the board. In general, if there’s a perceived value by the member or patient of at least $200, employees will be more motivated in completing the assessment. Some employers are reluctant to make that investment, but some are beginning to change. They realize that if you can find employees with health issues sooner, and can get them actively engaged in their issues, you can mitigate a hospital admission or an emergency room visit. The information provided in a health risk assessment is important to a company.

What are the benefits of completing a health risk assessment?

It provides safety, early identification and prevention. Many assessments have a pharmacy piece, where you can determine if an employee’s medications might have competing side effects or adverse effects.

Health risk assessments also develop a baseline for what employees’ health statuses are and provide earlier identification of those employees who need additional help. They also provide earlier identification of employees who have not received the necessary preventive studies or tests.

Kirk Cianciolo, D.O. MBA, is a senior vice president and chief medical officer at AvMed Health Plans. Reach him at (352) 337-8709 or kirk.cianciolo@avmed.org.