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Wednesday, 17 May 2006 12:51

Protecting your own

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In light of the recent wave of corporate scandals, directors and officers have come under increased scrutiny. Meanwhile, increased corporate governance, in the form of the Sarbanes-Oxley Act, has had a major impact on their liability. That’s where directors’ and officers’ liability insurance comes into play.

This type of insurance is a wise investment for businesses of all sizes, says Marc L. Seror, vice president of Sander A. Kessler & Associates Inc. “It doesn’t just apply to public companies, but also for many privately-held companies, as well as nonprofits.”

Smart Business spoke with Seror about what types of claims can be made against directors and officers, how companies can benefit from having liability insurance and what types of coverage should be included when purchasing a policy.

What is directors’ and officers’ liability insurance?
It’s insurance to protect the individuals who serve as directors and officers of a company. The duties of a director and officer really include the duty of loyalty, the duty of care and the duty of obedience. A breach of those duties is what leads to a variety of claims. Many times, this type of insurance can also protect the company itself from a variety of lawsuits.

Who can make a claim against a director or an officer?
Most people think only stockholders can file a claim, but actually, any stakeholder can do so. A stakeholder can be a customer, competitor, vendor, fellow board member and even employee. The Tillinghast 2003 Directors’ and Officers’ Liability Survey states that half of all claims made against directors and officers are made by shareholders while a third of all claims are made by employees. Directors and officers of companies experiencing mergers and acquisitions or divestiture activities are more exposed to claim potential.

What kinds of claims are covered by directors’ and officers’ liability insurance?
The claims can include employee discrimination, unfair employment practices, wrongful termination, disposal of corporate assets without regard to the firm’s ability to pay for or secure the company’s debt, violation of antitrust laws, unfair competition and even improper loans made to directors and officers.

How can a company benefit from having this type of insurance?
It gives an organization the ability to attract a director or officer to serve on their board. Without directors’ and officers’ liability insurance, no one in their right mind would accept a position because their personal assets are at risk for the decisions they make as board members. With the new Sarbanes-Oxley Act of 2002, the cost to the individual may actually be higher.

How has the Sarbanes-Oxley Act affected the liabilities that company leaders are faced with?
The Sarbanes-Oxley Act is the legislative response to the financial collapse of Enron, WorldCom and Global Crossing. This [federal] act targets corporate disclosures and it establishes criminal liability for their misrepresentations. The goal is to eliminate the expense abuses, off-balance sheet investing and other corporate misdeeds. It does this by requiring companies to file reports with the SEC which include reports on corporate governance, financial disclosure, auditor independence and even corporate fraud.

Although the law only applies to public companies, some recent judicial rulings suggest the trend toward greater accountability will apply to privately-held companies as well. For example, a recent Delaware court ruling indicated that independent directors could be held liable for deliberate indifference as well as active negligence.

What basic coverage should be included?
When someone is looking to buy directors’ and officers’ liability insurance, the first thing they should look for is coverage that is ‘pay-on-behalf-of’ rather than coverage that indemnifies. Obviously, one would rather have an insurance company pay on their behalf rather than reimburse them for expenses or claims.

A second item is the limit should be sufficient to protect the company’s assets. There should be full coverage for prior acts, and it should go as far back in time as possible. There should be a broad definition of claim, and they should include coverage for the entity whenever it is available. Punitive damages should be included where they are insurable, though not all states allow it. Also, they should have the most favorable venue wording.

What factors are considered when setting a premium for directors’ and officers’ liability insurance?
The premium is a function of several underwriting factors that include the assets of the company, the company’s prior claim experience, any recent activity like mergers and acquisitions, reorganizations or layoffs. Also, the limit of coverage that is selected and the financial strength of the company are factors that are taken into consideration.

MARC L. SEROR is vice president of Sander A. Kessler & Associates Inc. Reach him at (310) 309-2269 or marc@sanderkessler.com.

Wednesday, 17 May 2006 12:34

Michael O. Johnson

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Michael Johnson embodies the lifestyle that his company sells.

The 51-year-old CEO of Herbalife International of America Inc. is an avid endurance sport athlete, and when he’s not participating in a triathlon, Johnson is working to make Herbalife a healthier enterprise. Since coming on board in 2003, Johnson has taken the $1.3 billion company public, managed a major debt offering, conducted a secondary offering and refinanced the capital structure.

Johnson spoke with Smart Business about his changing view on business leadership, the value of experience and problem with charisma.

Develop your vision. We just put together a vision, mission and values for our company. We rolled this out as a program worldwide. Senior management became trainers of this. It’s almost like the Ten Commandments.

They become an operating methodology for the company. We do the right, honest and ethical thing. We make decisions in our work based on facts, not on hearsay. We work hard and hold ourselves accountable. We strive for excellence. That’s part of our value system.

We apply facts. It’s good to have guts, but you need to go back and look at ‘How are we making this decision?’ Everything comes back, eventually, to the core principles of what we have out there.

Trust your gut. I used to think leadership was 50 percent fraternal — getting people to work with you and for you and seeing the vision — and 50 percent technical — some strong skill that you have and applying it to the market. In today’s world, there is a third piece of leadership — guts, an instinct for where you are in a situation with somebody, when to apply pressure, when not to apply pressure, to have a feel for the meeting.

What is that person’s mental makeup for the day? Sometimes you have to talk people off the ledge. And you don’t want to be pushing when you’re trying to pull them in.

Lead with wisdom. There’s an instinctual part of what I’m learning in life, and especially business, that is ... wisdom. You get it over time. There are some great young leaders, but they have some way that they operate that’s very standardized. As you get a little older, wisdom plays a part of it. And wisdom is guts.

Don’t mistake charisma for leadership. We mistake charisma for guts sometimes. People are drawn to (some executives), but they may not be drawn to something in depth.

They might be drawn to something that is slightly shallow. It might be looks. People are biologically drawn to each other by looks or voice or style or clothes. Someone who has a little depth, someone who has been around the block a few times, has a much more powerful presence than someone who just has presence.

Deal with your weaknesses. This is a clich, but it is a strong one: Hire strength to your weakness. It’s something that I’ve employed all my career that has worked out pretty well for me. Time will be the real judge of it.

I didn’t come up through finance or accounting. Had I known what I know now, I’d have gotten a finance degree. Numbers are the core of any business.

I’ve self-educated myself over the years to be as articulate as I possibly can be about financial matters. But this is a world of high finance, especially as companies get larger and get involved in foreign markets and debt markets.

Know the rules. The public company sector in today’s world requires a massive amount of reporting in a massive amount of areas. Areas that you wouldn’t think have public scrutiny now have a major amount of public scrutiny.

Shareholders have a right, and it’s a good right, to know everything about a company. In the past, as a somewhat private company, we didn’t have to have a mass of people doing quarterly accounting for us. We do now. We didn’t have to have ‘Qs and Ks and 8-Ks’ going out every time we sneezed. We didn’t have to be as thoughtful about every statement we made to everybody about everything.

Give back to the community. I’m over that halfway point in life. At some point, you’ve got to start giving back. The sense of the founder of this company was to give back. Even at a young age, he put into place our family foundation with the idea of giving back.

I’m going to measure success in this company on a lot of things. Of course, they’re going to be financial and have Wall Street metrics to them without a doubt. The real success we’re going to have is when people look at the Herbalife brand and don’t have any suspicions. They’re going to say, great products, great people, great company, great community service.

Nobody owns the nutrition brand. ... I want to own it. We want to own the idea that the mission of nutrition is Herbalife.

Learn from the past. Don’t discount any of your experiences. I am constantly amazed how every experience I’ve had in life — I’ve been a paperboy, cut lawns, shoveled snow, ran a restaurant, a disc jockey, worked in the entertainment industry, published a magazine.

There were points in my life when I thought I was not on the road to success. I didn’t have one of these undergraduate, graduate, Wharton MBA to become the CEO. I didn’t have that track. I had a much less typical track.

The more I found out, the more leaders I encounter, most of them did have pretty untypical tracks. There is a misnomer that there is some planned ascension program for people. Take every experience, gather it in and try and find some horizon point on it.

Don’t give up. When you’re working your butt off and toiling away up through some management rank that may be middle management, and you don’t think there’s any big picture beyond it, don’t be so sure that there’s not. Every experience adds value to who you are.

Keep it simple. What’s lacking in business today is simplicity. People are striving to make things complicated when people should be striving to make things simple. Let’s stop impressing people with all the information we have, and let’s get down to the essential points. Then let’s let communication add the things that we’re missing.

We confuse things. We make simple things confusing. Business is not that complicated. It’s usually a product, a process and a consumer.

HOW TO REACH: Herbalife International of America, Inc. (866) 866-4744 or www.herbalife.com

Monday, 01 May 2006 09:40

Exchanging ideas

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Communication is central to our everyday lives. From dawn to dusk we correspond, converse and cajole. Without it, managing, leading and inspiring would be impossible. At the corporate level, having an effective strategic communication plan can make the difference between a thriving business with superb employee and customer relations versus a disjointed operation with no clear mission.

An integral piece of any strategic communication plan is distributing an unambiguous message — both internally and externally — that clearly defines a company’s identity.

“The principle danger of not aligning internal messages with external messages is that the corporation will eventually lose its focus and not operate as efficiently as it should,” says Edward Clift, assistant professor and chair of communication at Woodbury University. “If your messages are not aligned, then your company will be pulled apart by two different visions of itself.”

Smart Business spoke with Clift about how to effectively deploy strategic communication, the importance of valuing employees’ input and how the Information Age has changed avenues of communication.

How can CEOs or business owners effectively use strategic communication to improve the exchange of ideas within their companies?
Strategic communication involves meta-level discourse, or talk about the nature of talk. It is the outcome of a certain way of thinking about communication in an organization; one that sponsors creativity and engagement as opposed to managerial control. I believe business leaders should model strategic communication by actively experimenting with communication processes in the workplace. They should work to enhance the flow of information and learn from obstacles they encounter or frictions they cause along the way.

What are the benefits of having an organizational structure where the input of all employees is valued?
The fuel of a cutting-edge business today, no matter what it sells, is the modern employee who is always on and always mobile. In the search for opportunistic risk, business owners experience the greatest returns when they successfully urge their employees to imagine new possibilities for the world around us. To remain nimble, a firm must encourage a diversity of perspectives, avoid assumptions about its own actions, and take chances on the people it hires. One example of innovative planning along these lines is the use of “unfocus” groups designed to elicit outlying perspectives and possibilities. Methods like this are a testament to the fact that it is really the people within an organization that keep it viable.

How important is it to align internal messages with those that are distributed to the public?
Transparency builds confidence and trust, plain and simple. There is no substitute for the alignment of internal messages with those that are distributed to the public. Cultures are formed as clusters of coherent messages so that a business, like a family, constitutes a miniculture of sorts. Maintaining separate public and private “faces” produces closed cultures that make it difficult to realize one’s maximum potential in the marketplace.

How has the dawn of the Information Age changed communication methods?
Words are falling out of favor, and simple redundancy is no longer enough to capture and hold people’s attention. I recently met a political operative who told me that he must relay political platforms seven different times in seven different ways before people start to listen. Ideas increasingly have to be communicated much more instantaneously and comprehensively through multiple channels and domains of discourse. Internet blogging, political cartoons, and personalized methods of distribution like the iPod all come to mind as stark reminders of how fast the world can change the way it communicates. The Information Age speeds up this process of change by leaps and bounds. However, CEOs seeking to develop usable and stable methods of strategic communication should not rely solely on technological solutions. They should cultivate instead a fluency in communication that will allow them to better manage the sociocultural roles enacted through such technologies.

When a company is reorganized, or if there is a merger, what steps can be taken to ensure that everyone is still on the same page?
It is true that many reorganizations and mergers look good on paper but fall apart in the real world. Changing business culture from the top down is an extremely difficult task. In fact, organizational culture was initially considered to be an obstacle to productivity after a series of controlled laboratory experiments known as the Hawthorne Studies (1931), which simulated a banking workplace environment. It was determined that employees quickly discover a multitude of ways to resist mandates that may be rational, but still negatively affect their deeper sociocultural selves. Leaders of companies going through such changes need to consider how their internal strategic communication decisions impact the invisible social and cultural selves that must also be integrated into the new business form.

EDWARD CLIFT is an assistant professor and chairperson of communication at Woodbury University. Reach him at (818) 252-5197 or edward.clift@woodbury.edu.

Sunday, 30 April 2006 20:00

Standard of care

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Jeff Butler has been a successful entrepreneur since the seventh grade, when he ran his own painting business. The key to his success — both then and now — has been a caring attitude for his customers.

“To me, ‘care’ is what makes the whole thing tick,” says Butler, CEO of Repipe Specialists Inc., a copper repiping company in Glendale. “Everybody in every part of the business cares about what they do, cares about the customer, cares that we give a good, quality product.”

This means Butler and his employees and partners always try to go the extra mile to please the customer and encourage referrals.

“We as the company are in the most control of how many referrals we get,” says Butler. “You have to provide a consistent, high-quality service.”

Butler’s methods have grown his company from $7.3 million in revenue in 2004 to more than $10 million last year.

Smart Business spoke with Butler about his strategies for finding good employees and encouraging referrals.

How does your business model benefit your business and your customers?
What I look for is, how do I get the best quality product to the customer in the most efficient way? There’s two ways to set up a business. [In most cases], the CEO’s at the top, and he’s trying to ensure that all the jobs in his company are going well. Well, there’s no way he can personally oversee all that stuff, so he has to have hired managers and people to do that.

What I’ve experienced, at least in the contracting trade, is the more people you hire and the more people you put between the owner and the customer in terms of that hierarchy or structure, No. 1, the more expensive the job becomes because you have more management. You get top-heavy. And (No.) 2 is, you never get the same quality as if you had the owner out on the job overseeing it because that’s the person who cares the most about the job.

I set my business up where I partner up with guys who own their own [repiping] business ... that are smaller shops. As long as I’m providing and making sure that the jobs are available for them, which I do, they can stay on the job and make sure that the job is going well.

It makes it so that the actual quality of work on each job is attended to by that owner, or at the very least, a senior supervisor.

How do you encourage referrals?
One, you show up when you say you’re going to show up — you’re on time.

We’re doing big jobs. We’re going into a person’s home and we’re opening up their walls, we’re replacing all their pipes. It can be a traumatic experience for these people. We just try to put them at ease by being extremely competent in what we’re doing [and] leaving the house at the end of the day cleaner than when we walked into it.

If we say we’re going to do A, B and C, and we get there and we see ‘We can do A and B, and C’ is not really very possible or it’s going to cost us a bunch more money, it doesn’t matter. We still do A, B and C because that’s what we agreed to do.

Also, we give customers cards that they can hand out to their friends. When that friend gets (a repiping) job done, we send (the person who referred them) $50. We have a tremendous number of people that do that.

How do you make sure you have satisfied customers?
You always verify the work that you’ve done. We call every single customer after we’re done with the job. We have an independent person who does a customer satisfaction survey.

It’s eight or 10 questions, and it goes through everything from the sales process to the repiping to the patching, anything else they want to say about the job. And if there’s anything at all that comes up on that survey from the customer, we go and handle it — immediately.

How do you find employees who will contribute to your mission?
I really have a clear picture in my mind of the type of person that I’m looking for. I sit down and I write down the qualifications of the person that I want for a new position before I go looking for that person.

I look for people who are kind of entrepreneurial in their own spirit and like to have responsibility. You don’t have to tell them what to do at every turn, so it makes for a great working environment.

One of the first things that I ask (job candidates) is, ‘What is it you like to do? What are your own personal goals?’ And I make sure that the position that I’m hiring them for really aligns with what it is they want to get out of a job or what their interests are. ... [Otherwise,] No. 1, they’re not going to succeed at it, and No. 2, they’re not going to have any fun at it.

HOW TO REACH: Repipe Specialists Inc., www.1-800-repiping.com

Friday, 31 March 2006 04:30

Outsourcing IT

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Reducing the amount of fixed costs can work wonders on the bottom line. Usually, however, reducing a fixed cost is a dicey proposition. For example, if you cut payroll expenses, your output might decline. That’s where outsourcing comes into play. With human resource expenses typically consuming the majority of IT budgets, outsourcing some of your network needs might be a smart decision.

“When you outsource, you have a business that charges you only for the work that they do. You don’t have to worry about additional payroll overhead,” explains Hormazd Dalal, president of Castellan, Inc.

Smart Business spoke with Dalal about how to best leverage IT budgets, the benefits and drawbacks of outsourcing, and how to find a qualified technology partner.

Where is the bulk of IT budget spent in a small to medium-sized business?

Clearly, the largest expense is human resources: the cost of the engineers and network administrators that support an IT infrastructure.

In what ways do you think these costs can be mitigated?

There are several skill sets that are required to manage your IT infrastructure, which includes employees ranging from a $90,000-a-year highly experienced engineer down to the desktop-level engineer who may be earning $40,000 a year.

What business owners and chief information officers need to carefully manage is where these resources are spending their time. You don’t want your high-level person running around taking care of small desktop issues. On the other hand, you don’t want your low-level desktop engineers trying to fix complex issues that are related to your server and the basic core of the network. One of the better ways to mitigate this is by deciding what you need in-house and outsourcing the other part. If you are very satisfied with one high-level engineer’s strong skill set, you should outsource the desktop support. Or if you have lower-level engineers who are handling the desktops of a larger organization, you should outsource the core engineering.

How would you define outsourcing, and what are some of the benefits of using this approach?

By outsourcing, I mean hiring a consultant or service company that can come in and handle either your desktop or higher-level support needs. One benefit is that it can be extremely lucrative. When you outsource, you only pay for the actual hours that your support is required for. Another benefit is that there is no risk of network engineers leaving the job and taking all of your intellectual property with them. When you outsource, you are working with a company whose engineers are cross-trained.

When outsourcing, what specific items should be included in a contract?

I don’t think that you should be forced into a long-term agreement. Make sure that your contract is short-term or month-to-month. If you’re unhappy with the company you hired, you should be able to fire them on the spot. Make sure that there is a guaranteed response time to your needs. A contract is just a piece of paper, so I think that the more important thing is checking references. When you’re looking for an outsourcing partner, call companies that they are currently working with and find out if they are happy or not.

What are the drawbacks of outsourcing?

One drawback of outsourcing is that you need to match the company that is coming in and taking over with your culture and application needs. If you’re strongly into ERP (enterprise resource planning) or if CRM (customer relationship management) is one of your major applications, then you want to make sure the company you hire has that expertise.

The other concern is that many business owners feel that they lose control and that their intellectual property can be accessed by outside employees. That’s a distinct risk. You need to trust your network outsourcing company.

How should you choose the right company for your IT needs?

You need to match them with your applications. For example, if you have a wide-area network that’s connected with Cisco routers, then you need to make sure that they have that skill set. If you are a Microsoft shop and your primary servers are running Microsoft Exchange, Microsoft CRM and Microsoft SQL, then hire a Microsoft Gold Partner or someone who has the backing of the software manufacturer and is authorized, trained and skilled in working with these applications.

How important is it to have the support of the manufacturers when you outsource?

It is important to outsource to a company that has access to the support of the software manufacturers. A Microsoft Gold Partner has direct access to top-tier support at Microsoft for mission-critical troubleshooting.

HORMAZD DALAL is president of Castellan, Inc. Reach him at (818) 789-0088, x202 or hormazd@castellan.net.

Friday, 24 March 2006 07:54

Nicholas R. Schacht

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Nicholas R. Schacht’s enthusiasm for the training industry is clearly evident.

“I love the potential of the industry,” says Schacht. “There’s no more fundamental unifying principle across any organization than the development and the continuing improvement of the knowledge and skills of its people.”

Schacht is president and chief operating officer of 32-year-old Learning Tree International, a $151.6 million provider of education and training to IT professionals and managers. Schacht spoke with Smart Business about where to find new ideas, how to share them with employees and how to measure success.

On finding new ideas:
We have a product development group that is, among other things, responsible for keeping abreast of technologies they learn about in the marketplace as they go to conferences or they talk with customers or they talk with instructors. There are a lot of people that are plugged into different things.

From talking with customers, you get interesting ideas. Not necessarily from customers just saying, ‘This is what we’re doing,’ but from customers saying, ‘Here’s a need I have, I wish I could fill it,’ which sometimes give you an idea that this would be interesting or that would be interesting.

You look at your competitors and identify what your competitors are doing, and if it’s worthwhile, maybe it’s worthwhile copying it. You don’t want to violate laws, obviously, from the standpoint of intellectual property, but so much of what we do to improve is based on imitation as opposed to invention.

I advise my people and advise my managers is to read outside of your area, to read about things that have absolutely nothing to do with training or nothing to do with IT or management. Read generally about what different companies do at different points in time. Sometimes you get remarkable ideas sparked. You look at stuff and think, ‘How can this apply to my business, even when, on first blush, it might not appear to?’

On finding new markets:
One of the challenges over the last couple of years — and I’m pleased that we’ve been able to achieve this and make it work and see results, even if we’re not yet where I want to be — is the introduction and building of a curriculum area of management courses where we aren’t a secondary provider but a primary provider.

If you want to be successful in business, you have to be a primary provider. You can’t be dependent on others to shape your own destiny. How do we shape our own destiny? We have to be able to put a product out on the market and then sell that product that doesn’t depend on the next Microsoft release.

What are we good at? We’re good at training and development. We’re as good as or better than anybody else in the field.

Changing the emphasis, in terms of the (product) mix, doesn’t mean abandoning IT training. It means growing other areas. Part of it also has to do with innovation in a couple of different ways. One is innovation in product. Management courses, historically, they’ve all been pretty much the same.

Part of what I’m trying to develop is, what is the better mousetrap for management courses? How do we offer a product that helps people learn better, relates more directly to their real-world environment and is more fun? If we can do that, then all of a sudden we have a market differentiator, which can be a real market buster.

On the biggest challenge for businesses:
As we see an increasing proliferation of technology in the workplace and society, all of a sudden we’ve got this huge amount of knowledge and information that becomes available to people. And the biggest challenge in making any organization work effectively isn’t the application of the technology, it is how do you make knowledge and information available to people so that they can then work smarter in terms of meeting their customers’ needs? That, fundamentally, is what training and development are all about.

On measuring success:
Bottom line is certainly a key way. From the very big picture — the business of business is business. We’re here to make money for our shareholders. If you just focus on the bottom line, you’re still driving blind. You need to look at, what is it about this company that causes us to be successful? What are the key differentiators and drivers for our clients?

If you look at why they buy, they buy because of our quality. I look at, very heavily, our quality ratings. How do our customers rate the quality of our courses? There are many ways to look at the data, but if you look at the data consistently, you do things well and you do things poorly. And you focus on doing things better.

Profitability is another metric that is very important. You can look at aspects of profitability from the standpoint of, how much are you spending to accomplish your current tasks? The answer should never be, ‘We’re doing fine.’ The answer should be, ‘We’re doing OK here, here and here, but we can improve there.’ You always want to look for the areas where you can improve.

Somebody once said, ‘You can’t save your way to greatness.’ You can only save so much, and then you stop seeing your gain. The other question is, what do we look at to believe we’re going to be driving revenue in the right way? The metrics that you look at there are sales volumes and sales activity, which drives sales volumes. There’s a time relationship between making the sales activity, whether it is for somebody on the phone — the number of calls in a day, the number of calls in a week, in a month — then translate that to the number of orders over a period of time, which ultimately translates into people attending courses or revenue in the door.

By managing some of the upstream metrics, we can begin to get a very good feel as for how effective our efforts are and how well the downstream metrics are going to turn out.

On communicating the vision:
Just saying, ‘There’s the vision, go to it,’ is sort of an anarchist’s approach to improvement. Organizations aren’t anarchies; they’re not really even democracies. One of the functions of leadership is to provide that direction while availing yourself of all the information and the knowledge of as many of the people in the organization as possible.

On his role as a leader:
As the leader, I have the luxury and the responsibility, more than anybody else in the organization, of being able to look up and out of the business as opposed to down and back at the current operation and past history. That’s really what my role is, to be looking forward.

HOW TO REACH: Learning Tree International, (800) 843-8733 or www.learningtree.com

Tuesday, 28 February 2006 19:00

Making connections

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When Lee Perlman was a young man working for his father’s chain of electronics stores, he learned quickly that what you sell is important but not as important as how you go about selling it.

After expanding his father’s company into a successful wholesale business, Perlman found himself dealing with a diverse group of retailers.

“The customer was typically in a big city like Miami, New York, Chicago,” Perlman says. “They’d have a photo store or a gift store or something like that. There were different ethnicities of businesspeople. Every group was represented. I got a life lesson very quickly in how to deal with people, how to be courteous and learn from their culture. You have to enjoy their company. That has stuck with me to this day.”

Today, Perlman is CEO and chairman of New Age Electronics Inc., a sales outsourcing powerhouse that provides logistics, distribution and remanufacturing services to consumer technology manufacturers and retailers. The company earned $530 million in 2003, a 50 percent increase from 2002; 2004 sales were in excess of $700 million.

As New Age nears the billion-dollar mark, it’s evident that relationships have had as much to do with its success as hard work and foresight.

“The No. 1 thing as a businessman and as businesspeople we have to do in every industry is earn a person’s respect,” says Perlman, who co-founded New Age in 1988. “You have to be very diplomatic and kind and make them understand how hard you are working. Be there to protect them. If they feel you’re honest and can make a good buck out of it, they will be loyal to you.”

That way of thinking led to New Age working with major manufacturers such as Hewlett-Packard, Canon, Sharp and Panasonic, and retailers such as Wal-Mart, Office Depot and Costco.

Perlman says New Age’s strength is identifying underserved needs and finding innovative ways to serve those needs. However, convincing a billion-dollar company that you can help it achieve greater efficiency and success can be a tricky proposition.

“A lot of people make the mistake of drinking their own Kool-Aid day in and day out,” says Perlman. “They think they are high and mighty, and they’ve got their own answers. Their first instinct is that you’re not believable. They don’t trust you.

“But I try to be very forthright, simple and clear as I’m describing what we can do for a vendor and what we can do for their customer and end user. No more, no less. You get your foot in the door, and you’ve got a start.”

Sometimes it takes a while to get that foot in the door. New Age was mostly handling distribution for Sharp home office products and Packard Bell computers in the early 1990s when, after about five years of trying, it finally got the attention of somebody at Hewlett-Packard.

“I wrote a white paper on how we could sell their fax machines to retail,” says Perlman. “We worked with them and were successful. Getting HP was a feather in our cap. It put us on the radar screen. And each year, HP gave us another opportunity.”

Perlman says that there are two keys to success he’s learned in his 18 years with New Age and his 28 years in the industry: Consistency, and your word is your bond.

Consistency comes from identifying ways to help another company become more successful and efficient.

“It’s not an innate quality,” he says. “It becomes intuitive over time. If you’re in a marketplace and you’re visiting on a consistent basis with your customer, you’ve got your feet on the street and your ear listening to the ground. You’ve got your eyes wide open. You’re getting input from the vendor and the customer. They’re telling you what customers are looking for.

“At the same time, the manufacturer is telling you what they want in the marketplace. You know what could possibly work, and you show them that it would be the logical way. We don’t win at everything we do, but we like to hit a lot of singles. Home runs come, but we like to be consistent.”

Relationships form the basis of a solid business deal, but you still have to deliver on your promises with a business model that works.

From the mid-1970s to the mid-1980s, Perlman helped his father’s company, Zemex, become a national presence with the concept of low overhead, low head count and warehouses in key locations for quick and easy shipment. It’s the same formula he used to build New Age. And though it works together with some of the largest retailers and wholesalers in the world, New Age has just 131 employees and four warehouses.

“We started out thinking we’d have a nice, small business,” says Perlman. “Maybe do $20 million and have a nice living. Don’t kill ourselves.”

But the explosion of products for the small office/home office changed everything as fax machines, copiers and other products began making their way into homes. Soon, Perlman found his business booming as he continued building relationships and identifying ways he could help his customer base. This changed the way he managed New Age.

“In the old days, the one thing I would pride myself on was being a real myopic manager,” says Perlman. “I would look at everything. I was a stickler for the process and dotting the I’s and crossing the T’s.

“But that didn’t allow me to grow, and I got stifled. I realized quickly that it’s people that make the difference. I can’t be all things to all people. I have to recognize my strengths and weaknesses. There are people more capable and qualified to do the things I don’t do best.”

Perlman and Adam Carroll, the company’s president and COO, can’t be the only ones contributing to the cause. New Age needs to have the right management team and employees, people who have Perlman’s and Carroll’s values and drive.

“It’s a very collaborative effort here,” says Perlman. “Everybody has a feeling here that it’s safe to comment and make a contribution. We encourage people to spread their wings and change the process or add a line.

“We set objectives and expectations that can be accomplished. We don’t want to set goals and expectations that can’t be accomplished because that would send a bad message. You have to be realistic, know who you are and that you can’t do it overnight.”

Much of Perlman’s business savvy was forged while working for his father. Being around him, going to meetings and seeing how he interacted with others had a big impact.

“The most important thing I learned from him was that to be successful, you need to be able to ask somebody to do something for you without asking,” says Perlman. “I know it sounds strange, but there has to be a way to have a relationship with somebody and plant a seed so that person has expectations to get something done without you having to remind them over and over again. If you find a way to communicate with somebody on that level, you’ll really accomplish your goals.”

Another important lesson Perlman learned from his father was how to listen. People are always asking you for something, he says, but sometimes they don’t know how to ask it, so you have to listen to what they’re trying to say.

Listening leads to trust. Trust leads to a relationship. And a good relationship leads to success.

“If you’re in business, you need to convince people you’re real and that you will, time and time again, make them money,” says Perlman. “You also need to convince them that you will do whatever you can in your power to help them be successful. If they understand all that, plus the fact that you are going to be successful, too, then nothing can stop you from being successful.”

How to reach: www.newageinc.com

Tuesday, 28 February 2006 12:12

Caring for health care benefits

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Health care costs have been rising at double-figure rates for a number of years. There are a host of factors involved, but so far, few solutions. As a result, many businesses have had to scale back their health care benefits or eliminate them entirely.

Kathy Holmes, vice president and manager in employee benefits for Sander A. Kessler & Associates Inc., is keenly aware of the burden employees face. “The inflation factor is three times higher for health care than earnings over the past 15 years,” she says. “It’s a huge concern and will take a complicated solution to fix the problem.”

Holmes spoke with Smart Business about why health care costs have risen, the best practice to safeguard against higher insurance costs and how changes to an existing plan should be handled with employees.

What are the reasons behind the rising costs of health care?
We’ve summarized what we consider to be the top 10 reasons for the premium increases and rising cost of health care.

  • Increased utilization. There has been a dramatic increase in the use of health care services.

  • Pricing catch-up. Insurers are seeing pent-up demand by providers for increased payments to compensate for past shortfalls in their budget.

  • Expensive disease treatments. People are living longer with chronic diseases.

  • Consumer demands. Many Americans feel entitled to unlimited, unrestricted access to any doctor, technology or treatment available.

  • Pharmacy advertising campaigns. These raise demand for prescriptions that may be medically unnecessary.

  • New technologies. America leads the world in expensive diagnostic and therapeutic procedures.

  • New laws and regulations. State and federal governments are increasingly intervening in health care requiring HMO’s and other managed-care carriers to provide specific specialty and ancillary services.

  • Overcapacity. Research shows that growth in hospitals and medical specialists lead to an increase in medical services provided.

  • Increased lawsuits. Malpractice lawsuits have skyrocketed during the past 20 years.

  • Persistent variation. There is a variation in the type of medical services provided in any given region.

What best practices can businesses use to help control health insurance costs?
The best tool is employee education — teaching them how to utilize their programs better. Although the insurance companies are paying for the services, it is important to be sensitive that there is a cost related to the services. When those costs go up, or if utilization goes up, then the premium is also going to go up. So primary employee education is the best practice.

What advice would you give to businesses struggling to provide insurance benefits for their employees?
The employer needs to look at benefits and payroll as a total compensation package. They should be projecting into their budget what those costs are going to be and integrating those costs into their future business plans in terms of what they may need to do to increase their income to cover these costs and still remain competitive with like businesses.

How should changes to an existing health plan be conveyed to employees?
We find it very effective to do employee announcement pieces. Typically, these show what the previous program covered, and then side-by-side to that, what the changes are so they have a true understanding of what exactly changed.

Also, have group meetings with employees, as well as one-on-one sessions, so it gives them a better understanding of the plan and how the changes personally affect them. With the group meeting, a representative of the health care provider should be present for legal purposes and to make sure that the benefits are represented accurately.

What are some of the pros and cons of managed care versus fee-for-service?
The pro for managed care is cost containment. This doesn’t sound logical when you look at the costs continuing to increase; however, without managed care there would be much higher increases.

For fee-for-service there is a much greater freedom of choice for the employee to go out and receive care from whichever provider that they please. But there is a higher cost affiliated with it.

Kathy Holmes is vice president and manager in employee benefits for Sander A. Kessler & Associates Inc. Reach her at (310) 309-2276 or kholmes@sanderkessler.com.

Monday, 30 January 2006 19:00

The inner leader

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Just because you are successful in business doesn’t mean you know all the answers. In fact, sometimes the key to success is admitting that you don’t know all the answers.

Andrew Cherng knows this as well as anyone.

Cherng is the founder and chairman of the board of Panda Restaurant Group, which includes Panda Express, the fastest-growing chain of quick-service, Asian cuisine restaurants in the country. Cherng has led Panda Express to the top of its industry thanks in large part to the strategic placement of restaurants in malls and other high-traffic areas.

As Panda Restaurant Group, which includes Panda Express, Panda Inn and Hibachi-San, has grown to include 12,000 employees in 37 states with revenue in excess of $750 million last year, Cherng has not only had to change the way he manages his business, he’s had to change himself.

And that, more than his booming business, seems to be Cherng’s true measure of success.

“Perhaps one of the biggest things we are focused on is personal growth,” says Cherng. “How do we help people to become a better human being? If you become a better human being, you are able to do your job better. This approach is new to us, but it is very clear today that we need to do this.”

Cherng accomplishes this by using Stephen R. Covey’s bestseller, “The 7 Habits of Highly Effective People.” The book has become a road map, steering him in what he believes is the right direction for his life.

The book presents an inside-out approach to effectiveness and is centered on principles and character. According to the book, change starts from within, and Cherng took that belief and ran with it.

“Most people get on the physical treadmills, but how do you improve mentally, emotionally, spiritually?” asks Cherng. “The total package. Where do you go to become a better father, husband, human being?

“Like anything else, you need to practice. I think, obviously, one of the reason’s I’m intrigued with ‘7 Habits’ is because some of my habits are not very good yet. There are people doing bigger, better things than I’m doing. Look at Jack Welch. He’s doing a lot, and he is living a full life. What’s my excuse?”

When Cherng and his father opened the first Panda Inn [the sit-down predecessor to Panda Express] in Pasadena in 1973, their lives revolved around the restaurant.

“In those days, it was really like a 24/7 kind of a thing,” says Cherng. “Your whole life revolved around the restaurants. I remember basically you would get up, go to work, come home and go to sleep.

“There were no other things that were near as important. The mindset was that you just have to do this.”

Today, Cherng tries to get away from that mindset and “get a life,” as he says. It’s something he also wants for his employees.

Because of that, employees of Panda Express and Cherng’s other restaurants are asked to attend classes to study “7 Habits of Highly Effective People.” Then, they are asked to put them into practice and teach others. The program has been in place since the middle of last year.

“I think it’s like planting a tree, then giving it time to grow,” Cherng says. “You have to have faith in the system. I feel we’re doing the right thing. It will all show through in the long run.”

Making his employees better has long been a focus for Cherng, who says that when he hires a waiter, he tells himself he’s really hiring a future manager. Nurturing his employees to help them advance in business and in life is a priority.

“One thing I’m in the process of learning is how to be critical without being critical,” says Cherng. “In other words, how can I be critical of something without being critical of the people doing the work? We all have to be good at what we do, but it’s important that we don’t demoralize people. (Being critical) can be a motivating factor or a demotivating factor.”

One of the biggest challenges Cherng faces is finding a way to help people realize they have potential, especially those people who have more potential than they realize.

“Most people can do more if they just think that they are more capable than they give themselves credit for,” he says. “We have a lot of wonderful, hard-working people in this organization, and sometimes they don’t believe in themselves and don’t invest in themselves.

“We are all ordinary people until we find that gift inside that we all have. Unfortunately, most people don’t even open it. I think many people have busy lives and occasional stumbles, and they become somebody that they weren’t intended to be. But some people find that gift one day. I think I’m close to it. At least I’m closer than I used to be.”

Cherng didn’t realize the potential for Panda Express until somebody else steered him in the right direction. In 1983, 10 years after he and his father opened Panda Inn, Cherng was invited by family then-UCLA football coach and family friend Terry Donahue to put a version of Panda Inn in a mall being built in Glendale.

When that first Panda Express did well, Cherng realized that mall traffic [and later, airport, stadium and casino traffic] spelled success for quick-service restaurants.

“It was very accidental,” says Cherng of the origins of Panda Express. “I had never really been to the malls before, at least not in a way where I realized the potential. I never knew about food courts until I was invited to open (the first Panda Express).”

As Panda Express grew, Cherng’s role in the business remained relatively the same. And while he is still very focused on operations, people and real estate, he tries to squeeze more out of his business.

“I’ve always been sort of the visionary and kind of a value keeper,” he says. “I’m the kind of person that will try to get everybody going a little faster.”

While talking about his business, Cherng always comes back to the issue of life and how to make it better. And with that in mind, he started Panda Cares in 1999. The program helps disadvantaged children by providing and aiding local organizations with food and volunteer services.

“That comes from my parents,” says Cherng. “My mother was always helping other people. I think we’re so blessed to have so much. We only do a fraction of what we could give back. But, like anything else, you have to practice. The more we do, the better we get at giving back.”

At 57, Cherng proves that becoming set in your ways doesn’t have to be a byproduct of age. Working on self-improvement and becoming more effective for the future are things he strives for every day.

“‘7 Habits’ is one book I read, but you name it, I read it,” says Cherng. “The more often I go back to it, the better I become. In some ways, I become even more thirsty.

“The most important thing is that we don’t know as much as we think we know. So never stop learning, and be open-minded. Be thirsty. Be curious about any kind of learning. Don’t stop.”

How to reach: www.pandarg.com

Tuesday, 31 January 2006 08:15

Buying in

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With interest rates still hovering near historical lows, it could be an opportune time for businesses to purchase the space they occupy. Not only does owner-occupied commercial real estate safeguard against dramatic rent increases, but it also provides a tax advantage.

“The key benefit is the depreciation. That’s the depreciation you don’t get when you lease, but you do receive when you buy,” explains Joe Yurosek, senior vice president and regional group manager at Comerica Bank.

Yurosek spoke to Smart Business about commonly overlooked real estate financing options, the pros and cons of fixed and variable rates, and why a business that already owns property might want to consider refinancing.

What factors should a CEO or business owner consider when looking at commercial real estate?
No. 1, does the CEO or business owner want to participate in any appreciation of a building which they wouldn’t participate in if they leased it? That’s a principal advantage that should be taken into consideration when deciding whether to lease or buy.

The second consideration is there are some tax advantages, as the building itself is depreciable over the useful life of the asset. The owner gets to depreciate the building and the improvements over the useful life of the building, but they don’t get to depreciate the land. Sometimes it’s critical for an owner to make sure that they secure a location.

When you own a property, you guarantee yourself the security of long-time location. This can be important in certain industries if you are near a port or close to a freeway. Or you might have [invested] excessive costs into a building so you would rather own where you already are than lease somewhere else.

On the other side of that there is the possibility, although in California it hasn’t been too prevalent lately, of price depreciation.

What are some methods that businesses can use to finance real estate?
The most active method used today is where the buyer is required to put down up to 25 percent and then they retain long-term financing for the remaining 75 percent. An alternative product that is really attractive when it comes to current interest rates would be industrial revenue bond financing.

There are also Small Business Administration products that offer benefits as well, including programs that require as little as 10 percent down. Also, everyone should contact their local municipalities, because often they have economic development programs and are willing to pass on financing support by way of low-cost money or loan-guarantee programs.

You mentioned industrial development revenue bonds. What types of businesses can benefit from this financing method?
There are some limitations on eligibility. Usually you have to be a manufacturer, but you can also be a nonprofit organization.

The buyer will be utilizing the credit strength of the bank or financial institution that issues the letter of credit support for the bonds. The bank then takes a deed of trust of the subject real property.

What are some factors that a business should consider when deciding whether to use a fixed or variable rate?
The buyer’s tolerance for risk is the key. When you choose a fixed rate versus a variable rate, you are hedging against increasing rates. If they don’t go up, you may be better off with a variable rate.

If you are inclined not to take risks, or if your business doesn’t support potential interest rate risk in the future, most people choose to lock in and know what their rates are.

Alternatively, variable rates allow for repayment flexibility. Some people like to pay off their loans early. By not locking in, it gives you flexibility to make early repayments.

What advice would you give to a business that wants to refinance the property that it already owns?
Today’s rates are at historically low levels, so a business with a variable rate might want to lock in and reduce future interest rate risks. It’s a very good time to lock in and move from variable to fixed.

Some owners are looking for additional funds. If they already own the property, this could be a good time to cash out by refinancing the building and using the cash proceeds to reinvest in the business. Refinancing is an alternative to selling a building if you need capital.

Joe Yurosek is a senior vice president and regional group manager at Comerica Bank. For more information, visit www.comerica.com.