Paul R. Harvey

Wednesday, 26 March 2008 20:00

Pay it forward

No company is perfect, and, eventually, a big mistake may cost you a big customer. But when you begin losing customers over small issues, it may be a sign that it’s time to revisit your commitment to being a customer-focused company.

When a trend of losing customers develops, many leaders make a beeline for their customer service department. After all, isn’t it responsible for keeping clients satisfied? Not if your goal is to become customer-focused. The best customer-focused initiatives run from the top all the way down, and the speed at which customers run to your competitor is, in fact, directly related to the depth of their relationship with your front-line employees.

“When you have emotional connections with your customers, it really binds you together,” says Kathy Riley Cuff, senior consulting partner, The Ken Blanchard Companies. “And to get that connection, your front-line employees have to be passionate— if you don’t have great employees dealing with your clients, you’re going to continue turning over customers.”

Smart Business recently spoke with Cuff about why every company really is in the business of customer service and, while your products or services may bring customers to your door, how it’s the relationships that keep them coming back.

Is there a growth stage in organizations when customer service typically suffers?

Yes. It happens when a company tries to grow too big, too fast — bigger than its ability to manage the process. You’ve got to do your homework and have a plan.

A lot of successful companies are successful in spite of themselves. You might open up 10 new offices, but if your systems do not support that growth, your internal folks, your employees, are the ones that suffer, hearing the frustrations from external customers doing business with you. They’d like to serve the customer, but the current systems you have don’t support them. You need to set them up for success so they can better serve the external customer.

Can you describe an emotional customer connection?

Here’s a grassroots example of building emotional connections. There’s a little restaurant where I live, with good food and moderate prices. When my kids were young, if the restaurant wasn’t busy, the owner would come over and take my kids and say ‘come on kids, let’s go look at the rabbits out the back door.’ There were probably never any rabbits there, but the owner wanted to give us 10 minutes of peace and quiet at the table alone together.

What happened was, the times we went in and the service wasn’t great or they were really busy and short-staffed, I was willing to make exceptions for that. I even got up and poured my own water. The moral of the story is if you don’t have an emotional connection with your customers, it’s much easier for them to find fault with you.

What is the most difficult aspect of creating a customer-focused company?

It’s getting people to buy in from the top down and then getting them to live it. Top management must walk the talk and really be good role models to the service initiatives. They can’t just say it and go along with it to appease others — they’ve got to be living it day in and day out and promoting the beliefs. Beliefs drive behaviors. For example, if you have a customer service department, everybody in the company may believe that department is the only one that deals with customer service. Instead, you have to get everybody in the organization to believe that it is everyone’s responsibility to deliver service. The other difficult aspect is keeping it front of mind. This shouldn’t be the training program of the month; you should be promoting that: We are going to be a customer-focused company, and we are going to consistently and persistently keep it in front of you.

How can you turn front-line employees into customer-focused employees?

There’s been a lot of research by my colleagues around the leadership profit chain. They found three aspects that make an organization vital, including financial success, employee passion and customer devotion. The results have shown a direct correlation between employee passion and customer devotion and, if you have those two, financial success happens.

Your people need to be asked for their input on things and need to feel like they’re listened to and that their ideas matter. And I’m a true believer that there is very little information that should be withheld from your employees, because you want to create ownership in these folks — you want them to feel like this is their business. An employee who feels valued and supported by the systems is going to be happier dealing with your external customers.

KATHY RILEY CUFF is a senior consulting partner with The Ken Blanchard Companies in San Diego. Reach her through The Ken Blanchard Companies Web site at

Wednesday, 26 December 2007 19:00

Megatrends and monster mash-ups

The New Year is going to be fast, furious and painful for companies that blink. Why? The key components are finally lining up to create the infrastructure for making a top-to-bottom transformation of our business world.

“The emerging megatrend for businesses to meet global competition is to become far more agile and much faster to drive more value to their customers,” says Bill Russell, executive vice president of Allegient. “To accomplish this, companies will have to tie their business goals, as they relate to serving customers, all the way through the enterprise.”

Smart Business spoke to Russell about how to tap the solutions, the processes, the people and the technologies that are emerging to support this new era of speed and agility.

How will business solutions impact the emerging megatrend?

We’re going to see a wave of new solutions this year. They’ll be customer-centric and aimed at generating new revenue or solving a problem or need. It’s not going to be about saving money or cutting costs. You can’t shrink your way to prosperity. It’s going to be around innovation — with a huge emphasis on fast delivery and driving more value to customers. A second mega-area of solutions is going to orient around business process efficiency. That efficiency is going to come from a business being able to tell itself how its processes are operating (i.e. process intelligence) and changing them for optimization.

Finally, a whole host of solutions are going to focus around making knowledge workers more effective or productive in collaborating on solutions, including how to be more creative and how to provide faster answers to business opportunities.

How are processes changing to support this?

Certainly, faster collaborative solutions development is going to occur. We’re going to see new techniques, with more new agile methods and new smaller-scale proof of concepts and prototypes, and types of initiatives that will drive business value faster into the end-user set. Frankly, to manage all of that, we’re going to see big trends around portfolio management, different types of initiatives and how to manage those initiatives, in terms of ensuring that you are executing the highest priority, the greatest speed and the most value.

Will we have to change the way we work?

In this area, the major trend picking up speed is tightening the collaboration between the business and IT sides through new roles to support the more agile processes. You can almost predict the beginning of the disappearance of the separation between business and IT. People have always talked about the business and IT areas within their organization, but really, there is no reason for that. We should be talking about business needs and business solutions that happen to have a set of roles — some from the business side and some from the technical side. Some of the emerging roles will include process engineers, account managers, business integrators, information architects and composite solution architects.

What is being demanded from technology?

Remember, we’re talking about a complete transformation of how we’ve been doing business. First, we’re clearly going to see the examination of ‘software as a service’ or SaaS. The reason for that is because of the lower risk and the speed of deployment in order to get the business value. Business process modeling and management technologies will take a big push forward this year. We’re watching the beginning of a movement toward social software, similar to MySpace, Facebook and Second Life, but for business. The buzzword emerging around this is ‘folk-sonomies,’ which are built on much more virtual, community-based technology platforms to support this more agile, faster and collaborative environment we’re discussing. Portals and collaboration software also are sure to see much greater deployment and emphasis this year. Finally, the services-oriented architecture/composite application technologies will be taking a lot more traction in 2008 because they support mash-ups, which are going to be hot.

What are mash-ups?

Mash-ups bring different information from different sources together and create something new for the value of a customer, executive or knowledge worker. For example, when you Google an address and get a map, you also get other data coming from street addresses and related information. It all gets mashed up before you see it to give you a richer consumer experience. In a business context, I might take data from a manufacturing system about what product has been produced, marry it to the customer data from my customer relationship system, and then I might want to look at my warranty database to see if there were any problems with the product. All of that is mashed up before I see it and before I go in to visit my customer. It’s going to include a portal presentation layer that allows me to request that mash-up in a really snazzy user interface.

BILL RUSSELL is executive vice president of Allegient in Indianapolis. Reach him at or (317) 564-5701.

Sunday, 25 November 2007 19:00

Minding employee contributions

Employee benefit plans subject to the Employee Retirement Income Security Act (ERISA) with 100 or more eligible participants at the beginning of the plan year are generally required to have an annual audit. For some companies, though, this important function can be an afterthought that can later rise up to bite them.

“Many companies view these audits as a commodity,” says Paul O’Grady, partner-in-charge of the benefit plan practice group at Armanino McKenna LLP. “Prudent employers treat them not as a commodity but as an essential component of the organization’s process for monitoring its duties and responsibilities for its benefit plan under ERISA.”

The Department of Labor generally requires an audit for large plans (100 or more eligible participants at the beginning of the plan year). Although, in limited circumstances, small plans may also be subject to the audit requirement.

Smart Business spoke with O’Grady about how taking a proactive rather than a reactive approach to employee benefit audits can turn this required task into an integral part of an organization’s employee benefit oversight function.

What are the responsibilities of benefit plan sponsors?

The primary fiduciary responsibility of the plan sponsor is to run the plan solely in the best interests of the participants and to administer the plan for the exclusive purpose of providing benefits and paying plan expenses. This includes diversifying the plan’s investments to minimize the risk of large losses and carefully following the terms of the plan documents consistent with the provisions of ERISA. Fiduciaries who do not act in the best interests of plan participants can be personally liable to restore losses to the plan and/or to restore profits resulting from improper use of plan assets.

What does the audit encompass?

There are two types of benefit plan audits that can be performed under the current ERISA regulations. The first type, a limited-scope audit, requires that the plan investments be certified as to their completeness and accuracy by a trust company or similarly approved entity and allows the auditor to apply limited procedures to the plan investments. As a result of the limited testing of investments, a limited-scope audit provides less auditor assurance and is generally less expensive to perform than a full-scope audit.

A full-scope audit applies more extensive procedures to the plan investments and includes audit procedures relating to the existence, valuation and completeness of the investments. Plans that are required to file with the Securities and Exchange Commission — generally, plans that offer employer securities as an investment option to the plan’s participants — must perform a full-scope audit and must also file form 11K with the SEC.

What are the pitfalls of treating this audit as a commodity?

Companies may look to the low-cost provider to perform the audit. While cost is an important consideration, experience offering these types of audits, which are very specialized, is crucial and can proactively identify potential problem areas. The Employee Benefit Plan Audit Quality Center of the American Institute of Certified Public Accountants provides an auditor selection tool to help companies choose an auditor.

Plans can run into trouble in areas such as the timely remittance of participant contributions. Participant contributions must be remitted to the plan as soon as they can reasonably be segregated from the employer’s general assets and no later than the 15th business day of the month following the month of withholding. I’ve seen instances where sponsors have been required to remit amounts in the tens of thousands to restore lost earnings to the plan as a result of failing to remit participant contributions in a timely manner.

Additional pitfalls range from problems applying the definition of participant compensation, which impacts participant and employer contributions to the plan, to a lack of understanding surrounding the investment fees being charged to participants. I’ve seen companies pay fines as high as $50,000 per year for failure to comply with a plan’s operational requirements or for failing to administer the plan properly. Misunderstanding the application of these and other rules can become a costly oversight for a company.

How can companies mitigate issues before a benefit plan audit?

Companies should stay current and engaged with their third-party administrative service providers and plan auditor throughout the year to stay informed of problem areas and ongoing regulatory developments, such as the recently passed Pension Protection Act.

Companies can arrange for an operational review, which will take a look at the plan from an operational perspective and provide feedback covering items that need to be corrected. Companies can also utilize technical resources, such as the Department of Labor Web site and the Employee Benefit Plan Audit Quality Center, which are good means for staying current. Finally, plan sponsors should be receiving periodic training on the workings of these plans.

PAUL O’GRADY is partner-in-charge of the benefit practice group at Armanino McKenna LLP in San Ramon. Contact Paul at (925) 790-2766 or

Tuesday, 25 September 2007 20:00

Trade school

When recruiters hit the college circuit in search of America’s most talented graduates, applicants with previous and targeted business experience certainly stand out on their radar.

Enter the development of student managed investment funds, or SMIFs, to help future job seekers better connect business theory with real world practice.

Through SMIFs, “students have the opportunity to apply the theoretical paradigms acquired through their business curricula to the merciless reality of financial markets,” says Dr. Stefano Mazzotta, assistant professor of finance, Kennesaw State University, and faculty mentor for the SMIF. “The skills they develop working for the SMIF will contribute to defining the future leaders of society and are particularly attractive to potential employers.”

Smart Business recently spoke with Mazzotta about how participation in the SMIF is allowing students to more quickly integrate their skills and education with the needs of today’s companies.

How are schools adapting to more closely match real-world demands?

I think from the companies’ perspectives, training is a huge issue. Firms want people that can function in a relatively short amount of time in whatever role they have to take. So, schools need to provide not only a solid education based on life-long, lasting core skills, but also a preparation so that students entering the job market will need relatively shorter training. This is challenging for schools. Real world activities like student managed investment funds are helping to bridge this gap.

What are SMIFs?

Student managed investment funds are a broad type of initiative that provides individuals with experience that they can promptly use and the ability to deal with difficult and technical material. At the same time, these programs promote learning from the humanistic level, including interacting with and leading other people.

The students here at Kennesaw are building the fund as a start-up venture — an actual LLC — with real money to be invested, and the need for management. The Henssler Financial Group donated the seed capital, and we look forward to expanding the network of donors and investors. That’s the beauty of this kind of project: The largest part of the work for the students is to manage themselves and see how their efforts directly determine the growth of the fund.

How will the fund operate?

It will operate like any other investment fund, but students will research companies and industries, write reports and then manage and invest the money. To purchase or sell a stock, students will make a sales pitch to their student body, which will vote for the purchase or sale of a security, at a certain price, in a certain timeline. As the adviser, I will review their motivation and, if it’s sensible and they have done diligent research, I will endorse the transaction. At that point, the investment advisory board, comprised of faculty and members of the business community, will have the opportunity to review the proposed transaction. If no objection is raised, then the trade is executed. However, the investment advisory board and I have an oversight function. We’re more like a safety net. The students should be free to make their own mistakes and take credit for the good things they do. However, we think it would be unfair to let them do this without the opportunity to hear the opinions of more experienced people.

What kind of training do the students receive?

The experience is designed to provide the maximum benefit to students who stay in the fund for the last two years of college. Some groups of students are trained in a more quantitative fashion and look at different companies’ market data using state-of-the-art econometrics software and financial economics models to design allocation strategies with an ex-ante superior probability of beating the S&P 500 benchmark. Some other groups look at investment prospects more from a fundamental angle, examining accounting data, strategy, industry and management, and develop a more traditional stock selection craftsman-ship. This dual approach and the interaction among groups help to broaden their perspective.

How are students selected to participate?

It’s more natural for business students to apply for these types of programs, but we are expanding our horizons with respect to any other student in the university with a strong interest. What makes somebody a successful investor sometimes is not only the knowledge of investing, but also some field-specific knowledge. The student managers also recruit their fellow students to provide new resources for when others graduate. They have to share their learning and coach the next core group of students.

How is the business community responding to the SMIF?

The SMIF experience makes these students a little bit special, and they get more interest from employers. Even though we are a nascent group, we have already had very good responses from employers: Firms such as Morgan Stanley and ING have hired our undergraduates, and one of our graduate students is working in New York as a hedge fund auditor at Rothstein Kass, a well-known accounting firm. We are always seeking new collaboration with businesses that might want to become involved with the SMIF at different levels.

STEFANO MAZZOTTA, Ph.D., is an assistant professor of finance in the Department of Economics, Finance and Quantitative Analysis at Kennesaw State University. Reach him at (770) 423-6341 or

Saturday, 26 May 2007 20:00

The psychology of lease negotiations

Business leases are one of the most important contracts a company will sign. They set out the obligations and rights that will govern tenancy for a substantial time period.

A poorly negotiated lease may result in inconvenience, financial hardship and a disruption of your business. At worst, you could be held captive by a lease if you haven’t carefully negotiated every facet of your tenancy, starting with the rate calculation.

“When shopping for office space and the landlord tells you he is asking $4 per square foot for the space — after you recover — you feel pretty good when the rate ends up being settled at $3.20 per square foot,” says Jason Hughes of Irving Hughes in San Diego. “It’s not every day that you can negotiate a 20 percent savings, so you may feel satisfied with the final number. But what about those ‘something extra’ costs that surface later?”

Smart Business spoke with Hughes about the psychology of landlord negotiations and the importance of professional representation when hammering out a business lease.

How have lease negotiations tipped in favor of landlords?

Five years ago, a landlord hoped to rent out his building for $2 per square foot — and would have given a tenant six months of free rent and a lot of money to improve the space — yet now that same landlord wants $3.50 per square foot with no free rent and half of the improvement money. The economics are nearly three times as good for the landlord, or one-third as good for the tenant.

Where does the psychology come into play?

It can be mentally satisfying when you buy something at a deep discount. Getting a deal is one of the pleasures in life. But some landlord markups are done with the sole intention of ending up at the ‘discounted’ rent price. Should that make you feel good?

Let’s say the landlord is asking $4 per square foot for a space and settles at $3.20 per square foot. Do you feel less taken? Or think of it another way: Would you feel better if most of the other properties nearby were asking for the same rate?

Doing business with respectable people who are problem solvers rather than problem makers is worth a premium. But what if you’re paying premium for a problem maker who also provides poor property management and packs operating expense pass-throughs to their tenants with season passes to the Padres and Chargers as well as cases of wine and Cuban cigars?

What is the basis for the landlords’ rent calculations?

While most people understand inflation, they cannot comprehend the annual inflation levels that commercial property owners incorporate into their rental increases. The U.S. inflation for the last 10 years has averaged less than 3 percent compounded, yet commercial owners have increased rents closer to 15 percent compounded per year.

These extravagant inflation averages make sense to landlords because their math has been reverse-engineered. The landlords pay whatever they need to in order to secure the purchase of the property, then they look back into the rental rates required in order to support the purchase price. Supply and demand, positive or negative net absorption, job gains or losses — those notions don’t have one iota of influence over this rent calculation. These landlords are operating in a vacuum, so why should they be concerned about worldly issues like employment data?

How can a tenant combat this tilted playing field?

The negotiations favor the house or — in this case — the building and its owner. Not unlike Las Vegas, the house wins far more than it loses.

It’s very important for tenants to play the game with all of the advantages available. This is where tenant representatives are invaluable. While they may not have all of the aces up their sleeve, they are able to see the cards being held by the landlord.

For example, regardless of how much a landlord is asking in rent, it is important to know how long the space in question has been vacant. Additionally, is the building well run, and will the tenant actually enjoy being in the building in several years? Or worse yet, does the landlord in question nickel-and-dime tenants to death in order to work his yield?

The way to combat this growing problem called ‘arbitrary landlord markups’ is to be represented by someone smarter, better educated and craftier than the landlords. Office leases are labyrinths of staggering complexity, requiring an expert advocate to protect tenants from being skewered with myriad hidden costs. Tenants often don’t even know the questions to ask, much less the answers. They need competent help.

JASON HUGHES is a principal at Irving Hughes Inc., in San Diego. Reach him at or (619) 238-4393.

Saturday, 26 May 2007 20:00

Knowledge workers unite

Just over the horizon is a new frontier where a knowledge worker’s commute might last only as long as the drive time to the nearest WiFi coffee shop.

The evolving technology to create this oft-predicted “end of business-as-we-know-it” environment is arriving, thanks to cooperation between the software giants and reasonable costs for emerging technology platforms, including portal implementations.

“The next frontier for businesses to raise their performance is to help knowledge workers to be more productive and innovative,” says Bill Russell, executive vice president of Allegient. “Portals represent one of the fundamental enablers for new ways for people to work together virtually in a much more tightly integrated fashion, and far more efficiently and effectively.”

Smart Business asked Russell about how the new portals are advancing collaboration, workflow, and information management, and how companies should be preparing now to step into and thrive in this exciting frontier.

How have portals evolved from their initial applications?

Portals originally debuted as a platform that companies could use to do what I refer to as mass customization, or personalization, of static information. Workers could log in and have delivered to them standard information that was most closely related to their primary job or role.

Now, portals have evolved and are becoming an actual place for knowledge workers completing their work, or at least organizing their work and their collaboration around that work. Work within the portal is not constrained by a person’s title. It can be very specific to the person’s role or contribution on a particular initiative, and the portal presents only the information and the business process piece that is specific to what that person needs to work on for that issue.

How are portals creating all new levels of collaboration within companies?

It’s not as if knowledge workers aren’t trying to deal with their information needs. The problem is that it’s usually through all types of disparate systems or capabilities like e-mail, Web sites, an intranet, document management systems and others. Some consulting firms like Gartner, Forrester, and others now estimate that a typical knowledge worker is spending as much as 50 percent to 60 percent of their day just sorting through emails, different information or document systems, trying to put themselves in a position to deal with a business issue, event, or need.

Portals, in a single integrated environment, can bring together the right people and the relevant information by focusing three elements including the content and information management piece, the collaboration piece, and the business process or workflow piece. The emerging portals pull it all together.

What are examples of projects or events that are best administered through portals?

Procurement crosses all kinds of traditional business functions that typically involve people from across the enterprise. A portal can lay out the procurement process, involve the right individual at the right step of the process, and bring them the information needed to make a choice or to make a decision – or to approve and advance the event. The entire procurement decision process happens within the context of that portal’s system and results in a purchase order through the appropriate vendor.

What process might companies first target when considering an initial portal implementation?

Companies should first consider dynamic and human-centric processes that may happen frequently and are a bit unpredictable and event driven, such as the on-boarding of new employees. A new employee has to get a cube or a desk, plus identification and passwords, employee benefits documents and much more, typically crossing many responsible functional departments well beyond HR. Most companies have very inefficient and sloppy on-boarding programs that make for a poor first impression and high costs. An embedded on-boarding portal application allows the hiring manager to enter the portal to start the process and transaction, and then the company and new employee can work through the different departments who advance the on-boarding of that employee. By the way, if anything, the typical exiting of an employee is usually worse, even more fraught with inefficiency, cost, and now risk for the typical organization.

Have we reached a point where all businesses must implement the new portal technology to compete and survive?

At the end of the day, this is about helping information workers to become a lot more productive. If we are entering a knowledge-based economy, then we’re talking about knowledge workers who have to make decisions every day to help the business or the enterprise operate more productively, and to do that, it’s going to take this type of capability.

BILL RUSSELL is executive vice president of Allegient. Reach him at (317) 564-5701 or

Wednesday, 25 April 2007 20:00

Redefining e-discovery

The days of pen and paper are all but gone as businesses race to implement the latest layers of information technology. Hidden within these layers are electronic documents that someday may become evidence for litigation.

To participate in today’s complex litigation, companies must produce and obtain extensive electronic evidence. As a result, the federal government recently approved amendments to the Federal Rules of Civil Procedure governing electronic discovery.

“The new rules create a process that addresses the need to retrieve, restore or translate electronic stored information before it can be reviewed for relevance or privilege,” says C. Philip Campbell Jr., a partner at Shumaker, Loop & Kendrick LLP. “With the vast amount of business data being stored electronically, it is crucial that all companies implement an organized global document retention policy.”

Smart Business talked to Campbell about the December 2006 e-discovery rule changes and the importance of implementing a global document retention policy.

How do the recent e-discovery rule changes impact businesses?

The updated federal rules define a new category of discoverable information known as electronically stored information (ESI). The new rules also establish the process for the parties and the court to address issues pertaining to disclosure and discovery of electronic information.

The main consideration for companies under the new rules is implementing a global document retention policy that sets out how long information is kept and defines how and when paper documents and electronic data can be destroyed. This is crucial because a stipulation in the new rules includes a ‘safe harbor’ — so if your company instituted and followed a reasonable document retention policy prior to identifying the likelihood of litigation, sanctions are unlikely if information is lost.

How are retention policies implemented?

The goal is to have a policy that allows you to conduct your business in the ordinary course. The first task is to decide what kinds of information should be retained and what kinds should be routinely destroyed. It must also be determined where the retained information will be stored, and who can access it. Companies should appoint either an IT person or perhaps in-house counsel to install the protocols and make sure the retention policy is in place and is periodically audited.

What steps should be taken if litigation is anticipated?

If you identify the likelihood of litigation — perhaps in the form of a letter, a disgruntled employee or certainly if you’re served with a summons or a complaint — you need to move away from your normal retention policies and put into place what is called a litigation hold. This means any information related to that potential claim or litigation should be segregated and protected to ensure it does not inadvertently get deleted or overwritten.

How is e-discovery defined in the event of litigation?

The new rules lay out guidelines for a court-mandated ‘meet and confer’ session (or series of conference calls) where all parties work through and hopefully reach an agreement about how to conduct the e-discovery process, including timeline and what information will be produced. Another consideration is to determine the ‘universe of information,’ or identify where this information is stored. Electronic information spreads far and wide and could be stored on company PDAs, office computers, employee laptops and home computers, or at outside resources.

The use of nonwaiver agreements are contemplated in the amendments. Non-waiver agreements allow parties to conduct a less rigorous privilege review prior to production, and if privilege materials are inadvertently produced, they can be reclaimed without waiving the privilege or confidentiality.

Can e-discovery interfere with normal business operations?

It certainly can, and the rule changes address this concern. The rules separate accessible from inaccessible information. Accessible information is typically data stored on hard drives, backup tapes, servers or hard drives. This is why it’s crucial to have your global retention policies in place, with mechanisms to best preserve information without impeding your ability to conduct business.

What resources are available to assist with e-discovery?

Outside document retention, implementation and forensic resources will provide experts to identify the information, determine what needs to be retained and in what format it should be stored. It may be more economical to tap these resources that are experts in the new e-discovery rules rather than trying to use internal staffing resources.

C. PHILIP CAMPBELL JR. is partner and head of the Litigation Department at Shumaker, Loop & Kendrick LLP. Reach him at (813) 229-7600 or

Wednesday, 25 April 2007 20:00

Renaissance or rhetoric?

A business headline in the mid-1980s read, “Will the last tenant out of downtown please turn the lights out?”

Unfortunately, the creative quip correctly foreshadowed the impending collapse of the downtown office market.

The 1980s concluded with tenants moving out of downtown to cheap alternatives in the suburbs — in concert with the opening of five new downtown high-rises and a horrid recession. The dust finally settled with a vacancy rate approaching 40 percent.

“The subsequent years have brought so much change — and so little change,” says Craig Irving, a principal at Irving Hughes. “A thriving central business district is paramount to the economic, social and cultural fabric of our region.”

Smart Business spoke with Irving about the current health of the downtown office market and where it’s heading next.

What is the current status of the downtown office market?

Downtown’s share of the region’s office market sits at about 15 percent. The current vacancy rate is approximately 16 percent, up from 11 percent a year ago. Factors involved in that increase include People First moving 100,000 feet of space to Texas and smaller tenants moving to the suburbs.

A suburban tenant of reasonable size occasionally moves into the 92101 ZIP Code. American Specialty Health took over the Paladion in the 1990s; Gray Cary later moved into 80,000 square feet; and Eset, a technology company, recently settled into 25,000 square feet. It’s unfortunate there are not more.

How did the downtown office market reach its current state?

Following the mass exodus in the late 1980s, a major imbalance of office space occurred, with more than 97 percent of all new office space being built in the suburbs. Meanwhile, 70 percent of the office inventory downtown was showing its age. Of the 16 business clusters that drive the region’s economy, (including wireless, communication, biotech and defense), only three (government, legal and financial) have a major presence downtown. Further, of the 3 million square feet now under construction in the region, none are downtown. Organic growth of existing downtown tenants has for the last 20 years primarily fueled downtown’s growth.

What factors drive tenants from the downtown market?

Beyond the major business sectors, most tenants are small business owners. After personnel costs, rent is their next-biggest expense. For example, when a small alw firm’s lease is set to expire, the new landlord, who just paid an exorbitant price for the building, plans to raise rent by 40 percent. The tenant does the math and determines it’ll either have to raise billing rates 20 percent to 25 percent or increase work hours by 120 to 125 percent. Neither is a good choice. The third option is to move the business to a location that will afford the company a par (or better) quality of life.

Downtown tenants are also subject to a lack of parking. Very few surface lots remain due to those lots now being filled with high-rise condo buildings. The remaining surface lots charge an arm and a leg and make it prohibitive for employers to offer parking benefits. This impacts employee morale, retention and recruiting efforts.

How does transportation come into play?

Many CEOs reside in Rancho Santa Fe, Del Mar and Fairbanks. The nightmare of the I-5/I-805 merge has influenced some to limit their office space search to anywhere north of the merge. Demographic studies of where all the employees live in the county should be evaluated and considered before eliminating certain geographic locations, but it is rarely part of the process.

Along the way, former city planners who forced developers of high-rise buildings to limit their parking to one space per 1,000 square feet also failed miserably to provide alternative means of transportation for commuters. Had those same planners imposed the same parking regulations on suburban developers, downtown would have held a major advantage because, as bad as it is, it is the hub of mass transit in the county.

How has this cycle forever changed the region?

In 1985, under great mayoral leadership from Pete Wilson, Ernie Hahn opened Horton Plaza. Some said this was a risky endeavor, but the Gaslamp District emerged as a fantastic destination for residents and visitors. Hotels sprung up and the convention center expanded, bringing millions of dollars to our region and billions of dollars invested into downtown’s resurgence. Residential development exploded, and we now have a vibrant central business district.

What is the outlook for downtown?

The downtown office market will always be fickle, but its resurgence provides a glimmer of hope for the future. Meanwhile, South San Diego will continue to build housing for the work force of our county. Downtown is the central location; hopefully CEOs soon will let their workers exit downtown instead of continuing up the I-5 freeway — or better yet, let them take the trolley straight into downtown. Fewer cars on the roads would be great for everyone.

CRAIG A. IRVING is a principal of Irving Hughes, San Diego. Reach him at (619) 238-4393 or

Monday, 26 March 2007 20:00

Fair market value?

The last few years have produced a resurgence of private equity companies investing in start-ups at a more sustainable rate than the late 1990s and early 2000s. A common way for these fledgling businesses to attract and retain top-flight employees is to offer them a share of the company through employee stock options.

But private companies using or considering the use of stock options to supplement employee compensation should be aware that key revisions to the Financial Accounting Standards Board (FASB) guidelines and IRS tax rules governing these options might dramatically impact their current or future stock option programs.

“Compliance with both pronouncements is based upon accurate determinations of the fair market value or fair value for stock options when they are issued,” says Jeff Stegner, a partner at Armanino McKenna LLP in San Ramon. “While this is not a difficult issue for publicly traded companies, the overwhelming majority of privately held companies that are issuing stock to their employees must retain a qualified professional to value these options.”

Smart Business spoke with Stegner about the FASB and IRS rule changes and what they mean to private companies offering or considering employee stock option programs.

What key elements of the FASB and IRS pronouncements impact employee stock options?

For private companies, FAS 123(r) went into effect on Jan. 1, 2006, stipulating that costs related to equity-based compensation be recognized in a company’s income statement. We have received a large number of calls on this issue from companies at the behest of their auditors, who can’t issue their audit opinion until this requirement is completed.

The Internal Revenue Service jumped on the bandwagon in October 2005 and issued 409(a), a measure that requires companies to report compensation to their employees if stock options were granted to them at strike prices below fair market value.

How are these pronouncements prohibitive to private companies?

A private company offering employee stock options must prove that it has set the exercise price of the stock option equal to the value of the common stock. The days when the board of directors could select a price and say, ‘Yes, that’s the right number’ are over. Companies now must either follow a set of specific steps for valuation or hire an independent valuation professional to calculate their stock’s fair market value.

The reason companies are considering employee stock options in the first place is to attract and retain qualified employees while preserving operating cash flow. In my experience, the percentage of companies that have this in-house resource with available time is very small.

Why is it crucial for employees that option prices be properly calculated?

Your auditor will generally require a valuation to verify you have properly recorded the noncash charge for granted options. But — perhaps more important — a valuation can protect your employees from substantial income taxes and penalties if the

IRS determines options are priced at less than fair market value. Obviously, management was handed the largest number of options, so it’s going to impact their bottom line the most.

For example, let’s say the option for the fair value of the stock is determined to be 10 cents. If employees were granted the option at a penny per share, the nine-cent spread is now taxable to them, but what do they really have?

They have an option to purchase shares in a company that is not publicly traded and may never reach a stage where they are able to realize a gain from the options, yet they can be charged current income tax on them even if they never exercise the option.

What does a company gain from a professional valuation of its stock?

No one is interested in what start-ups are doing today; they’re interested in the upside potential next week, next year or in five years. But you can bet that IRS auditors are going to look closely at big, splashy news headlines like Google’s acquisition of YouTube and others.

If your start-up eventually realizes a large liquidity capital event worth many multiples of the original option price(s), the IRS is going to ask how you determined the fair market value of the stock at the time of the option grant and decide if you complied with the 409(a) valuation rules.

What actions should be considered before implementing stock options?

Most important, companies should not be afraid to offer stock option plans. With proper implementation, stock options are the lifeblood for successful companies generating and advancing new technology.

The key to a successful plan is following the rules and utilizing an experienced, independent appraiser to value the shares of your company.

JEFF STEGNER is a partner and head of the ValueNomics Department at Armanino McKenna LLP in San Ramon. Reach him at (925) 790-2692 or

A one-size-fits-all approach to information technology (IT) projects pervades today’s business environment.

This single-model, staff-augmentation mentality can be serviceable, but it can also foster a lack of project planning and focused initiatives.

“Too often, the needs of the day prevail; I call it the ‘tyranny of the urgent,’” says Bill Russell, executive vice president of Allegient in Indianapolis. “Instead of applying a project-oriented focus to maximize outside resources, the resources are expected to walk in the door and simply complete coding tasks.”

Smart Business recently spoke with Russell about alternative project models and how companies can best align internal assets with outside resources to bring about successful IT projects.

What indicators point toward utilizing outside resources?

The first indicator is the most crucial and may have nothing to do with required technical skills. Will the business and technical subject matter experts (SMEs) be available to carry their end of the project? You have to have people on the inside who really know the business process to define what must be delivered.

A second common indicator is that the existing staff doesn’t know about or have experience with a new technology. A third indicator that outside resources may be required is the speed or timing of the project. When projects are sole-sourced inside the company, they often cannot meet the speed requirement because projects often fall to second priority behind keeping the other systems running.

What are realistic expectations for SMEs?

Generally, companies overestimate how much time these subject matter experts can put into an initiative and they under-weight the demand from their daily responsibilities. These people have full-time jobs and they’re going to be constrained. There’s a survey by Forrester that says the biggest hurdle to companies’ IT initiation and delivery is due to SME constraints.

Some companies will utilize dedicated SMEs for certain strategic projects. For other projects, it is reasonable for SMEs to only be available 10 percent to 15 percent of their time — with a maximum of 25 percent — while maintaining their regular job. In high-growth companies, it’s unrealistic to expect an SME to spend more than 10 percent to 15 percent of his or her time on an IT project. This calls for consideration of outside resources.

What other resources should be considered for IT projects?

Companies should realize that all of their existing staff is going to be constrained. Generally, only about 25 percent of a company’s IT budget and resources are dedicated to accomplish new capabilities, so outside resources become crucial to amplify the available in-house knowledge and skills.

Outside resources are going to have the concentrated focus to bring the project together and manage it on a day-to-day basis. There are outside resources for project management, business process and requirements definition experts and development and testing that can be applied.

How are outside resources best aligned with in-house personnel?

A system of ‘shadows,’ or pairs, at the lead positions can be effective. A project manager, lead developer or test manager provided by the outside resource can be paired with and leverage the internal SMEs in these categories. In this model, SMEs can handle perhaps six or more projects, while the external team concentrates solely on the individual project it is trying to deliver. This pairing allows the outside resources to navigate through the company’s cultural policies and procedural items (SME assistance) while focusing on managing the initiative and the resources to get the work done.

It’s also extremely important to align the outside resources with both the internal business and IT project sponsors. This communication triangle ensures that the external resource maintains a tight collaboration between both the business needs and the IT group needs.

A key benefit to alignment is that it helps build knowledge transfer into the project plan. If an external team handles the entire project and then walks out the door, it does not leave the internal team in very good shape to continue to support the platform. A pairing system builds knowledge transfer into the process.

What alternatives to the pure staffing model should be considered?

Projects that are time-sensitive or unanticipated may require an alternative.

One alternative is to consider defining either parts of projects or entire projects so that outside teams can be brought in and held accountable. At the end of the day, inside resources simply cannot be held as accountable as outside resources.

Defining sharp boundaries that include specific requirements, timelines, budgets and deliverables allows the outside resources to focus on completing the project with little day-to-day support distraction for existing systems.

BILL RUSSELL is executive vice president of Allegient. Reach him at (317) 564-5701 or