You can’t be afraid to fail. But there are still steps you can take to guard against unnecessary failure, even in the rough economic environment of the past two years.
If you can take the lessons you’ve learned from your missteps, and the often-harsh lessons the recession has taught you, and use them to become a better risk taker, you can emerge from adversity in better shape than many other companies.
With the Detroit area serving as one of the epicenters of the nation’s economic strife, the business leaders throughout the community have learned many such lessons and have shared a lot of them with Smart Business Detroit over the past several years. Here is what three of our previous cover story subjects had to say about dealing with adversity in the world of business.
“Failure becomes like scar tissue. Scar tissue is stronger than regular tissue, and people who step out, take risks and fail develop scar tissue. That makes them better and stronger the next time. What you can’t do is view it as, ‘They failed, they’re a bad person, they have no place with us.'”
president and CEO,
Valassis Communications Inc.
"Staying aggressive in an economy like this helps keep a team unified. People like to be a part of a winning team, and if you try to rally your team around aggressive but realistic goals, it’s amazing what you can accomplish, even in a bad economy."
president and COO,
Service Brands International LLC
"Whether it’s managing your personal affairs or leading an organization, you should never get lulled into a feeling that because times are good, they’re always going to be that way. You have to discipline yourself for the down cycle and gear your spending and decision-making around the idea that it’s going to come. When it does, you’ll be fine because you’ve prepared for it."
former chairman and CEO,
Domino’s Pizza Inc.
Things could have turned out much different for Ali Brown had she not taken control of her life.
“Ten years ago, I was working as an employee in a tiny company in New York,” says Brown, founder and CEO of Ali International, a multimedia company that provides online marketing tools and strategies, coaching, seminars and instructional literature for more than 50,000 women entrepreneurs worldwide. “I was continually frustrated in all the jobs I had, which made me realize I was unemployable.”
Brown saw only two viable options: “I could be unemployed or self-employed, so I started a little freelance writing business, marketing myself online with an e-mail newsletter.”
That newsletter began to grow and Brown started to gain a following online.
“People started asking all kinds of questions about marketing and how I was growing my little business and asking for all this small business advice,” Brown explains. “So I started writing e-books and selling them to the people who were asking the questions.”
Today, that little business has become a multimillion-dollar operation and an Inc. 500 company. Brown publishes a high-end magazine, is regularly featured on TV and radio talk shows, and last year, she was named one of Ernst & Young’s Entrepreneurial Winning Women.
Smart Business sat down with Brown to discuss her passion for helping other women entrepreneurs reach their own goals.
What drives you?
The best part is my job is helping other women succeed through starting their own businesses. I offer products, resources, coaching programs and a community that’s dedicated to helping women entrepreneurs. These range from online marketing basics to one called Business Building Blocks.
When people go to start a business, they don’t often know what they should be thinking about in the legal department, marketing department or financial department. So this is Business 101 in a box. You start thinking differently when you’re an entrepreneur, and if you want to be wealthy, you have to learn how to take risks and do it in a smart way.
What makes Ali International’s value proposition unique?
My clients and customers say they love following me because they get business advice in a fun, real way. I talk with women who may be running a business from their kitchen table. They’ve got kids running around and they’re juggling their lives. Unfortunately, there are very few role models out there, so I’m able to fill a need in the marketplace.
Speaking of role models, what’s the best advice you’ve ever received?
It came from one of my mentors: Aim for the top because there’s more room. There’s actually less competition at the top, so I’ve not looked at the people around me in my industry but at the people who are at the top of the industry.Then, I ask how I can get there and position myself to stay there.
As you’ve worked with women entrepreneurs, what are some of the different challenges you’ve found they face?
There are two that stand out. One is the often-talked about family and work balance. For women who may traditionally be in the home, they feel pulled in different directions. But on a more personal and human level the other challenge is learning how to take risks and believe in themselves. Women are often programmed for safety. It’s in our DNA. We want to be safe and secure, and it’s really scary for women to put themselves out there. They’re often thinking, ‘What will people think of me? Can I really do this?’
So for many women, I see the personal journey even more rewarding than the financial journey because the person they become in the process is priceless. They become this incredible role model for their family and for the women around them. It’s a ripple effect, and it’s really going to change the world.
What’s the first step toward learning how to take risks?
Surround yourself with risk takers. You’ll begin to realize that in order to become successful, you have to become comfortable at being uncomfortable. You are often the average of the people who you are around the most, so seek out a network, come to a conference or join a coaching group where people come together and exchange ideas. Figure out the level that you want to be at, and seek out people who are already there.
Where do you find opportunities for your own growth?
One key to growing any business is listening to your customers and clients, but you also need to keep a long-term vision of what you want. I have my path, which is helping women entrepreneurs. But at the same time, I keep an ear to the ground and listen to the topics that they’re interested in and the needs they have. That’s where the coaching came from. I was publishing courses and books, and women still said, ‘I want to talk to you. Can you coach me one on one?’
My events started because they wanted to get together in person. Now, I have a conference every year called SHINE, which has become the premier conference for women entrepreneurs. This past year, it was in Las Vegas. In 2011, it will be in Dallas. It’s a three-day event, and we bring together hundreds of women entrepreneurs.
Even my magazine is about business, life and style for women entrepreneurs. I heard the things they were talking about and created something around it. That’s something you need to keep in mind when you’re looking for ways to grow a company: When you hear ideas, respond to them, but you also have to figure out a way that those ideas will make money.
It’s a constant journey of evolving your business model. Match the path you want and the passion you want to get out to the world with what they will be willing to take out their wallets and pay for. You also must figure out how to provide value.
What advice would you offer a woman who is unhappy with her current situation and looking for a change?
The first step for any woman who has an idea for a business or any woman who just wants to start a business is to start paying attention. Start paying attention to ideas that you have and write them down. Listen to ideas that people are talking about, then get out immediately to start networking to make it happen because that’s going to change your life.
So what does the future hold for Ali Brown and Ali International?
In the next few years, you’ll see me doing a lot more media and television, expanding internationally and having more events, reaching women in developing countries and helping them develop how entrepreneurship can help them.
How to reach: Ali International, www.alibrown.com
If you are looking for the employees of Kroff Inc., you might find them racing go karts or setting up an ambush to blast Co-Owner and President Fred Potthoff with paintballs. You also might find them creating innovative solutions that lead to profitable new divisions within the company.
For Potthoff, the extracurricular activities are an important part of how innovation gets done at Kroff, a $40 million company that provides water treatment chemicals and solutions to industry.
“We do a lot of things as a company to get closer to the employees,” says Potthoff. “There is a lot of interaction between [senior management] and everyone else in the company.”
Besides the obvious enjoyment of shooting co-workers with exploding paint pellets or putting your boss into the wall on turn four, the outings help everyone get to know their co-workers and managers a little better. This familiarity also helps break down the barriers when it comes to presenting new ideas. If a lower level employee has what he or she thinks is an innovative idea, it’s more likely to be shared if there’s an established comfort level with the people that will be looking at it.
Even the presentation of potentially monumental ideas comes in a somewhat informal setting – the standard managers’ meeting. Because the sales reps are comfortable with their managers, the usual process is the sales reps share their ideas with their manager, who in turn, presents it at the managers’ meeting.
The results of this process are impressive: Six differentcompanies have been created at Kroff, and the idea for each one came from an entrepreneurial employee.
“It starts with hiring the right people,” says Potthoff. “You let them come up with good ideas and then sometimes you take a risk financially.”
When Potthoff is looking at finding his next entrepreneurial employee, there are two key things he focuses on: competence and motivation.
“Motivation is the most important, and has about a 70 or 80 percent chance of predicting success, but also is the most difficult to determine,” he says. “You can make sure someone has the right degree and look at who they worked for and who they were trained by, and that’s one indicator of success. But if someone has that drive, they will work to get close to the customer to come up with something innovative. It’s a behavioral thing. You have to dig into their past and look at projects they were involved in that were successful.”
Once you have entrepreneurial people, you need to do your part to make things happen.
“The first thing is to put ego aside,” says Potthoff. “One of the things that used to drive me crazy at other organizations is that there was too much top-down management. Some senior manager decided the company needed to be in market X, would fill out the forms and make the call, but no one would actually come out to the field to see if it was a good idea or if we could make it work. If you are hiring talented people, you have to listen to them.
“Secondly, you have to be willing to take action and some risks. It’s one thing to listen to great ideas, but if you don’t act, employees will say, ‘Why bother?’ You have to be willing to act on something when there looks to be an opportunity.”
With risk, comes reward – for everyone
Innovation is a balancing act of risk and reward. The bigger the risk, the bigger the reward. Fred Potthoff, co-owner and president of Kroff Inc. says that it’s necessary to take risks in the market to be successful.
Thanks to Kroff’s culture that’s focused on making everyone an entrepreneur, there are a lot of good ideas that come from the employees who are closest to the market.
An employee takes a bit of reputation risk whenever he or she brings an idea forward, so there needs to be a reward for successful ideas. At Kroff, if someone comes up with a great idea, the company will form a new division around that idea and the person who brought it up gets to be in charge – essentially an instant promotion to general manager.
If you have hired entrepreneurial types, they’ll work hard at the lower levels to find that next great idea for you, knowing that they too will be rewarded with more responsibility. Combine that with an incentive-driven pay plan, and you have a recipe for a company where management benefits from a constant flow of revenue-generating proposals from ultra-motivated people that know the markets the best.
How to reach: Kroff Inc., www.kroff.com or (800) 466-3066
Herb Kohler believes in doing things big. And as chairman and chief executive of The Kohler Co., the Wisconsin-based plumbing fixture giant founded by his grandfather in 1873, he is in the perfect position to do so.
Kohler sets the vision for the family-owned business and its four divisions, 50 brands, 50 manufacturing locations and more than 30,000 associates scattered across six continents. He’s also a Forbes billionaire who has a passion for golf. Kohler’s Hospitality and Realty Group owns two world-class golf courses — Whistling Straits, site of the 2010 PGA Championship, the 2015 PGA and 2020 Ryder Cup, and Blackwolf Run, site of the 2012 U.S. Women's Open. It also owns the five-star American Club hotel and the Old Course Hotel in St. Andrews, Scotland, the latter of which sits on the fairway of the most famous hole in golf, the Road Hole.
“It’s just a fledging little business,” Kohler says. “It’s sort of wonderful.”
Smart Business sat down with Kohler to talk about myriad issues, including why it’s important to encourage risk-taking and how social media is changing the way business is done.
Mr. Kohler, you’ve forged partnerships with several major golf organizations in a relatively short period of time and expanded Kohler’s brand. How important is that ability to build and foster different kinds of relationships in order to diversify a business?
We’re fortunate to have a growing, multidimensional company that today goes well beyond just our core products. We historically put on large exhibitions in furniture, kitchen and bath products, so we have a talent in dealing with large crowds and large events. When an organization like the Royal and Ancient, United States Golf Association or the PGA America picks partners, they select the course first but then put all the infrastructure in support behind it.
Having our expertise is a major factor in their selection and final resolution. But it is relationships that make this possible; it’s what gets them to look at you in the first place. They are equally important, but relationships can’t carry a day. It’s the quality of the facilities and the quality of the support organization, the people and whether or not they have the capability on a continuing basis to support these larger things. These Majors provide a sizeable amount of the annual income of these organizations, so you have to be able to execute without fail. They really rely on you.
You’ve built a reputation as a leader who embraces risk. How critical is it in a culture of innovation to have risk-takers on your team?
It’s not easy in a large organization to foster any degree of risk-taking, but we ask all of our businesses, regardless of what they make or what they serve, to live on a leading edge.
They have to understand where that edge is — what’s at the forefront of their particular business field — and then, they have to have the imagination and the technology, combined, to be able to leapfrog that edge — get out there in front and stay out there in front.
We’re asking for an entrepreneurial spirit, and we do that with every business in our portfolio. Some do it better than others. Our senior executives in China are doing wonderfully well as an example.
Is that where you see the next big market for growth?
Yes. We have 10 plants there — eight for kitchen and bath, one for engines and one for power systems. Eighty percent of the product that’s manufactured in those plants stays in China. We are building a brand as fast as we can build it because within a relatively short period of time — 10 years — (China) will be the largest plumbing market in the world and the largest satellite power market in the world. It behooves us and everyone else to take a hard look at China.
What other international markets are on your radar?
India. India is perhaps 10 to 15 years behind China in its escalation, but it’s extremely important.
When you’re playing in a global market how do you protect your brand while you’re focused on growing it?
I make sure we live up to our guiding principles. The first is to live on the leading edge in design and technology, in product and process. The second is to maintain a single level of quality across all these product categories and across all the price points (that) are within a product category. We market from the low end to the midmarket to the high end and to the mass market. That’s a broad range of price points. Our prices vary because of materials, function and because of the level of detail but never in quality. That level of quality must be consistent. And, when you combine that level of quality with leading-edge products and services, that establishes our reputation. So that’s where I put my time and energy, making sure we live up to our brand.
You have embraced technology as part of your innovation. Where has it played a larger role?
There are many aspects of technology — the technology that we use to communicate, the technology we use to run our machines. We’re obviously seeing this explosion of technology in all aspects of our lives. When I built the first golf course, which opened in 1988, I was compelled to do it because of a stack of suggestions slips — physical suggestions slips. One hundred of these little slips of paper. It’s almost unimaginable today, but that was the mid-’80s. How recent! The world has totally changed. You would never find a piece of paper like a suggestion slip around today. No, you find your BlackBerry and send a message.
What about social media? What is Kohler doing in that area to connect with customers?
That also is a constant evolution. It’s remarkable. We’re just undergone a major renewal (at Kohler). We created a website for over 100 different organizations within Kohler. It was so broad. And then we created sites within those sites — and each of those works for the business and does what that business wants. But the engine underneath had a lot of standardization. It was a big task to standardize the approach within product fields, but on the other hand, it had to have a very local feel for people in places like China, Thailand and Vietnam. You can’t do business globally if you try to make all of your customers worldwide interact with you as if they were Americans.
How to reach: Kohler Co., www.kohler.com
There’s no doubt that cloud computing has received a great deal of interest from companies both large and small over the last couple years.
Gartner Inc. estimates that cloud services revenue grew 17 percent in 2010 to $68 billion. The promises of ROI, cost savings and lower total cost of ownership are some of the major contributors to this trend.
Despite this fact, there are many companies that still aren’t seeing the cost savings. A CIO of a major health care company recently had this to say about moving to a cloud based PBX: “I did look at the cloud solution very carefully and it was just too expensive.”
Smart Business spoke with Mark Swanson, the CEO of cloud communications provider, Telovations Inc., headquartered in Tampa, Fla., to get a better handle on cloud financials.
If you put your financial hat on, how should one look at the cloud?
The easiest way to think about cloud computing is that your technology infrastructure — the servers and software you purchase, run and maintain — is on the Web. Unlike traditional software, which is deployed on-premise, cloud applications are designed for Web deployment — that is they are multi-tenant and users share processing applications managed by the vendor. From a financial perspective the cloud has three basic attributes:
- Little or no upfront costs. Instead of paying license, hardware and/or installation fees, users pay as they go. There’s little upfront capital cost as companies pay per user, usually by a monthly fee. From a financial perspective, you can take advantage of scale, which means the cost per user is less, especially over shorter time horizons like less than five years. In addition, these systems require skilled technicians to deploy and maintain, so perhaps the biggest thing you realize is that the upfront costs include the cost of hardware and IT employees that no longer need to be in-house.
- No hardware or maintenance costs. In the cloud, the vendor takes responsibility for maintaining the software and servers. However, if you just evaluate the ROI of switching from on-premise to cloud products by comparing what they are spending now to what they will be spending if they switch, it’s not really comparing apples to apples. In an on-premise environment, the customer pays for the hardware, storage space and IT personnel to maintain the system, in addition to the software. In a cloud environment, the vendor fronts those costs, so a larger percentage of the total cost of ownership by the customer shifts away from hardware and people and toward software.
- Quick implementation process. Many seasoned IT professionals have heard the nightmare stories about over budget/over time failed implementation projects where you are spending money but getting zero benefit. With the cloud, most applications can be up and running in a few minutes because there is no software to install. The implementation process also is easier for companies with multiple locations or remote workers as everyone can have access to the same version of the application simultaneously.
After you pick an adequate time horizon, a Net Present Value (NPV) calculation can be quantified pretty easily. But it’s really the intangibles that make or break the calculation.
What do you think is an adequate time horizon to evaluate?
I suggest analyzing whether to make the switch as a three-year amortization of upfront costs for an on-premise application including servers, software licenses and installation, plus estimated maintenance and support costs, and comparing that to the cost of subscribing to the cloud version of the product for three years. Some might think that three years is too short, but according to many studies three to four years makes sense for several reasons. What you have to consider are unplanned events: you get acquired, technology obsolescence, you grow too fast, and the big one, how long apps take to test. Gartner also reports that testing consumes 25 to 50 percent of the average application life cycle. That’s a year right there!
What are the intangibles that sway the calculation?
This is where you get into what I call ‘BeanCounteritis.’ Many financial people get wrapped around the axle about the hard cost comparison with premise based systems. The real savings and return lie in the soft costs surrounding cloud based applications, including:
- Office space. Create ways to work remotely, which enables savings on office space through hoteling or home offices.
- Reduced support costs. Rather than having to employ in-house experts for product support, the vendor typically provides support directly for the customer.
- Reallocation of resources. IT staff can focus on more strategic projects, rather than system upgrades and maintenance.
- Easier and more regular upgrades. Vendors regularly upgrade products. In the cloud, those enhancements are made automatically in the background without disrupting work.
- Disaster recovery and backup capabilities. One of the costs incurred by customers who keep their data on-premise is backing it up, typically via tape or a third-party backup provider. This is another area covered by the vendor in a cloud environment.
- Credits from SLAs. Downtime is never good and it is particularly bad for cloud vendors. They spend extra money to make sure it does not happen. And if it does you get a nice credit. You won’t get this from your IT staff.
Any other symptoms of ‘BeanCounteritis’?
Perhaps the biggest threat of ‘BeanCounteritis’ is not considering risk. Often companies become so gun shy about pulling the trigger on large capital expenses that they let others get a leg up on them. The cloud ultimately is a way you can count your beans and eat them too. The cloud makes it easy to change direction without incurring the capital costs and significantly reduces the cost of failure. That’s the great thing about cloud apps.
MARK SWANSON is the CEO of Telovations Inc. Reach him at email@example.com.
This is a cautionary tale about the danger of going to market with a product before you’re truly ready to handle the crush of consumer demand. It may sound like a dream come true in these tough economic times, but it was nearly too much for Ron Vigdor and his 70 employees.
It all began about four years ago when concern was growing about Bisphenol A, also known as BPA. The presence of this substance in plastics was creating concern among young parents who worried that their babies may be exposed to it. So Vigdor developed a line of products that were guaranteed not to contain any BPA.
The response was overwhelming.
“We saw a tremendous spike and upsurge in demand for our product,” says Vigdor, founder, president and CEO of BornFree Inc. “So much so, that we probably had to work 13 to 15 hours a day literally manufacturing the product and flying it internationally to the United States for next-day delivery.”
When you have a product that everybody wants, you have a choice to make: Spend what you need to in order to meet the demand or wait until you’re sure you’re ready to handle it. The problem, of course, is the demand may not be there anymore if you decide to wait.
“You have to do more or less a cost analysis of what it’s going to cost you versus what kind of market share or gain you’re going to receive,” Vigdor says. “We spent millions of dollars getting the product to the shelves.”
Vigdor was confident that revenue would make up for the costs incurred in the beginning.
“Our manufacturing capability was roughly 1/10 of our current manufacturing capability,” Vigdor says. “Everything was exponentially anywhere from two times to 10 times the demand or needs we originally envisioned in our business plan. At the end of the day, it was a smart decision. Financially, I don’t know if it was the smartest decision, because we had to spend so much money.”
The decision to try to meet the demand created a high level of stress for Vigdor and his employees for a period of about six to eight months.
“We had to make sure we could try to please as many retailers as possible,” Vigdor says. “And try to gain as much market share. When you don’t have enough supply and great demand, that’s probably the most amount of stress anyone could have trying to combat that.”
Vigdor was able to work through the stress and meet demand, but there were risks involved. And that’s the choice you have to make when faced with the same situation.
“Do you come out and release a product when you have 50 but demand is 250?” Vigdor says. “Or, I can manufacture 250, but the product is 95 percent great and not 100 percent great. Do you go to market with that? You should always go to market when your product is 110 percent. You always want to be on top of it, and you always want to make sure you have the best product available.”
Vigdor’s advice, despite his success, is to take the patient approach.
“Don’t come out to market before you’re ready,” Vigdor says. “You’ll just end up with egg on your face. If you’re not ready, it won’t do as well as you want. If you have a great product but your manufacturing is not able to ramp up to scale, you’re going to upset some customers because you can only deliver to a handful of customers.”
How to reach: BornFree Inc., (877) 999-2676 or www.newbornfree.com
Keep your cool
Ron Vigdor thought he deserved one deal and his buyer did not feel that way. At one of the most stressful times of Vigdor’s life, the result was not good.
“I exploded,” says Vigdor, founder, president and CEO at BornFree Inc. “I stuck my foot in my mouth. I said, ‘You’re only the stepping stool for me getting bigger and better.’ That did not go well with the buyer.”
You need to recognize those times when your patience is thin and you’re prone to losing your cool, says the leader of the 70-employee company.
“If you are in a position in which you believe you are going to be confrontational, even if you think the customer is wrong, the best thing to do is step away from the actual problem,” Vigdor says. “Give it some time and rethink it.”
If you do lose your temper in front of your people, use it as a lesson to show them that you’re not perfect either.
“Teaching humility shows all people that you are human other than just being a tough CEO who says it’s my way or the highway,” Vigdor says. “It allows you to have a more personable connection with your employees as well as your vendors and manufacturers.”
As we enter the second month of 2011, it’s time to think of some of the resolutions made just a short time ago. For some, it was to lose weight, eat better and exercise more frequently; for others, it was to save more and invest wisely.
As more and more people are increasingly concerned about the viability of our nation’s Social Security system, the focus has continued to shift toward providing for our own retirement, says Mark G. Metzler, director, Audit & Accounting, at Kreischer Miller.
“One mechanism that owners of businesses and their employees often have is their company’s 401(k) retirement plan,” says Metzler. “Because many people are not professional investment managers, an option provided in many plans is ‘target date retirement funds,’ sometimes referred to as ‘target date funds’ or ‘lifecycle funds.’”
Smart Business spoke with Metzler about target date funds and how they can work for you.
What are target date funds?
Target date funds, which have grown in popularity in recent years, are long-term investments, typically mutual funds that hold a mix of stocks, bonds and other investments designed to reduce overall risk. The funds are generally structured as investments for individuals with particular retirement dates in mind. The name of the fund often refers to its target retirement date (e.g., Retirement Fund 2025). As a fund gets closer to its named target date, the investment mix shifts to become more conservative.
This is appropriate because an individual nearing retirement may wish to have his or her investments become more liquid to provide for living expenses, as well as to minimize losses in a volatile market. Ideally, the target date retirement fund concept is a simple way to provide for professional portfolio management. The investment firms sponsoring the funds make the investment allocation decisions for participants based upon the target date.
Are all types of target date funds basically alike?
No. Funds that share the same target date may have significantly different investment strategies and risk profiles. The Department of Labor’s Employee Benefits Security Administration (EBSA) and the Securities and Exchange Commission (SEC) published an investor bulletin stressing that ‘participants should not rely on the fund’s target date as the sole criterion for selecting the investment because funds with the exact same target date may have entirely different risk strategies, risks, returns and fees.’
One of the most significant differences among target date funds is the construction of the ‘glide path.’ The glide path represents the asset allocation philosophy among equities, bonds, cash and other investments at various times throughout the investment life of a participant. Typically, all target date funds have a higher exposure to equities when the participant is furthest from retirement (at the beginning of the glide path) and steadily decrease the exposure to equities as the individual approaches retirement age.
However, different investment managers may have significantly different strategies for a similar target date fund.
The EBSA and SEC provided an example in their bulletin of the extreme differences between target funds with identical target dates. In the example, at its target date, Fund A had an asset allocation of 60 percent stocks and 40 percent bonds, while Fund B maintained an allocation of 25 percent stocks, 65 percent bonds and 10 percent cash investments.
Fund A does not reach its most conservative mix of 30 percent stocks and 70 percent bonds until 25 years after its target date.
How can funds with the same target date have such significantly different investment philosophies?
In the simplest terms, it depends upon whether the fund manager is investing ‘to retirement’ or ‘through retirement.’ When the fund manager invests ‘to retirement,’ it is anticipated that a significant portion of the portfolio will be liquidated at the target date to provide for living expenses, so therefore it would comprise a much smaller percentage of equities. Conversely, when a fund manager invests ‘through retirement,’ it is anticipated that the individual will continue to have a much higher exposure to equities and will continue to invest in the market throughout his or her retirement years.
In the 2008/2009 market downturn, participants close to retirement whose target date funds followed the ‘through retirement’ date philosophy were shocked at the large losses their funds suffered as they mistakenly believed they had been shielded from substantial loss by investing in a target date fund.
What should someone consider when evaluating a target date fund?
First, remember that all investments have some level of risk, and even the same type of investment may have more or less risk than other seemingly identical ones. Participants should read the fund’s prospectus to focus on:
- When does the most conservative mix of investments occur?
- What is the fund’s risk level?
- How has the fund performed in the past, and what is the fund’s Morningstar ranking?
- How does the asset allocation change over the life of the fund?
- What fees apply?
Target date funds provide simplification to the average investor. While there is no magic pill that provides for a guaranteed return or that eliminates the risk of loss, target date funds do provide a level of portfolio management and complexity that is typically out of reach for most investors.
Mark G. Metzler is director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
Most business owners know that the key to keeping business costs down — including insurance costs — is to look ahead.
Sergio D. Bechara, chairman and founder of Millennium Corporate Solutions says there are several factors keeping rates somewhat flat for now, but further increases are on the horizon. Companies should begin planning now to keep the rising costs to a minimum.
“A bend in the road is not the end of the road unless you fail to make the turn,” Bechara says. “It’s not all doom and gloom, just different variables we will have to navigate through, which in years past were non-issues.”
Smart Business spoke with Bechara about what businesses can expect in the future, and how these changes will affect their insurance costs.
What factors are keeping rates flat for now?
One is the reserves insurance companies have built up. Many carriers are using those reserves as capital to redeploy into any number of investment vehicles. But for the most part the carriers use it to buy more market share. The carriers are using capital to not necessarily acquire other carriers but different accounts, and they’re doing it with lower premiums.
Sometimes the rates are lower today than they were three or four years ago, and the risk has not improved. In some cases, the risk might even have deteriorated.
We’re hitting a point where a lot of the capital that is eroding is now going to translate to a rise of rates. The upward trend probably will start in 2012 or the last quarter of 2011. It probably will not be a volatile trend, but it will start trending up.
In essence, this will happen because insurance companies are now reserving appropriately. So if they bought business by low-balling prices in 2009, they will have to apply reserves on the claims for 2009 that are appropriate to that particular year.
Another factor that contributed to softening rates was price competition. When AIG was a damaged brand, its only way to compete was to slash its rates. That had an artificial effect of lowering rates because, to keep their market share and to compete, other carriers had to meet AIG pricing. Today, that is less an issue than it was in 2008.
What are some steps companies should take to prepare for these changes?
One is preparedness from a budgetary or pricing standpoint. If insurance costs are large enough from a budgetary perspective, companies need to know where the pricing trend is going. Then, they can adjust their burden lines appropriately so they don’t accept today’s reality as continuing in perpetuity.
Second, the insurance community fosters a financial partnership between a carrier and the insured. It is very similar to the partnership between a lender and the entity seeking a loan. The one that can best prove they are not going to need the insurance will pay the lowest premium. Just like the ones that can best prove they don’t need the money have the highest likelihood of getting a bigger line of credit or a lesser rate on money borrowed from the bank.
In past years, watching claims has not been as important as it will be in the coming years. Now, there is a malaise about claims. It’s not resulting in higher premiums, so no one is paying attention. When we turn the corner, carriers will point to claims experience as a means of pricing future premiums. Then it becomes important. Between 2012 and 2015, there will be a lot of talk about what’s going on with claims. Focusing on claims now is essentially making sure we gussy up the report card before it becomes relevant.
What can companies do to ensure they determine the right course of action?
Take a proactive approach. That could mean developing a rapport with different carriers or brokers, beginning to negotiate multi-year contracts with insurance markets, or negotiating contracts contingent-based on loss ratios.
Looking forward, it is hyper-critical to manage the claims. Don’t just hand them over to the carrier with the hope that all goes well. Nobody is going to care more about your claims than you do.
The concept of risk management is that the steps you initiate today are benefits you realize about a year or so from now, sometimes even longer. This is one of those areas that will be more important with carriers switching to underwriting for profitability rather than market share. When they make that switch, then you need to demonstrate to a carrier how you will be a profitable account for them.
What other issues will affect future pricing?
Like many other states, California is in a position of financial weakness.
The Division of Occupational Safety and Health (Cal/OSHA) will have a more pronounced presence in the business community than it does now. OSHA compliance is going to be an important factor, not just for insurance costs but costs in general.
A soon-to-be-popular question is ‘Where does it stand with OSHA?’
Companies should prepare for that by establishing sound policies and procedures for OSHA compliance. Build the ark before it rains. It’s important to do that now, because there are going to be more visits from compliance officers than there were in the past, because OSHA is under edict to become a self-funded part of the state government.
Businesses should also pay attention to AB 2774, which became law in California on Jan. 1, 2011. It’s one of the most important pieces of occupational safety and health legislation since Cal/OSHA came into existence. It provides the Division of Occupational Safety and Health with a series of steps that must be completed to establish a serious violation. And if the steps are followed, employers will face major fines that are more likely to stick — and stick without reduction.
Sergio D. Bechara is chairman and founder of Millennium Corporate Solutions. Reach him at (949) 857-4500 or email@example.com.
Jeff Ready learned a valuable lesson about overcoming failure when he was 16 and had his first car accident.
“I was terrified of driving after that,” Ready says. “But the next day, my dad filled up the other car with gas and told me to go drive it until it was empty. The lesson was, ‘You screwed up, but too bad. Move on and get back to work.’”
Ready is not quite as blunt with his employees at Scale Computing, but the idea is the same. He wants them to always know that if they make a mistake in the pursuit of a worthy goal, he’s not going to jump all over them if it doesn’t work out.
“I would rather see people trying things and screwing it up than not trying things at all,” Ready says.
It’s an approach that has helped Scale grow quickly and become a solid presence in the data storage industry.
“Mistakes are a sign of progress,” says Ready, the company’s founder and CEO. “You can always do what you’ve always done and make very few mistakes. But if you’re going to go out there and advance, do something new, take some risks, there will be mistakes.”
Fear of mistakes leads to a situation where every decision is agonized over through a series of committees and meetings, without ever taking action.
“So you end up taking very few risks and making very few mistakes but also making very little progress,” Ready says.
In order to make progress, your primary function needs to be to knock down barriers that get in the way of your team’s ability to do its job. Beyond that, you need to stay out of the way and let them do what you hired them to do.
“Pick something that is a significant chunk of responsibility,” Ready says. “Take something that is meaningful, something that you as the CEO feel personally responsible for, something you would be concerned to give to somebody else and give it away. Just do it.
“Pick somebody in the organization that you feel is capable and give them full control of that. Your job is to knock down barriers that get in their way. But you are not going to dictate how they do it, when they do it, etc.”
When you insist on being in on every last decision your company makes and taking part in every key meeting that occurs, you place a limit as to how much your company can grow. That limit is your personal capacity to get things done.
Ready uses the example of his company’s search for partners to illustrate his point.
“We sell data storage,” Ready says. “We’ve been looking at partnering with key companies in networking and switching to bundle products with us. A company like us is probably going to look at partnering with a much larger organization.”
A micromanager would have no choice but to take the lead on this kind of initiative out of fear that his team would screw it up.
“I’m the CEO, therefore I’m going to go out there and run this initiative,” Ready says. “The problem is, your business marches on while you’re jerking around with this other thing. You can’t juggle all of the tasks required for what you’re already doing plus all the new stuff. If you think about the whole top-down approach, you inherently have a situation where your ability as an organization to grow and expand is limited by your own capacity to handle these things.”
You may be surprised by the results when you let someone else take the lead on a project.
“They’re probably not going to screw it up any differently than you were going to,” Ready says. “You just have to start somewhere. It’s like ripping the Band-Aid off.”
How to reach: Scale Computing, (877) 722-5359 or www.scalecomputing.com
Study your successes
It’s probably in the first chapter of any leadership handbook. It’s a prevalent theme in the main story on this page. But Jeff Ready says it takes more than just learning from mistakes to be successful.
“The greater lessons can come from trying to learn from your successes and trying to analyze, what was it about that success that made it successful?” Ready says. “The natural tendency is if something works, you just keep doing it. That makes sense. But is there room for improvement within that particular process?”
If you have a successful marketing program, was it the message that stood out or the medium you used to transmit that message?
“Let’s say you believe that it was the message of that ad that was effective,” Ready says. “Then the risk you might take is to take that message and apply it in a different venue. Maybe it was a print ad that worked and you’re going to take it and apply that same messaging online or in a telemarketing application. If that fails and you’ve got this culture, it made perfect sense to try it. The failure is not that big a deal. We know it works in print, but it doesn’t work in telemarketing, so we’re going to try something else.”
Similar to for-profit corporations, nonprofits and charitable organizations (hereafter “nonprofits”) are highly susceptible to myriad risks. Faced with pressures created by today’s economic environment, nonprofits participate in a fiercely competitive environment. Barriers to entry for new organizations are low, and donors can easily shift their giving to alternate organizations. Additionally, nonprofits are generally staffed with employees and volunteers who are first committed to helping the organization achieve its mission. The achievement of this mission requires considerable resources, often leaving less than adequate time for these individuals to establish and/or maintain enterprise risk management (ERM) processes.
When properly implemented, “ERM processes can not only help nonprofits safeguard assets and their reputation, they can also allow the organization to capitalize on opportunities afforded by risk taking,” says Harry Cendrowski, managing director, Cendrowski Corporate Advisors. “In this manner, ERM implementation is similar to corporate strategy initiatives.”
Smart Business spoke with Cendrowski about the risks faced by nonprofits and the manner in which a nonprofit can develop and implement an effective ERM process.
How should a nonprofit develop an ERM process?
Risk management for nonprofits begins at the highest levels of the organization, with the board and C-suite executives. Before risk management processes can be devised and implemented, these individuals must work together to identify an overarching, balanced philosophy of risk. This philosophy should detail the risks the organization is willing to bear, as well as the expected reward for taking such risks. It should also be accepted uniformly among high-level individuals, for if it is not, downstream employees and volunteers will see a fractured view of not only the organization’s risk philosophy but also the vision by which the organization will achieve its mission. This may, in turn, lead these individuals to make decisions that are not necessarily in the nonprofit’s best interest and most certainly not aligned with its balanced risk philosophy.
Once a balanced risk philosophy has been established, the risks faced by a nonprofit should be enumerated and evaluated according to their potential impact to the organization and likelihood of occurrence. A priority should be placed on mitigating high-impact/high-likelihood events, as these risks pose the greatest threat to the organization. Mitigation might include the implementation of processes designed to detect and correct risks once they have occurred, or processes designed to prevent risks from occurring.
What mistakes do organizations make in establishing ERM processes?
Many nonprofits and for-profit corporations do not allow enough time for an ERM process to take hold within the organization. They sometimes rush implementation, which, in turn, causes a lack of process ownership at the employee or volunteer level. The implementation of an ERM process requires significant cultural change; this is not something that can be altered overnight. Cultural change is an indirect effect of other organizational changes and leadership behavior; it cannot be directly effected by leadership. However, once cultural change has been embraced, and a risk-focused culture has been adopted, employees and volunteers will be conscious about the risks associated with their jobs and the impact such risks may have on the organization.
How much time should leaders and the board allot for the implementation of an ERM process?
The amount of time required for an ERM process’s implementation varies for every organization. In addition to being a function of the organization’s size, it is also a function of the current state of the organization’s environment and the approach of its employees and volunteers. If these individuals have rarely had to think about risk, an ERM process will take a considerable amount of time to implement. ERM is very similar to corporate strategy in that changes can certainly take place, but they may require considerable time to implement. Short- and long-range ERM plans should be developed, complete with key milestones and roles and responsibilities for process managers. These plans should subsequently be monitored to ensure that the organization is progressing and that the ERM process is evolving as the organization intended. This will ensure that realized benefits of the ERM process are maximized.
What benefits can nonprofits realize from ERM processes?
ERM helps nonprofits maintain their relevance and capitalize on opportunities presented by risk. For example, when its goal of defeating polio was achieved, the March of Dimes made a conscious change to focus its efforts on preventing birth defects. Without this change — or the support of the change from its donor base — the organization would probably have become irrelevant to its donors. ERM also helps nonprofits mitigate perhaps the largest risk they face: reputational risk. Stripped of a once-sterling reputation, a nonprofit will find it extremely difficult to rebuild its image. This could have far-reaching consequences beyond the direct realization of a risky event.
For example, in a university setting, misappropriation or misuse of university endowment funds could have a significant impact on the organization’s overall reputation. Both Princeton and Yale University recently settled lawsuits in which the plaintiffs alleged the universities misused millions of dollars of endowment funds. The lawsuits harmed the reputation of the university not only in the eyes of existing donors, but also potential donors looking to make contributions, faculty, staff and even potential students.
It is important to note that what begins as the realization of a seemingly isolated risk may soon impact the organization as a whole — on many levels — if a functioning ERM process is not in place.
HARRY CENDROWSKI is managing director for Cendrowski Corporate Advisors LLC. Reach him at firstname.lastname@example.org or (866) 717-1607, or visit the company’s website at www.cca-advisors.com.