The difference between generally accepted accounting principles and the Hollywood version, says Marcia Harris, a partner in Alschuler Grossman Stein & Kahan LLP’s Entertainment & Media Department, is significant. “In studio accounting, it’s whatever the contract says,” she explains. “They are not in any way limited or hampered by generally accepted accounting principles.”
Smart Business spoke with Harris about how movie studios benefit from this practice, some of the legal issues that are raised and how disputes are settled through arbitration.
What does Hollywood accounting consist of?
It consists of whatever the contract says. Most of the studios have definitions of their profit participations, whether you call them adjusted gross, contingent proceeds or however you define it.
There are 20- to 30-page definitions that describe how the studios will account to participants. It has nothing to do with generally accepted accounting principles, it has to do with what the parties negotiate. Unless you are a very heavy player you don’t get too much chance to negotiate many protections in those definitions.
How can a movie studio benefit from this practice?
They can assess expenses to a film or television show that more properly would be part of the studio’s general overhead in operating as a studio. If they can charge it off to a film or television show, that takes it off of their financial statement.
They can create fictions, where instead of reporting all of the revenues from the distribution of home video or DVDs, they pay a royalty from one of their entities to another entity. Thus the participant only participates in the royalty, not the full pot of revenues.
In the studios that have multiple distribution channels and production channels, they can deal with each other and manipulate the license fees among their affiliated entities so that the participant receives less revenue than might otherwise be the fair market value.
How can players in the business secure agreeable contracts from studios?
If they can get a deal that is pure gross or a gross at the source deal, that is the way. The more attenuated you get with distribution fees, distribution expenses and production costs, that just leaves more areas of potential abuse.
The first thing they can do is try to be very successful so that they don’t have to worry about some of the usual manipulations. Also, they should have good representatives that know what they’re doing when they’re negotiating these agreements, because the more protections that they can negotiate in, the fewer problems there will be down the line.
What are some legal issues that are raised by this accounting method?
Breach of contract is one of the usual claims. In the last few years, whether or not a distributor owes a fiduciary duty to participants has been litigated.
In a case that went up to the Court of Appeals, Gary Wolf vs. Disney, having to do with Who Framed Roger Rabbit, the court found that there was no fiduciary duty between a participant and a distributor in arms-length transactions. However, they said if the relationship between the studio and the participant was akin to a joint venture, then they may find a fiduciary duty.
Another claim that is litigated frequently is the implied covenant of good faith and fair dealing, which basically alleges that the studio denied the plaintiff the benefit of his bargain.
If a case goes to an arbitrator, what does the arbitration process consist of?
It’s as varied as there are arbitrators. I had one arbitration that was supposed to last three days. Instead we had 21 days of testimony and it lasted for (more than) two years. Other times it’s much speedier.
The studios have, in the last few years, tried to get their participants to agree that if there is a dispute concerning participation accounting, it goes to arbitration to avoid a jury and avoid all of the discovery that you would be entitled to in court. Most arbitrations for studio accounting have to do with whether the studios are self-dealing among their affiliated entities.
How has the advent of DVD sales and rentals affected Hollywood accounting and the studios’ revenue models?
It has certainly added to their revenue streams. DVDs, have in many instances, generated more revenues than a film’s theatrical distribution. They’ve also distributed DVDs of television shows like the entire Sex and the City series. These revenue streams continue to be extremely important to the studios, and to a lesser degree, the participants.
Marcia Harris is a partner in Alschuler Grossman Stein & Kahan LLP’s Entertainment & Media Department. Reach her at
But a stealth spyware program can be the most dangerous. Quietly embedded, a user might not even be aware that a hidden program is recording passwords and other confidential and private information.
Like viruses, spyware programs mutate at a swift pace. Fortunately, protection for computers has evolved as well. “Spyware is now recognized as a threat and protection is available through enterprise level software,” says Hormazd Dalal, president of Castellan Inc.
Smart Business spoke with Dalal about the malicious nature of spyware programs, the importance of businesses protecting themselves from spyware and the transformational nature of viruses.
What is spyware and how does it differ from viruses?
Spyware is a malicious code designed to monitor activity on a computer. Examples of this include basic monitoring, and the more malicious key loggers, which means that the perpetrators write a program that sits on the computer and then logs your keystrokes. This means they could log passwords that you are typing in, or your credit card/social security numbers, etc...
Basic Monitoring spyware is more annoying than malicious. They record what you do, how long you spend at each site, and then they force pop-up ads on you. Generally, its used by marketers, but it can plague a computer because it spies on the way you’re working.
Viruses, on the other hand, are in a different category and they are written to do damage on your computer. Spyware is different from viruses but equally malicious.
How have malicious threats like spyware and viruses changed over the years?
Spyware is relatively new. Computers have started to get infected by it over the last 18 months to two years. Just like viruses, new ones are written every single day by somebody out there with different objectives, from making sure that you go to a certain homepage to tracking where you’ve been, to sending pop-up ads to you.
How can a business protect its network from spyware?
Just like with viruses, when they first came out, there were standalone tools to help with protection. Now most businesses are well-protected from viruses because they have enterprise-level monitoring and management services.
These services check viruses before they come into a network and monitor the virus definitions on the work stations centrally, so you can look at one computer and do a sweep of the entire network.
Likewise, there are some manufacturers making very good enterprise-level spyware protection. This software sits on the server and deploys the latest definitions through every workstation in the network and implements levels of spyware protection from making sure that your homepage isn’t hijacked to making sure that something isn’t added to your startup programs.
How important is it for a business to protect itself against spyware?
As important as protecting yourself against viruses. In fact, possibly more. Because without it you risk having identity theft and your computers can slow down and freeze. And of course, pop-up ads can become an annoyance and reduce productivity.
How does a business know if its computers are infected with spyware?
Invariably you will go to your homepage and you will find that it has been hijacked and you’ll be getting pop-up ads. But in some cases, you don’t know because it’s just logging everywhere you’re going on the Internet and it’s not taking up (many) resources.
With a slow PC you can tell. Fast PCs just manage to let that process run. With a serious infection the user will know about it but might not notice a minor infection.
What steps should a business take if it is infected by spyware?
There are several removal tools available. Typically, you need a professional or an IT person to come in who knows how to run these tools. Sometimes systems need to be brought down into safe mode before they can be cleaned up.
In some very, very extreme cases, the computer needs to be rebuilt with the software being reinstalled. This is a last resort, which is both expensive and time consuming, which is why the protection is so important.
Hormazd Dalal is president of Castellan Inc. Reach him at (818) 789-0088, ext. 202, or email@example.com.
Then, in the 1990s, ValleyCrest saw an opportunity to enter the golf world.
“The golf business was just another niche business we saw an opportunity to get into,” says Richard Sperber, president and chief operating officer. “Golf courses have really smart operators who are worried about how to get more people to play. They weren’t as competent in how to make it look good. It was just a niche we found.”
Today, the company builds and maintains landscapes for everything from private residences to hotels and resorts to theme parks. The $700 million in revenue it did in the 2004 fiscal year was a 12.9 percent increase over the previous year.
“I really got involved when we were doing $100 million of work,” says Sperber. “Then we hit $200 million and we thought we were going along pretty good. When we hit $400 million, we said, ‘Wow, we’ve really become larger than we’ve expected.’”
ValleyCrest tried to go public in the 1970s, when it was worth just $10 million. But it didn’t work out and the owners bought back the shares.
“Our type of company is more long-term,” says Sperber. “Everything we do is for the future. When you go public, everything you do is for the next quarter.”
“The key,” says Don St. Clair, vice president for marketing and adjunct faculty member of organizational leadership at Woodbury University, “is you really have to know your organization. Organizations are living, breathing entities and they all have different personalities and propensities to absorb change.”
St. Clair spoke with Smart Business about how change should be communicated to employees, the importance of acting swiftly yet compassionately and how organizational change can lead to innovation.
What are the basic principles of organizational change?
I think of three things: the change should be intentional and purposeful, it needs to be well-planned and it needs to be well-communicated. Members of an organization should be afforded the opportunity to understand what’s happening, why it’s happened and how it’s going to happen. That really creates the best opportunity for the acceptance of change, and hopefully buy-in. We want people to accept the change as a minimum and what we’re really hoping for is for people to embrace the change.
How should a business owner communicate to his/her employees that there will be an organizational change?
Very directly, first of all. We hear that information is power, but information is also medicine. The more organization members know, the more they are able to process, reconcile and embrace what’s happening.
They need to understand the necessity of change and the benefits of change, or the consequences of not changing. And we can’t just say it once. Think of it as a good advertising campaign: you have to hear a marketing message, depending on whom you ask, seven to 12 times before you really get it. It’s the same thing with communications in a change situation. People have to hear repeatedly what’s happening, why it’s happening and how it’s going to affect them.
The other thing is that the minute change begins, rumor begins. The only way to mitigate rumor is to continue telling the truth so that people are able to hear what’s really happening and recognize rumor for what it is.
How important is it for employees to feel like they have a defined purpose and role to play in the change?
It’s vital. The first human reaction whether it’s from the oldest, most senior staff member or the newest, most junior staff member is, ‘How does this affect me?’ Buy-in or acceptance is more likely to occur if organization members understand their role.
Change is stressful, so understanding how one fits into change reduces that stress. In some cases change has an adverse effect on an organization member. That organization member’s role may change in a way that they’re not comfortable with or their role may be eliminated.
When change is going to have an adverse impact on members of the organization then that has to implemented very swiftly and very compassionately.
It has to be done in a forthright and honest manner because other people in the organization are going to be watching how you treat the people who are coming out on the short end of this change stick. They’re going to know in their hearts that if they’re ever on the short end that’s how they’re going to be treated. That’s going to impact their morale, loyalty and productivity to the organization.
Once a change is in place, how can a business owner measure its effectiveness?
Metrics need to be established up front, before the change is implemented. You need to identify why you’re making the change, identify the outcomes you want and how those outcomes can be measured.
Those outcomes may take many different forms. It can be productivity improvement, customer-service improvement, cost-structure improvement the list of potential benefits from a given change is endless. More qualitative outcomes like improvements to morale or teamwork are much harder to measure. Outcomes of qualitative nature really require the executive to be in touch with his or her organization in a very personal way.
The key is to identify your desired outcomes in advance, determine how they’ll be measured, set a time frame for when you’re going to measure and then just do it. There will be different metrics and different measurements depending on the organization and the situation.
How can organizational change lead to increased innovation?
Increased innovation must be the purpose for the change. If that’s the case, you’re going to want to engineer change designed to open creativity and encourage experimentation in your organization. Innovation tends to come from consistent effort, constant questioning and the willingness to make mistakes. Careless mistakes can’t be tolerated, but the only way to never fail is to never try. So a company with a never-fail culture will find it very difficult to innovate.
Collaboration is very important to a healthy organization. Bringing divergent views of a problem or market opportunity is a good way to seed innovation. However, when collaboration requires consensus building, innovation may suffer. At some point innovation requires decisive action.
Don St. Clair is vice president for enrollment management and marketing at Woodbury University. He is responsible for the recruitment of students and overall university marketing. He also teaches teaches regularly in Woodbury’s innovative Masters in Organizational Leadership program. Reach St. Clair at firstname.lastname@example.org.
The value that intellectual property provides shouldn’t be viewed strictly in revenue terms. It can also serve as collateral to secure various types of financing. Of course, lenders require legal documentation to prove that these assets are indeed proprietary.
“If a business is interested in leveraging its intellectual property by offering it up as collateral for a loan,” says Bonnie Kehe, the senior vice president and regional managing director for Comerica Bank’s Technology & Life Sciences Division, “that business owner should ensure that it is properly patented, trademarked, copyrighted, etc.”
Smart Business spoke with Kehe about how value is assigned to a company’s intellectual property, the steps that a business should take if it’s interested in securing a loan with these assets and why an increase in this financing option is a good sign for the tech sector.
What types of businesses tend to use intellectual property as a financing option?
Businesses that have a valuable portfolio of intellectual property. A software company, for example. A medical device company, where the technology is their own, and they’ve actually designed and developed the product. Most companies have some sort of intellectual property such as trademarks. Also, there can be value in a branded name, which is intellectual property.
How do you assign value to a company’s intellectual property?
It’s typically a subjective valuation and it’s based on a variety of factors. For example, if you can project future cash flows based upon the sale of a product that is your own, like software, then you can come up with a value of that intellectual property.
In the situation where a company has institutional investors, like venture capitalists, then the investors have likely assigned a value to the company in connection with a recent financing.
The third way would be independent intellectual property appraisers that institutions hire to value a company’s intellectual property portfolio. Again, the valuations are based on a lot of different matrixes, including discounted cash flow.
How important is it for CEOs or business owners to look after intellectual property not only as a legal asset, but also as a financial asset?
If the company is planning on leveraging the intellectual property portfolio, or if there is intellectual property that is integral to its business, than it’s very important. The CEO or business owner should ensure that it’s legally registered and properly protected.
What are the first steps that a business should take if it’s interested in securing a loan with intellectual property assets?
There has to be some matrix for assigning some sort of valuation, even though it may be a very subjective valuation. If it’s just a brand name that the company is looking to leverage, there are some lenders that will lend against brands. What’s key for other lenders is that the intellectual property is adequately protected it’s registered, it’s patented.
In the case of software, it needs to be not only copyrighted, but also registered with the Library of Congress. So there is a two-step process with the registration and copyright of software.
Also, the business should work with intellectual property attorneys, because there are a lot of law firms that have special practices specifically related to intellectual property.
How common of a practice is it to lien intellectual property when making a loan?
In middle-market lending it is not terribly common. It is very common if a financial institution is banking a technologically driven company, meaning a company that is deriving a part of its revenues from its intellectual property.
Do you expect to see an increase in using intellectual property for financing options?
We hope so because it’s indicative of a strong technology market. With the dot-com bust, the entire tech sector was in a trough from 2000 to 2003, 2004, and we’re now just beginning to see some activity. The sector is here to stay.
It’s the future, both on the life sciences side as well as the information technology side. We would hope to see continued growth in the financing of tech companies. A lot of it is going to be an economy- and industry-driven phenomenon.
Bonnie Kehe is senior vice president and regional managing director of Comerica Bank’s Technology & Life Sciences Division. Reach her at (714) 433-3266 or email@example.com.
Body by Jake Global Chairman Jake Steinfeld was thrilled to be asked to speak at the Stanford Graduate School of Business Entrepreneur Club. His excitement was short-lived, however, when he learned that Berkshire Hathaway’s Warren Buffett was speaking at the same time.
“I got that phone call would I be interested in making a speech,” recalls Steinfeld. “I said I’d love to.”
As the event neared, event organizers told him how excited everyone was to have him.
But when he landed at the San Francisco airport, something about the men who came to pick him up made him uneasy.
“Fellas, what’s up? If something’s going sideways, just let me know,” Steinfeld said to the pair.
“They said, ‘Jake, do you know who Warren Buffet is?’”
“Yeah, sure I do,” he told them.
“Well, Warren makes these drive-bys at Stanford ... ”
“And he’s going to be there today,” Steinfeld says. “And he’s going to be there when I’m speaking.”
They said, “Yeah.”
I said, “What’s that problem? I’m going to his speech.”
When the car arrived at the campus, Steinfeld’s mood was only slightly eased by the beautiful surroundings.
“We got to the school,” he says. “Inside I was kind of bumming, but you’ve got to keep your game face on. Whoever’s going to be there is going to be there. We’ll have a great time. We parked the car, walked around, walked to where the business was and then walked to this lecture hall that was just teeming with people out the door.”
“‘Mr. Buffet, huh?’” Steinfeld asked.
They said, “No, that’s where you’re speaking.”
Steinfeld was elated.
“It was just dynamite,” he says. “The day was one of those days you just wanted to bottle. The speech went off great. The students were fantastic. The questions were as pure as pure could be. What I mean by that, (the students) were more interested, more fascinated or more concerned not with successes I’ve had in my life but how I was able to overcome failure.
How was I able to overcome a challenge, someone telling you no? You don’t learn that stuff in school. Someone can talk to you about getting punched in the face, but until you experience it, how are you going to react?
“I just thought it was a very intriguing and very interesting afternoon.”
Steve Kessler, CEO of Sander A. Kessler & Associates Inc., believes a well-crafted disaster plan is the key to ensuring a businesses’ survival in the wake of a catastrophe. “The best thing to do is to keep the business operating. The best way to keep the business operating is to have a disaster preparedness plan. By keeping the business going, I keep my customers, and if I keep my customers, I keep my employees,” he explains.
Smart Business talked to Kessler about creating a disaster preparedness plan, the importance of backing up data and the virtues of business interruption insurance.
Both man-made disasters and natural disasters can cripple a business. How can being proactive and preparing for the worst-case scenario help a business reemerge from a catastrophe?
It can mean the difference (between) being able to go back into business or not recovering at all.
Having a solid disaster plan in effect might put you in a position to not only reemerge from the disaster more quickly, but also attract business from competitors who were not as well prepared. While they’re still trying to figure out what to do, you’re already back in business and providing products and services to not only your customers but their customers, as well.
When formulating a disaster preparedness plan, what steps should a CEO or business leader take?
They should ask themselves the question what if? What if it is a fire within their own locale? What if it is a quake or a flood that affects the whole city? Can they operate from another location? Can they get their equipment? How do they communicate to their customers that they’re still in operation? How do they get their power and their water?
It is important to ask these questions. And they should not do it alone, they should include the strategic people in the organization because multiple heads are better than one.
What type of information should be included in a crisis communication plan so that a business leader can stay in touch with their employees if a disaster strikes?
Number one, you should create a telephone tree so that there is a process where people within the organization can contact all of the associates or employees and notify them of what the plan is. All of the owners, leaders and managers should have a copy of the plan along with their areas of responsibility. The associates don’t have to have a copy of the plan, but they should be aware of it and know what their responsibilities are, if any.
How important is it to back up computer data frequently and keep a backup tape off site?
It’s critical. In fact, it’s so critical that we have three layers of redundancy. We use a service in Calabasas that has two servers constantly replicating our data. We have backup tapes that go off site daily to a local storage facility. Then we have weekly backup tapes that leave the state and go to Arizona.
Without data you’re finished. Whether it be customer based information, accounts receivable or accounts payable, this information is critical.
What advice would you give about obtaining business interruption service?
This is the single most overlooked area of insurance. Business interruption covers continuing expenses, the profits you would have earned had the disaster not occurred and salaries of key personnel. Without it most businesses don’t the have the financial means to cover these three critical items.
People think they’re going to be back in business in a couple of months, but if your building goes down it will take three months just to secure permits. Then you have to build.
And if you have a natural disaster, everyone is scrambling for contractors and permits so you’re going to be down longer than you thought maybe up to a year. If you don’t have this type of insurance, you might never get back into business because you will lack the financial resources.
What are some other types of insurance coverage that should be in place?
You need to always insure your property to the full replacement cost value for building, inventory and equipment. If you’re in a flood plain, such as our recent situation in Louisiana, you need to carry flood insurance. If you’re in an earthquake-prone area such as California, then you need to carry earthquake coverage.
Also, the policy should contain building ordinance insurance which covers demolition costs, increased costs of reconstruction and any loss of value of the undamaged portion of a damaged building. At the time of a loss, no one ever complains that they have too much insurance.
Steve Kessler is CEO of Sander A. Kessler & Associates Inc., a property and casualty insurance and employee benefits firm. Reach him at (310) 309-2200 or firstname.lastname@example.org.
Of course, a product or service that may be essential for one company might not be for another. “Every business has different needs,” explains Hormazd Dalal, the president of Castellan Solutions. “One company’s frivolous purchase could be another company’s need.”
Smart Business spoke with Dalal about distinguishing between the frivolous and the essential, what types of warranties should be purchased and the importance of network security.
Business owners face a wide array of choices when buying IT equipment. What advice would you give them about making efficient purchases?
For computers themselves, buy from one reputable manufacturer. Try and buy servers and work stations from the same manufacturer so that you build a relationship with that manufacturer, and across the board, you have the same hardware.
The concept is generally not the same when you are purchasing network infrastructure items like switches, firewalls, spam appliances, network storage, etc.... In those instances, one manufacturer may make a great firewall, but a horrible switch.
I would recommend finding a reputable IT solution provider to get advice before purchasing network infrastructure equipment. Getting the right mix of infrastructure equipment can be crucial to both stability and expandability, which is where your IT provider becomes an invaluable partner.
What types of warranties should be included?
On servers, which are normally mission-critical, always buy the best. Buy a four-hour response time. Typically, if you have a mail server go down in a 100-person company, that means 100 people can no longer communicate with each other or the outside world.
On the other hand, if a workstation breaks, then only one person is affected, not the entire company. So a lesser warranty is adequate, like a next-business-day response time. If you have an IT department or work with an IT support company, you generally don’t need to buy the software support warranties. These typically cover the operating system, which is configured and maintained in-house.
If you buy software that’s proprietary or custom-made, then you want to buy a support warranty. These contracts become invaluable in the event of a higher-level configuration issue providing support to your IT department.
How can a business owner distinguish between the frivolous and the essential when spending their IT budget?
Decision makers need to break down the employees’ habits, look at the work flow and determine what is really a need and what is just a want.
There may be somebody who says that they need to have the latest version of Microsoft Office. It turns out that this person just uses e-mail, and barely knows how to use any of the advanced word processing features. That would be a frivolous purchase.
Every business will face several needs, however. Security patches need to be delivered automatically to all computers. The best anti-virus and anti-spyware protection available is crucial. The most important need of all, however, is a proper backup solution with off-site storage capabilities that you utilize on a regular basis.
Technological advances drive the computer industry. How important is it to update products to keep up with competitors?
You should update your products to stay on the cutting edge of security patches, vulnerabilities, and in some cases, just so you can continue to get support. If you’re running an old piece of software that keeps crashing, then go ahead and spend the money to upgrade because it will bring you back productivity returns.
On the other hand, if your software is doing what it is supposed to, it meets your business needs and is doing so in a stable manner, then don’t spend the money just for the sake of upgrading.
Some companies are hesitant to improve their network security due to cost. In the long run, do you believe the savings associated with avoiding breaches outweigh the upfront costs?
Absolutely. The argument against this question is that people say, ‘My intellectual property is valuable to my company, but if someone steals it, it doesn’t really matter.’
What these business owners miss is that if a competitor wanted to get in and get your intellectual property, then basically you’re at war. Who wouldn’t want protection in a battle?
What they also fail to realize is that they need to be protecting themselves from the kiddie hackers, the people who aren’t interested in the data. They’re just interested in the challenge of breaking in and bringing a system down. They wouldn’t even know what to do with your data, but the harm that they could cause in nuisance value is what you need to protect yourself from.
Hormazd Dalal is president of Castellan Solutions. Reach him at (818) 789- 0088, ext. 202 or email@example.com.
In 2000, Schmitz formed his own private equity firm. In 2001, he orchestrated a merger between KPMG’s national finance and accounting business process outsourcing (BPO) practice and accounting firm itAccounts, forming Outsource Partners International Inc. (OPI).
The deal stipulated that Schmitz join OPI as chairman and CEO.
During OPI’s first year, revenue was $2.6 million. By 2003, revenue had grown to $26.8 million, a 941 percent increase from 2001. OPI’s growth slowed in 2004, with $28 million in revenue, but Schmitz expects that 2005’s revenue to be about $40 million.
Smart Business spoke with Schmitz about how he runs a rapidly growing business with 800 employees across two continents.
How do you communicate your vision to employees?
First, there is an internal monthly newsletter where we try to communicate pride-building, things about culture, what’s going on in the business and where we are heading. I have a lengthy column in that newsletter that talks about how we’re doing and opportunities for our people.
I also have a fairly broad-based conference call once a month with a large number of our leaders probably the top 25 people. We spend at least an hour or more each month talking about what’s working and what’s not.
I also travel a lot. I travel every week somewhere. I go to India twice a year we have over 600 people in India. I break them down into groups of 30; I take an hour with each group. I give a presentation about where we are and where we are going and, most important, what opportunities exist for them.
Then I entertain questions.
How does fast growth help with employee retention?
We are very unique. And what I promote is not so much the money, because at the end of the day, I don’t believe that money itself is all that much of a retention device.
I promote career advancement. I promote the idea that if people wish to pursue a career in accounting, we offer a very unique opportunity for them. With us, because we are growing so rapidly and because we have such a nice portfolio of clients, people who join us enjoy a very unique career opportunity.
They enjoy career advancement as we grow. They pick up additional responsibilities without having to wait for someone to die, retire, quit or get promoted.
They get to see a large number of different companies. We can rotate people from client to client. They can experience different things and add to their knowledge base. The career opportunity we offer is the No. 1 thing that causes people to be attracted to us and stay with us.
What obstacles have you had to overcome with such fast growth?
The challenge is always managing the various aspects of your business. In our case, I can divide that into, how many people do we have at any one time standing by, preparing for the next client in India? How many people should I have in my sales and service group? How do I balance that versus the India head count?
And then there is infrastructure. As you grow rapidly, some of the systems you used back when you were a $5 million company no longer apply. You have to really expand and upgrade. It’s more than just adding servers and spending money. It is building out that infrastructure that enables people to readily communicate.
Balancing the infrastructure build-out and the ever-changing need for more sophisticated infrastructure, along with my sales and service personnel, along with my India personnel, is a challenge.
Those things can get out of whack pretty quickly. And once they get out of whack, you have a problem, because they can’t be fixed overnight.
How do you continue to improve your business?
I always believe the old adage, ‘That which is measured gets improved.’ So we drive our improvement by measuring the things that we want.
We have a client-satisfaction survey. We also have Web-based tools that enable us to monitor our group on various functions. As we monitor and measure those types of things, we learn both what our clients are expecting of us and we learn from our mistakes. The way to be successful in business is to learn from your mistakes.
The 90-day challenge is a methodology that we deploy on our clients. In addition to improving our business, we’re also committed to improving our clients’ businesses and the way our clients operate. We use the 90-day challenge to sit down with our clients and figure out how they can improve their operations and what we can do and what role we can play.
So we have two levels of continuous improvement. One is for our own business and one is for our clients’.
HOW TO REACH: Outsource Partners International Inc., http://www.opiglobal.com
“Every company has several obligations,” says Mike Rudd, director of client services for International Profit Associates, a consulting firm that works with businesses across North America and Canada. “To generate enough cash flow to meet the company’s daily cash requirements, produce a profit commiserate with the risk involved in the business practice, allow the owner(s) to maintain a good quality of life, and assure the employees a fair wage and safe work environment.”
Rudd says the concept of excess-based profit incentives was developed as a methodology to ensure the business maintains the profit margins required to thrive and provide employee motivation based on specific performance criteria.
Smart Business spoke with Rudd about key principles that need to be addressed in order to establish and maintain a good incentive program.
What’s the first step in developing an incentive program that works for a specific business? You have to define the minimum gross profit your organization must produce in order to maintain its return on risk. The amount of incentive is calculated on the gross profit generated in excess of this amount.
This allows the company to increase profits as the excess profit is shared with the company and employees.
Should you have one incentive for all employees or individualize incentives to each employee?
In order to be effective, incentives must be tied to cost areas that employees have control over. This could be labor hours, material costs, overtime, reworks and waste and scrap, small tools and consumable supplies.
This is in direct contrast to an incentive plan that does not take into account the individual contribution of the employees. If you try to create a one-size-fits-all approach, you could run into problems where an employee’s incentives are dictated by factors beyond his or her control. That can be pretty demotivating.
Is there a specific way to account for the incentives on the books beyond a category called bonuses?
The financial reporting system must reflect the distinct/discreet operations of the company so it will be possible to measure the performance of employees. If a company lumps all of the direct job/production costs into one ledger account, it will be impossible to measure where either improvement or poor performance is coming from.
What components are critical to any incentive plan?
The way to hold employees accountable is to have a program that rewards good performance and negatively impacts the incentive amount if the performance is subpar. For example, if the employees maintain a waste and scrap budget below what is established by management, the incentive paid to employees increases. If the waste and scrap budget is exceeded, the incentive is decreased.
The incentive plan should reward all employees of the company based on their specific contributions to the overall success of the company <\m> the greater the responsibilities, the greater the reward. This includes senior management, administrative personnel, supervisors and line employees, down to the least-senior positions.
How often should incentives be distributed?
Rewards on a consistent basis, monthly or quarterly, maintain motivation but reduce the administrative burden on management. Do not fall into the year-end bonus syndrome. The bonus is generally arbitrary, is not based on performance, leads to entitlement and is often paid because the employees expect it regardless of the financial ability of the company to absorb the expense.
Management pays because it does not want to disappoint the employees.
What impact do these types of plans have on the overall net result of a company’s operations?
Excess-profit incentive plans force employees to pay attention to the work at hand. They have the greatest impact on profitability and whether management pays because they do not want to disappoint the employees. Done correctly, it can be an extremely powerful tool for your business.
Mike Rudd (firstname.lastname@example.org) is director of client services for International Profit Associates. IPA’s 1,700 employees offer consulting services to businesses throughout the United States, including Alaska and Hawaii, as well as Canada. Reach Rudd at (847) 808-5590 or at www.ipa-iba.com.