Do you think employees leave your company for better pay or more robust benefits? If you answered yes to that question, then you aren’t alone. According to the “2008 Global Strategic Rewards Survey” conducted by Watson Wyatt Worldwide, work-place stress is one of the top reasons employees say they leave organizations, but stress doesn’t even register as one of the top five reasons employers cite as causes of employee resignations. The survey demonstrates that organizations applying an integrated approach to reward and manage talent have an advantage in attracting, engaging and retaining the talent they need to succeed in their markets and outperform peers.
“Some of the myths that employers subscribe to are the reasons why employees come and go,” says Laurie Bienstock, U.S. practice director for Strategic Rewards for Watson Wyatt Worldwide. “Once they understand the impact of stress in the workplace, employers can reshape their employee value proposition and take steps to attract and retain top performers.”
Smart Business spoke with Bienstock about reducing workplace stress.
What are the top causes of workplace stress cited by employees?
According to the survey, employees are most stressed about the day-to-day challenges associated with their jobs, more specifically the increasing expectation to do more with less. Here’s what employees mentioned as the most frequent causes of stress:
- Job definition Unclear or unrealistic performance expectations cause stress, along with unrealistic workloads, inadequate training and poorly defined work processes.
- Work group environment A lack of teamwork and/or a lack of staff to perform their job duties create workplace stress.
- Supervisor Employees were split about how supervisors contribute to work-place stress. Low performers said their supervisor was a cause of workplace stress whereas top performers more frequently cited poorly defined work processes, not their supervisor, as a reason for stress.
In times of economic uncertainty, it’s even more important to ensure employees are engaged and have the resources needed to do their work. If organizations are forced to reduce their work force, they must be careful not to expect the employees left behind to do the jobs of those who have left this creates excessive stress and may impact retention, particularly as the economy rebounds.
What actions have organizations taken to combat stress and which are most effective?
Organizations report taking these steps, with some being more effective than others:
- Strengthen performance management. Clarifying job definition and defining realistic performance expectations through their performance management systems is viewed as highly effective in reducing stress, according to more than half of the survey participants.
- Improve management communication. While many companies have instituted more frequent management communication around corporate goals and the company’s performance, the tactic was not reported as highly effective in reducing stress.
- Re-engineer job processes. Re-engineering work flow and processes was highly effective in reducing stress.
- Improve training. More than half of the surveyed companies increased the availability of employee training, but training was cited as one of the least effective methodologies for combating stress.
- Flexible work schedules. While almost 60 percent of organizations indicate they are making it possible for employees to have a healthy, comfortable balance between work and personal lives, only 50 percent of employees agree. Flexible scheduling is the most common tool employers are using to facilitate work-life balance, with work-at-home/remote policy and adjusted staffing levels common around the world, as well.
Why is an integrated approach to rewards and talent management effective in reducing stress?
An integrated approach ensures that the programs and processes in place at your organization align with your business strategy as well as the needs of your current and future work force. This includes creating and living up to a compelling employee value proposition. By implementing a holistic approach to rewards and talent management that drives business results, aligns pay with performance, promotes healthy work-life balance and integrates employee learning and succession planning, employers drive employee engagement (which reduces stress) and achieve higher productivity.
Are there other benefits for employers?
Employers benefit from other soft cost reductions as a result of lower employee turnover such as decreased recruiting and retraining costs and sustained productivity levels. According to the survey, companies that take an integrated approach to reward and manage talent are less likely to experience problems attracting critical-skill employees (20 percent less likely) and top-performing employees (25 percent less likely); have less trouble trouble retaining critical-skill employees (33 percent less likely) and top-performing employees (18 percent less likely); and are 18 percent more likely to be among the top financially performing organizations.
LAURIE BIENSTOCK is the U.S. practice director for Strategic Rewards for Watson Wyatt Worldwide. Reach her at (415) 733-4311 or email@example.com.
But the achievement is even more astounding when you consider that AMN Healthcare is in an industry composed of hundreds of competitors that has evolved from infancy to adulthood in record time. While the industry continues to eke out organic growth, its maturing status encourages consolidation, so larger competitors are making acquisitions and nipping at AMN Healthcare’s heels.
Nowakowski’s secret for maintaining the lead is never looking back in the rearview mirror at the competition and always striving to be the pace car that others must follow.
“To maintain an industry leadership role, you have to be constantly looking forward, earn the business every day, make long-term investments and take chances with people,” Nowakowski says.
She likes to offer people career opportunities because, at one time, she was given that all-important first chance to prove her abilities before she had all the requisite experience, and she grew through the process. Nowakowski also differs from many of her peers in that she was promoted to the CEO position from within the organization. Starting as the company’s first chief financial officer in 1990, she later became division president, then company president and finally CEO in 2005. Now, she’s the leader of a NYSE-traded company that generated $1.16 billion in revenue in 2007.
Under Nowakowski’s leadership, AMN Healthcare has grown by increasing its service offerings and global recruiting strategy, and in addition to driving organic growth, the company made five of its eight acquisitions under her leadership. Today, AMN Healthcare operates under 12 distinct brands as a way to recruit the highly coveted nurses, physicians and allied health professionals it places on contract assignments.
Create brand diversity
Nowakowski joined what was called American Mobile Nurses in 1990, a growing privately held provider of travel nurses. Clients were beginning to express an interest in contract allied health professionals, and the industry was growing by expanding the contingent work force concept to other health care disciplines. The following year, the company grew organically by launching a mobile therapist division, and in 1998, the company launched the AMN Healthcare name. The expansion phase has continued including overseas nurse recruitment and the more recent acquisitions of MHA Group, a provider of temporary physicians and physician direct-placement services, and Pharmacy Choice, which provides temporary and direct placement of pharmacists.
“Clients were asking for contract physicians,” Nowakowski says. “The key is to listen to them, anticipate the market, and then get into the space quickly. Otherwise, someone else will offer the service. To be an industry leader, you have to be a single-source service provider to clients or else you give a competitor an opening.”
Today, AMN Healthcare provides a full range of staffing services under a multibrand recruiting model. While there’s an increased cost and a few challenges associated with executing the strategy, each brand attracts a different group of health care professionals, so there’s value in retaining the inventory of health care professionals and the placement team who garners relationships with the contingent workers, following an acquisition. Sometimes, there are multiple suitors for health care staffing firms, so how the CEO handles the transaction and the integration of the brands often dictates success in maintaining the brand identity and retaining the work force.
“The key to managing multiple brands and keeping them intact is to respect each organization’s differences,” Nowakowski says. “You can’t expect to change everything overnight, and you shouldn’t change everything. You should author the integration plan before the acquisition closes and involve the key leadership of the prospective acquisition in the assimilation strategy. The process builds trust and eliminates surprises. Agree upfront which functions and decision-making processes will be consolidated and which will remain autonomous.”
Agreeing about the future operating model as part of the due-diligence process keeps the acquisition from unraveling once the investment is made. Each AMN Healthcare brand has its own president and its own profit and loss statement, which ensures operating independence, and the structure appeals to selling entrepreneurs. Nowakowski favors integrating back-office functions, like accounting and risk management, while providing new acquisitions with tools that enable growth, such as improved Web sites and technology capabilities.
“Each brand has its own operating plan, which is approved by the board,” Nowakowski says. “Of course, we’re looking for them to fit in to the long-term company goals and cohesiveness around things like pricing and the types of disciplines they are providing, but they have a great deal of autonomy in how they conduct business. That maintains the brand’s independence and its ability to appeal to a different segment of the contingent work force.”
Put people first
While people are a vital component in the success of most businesses, in the staffing industry, the key is the quality of the workers placed on assignment. In addition, clients rely on the expertise of recruiters to make critical placement decisions. With people dictating the company’s success at every turn, relationship prowess and execution consistency not only sustain the AMN Healthcare operating model, they directly impact the company’s industry leadership position. Because AMN Healthcare must compete for acquisitions, contingent workers, recruiters and clients, Nowakowski is adept at handling people and leading the way with her talents.
“We were vying to acquire MHA Group and closing the transaction was a critical step for our organization because having physician placement capabilities was vital to becoming a full-service provider,” Nowakowski says. “There were several times during the negotiations when the deal was off the table. I think what finally helped move the process forward, is that I envisioned the deal through the eyes of the other party. The contract included a post-acquisition earn-out bonus for the owners, if certain results were achieved. They were concerned they wouldn’t earn the minimum bonus, so I finally agreed to a guarantee. I think, sometimes, you have to put your ego aside when things get off course and come back to what makes a good partnership, which is trust.”
Each brand has its own sales force, so it’s important to keep the business development team focused on winning the battle against outside competitors, not merely diluting revenue generation by competing for the same business against other AMN Healthcare representatives. Clients can also be confused when multiple brands are offered under a single company umbrella a reason why many executives often favor brand consolidation following acquisitions. Nowakowski relies on her people management skills to build a cohesive team focused on taking down the company’s outside competitors not each other.
“I think it’s important to discuss how the sales teams will work together as part of the acquisition discussions and involve the managers and the sales teams in the strategy,” Nowakowski says. “We use a cross-selling model, and the sales teams’ incentives are aligned, which encourages the representatives to help their counterparts. They visit the client in teams, presenting our offerings only under the AMN Healthcare brand. Going to the client as a unified team creates trust between the sales groups and message uniformity with the client.”
Building and developing an internal staff has been vital to executing the company’s growth plan, which includes competing for the attention of the more than 2 million nurses in the U.S., who have their choice of jobs. Nowakowski says the company went from 800 associates to 2,000 seemingly overnight, in part because staff chose to remain with the company after acquisitions but also because she delivers on her promise of providing career opportunities to up-and-comers. Last year, 40 percent of the company’s promotions were awarded to internal staff in accordance with Nowakowski’s belief that talented personnel should be given the opportunity to spread their wings.
“I moved one consultant from Deloitte over our payroll and billing system, and he created the entire infrastructure that pays and bills our 7,000 assigned clinicians every other week,” Nowakowski says. “I gave him the opportunity to run our allied health division, even though he had no sales experience, because I was so impressed with his work. Sometimes, passion and commitment can make up for a lack of experience.”
In addition, having the staff and resources to assimilate acquisitions effectively and continually assessing the adequacy of the company’s infrastructure to sustain growth is something she reviews every day because both are vital to maintaining the lead.
“You can’t effectively integrate an acquisition with staff who can only dedicate themselves to the task part time,” Nowakowski says. “It’s a full-time job to do the job correctly and to make sure people are working together cohesively. CEOs should evaluate their staff and infrastructure before attempting an acquisition to make certain there are enough capable resources to assure a seamless transition.”
Investment in continuous improvement
When staffing industry customers procure services, they have many options, so customers must be satisfied or else they will defect to a competitor, and there’s certainly no room for error when contracting health care personnel care for patients. Nowakowski says that continuous improvement and continuous investment go hand in hand, because error reduction and client retention allow CEOs to reduce overhead and rework costs, which frees up investment funds.
“Quality and continuous improvement are the fabric of the organization,” Nowakowski says. “To create a culture of continuous improvement, CEOs have to constantly talk about the importance of quality, monitor metrics and quality ratings, and provide staff with incentives that support the quality mission.”
To demonstrate her commitment to quality, Nowakowski explains each of her decisions to the company’s staff by illustrating how her choice supports her commitment to quality, especially when her decision supports quality but not increased revenue. For example, Nowakowski says she could lower the selection criteria for contingent staff, enabling recruiters to fill more requisitions, but that would send the wrong message about the importance of quality to the team.
In addition, AMN Healthcare conducts anonymous quality surveys among client and contingent professionals and Nowakowski monitors those results along with data that measures the company’s basic deliverables, such as the percentage of filled orders, completed assignments and order cancellations.
She also uses feedback from client and contingent worker focus groups to craft the company’s investment strategy. AMN Healthcare maintains 20 different Web sites geared toward the recruitment and professional education of each brand’s contingent workers. The company’s latest investment, supported by focus group feedback, enhances each site’s social networking capabilities, creating a portal that will get into the lives of the health care professionals.
The concept and the investment decision were partly influenced by industry leaders outside of staffing. Nowakowski says she learns from observing what leaders do in all industries to keep their companies in the lead.
“We watch Nike and Google and bring some of their best practices to the table here,” Nowakowski says. “I think CEOs can learn a great deal from looking outside their own company and industry for ideas and what keeps them ahead of the competition.”
Under Nowakowski’s leadership philosophy, there’s no doubt that growth requires capable people and ongoing business investment, but she says those things are even more important if the CEO wants to maintain an industry leadership position, which is garnered through a blend of organic and acquired growth.
“While I think long-term investment is vital to sustaining growth, so is remaining steadfast with your values,” Nowakowski says. “As time goes on, strategies will evolve, but a commitment to respecting the individual, quality and continuous improvement are the things that keep companies at the top of their game over the long haul.”
HOW TO REACH: AMN Healthcare Services Inc., (866) 871-8519 or www.amnhealthcare.com
The debate over whether real estate acquisition transactions should be valued as business combinations should have ended after the implementation of Financial Accounting Standards No. 141 (FAS 141). Now a new change in the accounting standards will modify accounting for investment property acquisitions.
Although FAS 141 was enacted in 2001, some accountants were continuing to value acquired real estate as land and buildings and not recognizing intangible assets acquired during real estate acquisition transactions. In December 2007, the Financial Accounting Standards Board issued Financial Accounting Standard No. 141 (revised), FAS 141R, which replaced FAS 141, but retains the fundamental basis of the original standard. Its adoption is also significant because it represents progress toward two additional initiatives: the gradual migration toward a single set of international accounting standards and the need for greater accuracy and a standard presentation of financial reporting.
“Executives who invest in rental real estate properties should become familiar with the new accounting standard now,” says Paul Louis, CPA, audit manager for the Audit and Business Advisory Services Group at Haskell & White LLP. “FAS 141R changes accounting and reporting requirements for real estate acquisitions in fiscal years beginning on or after Dec. 15, 2008. It will require measuring and recognizing the acquired business at its full fair value as of the acquisition date.”
Smart Business spoke with Louis regarding what CEOs should know about the change in standards under FAS 141R.
Are real estate acquisitions considered business combinations?
Yes, but the definition applies, with some exceptions, to acquisitions of rental commercial or office property with tenants in place, not vacant land or owner-occupied property. Companies are not only purchasing the land and building, but they are purchasing the entire business. As part of the transaction, the buyer obtains control over the real estate and becomes responsible for all of its activities. In that respect, the acquirer’s balance sheet will more accurately capture the fair value of the assets acquired and assumed liabilities as of the acquisition date than it would using a traditional approach.
How does FAS 141R impact the treatment of acquisition costs?
This is one of the biggest changes under FAS 141R. Direct professional fees related to the acquisition, such as consulting fees or due diligence costs, can no longer be capitalized or used as part of the real estate acquisition cost. Now, those fees must be completely expensed in the period in which they occur. This change gives a real-time presentation for the fair value of the acquired assets and assumed liabilities as well as the expenses. This will impact the profitability of the acquiring company in the acquisition year as well as the years immediately preceding and following the acquisition.
How does FAS 141R change the allocation of tangible and intangible assets?
Tangible assets include land, building, site improvements and tenant improvements. Intangible assets include the value of existing leases (including the value of those leases that are above or below existing market rates), customer relationships, leasing commissions and legal and marketing costs. FAS 141R retains the guidance of FAS 141 for identifying and recognizing intangible assets. The value of all acquired assets and assumed liabilities should be based on fair value. The value of the existing leases and the materiality of those leases are some of the major components for the determination of intangible assets value. The acquired tangible and intangible assets and any assumed liabilities can be valued using one of these approaches or a combination: sales comparison, income approach or cost approach valuation.
What other changes should CEOs expect from FAS 141R?
Expect to provide greater transparency and disclosure to the financial statements’ user. The users will often be lenders or investors, who will benefit from greater standardization so they can compare expenses and values across similar transactions. The auditor will test the reasonableness of the assumptions used by valuation and appraisal specialists in setting the property’s fair value.
How can CEOs prepare for the change?
Begin addressing the changes with team members who are involved with real estate acquisitions and the members of the accounting department who prepare your company’s financial statements. Run financial models as part of the due diligence process to understand how the new standards will impact your company’s profitability as you consider new deals. Be sure to identify all the costs, including all the depreciation and amortization of tangible and intangible assets, respectively. Watch for updates and check with your accountant for more information.
Lastly, remember FAS 141R applies to acquisitions made on or after the beginning of the first annual reporting period beginning on or after Dec. 15, 2008. So for companies that have a fiscal year-end of Dec. 31, this new FAS statement is applicable for acquisitions made on or after Jan. 1, 2009; and early adoption of the standard is prohibited.
PAUL LOUIS, CPA, is an audit manager for the Audit and Business Advisory Services Group at Haskell & White LLP. Reach him at (949) 450-6237 or firstname.lastname@example.org.
All businesses will be affected by AB 32, known as the California Global Warming Solutions Act of 2006, especially with rising electricity and fuel prices. The only unknown is the extent of the fiscal impact and whether efficiencies will offset the increased costs. AB 32 is considered to be the most aggressive mandatory global warming program in the world, so the earlier CEOs develop an understanding of it, the better off they will be.
It is possible to forecast AB 32’s final emission-cutting strategy by reviewing the 2007 ARB (Air Resources Board) draft recommendations, according to John J. Lormon, partner and chair of the Environmental, Land Use and Governmental Affairs Practice Group with Procopio, Cory, Hargreaves & Savitch LLP.
“California intends to publish its final scoping plan to reduce greenhouse gas emissions (GGE) through regulations, market mechanisms and other actions by Jan. 1, 2009,” Lormon says. “CEOs should pay attention because the first draft of the scoping plan was released in June 2008, and the final strategy will be adopted by the end of 2010. The law includes fines up to $1 million for corporations and criminal sanctions of up to one year in jail for individual offenders.”
Smart Business spoke with Lormon about the likely final regulations under AB 32 and what CEOs should do to prepare.
What areas are targeted by AB 32?
AB 32 targets a return to 1990 emissions levels by 2020 (as much as a 30 percent reduction from what the 2020 emissions would otherwise be). There are many AB 32 effects, including the following: increases in electricity, fuel, construction and manufacturing cost; land use and forestry conservation impacts; and consumer lifestyle changes.
What were the early recommendations, and how will they impact energy and fuel?
Electrical utilities must triple their investment in renewable energy sources, and automobile manufacturers will have to produce more efficient light duty vehicles (if the U.S. EPA grants California a waiver), which may cost more to buy but should cost less to operate. Buildings, both new and retrofitted, will have to be more energy efficient, so property and leasehold acquisitions must consider these requirements and costs.
Regulations similar to those required for vehicle smog checks will apply to mobile air conditioning units and make it illegal to self-repair a motor vehicle air conditioning unit. Tire pressure monitoring system will be installed in all vehicles sold in California to increase mileage and reduce emissions.
What recommendations apply to manufacturers?
Appliance manufacturers will be impacted by regulations both directly and through their supply chains. Reduction of ozone-depleting substances used in consumer products will require reformulation of everything from cleaning products to paint and other coating materials; perfluorocarbons emissions in semiconductor manufacturing will be reduced or phased out. Regulation of the cement industry will impact all aspects of the building industry and its customers.
Are there any other recommendations that will impact businesses?
The Governor's Office of Planning and Research (OPR) issued a new technical advisory on the California Environmental Quality Act (CEQA) and Climate Change. All projects subject to CEQA review must consider significant effects caused by GGE. California's clean car standards, goods movement measures, low-carbon fuel requirements and movement of water (which uses 20 percent of the electricity in the state) will all be subject to GGE regulation and price increases.
What should CEOs do to prepare?
Educate yourself. The effects of AB 32 will be significant and broad. AB 32 will change permit and recordkeeping requirements and purchasing decisions and practices; corporate disclosure requirements will be expanded to include GGE; due diligence in mergers and acquisitions will change, as will budget and financial planning. Risk analysis for D&O and CGL insurance should be reviewed for appropriate coverage. CEOs should set up AB 32 news alerts to track new developments and attend science, law and policy workshops to stay informed. The EPA Climate Change Business Guide can be found at: www.epa.gov/partners.
Document baseline emissions. On Jan. 1, 2008, certain large California emission sources were required to report their 1990 baseline emissions. Early action to reduce emissions is great, but to get credit for early action, inventory and document your company’s emission baseline before making improvements or purchasing new equipment.
Take advantage of emerging opportunities. AB 32 will use market-based mechanisms like a cap-and-trade program, where companies can sell emission credits at a market price. So if your company converts its vehicles to natural gas, for instance, you’ll have available credits you can use or sell. Also, new regulation frequently opens the door for new products, services and investments, but CEOs need to be educated to spot these new opportunities.
JOHN J. LORMON is a partner and chair of the Environmental, Land Use and Governmental Affairs Practice Group at Procopio, Cory, Hargreaves & Savitch LLP. Reach him at email@example.com or (619) 515-3217.
Executives are frequently diligent and detailed negotiators when consummating a real estate purchase contract or long-term lease. But even the most thorough owners and tenants do not pay enough attention during the next phase, when construction or tenant improvement contracts need review and approval. Many of these contracts begin as boilerplate documents created by construction-related associations and, unless they are meticulously reviewed and modified, owners may forfeit savings opportunities, sustain cost overruns and assume financial liability for the contractor’s debts.
“Almost invariably, the contract presented to the owner by the contractor is missing fundamental provisions required by law or good construction practices to protect the owner against preventable risks,” says Katherine M. Knudsen, a construction litigation attorney with Procopio, Cory, Hargreaves & Savitch LLP. “If the contract does not provide adequate protection, the owner’s financial liability can quickly grow to hundreds of thousands of dollars due to delays, the contractor’s failure to pay its subcontractors or other situations. To avoid or limit financial loss or liability, owners should address and allocate these risks in the contract.”
Smart Business spoke with Knudsen about how to avoid the hidden pitfalls in construction agreements.
What is the first step in negotiating a construction agreement?
Before contract negotiations begin, owners should check with the California Contractors State License Board to verify the contractor’s history and to make certain the contractor has an active license. Also, an owner should verify that the contractor has adequate insurance coverage, including comprehensive general liability and workers’ compensation, preferably from an A-rated carrier, and verify the contractor’s ability to obtain payment and performance bonds. Further, the owner should check references and investigate the contractor’s qualifications and experience. Next, have a construction attorney review the contract to protect the owner’s interests and to make certain the scope of work, the compensation and the schedule for performance are all spelled out in detail. It is imperative that the contract include a construction schedule identifying completion dates for each phase of the project so the contractor is held to a timeline.
What else should be included in a contract?
Contractors should be required to provide a schedule of values or a budget for the project to help ensure that the contractor stays within the contract price and to guard against overpayment. Further, the contract should provide that the owner may withhold 5 to 10 percent from each progress payment until the work is fully completed and inspected and the time for subcontractors and suppliers to record mechanics’ liens has expired. The contract should also have a clause providing the owner the right to receive timely audits, a full accounting for the project and documentation of expenses if the contractor is being paid based on the cost of the work.
Are indemnification clauses and lien waivers important?
Owners should make certain the contract contains an indemnification clause stating that if the contractor fails to pay its subcontractors or suppliers, fails to keep the property free from liens, or causes injury or damage to persons or property, then the contractor shall indemnify the owner for all claims, lawsuits, losses, attorneys’ fees and costs. In addition, the contract should also contain language requiring the contractor and its sub-contractors and suppliers to execute conditional and unconditional lien waivers and releases before receiving progress payments and final payment, making it less likely that any mechanic’s liens or stop notices will be filed against the property.
How can construction delays be prevented?
The owner may consider including a ‘no damages for delay’ clause to help safeguard against a delay claim the contractor may assert if the project is not completed within the agreed-upon completion time. On the flip side, the owner may want to consider the inclusion of a liquidated damages clause entitling the recovery or withholding of a set amount for each day the project completion is delayed beyond the date set forth in the contract due to the contractor’s fault.
What bonds should be required?
The general contractor should be required to carry payment and/or performance bonds on the project, although the premium for such bonding is customarily borne by the owner. Even with a competent, adequately capitalized contractor and a well-drafted contract, unforeseeable difficulties may arise on a project. Payment and performance bonds offer additional protection to the owner. Generally, a performance bond ensures that the construction of the project will be completed if the contractor is unable to do so and a payment bond ensures that the subcon-tractors and suppliers will be paid if the contractor fails to pay them.
These recommendations are just a fraction of what owners should include in construction contracts. The main thing to remember is that ‘contract due diligence’ should not end when the lease or purchase agreement is signed.
KATHERINE M. KNUDSEN is a construction litigation attorney with Procopio, Cory, Hargreaves & Savitch LLP. Reach her at (619) 515-3206 or firstname.lastname@example.org.
Is there a credit crunch? Based on the formal definition there is, because lenders are exercising much greater caution before granting business loans. However, banks actually have plenty of money to lend to qualified and well-prepared borrowers. While there’s definitely been a trickle-down effect from the mortgage industry, causing lending institutions to scrutinize business loan requests more carefully, CEOs can still secure funding by understanding the tighter requirements and using a more pragmatic approach to the market.
“It’s not that banks aren’t lending money,” says Jim Paul, senior vice president for retail administration at Fifth Third Bank (Tampa Bay). “CEOs need to have a better understanding of what banks are looking for and what’s behind their lending decisions because there’s more need for due diligence and preparation when applying for a loan.”
Smart Business spoke with Paul about the current lending criteria and how CEOs can successfully secure business loans.
What are banks looking for when evaluating loan requests?
Out of all the criteria, the most important is cash flow. If the banker doesn’t think the borrower has enough cash to service the debt, the request stops right there. They will also factor in the debt service costs when evaluating the company’s cash flow requirements and project whether the business will produce enough cash to make the payments over time. Many borrowers think that collateral can overcome cash flow shortfalls, but collateral doesn’t make up for shortfalls in cash. Banks are really not interested in taking over assets if a business fails to make its payments, so right now cash is king.
What else are lenders reviewing?
Lenders will review credit scores and how the borrower has historically used credit facilities. In privately held companies or partnerships, the personal credit scores of the owners will be reviewed, but the lenders will also be looking to see if the borrower has been using funding vehicles appropriately. For example, a line of credit is designed to meet short-term needs, such as paying bills or meeting payroll to bridge gaps in receivables. These funding vehicles were never designed for business expansion. So if the owners have been using credit lines for expansion purposes that will be a red flag to the lender.
Are intangibles reviewed?
Character is definitely the third thing lenders will review. It helps if you have a relationship with a bank, but if that’s not the case, the lender will look at the industry, the owner’s history, experience and reputation and how you approach the institution when requesting a loan as a gauge of your character and professionalism.
How can CEOs prepare before approaching a bank?
First, you’ll want to meet with several bankers to gauge the market and understand what lenders are looking for because having greater knowledge of the lending side will help you tailor your presentation and business plan to meet the requirements. The discovery process will also help you estimate both the type of loan and the loan amount your business will qualify for. Rates are still at an all-time low, but lenders are charging more for increased risk, and they are looking at worst-case scenarios to see how the borrower and the business might fare under a variety of conditions.
For example, if you’re applying for a loan to purchase property, you might need to secure key person life insurance to secure the loan or present your collateral and cash flow in a way that’s on target with what the lender is seeking. Let the lenders know exactly what you’ll be using the funds for and allow them to get to know you and your business, so they’ll be comfortable lending you the money.
What’s the best way to approach the lending institution?
The most successful strategy I’ve seen is where business owners approach a lending institution in partnership with an attorney and an accountant. You’ll also need a customized business plan tailored toward the lender’s requirements. It adds a great deal of credibility when a team of professionals collaborates in authoring and presenting the business plan, and a joint presentation makes lenders more comfortable because accountants can often address questions about cash flow and how the funds will be used. Borrowers can tap local resources, such as the business department at local universities or the Small Business Administration to help author a business plan if they can’t afford to partner with a local accountant and attorney. In today’s environment, success is commensurate with taking the time to understand the market from the lender’s perspective and then crafting your approach in such a way that it addresses all the lender’s concerns.
JIM PAUL is senior vice president for retail administration at Fifth Third Bank (Tampa Bay). Reach him at (813) 306-2511 or email@example.com.
Corporate charity is good for business. That’s because experts link companies that have high levels of productivity and retention to corporate cultures of integrity and community giving. Within the top-performing companies, an effective community affairs program serves as the glue that binds the company to the community and the employees to their company.
“Certainly, giving back to the community demonstrates strong social responsibility, and it also helps build the community that supports your business,” says Curtis Stokes, vice president for community affairs at Fifth Third Bank. “But, in addition, an effective community affairs program creates high morale, it helps marketing build a brand and, when your staff is out there in the community, it also generates positive media exposure.”
Smart Business, spoke with Stokes about the benefits of community affairs and what makes a program effective.
Why is community affairs valuable?
Through personal involvement, employees become the face of the organization as they immerse themselves into the community. When they bump up against other community leaders, they get the opportunity to transfer your company’s brand, mission and vision, and that interpersonal contact generates dividends. For example, an employee might meet another business leader at an event, and that person will suddenly remember hearing your company’s advertisement because that human connection pulls it all together for him. Employees also feel better about their organization and their role when they have the opportunity to represent the company at events outside of work because it provides balance. Statistically, it’s been proven that retention and productivity improve when employees are involved in the community because it gives employees a sense of purpose and pride, which builds morale and engagement.
How can senior leadership be involved?
Senior leaders can set the tone by serving on boards of nonprofit organizations. They not only lend their business and professional expertise to these organizations, but they help raise funds to support the cause, and personal involvement from senior leaders demonstrates that the company is committed to giving back to the community. At Fifth Third Bank, our officers are not only involved through board participation, but the bank provides financial support to the organizations where they serve. In addition, senior leaders get the opportunity to network with other executives and community leaders, which builds external relationships that benefit the company.
How can managers play a role?
Managers should serve on nonprofit board committees, where they can lend their expertise and also reap the benefits of networking. Nonprofit organizations frequently need participants for finance, audit or development committees, so accounting and finance professionals or members of the marketing department often volunteer to serve on these committees. To make certain the time commitment is beneficial for everyone, survey your management team members about their interests, and then match them to organizations that support your company’s visibility goals and philanthropic mission.
How can employees be involved?
Employees benefit the community and their company by volunteering their time in supporting local events, such as cancer walks or charity fund-raisers. Select three or four events each year that the company would like to sponsor and get everyone involved by raising money and sponsoring teams. Walks are often good events to sponsor because they are team-oriented, so employees can reach out and engage family, friends and customers, creating a circle of support and awareness for the event and your company. Also, having your company’s name associated with sponsorship creates good will within the community and a positive corporate image. We provide our employees with lapel pins when we support an event; people notice them and comment, which creates excitement about the event and positive conversation about the bank.
What are the best practices for dovetailing community affairs and marketing?
Jointly set a strategy that links your marketing program with your foundational support, community involvement, community development and other corporate giving programs. Once the strategy is set, establish selection criteria for the events and organizations your company will support that will give your organization the right visibility. Include the goal of supporting key customer relationships through joint involvement or the opportunity to place an executive at a board level in a nonprofit organization with high visibility. This step also helps companies target their annual giving through foundation grants or matching fund programs. Finally, use press releases to let the public know about your involvement and sponsorships and create internal campaigns to drive employee interest and energy.
CURTIS STOKES is vice president for community affairs at Fifth Third Bank. Reach him at firstname.lastname@example.org or (813) 306-2488.
After the first set of case studies detailing the missteps of the banking industry prior to the recent avalanche of problems, there’s already one key lesson from the in-depth reviews of the industry’s sales management practices that should gain the immediate attention of all CEOs, says Scott Barton, Senior Consultant for the Sales Effectiveness and Compensation Practice at Watson Wyatt Worldwide. Barton’s top observation: Don’t wait until revenue growth stalls to review the ROI of your sales force.
“When the banking industry was in the midst of an unprecedented growth cycle, there just wasn’t much attention paid to sales force effectiveness,” he says. “Management was adding people and not caring about the return it was getting for its compensation expenditures, until net income plummeted. Now, there’s renewed interest in looking at what caused the disconnect between revenue and compensation expenditures.”
Smart Business spoke with Barton about learning from the banking industry’s renewed rigor around sales force effectiveness.
What was the first problem you found?
The first issues that created sub-par sales performance in the banking industry were poorly defined sales roles and a general lack of discipline in reviewing how the sales team was spending its time. We know from our research that top performing sales teams spend 20 percent more time in new business generation activities when compared to the time spent by average performing teams. This produces a much greater return for the associated compensation expenditure when compared with the cost for client maintenance or administrative duties. Management should review the sales staff’s time allocation between hunting and farming activities and make certain that variable compensation is calibrated to reward more generously for growth, and limit the staff’s activities that don’t directly correlate to new customer development and revenue growth.
Did adjusting the sales structure help?
Some banks are now breaking out their sales positions into roles that are strictly dedicated to either new business development or customer maintenance. What they found is that one person can handle larger volumes of existing customers, so the company achieves better revenue leverage for the allocated expenditure. Banking executives also found they could hire for specific attributes when hiring strictly for hunters or farmers, instead of hiring for a composite profile for blended roles, and they achieved better results from dedicated business development and customer maintenance personnel simply because of increased focus. This type of functional realignment also affords management greater visibility into the disparate cost detail and performance of the two groups.
Was there sufficient accountability for profitable business generation?
Many organizations wind up with a poor sales compensation ROI because the basis for variable compensation is business that does not contribute to profitable growth. Last year was a tough one for many commercial lending organizations, but you wouldn’t have known it by looking at some of their relationship managers’ pay checks. Relatively high base salaries and incentive metrics tied to overall asset volume meant a portfolio could be flat and unprofitable, but the relationship manager made good money. Similarly, new business development officers were paid on new loans, many of which ended up being bad bets for the bank. Management should ensure each sales person carries a goal that covers a portion of the company’s revenue or margin objectives. Commission-only plans, based purely on volume, are appropriate in some instances. But too often we see this disconnect between company objectives and sales rep pay, where goal-based plans at the rep level would have closed the gap.
What’s the best way to align sales compensation with company profitability?
Start by understanding how each sales role impacts revenue or margin. Establish individual goals based on these measures. For example, if a business development rep has considerable influence over revenue volume in an assigned territory, base the goal on revenue volume and the forecast of growth for the territory. Setting the goal on measures that do not impact revenue or margin, or financial measures over which the rep has little influence, won’t help the bottom line. Similarly, setting the goal too high, or providing only limited variable compensation opportunity, won’t sufficiently motivate the rep.
Does sales turnover impact profitability?
Some critical client-facing employee groups still churn at an alarming rate, which in turn creates customer churn. Low pay often results in poor morale and disengaged staff; we know from our research that profitable revenue growth is a function of having engaged and skilled staff. Develop and maintain an effective communication strategy that reinforces the alignment of business change with changes in customer preferences; offer junior-level employees career development and training to foster a longer-term perspective. Also, calculate the cost of lost customers and review your sales compensation levels to make certain it’s adequate for your exposure. It can be very expensive if a sales person leaves, taking a customer with him.
SCOTT BARTON is a Senior Consultant in the Sales Effectiveness and Compensation Practice at Watson Wyatt Worldwide. Reach him at (415) 733-4263 or email@example.com.
CEOs have long worried about financial losses from stolen or forged checks, so most executives have taken steps to prevent those types of losses by keeping checks in locked drawers and creating procedural safeguards. But with the advent of online banking and electronic financial services, today’s criminal is more likely to enter your company through cyberspace than the front door.
Phishing, which is a form of online identity theft that uses both social engineering and technical subterfuge to steal personal data and account information from users, can be hard to discern from legitimate banking institution communications. In some cases, bank and credit card brands are hijacked and used as part of phony e-mail schemes; the APWG reported the hijacking of more than 178 brands during November 2007. These two examples are only the tip of the modern-day fraud iceberg.
“There’s been a big increase in counterfeit items because of desktop publishing technology that allows hackers to replicate and print any company’s checks anywhere in the world, once they’ve stolen the information,” says Terry Akin, vice president and regional risk manager for Fifth Third Bank.
Smart Business spoke with Akin about how executives can protect their company’s assets.
What are other modern fraud techniques?
Anyone inside or outside your company has the ability to transfer funds to his or her personal accounts if he or she has the password and the signature information for your business accounts. Today, more companies wire money between accounts online through the use of a PIN by designated users, so the theft opportunities are greater. Some perpetrators use malicious software that downloads onto your desktop and secretly captures the information needed to access your accounts during transactions, or they steal the information by sending an e-mail from someone who appears to be your banker requesting the information.
What are some preventive measures?
First, keep all personal and business account information secured by locking up checks, codes, passwords and account statements and limiting the number of people who can sign checks. Also, make sure that users log out of computers when they are away from their desks, create a policy that passwords should never be stored in the computer’s cache and instruct staff not to respond to any e-mail request for bank account information. Requiring dual signatures, especially on large checks, is an excellent idea as is segregating duties, so one employee can’t complete all the steps in a payment transaction. Certainly, audits are a necessary part of a good prevention structure as is entering dummy transactions into the system from time to time, to see if they are discerned during the accounting process.
What security measures should the bank provide?
Many banks offer their business customers a security system called positive pay. Traditional positive pay is a system where banks verify checks presented for payment against a list of issued checks previously submitted by the company. There’s payee positive pay, which involves comparing the image of the payee name on the check to the payee name included on issue information provided to the bank.
Most financial institutions offer enhanced authentication procedures that require the person logging in to prove who he or she is, usually by asking a series of questions whose answers are known only to the user. In addition, there are other bank security measures available to business clients; one such system reviews banking activity electronically and generates exceptions that are kicked out for human review. Often, the banking relationship manager is familiar with the client’s typical transactions and can place a call to verify authenticity if the transaction seems out of the norm. Also, banks that specialize in business relationships will often customize review processes and authentication procedures based upon the customer’s request, and CEOs should alert their personal bankers to business changes.
How can CEOs protect data stored externally?
Today, more people are using laptops instead of desktops, which poses a unique security challenge, simply because someone breaking into your company can remove a laptop more easily than a desktop. More employees use laptops in remote locations away from the protection of the office environment and network security systems. Be sure to have a policy about what information can be stored on laptop hard drives and require that laptops are locked up when not in use. It’s not a good idea to have any accounting or banking information stored on laptop computers.
Last, be aware of the threats posed by wireless networks. Without an appropriate firewall, wireless networks may launch the company’s financial transactions into cyberspace where anyone can grab the information, access the account and transfer the funds.
TERRY AKIN is vice president and regional risk manager for Fifth Third Bank. Reach him at (615) 687-3104 or firstname.lastname@example.org.
New audit standards go into effect this year for companies that have employee benefit plans subject to the Employee Retirement Income Security Act (ERISA), and who have 100 or more eligible participants. For many CEOs, audit fee increases will seem inevitable. But the audit tab doesn’t have to be significantly higher, according to Jennifer Cavender, audit manager for Audit and Business Advisory Services Group at Haskell & White LLP.
“Keeping your benefit plan audit fees down can be done if you’re willing to plan ahead and dedicate a little extra time to the process,” she says. “Many times, companies are billed additional audit fees above their engaged fee because of delays in the process or additional work that was not anticipated at the front end.”
Smart Business spoke with Cavender about the audit requirements for employee benefit plans and what CEOs can do to manage the cost.
When is a benefit plan financial statement audit required?
Generally, a plan is required to include audited financial statements with its Form 5500 filing if it has more than 100 eligible participants at the beginning of a plan year. This is an area where many companies have gotten into trouble in the past because they assume that they only need to include plan participants with account balances in the employee calculation, when, in fact, the calculation includes those who could participate but choose not to. A company that is moving in and out of the 100 eligible participant requirement should contact an accountant and legal adviser to analyze its status and determine whether an audit is necessary for their Dec. 31, 2007, plan year.
What are the audit changes effective for plans with a fiscal year ending Dec. 31, 2007?
The new audit procedures require auditors to really focus on the risks of the plan financial statements being misstated. In order to understand the plan’s risks, we must understand the plan’s internal control environment and the specific activity level controls in place. We must also consider the fraud risks associated with the plan and its operations. Once we understand the intimate details of the plan and its internal control structure, we can plan an audit that is tailored to the risks for the plan. This should help auditors to focus on what is key to the plan and its financial statements.
This is an opportunity for companies to really get value out of the audit process. These new standards will equip your auditors with the necessary information to provide you with valuable feedback on how you can improve the operations and management of your plan and reduce fraud risks.
How should companies prepare for the audit in light of the new standards?
Planning for the audit is the most important thing a company can do to keep audit fees at bay. If you are a company that has just reached the threshold and will need an audit of your benefit plan for the first time, you will need to engage an independent CPA that has experience auditing benefit plans and obtain a list of what that person will need well in advance. Next, communicate with your asset custodian and third-party administrator because these people will be furnishing most of the information for the audit. Maintaining a good relationship with them throughout the course of the year is vital because if you’ve forgotten something and need them to send additional documentation once the auditor arrives, they’ll be more responsive. Also, a good third-party administrator will keep your company informed about legal requirements throughout the course of the year and will help you meet the Form 5500 requirements on an ongoing basis. Last, companies need to have their internal controls well documented for the auditor in the form of narratives, flow charts or matrices.
What is the most important thing to remember when working with the auditor?
Start early. Benefit plan audits take a little longer than business audits because there are multiple parties involved and the asset custodians can become overwhelmed during peek times when everybody is making requests for information. Also, assign a company point person to the auditor who can answer questions and furnish documentation quickly. This is key to keeping fees down. If the auditor has to talk to multiple people in order to obtain every requested item, delays and frustration will result.
Are there any other benefits to employers for having a benefit plan audited?
A benefit plan helps a company attract and retain key employees because it positions the company as an employer of choice in the marketplace. While the audit may seem costly and cumbersome, it can provide assurance to the employees that their money is being handled correctly and responsibly. Consider sending an e-mail or a letter to your employees each year, letting them know that the audit has been completed by an independent CPA firm and that no irregularities were found; then thank them for their loyalty and hard work. By taking this extra step, CEOs can demonstrate good will toward their employees through the audit process.
JENNIFER CAVENDER is an audit manager for the Audit and Business Advisory Services Group at Haskell & White LLP. Reach her at email@example.com or (949) 450-6200.