PETCO Animal Supplies Inc. was becoming a victim of its own momentum.
It was 2004, and Jim Myers had just taken over as the CEO of the nationwide pet supply store chain. The company had achieved tremendous success, experiencing significant growth on sales and earnings in the 1990s and early years of this decade.
PETCO was in the right spot at the right time.
“People were really starting to humanize their pets, and our initial success came from being innovators and creating ideas around that,” he says. “I think we were the first to allow pets into the stores, the first to have adoptions of animals in the stores. Almost all the elements of what is now the pet superstore experience are things we initially tried ourselves.”
But as PETCO vaulted into the retail stratosphere, cementing itself as a giant in the pet supplies industry, a new problem sprouted: The spirit of innovation that had built PETCO had been choked off by a companywide desire to not mess with success.
“What developed in our organization was a fear of making change,” Myers says. “It was working so well, the message down through the organization became ‘Don’t change it, it’s working.’ That stifled innovation.”
While PETCO stayed on its treadmill, competitors closed the gap, expanding their retail arsenal to offer many of the same products and services PETCO offered.
If PETCO was to maintain its standing as a pacesetter in the pet supplies business, Myers knew he needed to rekindle the innovation fire within his employees and get his company back to the cutting-edge thinking that had set it apart from the competition to begin with.
“It was really time to shake up the thought process and bring some more risk-taking back into the organization,” Myers says. “We made it a personal challenge to come up with the next innovations.”
Build a message
To reawaken an innovative mindset in his employees, Myers needed to tweak their collective thought process.
Over time, the company had rested into a comfortable groove of going through the same motions each day. Employees had been coached to concentrate on their own tasks and leave the big-picture thinking to the administrators further up the ladder.
That type of thinking can make for an efficient organization but fails to stimulate ideas. With that in mind, Myers says he needed to build interest in innovation by showing employees how their ideas and their work could impact the company as a whole.
“We started really encouraging individuals to view their jobs as not just work but that they are each an integral part of what we do as an organization,” he says “They make it easier for our customers to take care of their pets.”
With a work force of approximately 22,000 in nearly 1,000 locations, communicating that message was more complicated than bringing everyone together for a company meeting. Myers and the company’s leadership team needed to cascade their messages across both geographic distance and administrative levels. And they needed to figure out a way to prevent the message from losing steam as it cascaded away from its corporate-management source.
The first step was to engage the company’s top managers. To get all of the primary decision-makers on the same page, Myers instituted a monthly conference call for the top 250 managers and executives at PETCO.
“Every month, we review how we did as a company and the near-term objectives for the upcoming period,” he says. “We consistently use this forum to talk about the dimension of each of our leadership principles and providing solutions for the customer.”
From that central meeting, communication needed to reach all the way down to the associates who work on the sales floor at each PETCO store — and the associates on the lowest rungs of the company needed to take the message of innovation and new ideas to heart.
The large-scale communication strategy focused on two principles: Keep it simple and grab employees’ attention.
“In today’s business world, sound bites are really important,” Myers says. “That is why we promote each of our basic organizational elements in a way that they can be easily remembered as concepts by themselves.
“We hold a leadership summit where we bring all the general managers in charge of every store together in one place, and spend a couple of days together. We go through some in-depth discussion on our basic principles, some tactics and training on how you bring these things to life for your associates. From there, they bring it back to their stores and have your own store huddle and relate the short-form version of what you worked on at the summit.”
Depending on the size of your company, it can take some time for a philosophy change to take root with every person. But if you can involve management at each level, you can help the message cascade more quickly and efficiently.
“If you can do it this way, the whole company feels like they’re touched at some level with the message,” Myers says. “There is no silver bullet, and no easy way to do it. The way to do it is to be consistent, be regular in your communication and ensure that you have a plan as for how that information will filter down through the organization.”
Innovate within a structure
Myers had to walk a fine line as he rekindled his company’s innovative spirit. While he didn’t want PETCO to maintain its status quo, he also didn’t want to drift so far into new territory that the company no longer focused on the products and services that had become its calling cards.
Innovating is good for a company, but innovating without a structure and set of goals can become a destructive force to your company’s vision and mission.
Myers met the challenge by communicating PETCO’s foundational principles of pet care and customer service as he was spurring an innovative mindset. In addition, he attached employee incentives to the company’s annual goals.
Myers didn’t want to hinder new ideas, but he wanted to create a culture in which employees and managers at every level of the organization are held accountable for setting personal goals that fall in line with the company’s overall goals. Within that structure, employees could innovate with the same targets in mind.
“We set specific goals for performance each year, and we have a program that acts as a repository for that,” Myers says. “It starts with me and our senior executive team. We sit down and lay out our financial plan for the upcoming year and all the various elements that will be required for us to be successful. We embed personal goals and company goals in each of our performance objectives.
“The system allows you to cascade that throughout the organization. My goals are cascaded down to the store level, so that everyone knows about them, and store-level goals are rolled up to organizational goals. By demonstrating personally that you start at the top by setting those goals and those goals are going to integrate with achieving the company goals, it sets a strong example for the rest of the organization.”
Personal goals at PETCO are linked to the company’s rewards plan, creating another connection between innovation and company goals. Half of an employee’s year-end bonus is based on the extent to which the company achieved its goals and half is based on the extent to which employees achieve their personal goals.
“In addition, halfway through the year, you have to meet with your manager as a kind of check-in,&#x
201D; Myers says. “At that meeting, you go over what progress has been made against the goals you’ve set for the year. It might also be a case where you have to adjust your goals if some external things happened that made the goals less likely. You don’t want to set goals that can’t be reached.”
Building innovation into your company’s collective mindset is a constant process of education, reaffirming, funding and gathering feedback. That’s why building a system for implementation is so critical to success.
“You can’t just say, ‘We need innovation,’ and just sort of hope that it bubbles up somehow,” Myers says. “You have to put money in your budget for trying new ideas and develop a process for submitting new ideas. You embed the process and then fund some of the ideas that match your overall goals. Then you have to share with the organization how it worked or didn’t work. After that, you have to solicit recommendations for future areas in which you can innovate.”
It also helps if you can maintain an open-minded approach when you’re soliciting and vetting ideas. You have to accept that there might be different ways to accomplish the same objective, and the way your company has always done it might not be the best way.
“As a leader, you need to have a personality that allows for innovation,” Myers says. “By that, I mean the idea that you can try different things at various levels of the organization. You need to realize that it’s OK to do things a little differently in an effort to find a better way to accomplish the same things. You’re not setting new objectives, you’re setting new approaches and new ways to better satisfy those objectives.
“With that, it’s OK to have some failures as you try new ideas, because you have to find out if they can be proven or not. You do your best to make sure each idea is properly vetted, but sometimes ideas fall short of expectations.”
Test new ideas
PETCO’s renewed focus on innovation has helped keep the company thriving (it generated more than $2 billion in 2008 revenue) in spite of the economic downturn of the past two years.
PETCO’s success has much to do with its ability to keep producing fresh ideas for employees and customers. But there is one more wrinkle that Myers and his staff have to deal with: how to get those ideas from the drawing board to the sales floor.
Once you give the thumbs-up to a new idea and green light it for rollout, it’s usually better if you can get a sample-sized result before you implement it throughout your company’s entire footprint. That way, if miscalculations are made, the effects won’t hurt the entire company.
Myers has set aside regions of stores for new product, service and policy testing. If the reception and results are positive, PETCO will roll out the new idea to larger regions until it takes effect across the entire chain.
Throughout the rollout process, Myers and his leadership team are frequently checking the new idea’s progress and gauging how well it is being received via feedback.
“You don’t just roll a new concept out to 1,000 stores and see how it turns out,” Myers says. “You take some small samples, learn what the outcome is there, what the challenges might be in implementing that new direction, and be sure you keep communicating with everyone on how to overcome them and how to avoid the pitfalls.”
If an idea is a success, it will begin to sell itself as people throughout the company start to buy in.
“More often than not, you find someone who has been a success with what you’ve just tested, and you let them be a promoter of change with the people they work alongside,” he says. “That one-to-one communication makes the new idea more personalized, and the more personalized you can make the experience, the more receptive people will be to the idea, and the more they will believe that it can be successful.”
How to reach: PETCO Animal Supplies Inc., (888) 824-7257 or www.petco.com
Chris Anderson, author and editor-in-chief of WIRED magazine, wants to set the record straight. His book, “FREE: The Future of a Radical Price,” does not suggest that all manufactured goods will eventually be given away for free. The true premise of Anderson’s book is the increase in free items online due to the low cost associated with digital products. Companies can release products and services for free without fear that people will be looking for a catch or a hidden price.
Smart Business spoke with Anderson about the evolution of free, its impact on customers and why companies cannot avoid competing with it.
In discussing the psychology of “FREE,” you wrote, “A free bagel is probably stale, but free ketchup in a restaurant is fine.” Is there a way for companies to positively transition a pay product to free?
Take something like The Village Voice newspaper. It was once a paid weekly, then went free. People said, ‘That’s when the Voice stopped being good when it went free.’ That’s actually very arguable, and you could say that the Voice went free to save itself rather than continue its decline in the old model. People do have a tendency to take things that were once pay and are now free and assume that there’s been a quality decline. The best way to make a product free is to invent a new product that doesn’t carry with it the baggage of the pricing expectation of the old product.
If you look at companies that have introduced free, such as airlines, you have companies like RyanAir and EasyJet and others that have brought out flights that are close to free. The way they’ve done it is by redefining the business they’re in. They’re not in the airline business. They’re in this broad suite of travel, whether they’re doing hotels and rental cars and getting a subsidy from the destination or they charge a lot for baggage so they’re actually in the cargo business. They just broadly redefined the business they’re in so they could make one thing free that others were charging for while making money from other things.
You point out that, sooner or later, every company will compete with free. How do you explain that to people who have yet to be affected by free?
This has to do with the fundamental economic principles of atoms and bits. Once upon a time, my tax accountant, my stockbroker and my travel agent were people. Now, they’re software, and they’re free. As things become software, they tend to become free, not that they’re entirely free.
When I said that every business is going to be competing with free, what I meant was that every business has a digital aspect and every business has the potential to turn certain aspects into digital. And if you don’t do it, somebody else will. You’re either going to use free [products or services] to market a paid product or you’re going to compete with someone who’s doing that.
Was this part of what led to the decision to make segments of your book available at no charge?
We wanted to walk the talk. We made the whole book available for no charge in different time windows. The idea was to use the bits to get the broadest sampling and awareness so people could get a sense of what I was saying but still continue with a premium version. The hardcover is the premium version of the book. In the first six weeks of the book’s release, it was downloaded more than 500,000 times in various forms and it also became a New York Times best-seller in its physical form. The use of free to market an idea, then have an upgrade to a premium format that’s paid, is something that not only can be applied to any business, but we attempted to apply to our own.
By Chris Anderson
Hyperion ©2009, 274 pages, $26.99
Special audio conference offer
Chris Anderson will be appearing on the next edition of Soundview Live, a free interactive Web event exclusively for subscribers of Soundview Executive Book Summaries. The event will take place on Jan. 13, 2010. For more information, visit www.summary.com/Soundview-Live.
When Ron Hall became the estimating manager for McCarthy Building Cos. Inc. in the early 1990s, he faced a new situation he hadn’t yet encountered at the construction firm.
“Suddenly, I’m not only in charge of the work, but I have eight people whose work I’m responsible for,” Hall says. “It doesn’t take long, once you reach that point, to realize that my success is tied directly to their success. My success is their success.”
It was a simple realization, but as he has moved up the ranks at the company, it continued to hold true. Today, he oversees the nearly $80 million Southern California division of the $3.5 billion company, and he knows that his division won’t succeed without having top-notch people helping him out.
Smart Business spoke with Hall about how to hire the best people to fit with your organization so you can get the results you want.
Engage with them. Obviously, you have to talk about the normal stuff — their education, the technical background — but I try to engage them in regular conversation so during the course of the interview, some of their true personality comes through.
Most people want to talk about themselves — most people that have balance in their life. They might come into an interview prepared to present an image. Their natural personality, if they’re well-balanced, it overrides the strategy that they might have had.
Ask them about their past experiences, and you delve into some of the stories that they start telling, and you ask them more about it. Inevitably, their personality compels them to speak.
The flip side is if they won’t talk about it, it’s also an indication of the behavior or the personalities that you’re dealing with. If they’re hesitant and guarded and won’t tell you much about themselves, then it’s not a promising sign. One of the most important aspects in leading my company is we have a lot of transparency in terms of what are our business goals and what are our financial results and what is our plan. We try to share that with employees at all levels of the organization so that they’re empowered and understand the big picture. Consequently, it’s important that if they’re going to succeed in our organization, it’s important that they themselves adhere to that same philosophy, and they’re willing to be open and honest and willing to trust others and put our trust in their partners.
Draw out their personality. As an interviewer, you have got to create an environment for them that makes them comfortable. If you’re sitting rigidly across the table from them with a stuffed tie and an arms-crossed posture, then you’re not going to get there. You need to allow them to see some of who you are. I try to make it a point to let my own personality show through in the first 10 minutes of an interview so they get a sense for that openness. Set that tone at the beginning of the interview to encourage them to follow suit.
[It’s] really just being genuine. I won’t hesitate to tell a personal story about how I got here or why am I in this position at McCarthy or why am I the guy that they’re sitting across the table from. There’s lots of stories. The plain old, ‘I worked hard, I was successful on this project and then I got assigned this project’ — the methodical, technical reprise of how I got here isn’t really interesting to anyone, but the notion of some of the mishaps I’ve had along the way and some of the change of philosophy and impact it had on me are more compelling for people, so I try to share some insight on my personal professional development.
Dig deeper. I seldom make any decision off of the first interview. I don’t like to do a 30-minute interview. I like to talk to the person for an hour or so, then I usually make it a point to tell them to go home and consider what we’ve talked about and sleep on it. I kind of want to do the same because how I feel at that moment might be a little different the next morning when I wake up or a week later, so I like to let that first interview settle in.
Then have a second interview. In the second interview, hopefully, you’re starting a little more advanced. In the first interview, the first 30 minutes is trying to relax. The second one, you get more to the personal issues quicker. … Some of the things that you have a better chance of getting done in the second interview is kind of peeling back some layers of the onion, if you will, of business philosophy.
Some of the things you can get to are flexibility. How adaptable are they going to be to the systems we operate versus the ones they’ve been doing in their other past jobs? How adaptable are they going to be to our personnel? We do a lot of stuff (from) a teamwork approach. It’s never just one person doing something. We usually have two sets of eyes on every activity, so it’s important that people can interact and work well with different personalities. On one job, it may be personality X, and then the next job of dealing with two people, it’s personalities Y and Z. Their flexibility and adaptability on interpersonal skills is important. I don’t think I get much of that in the first interview. You get a better sense of their interpersonal skill sets because you’re deeper into the conversation.
It’s a reactive thing. I don’t have a set of standard questions, but if they want to talk about their particular approach on how to deal with this certain aspect of the job they’re interviewing for, you can react to what they’re focused on and you can dig into it a little deeper. It all has to stem from a unique approach to that individual. You have to listen to what they’re saying, and from that, you can kind of see where they’re thinking, and that steers you in the appropriate areas to steer a dialogue to try to get deeper.
How to reach: McCarthy Building Cos. Inc., (858) 784-0347 or www.mccarthy.com
Wrapped in that six-word declaration is a lot more weight than you might initially realize.
The idea of leading in a positive, upbeat fashion is nothing new. Managers like to encourage, employees like to be encouraged, and the need for positive reinforcement is even greater with the cynicism that has gripped work forces as the nation’s economy has faltered.
But to Salinas, the general manager of Barona Resort & Casino, positive leadership is about more than smiling, waving and small talk while in public. It’s even about more than dishing out bonuses and prizes to high performers.
To Salinas, positive leadership is a state of mind, a personal core value that he has made into an organizational core value at Barona. Salinas says the mental fortitude to overcome the negativity spawned by the current state of the economy starts with him, his leadership team and the examples they set.
“Always remain positive,” Salinas says. “People look to you as a leader, especially in difficult times. They need to hear that things are going to be OK and that you’re willing to remain upbeat. That doesn’t mean that you bury your head in the sand and pretend that there aren’t difficulties, but you need to also make sure you’re honest and open about the things that you can celebrate. Whenever you can, find the good things that are happening in the organization and talk about them.”
There is no magic bullet for staying positive. You need to make up your mind that you will promote the good news as much as you have to report the bad news. You have to communicate often, which includes allowing yourself to be accessible to your employees. And you have to set the example you want everyone to follow — and do it every day.
Set the example
Leaders set an example for their employees on both a conscious and subconscious level. Even when you’re not speaking or sending out e-mail blasts, you need to remember that you’re still communicating. Employees will watch your demeanor, your attentiveness and other nonverbal indicators in an attempt to read what is going on behind the scenes.
If you are withdrawn, aloof or exhibiting any other kind of counterproductive behavior, Salinas says you should expect your employees to do the same.
“Your staff emulates the example you set — it’s as simple as that,” Salinas says. “They’re going to behave the way you behave, not according to what the core values say on paper. People emulate their leaders.”
With that in mind, Salinas has made it a point to live the culture for his 2,975 employees. “Live the culture” has become something of a business cliché, but to Salinas, it has a very real meaning. It means that he must always remain aware of how he’s leading, the verbal and nonverbal messages he’s sending, and use his perch at the top of Barona’s hierarchy to spur positive momentum throughout the organization. Part of that is frequent communication with his management team — which serves as an ongoing informal evaluation process to make sure all of Barona’s leaders are communicating the same messages to all of the resort and casino staff.
“On the conscious level, what you have to do is make sure that your leaders, the people who report to you, can articulate your core values and what they mean — what it means to be Barona Resort & Casino — and making sure the people who report to them understand the same thing,” he says. “That’s very conscious. You set a communication process in place to communicate your core values down to all levels of the organization and the meaning behind each value. We start at orientation with new folks and we hammer our vision statement and core values into them constantly.
“You constantly have to do that all the time, and I can’t stress ‘all the time’ enough. It has to be in everything you do, every piece of communication that you put out there. Every communication we have will contain a core value, so that there is always a core value or our mission statement or a business imperative in front of somebody’s face all the time.”
On a subconscious level, in addition to communicating through your behavior, you also need to develop an understanding of the feelings you’re conveying with all types of communication. Depending on how a message is worded, it can have different implied meanings to different people.
Salinas says that because subconscious communication encompasses nonverbal communication and implied meanings, it is much more difficult to harness. But it’s something you need to learn to do, because every time you’re in the public eye with your employees, you’re communicating, whether you realize it or not.
“On the subconscious level, you have to make sure that everything you do is aligned with your values,” he says. “The way pieces of communication are worded is really important. The way things are said and how they make somebody feel is really important. Our core values make people feel a certain way, and the stuff I’m doing on a daily basis should be consistent with our core values. In other words, your behavior should make people feel the same way they do when they see the core values.
“That all goes back to how do you look, how do you carry yourself, are you making eye contact with your staff and smiling. Are you stopping and sincerely conversing with people you see each day? It’s a little more difficult, but you just have to doggedly pursue this whole idea of living the culture. It really does start with you and work its way down.”
Set up feedback channels
You can pay attention to all aspects of how you communicate, but the only way you’re really going to find out if your messages are reaching every person in your company is if you give your employees a chance to have their say.
Salinas has set up many of the feedback channels widely used throughout the business world. He holds quarterly all-staff meetings with a question-and-answer period. He makes himself as accessible as he can during his walks around the resort grounds. He answers e-mail.
But Salinas and his staff have taken things a step further at Barona. Salinas has continued to utilize a program that predates his tenure as general manager. It’s called the Barona communications team, and it comprises employee representatives from throughout the Barona organization.
The goal is to give employees in every area of the organization a chance to reach management in a formalized manner and to provide an effective top-down means of communicating messages.
“This team is comprised of 40 or so front-line staff members who meet weekly with the senior vice president of human resources,” Salinas says. “I try to attend those meetings when I can, and it’s purely informational. Those staff members on the team come from all areas of the operation, they do updates about what is going on in their areas and if the people in their areas have questions, they put those on the table. The representatives are then responsible to go back to their areas and communicate the information that they’ve learned at the meetings.
“A program like that allows you to get information on the grassroots level. It also allows you to get information to your staff that is accurate, that hasn’t gone through the rumor mill and com
ing out distorted on the other end.”
Feedback is a critical element in allowing employees to take ownership in the direction of the company. If they’re helping to steer the company, your employees will generally exhibit a more positive attitude as they work toward carrying out the company goals and mission.
Feedback is also useful as an idea generator. Even if a particular employee’s job centers mostly on manual labor, it doesn’t mean that you shouldn’t try to harness his or her brainpower. Ideas can come from anywhere.
“Every once in awhile, a staff member will surprise you with a monster idea that could make you a lot of money,” Salinas says. “But those big ideas are pearls that are few and far between. You also need to look for the small things that someone might be telling you about. Someone farther down the ladder that they have this cool idea, and you might not personally see the results, but it might be big for their department. So you make it happen and do it with as much fanfare as you would for a big idea.”
Though you might be more budget-conscious due to the state of the economy, Salinas says you shouldn’t hold back financially if the idea makes sense on every other level. Most of the ideas that you get won’t be million-dollar ideas that cost a fortune to get off the ground.
“If you keep encouraging it, you’ll get absolutely inundated with new ideas,” he says. “People will keep coming to you. If that happens, you might start to get some pretty wild ideas that you know you can’t use, but it really doesn’t matter, because at least people are engaged and they’ll be thinking about what they can do to [make] things better. That’s the all-important ownership piece that you need to build within people.”
Make time for fun
You’re in business to do a job and make money, not entertain or be entertained by your co-workers. But fun doesn’t have to be frivolous. In fact, it’s essential to getting the most out of your employees, particularly as they get bombarded by bad economic news from every media outlet.
At Barona, Salinas has placed an emphasis on creating an enjoyable work environment — but he does it with an eye toward reinforcing his core values.
Salinas hands out star performer awards and cash bonuses at every quarterly company meeting, in much the same way a lot of leaders do. But he takes it a step further with a little something extra. It goes back to Salinas’ belief that little things can make a big difference in the attitude of your employees.
“It’s doing these little things where you can plug away and make people feel good about where they work,” he says. “We have quiz contests on our core values and things that are happening at the casino. It gets people psyched and excited, but at the end of the day, the real key is that someone from management took the time to say, ‘Thank you, and here is a token of our appreciation.’ It’s a simple act, but it’s amazing how that doesn’t happen enough in business.”
Salinas also made it a priority to avoid one of the biggest morale destroyers in business: taking away employee perks. Sometimes you have to get creative to keep employees happy, and that is exactly what Salinas and his staff did.
When Barona moved its casino into a new facility, the old facility was slated for closure, along with its dining hall, which also served support staff working in separate buildings around the Barona complex. Spurred by an employee’s suggestion, Salinas decided to keep the facility open and covert the dining hall into an employee lounge.
“We kept the old facility open, and we added some high-end vending machines, some plush sofas, and it’s now a place where people can just relax,” Salinas says.
“It can be very easy to save some money here and there by taking away or not implementing some of these feel-good programs, but that’s a huge mistake as far as your employees are concerned.”
How to reach: Barona Resort & Casino, (619) 443-2300 or www.barona.com
A man invested in a piece of real estate many years ago as part of a partnership in which he was the majority owner. The agreement stated he had pretty much free-ranging authority to do whatever he wanted, including amending the basic agreement. Recently, he moved the property into a trust.
The problem is, there was a caveat in the contract that stated that if the property were ever moved into a trust, the minority owners could buy out his majority share at book value.
As a result, he’s probably going to lose control of the future of the property that he’s managed all these years.
The lesson is simple: When it comes to legal matters, it’s the little things that can get you.
The contract hadn’t been reviewed in years, and a few sentences buried in the agreement completely changed everything.
While all of us would much rather be thinking about how to grow our businesses rather than quibbling with attorneys over the wording used in the second-to-last paragraph of a contract, a simple oversight could lead to disaster.
When you are making deals, it’s easy to get excited and start overlooking the details. But over time, circumstances change. It doesn’t matter whether it is taxes, partnerships, mergers or estate planning. It pays to have an attorney review all of these documents not only before you sign them but also from time to time so you don’t make any missteps that would jeopardize the contract, regardless of whether you are a Fortune 500 company or a family business.
Spend a little money upfront to prevent having to spend a lot of money later on. You have to look at a relationship with a law firm as an investment in your company. For many mundane services, you can negotiate a flat fee to fix your costs and avoid any surprises.
If you take the time to build a relationship with a firm or firms, you can get a lot more value out of it. As they get to know your business better, they can advise you of potential risks that you may not be aware of.
Attorneys can also help you out in other areas, such as assembling a board of advisers to help guide you to your growth goals or preparing your business for an initial public offering. They also often have great connections throughout the business community and can help you network, as well. As you build the relationship, your lawyer can become a trusted member of your inner circle.
Make sure you talk about costs upfront, regardless of whether you are working with a single attorney on a routine matter or with a multinational firm on a major acquisition. A big reason why executives often avoid lawyers in the first place is because of the fear of costs. In this economy, every nickel counts, and being handed a legal bill that is four times what the estimate was is not something you want to deal with.
Try to get as many services as possible done for a fixed rate to control your costs. There are some services, such as litigation, that have to be done at hourly rates. If that’s the case, then ask for an estimate upfront and demand regular updates on hours worked and how far the case has progressed so you have a better idea of what your costs are going to be. If a firm won’t work with you on cost control, then it’s probably time to look elsewhere.
Laws are the rules that govern the game of business. While it can be expensive to make sure you are playing by the rules upfront, it can be even more expensive if you find out that you made mistakes later on. As the old saying goes, an ounce of prevention is worth a pound of cure.
FRED KOURY is president and CEO of Smart Business Network Inc. Reach him with your comments at (800) 988-4726 or firstname.lastname@example.org.
Savvy CEOs are taking advantage of the slumping commercial real estate market by evaluating whether their space meets their needs while the cost to buy or lease is low.
Commercial real estate prices fell again in the second quarter, showing an 18 percent national decrease compared to the previous quarter, according to Massachusetts Institute of Technology Center for Real Estate’s index. The drop placed the price index 39.2 percent below its 2007 second quarter peak.
Clearly, the market is experiencing volatility, but opportunities are presenting themselves.
“Tenants and buyers are in a great position, and it will probably be this way for another 12 to 18 months at a minimum,” says Andrew Ewald, member of the Tenant Advisory Group, Grubb & Ellis/BRE Commercial.
Whether you’re searching for a new property or hoping to reconfigure space for efficiency’s sake, cost savings can be yours. The first course of action is to connect with an experienced commercial real estate broker to weigh your options because there are plenty of them.Debate to buy versus lease
The decision to buy or lease property has less to do with the current state of the market and more to do with each company’s individual circumstances.
Think about your industry, your strategic plan, your company culture and what those will look like five or 10 years from now, then add the amount of capital you have for discretionary spending. Most companies lease to stay adaptable.
One of the bigger challenges facing the market today is that the capital markets are at a standstill, leaving few lending opportunities. The loan-to-value ratio has changed dramatically. Once, you were putting 10 percent to 30 percent down for a loan; today it might be as much as 50 percent.
“It’s a great time to buy as values are significantly less today compared to two to three years ago, but I think it’s going to be an even better time to buy in the future,” says Travis Carter, senior associate, Irving Hughes Inc. “I think the market values are going to continue to be going down, and I think we’re going to see more distressed assets coming available in the market in the next 24 months, which is going to drag the overall values down.”
It’s important to work with your broker to analyze your options and ensure the best deal, especially because prices and volatility vary by market and even within markets. Renting sublease space may even be the way to go because it’s cheap, but be sure to investigate the leaser’s financial standing before signing anything.
No matter what your decision, you’ll more than likely see savings because sales prices have fallen and landlords are becoming more and more creative with incentives to retain and attract tenants.Renegotiate your lease
If your lease has been tucked away, dust it off and read the fine print. Renegotiating your lease can lead to immediate savings and even allow you to get better use out of your space. Again, the returns may vary based on your landlord’s willingness to bargain, but your market insight can be used as leverage.
Before you go to your landlord, there are a few questions to ask yourself. First, how much time do you have left on your lease? A prime time to renegotiate is when there is two or three years left on your lease.
Second, how much time do you commit? If you discuss the popular blend and extend deal, where you sign a lease extension in exchange for reduced rent, you have to think about whether the space will continue to meet your needs for that length of time.
Third, can you give back or add space? If you’re cash-strapped or your company has reconfigured its employee base, maybe you can work the renegotiation in a way that better uses your space, such as adding or subtracting square footage.
Fourth, use your broker to research your landlord’s financial position, such as insight on how large the mortgage is and whether your landlord has good credit.
“I think you have to just do your due diligence,” Carter says. “Just understand maybe what their debt is on the building, how many properties do they own in the area and how are those properties holding up in this market.”
Fifth, research your options in the marketplace. Even if staying makes the most sense, at least you can present your landlord with the possibilities that wait should you leave. Some tenants are offering free rent, moving allowances and increased tenant improvement dollars.
“There’s really limited tenant activity, there’s an abundance of options, so you want to create a competitive environment where landlords are fighting for you tenancy even if you think a potential renewal makes sense and your existing space works well,” Ewald says. “You want that competitive environment and your broker to create that competitive environment so you’re in a win-win position to negotiate with all parties and to negotiate a better economic real estate transaction.”Consider more than just costs
Before you sign next to the X, take into consideration more than just the monthly dollar amount you’ll be paying. The general checklist for picking property once emphasized location, employee driving time and amenities. Those concerns remain important, but the current state of the economy has also brought to light the need for efficiency, flexibility and sound deals.
Working with a broker will allow you to receive the best bang for your buck, meaning fair market value, tax breaks, relocation incentives, landlord concessions and operational costs, while making sure it’s a strong deal.
“Outside of the economics of the deal, tenants should take into consideration who the landlord is, what their credit is, what flexibility the tenant has in the event the building goes back to the bank, what rights do they have to offset some of the concessions that the landlord has offered,” Carter says.
The real estate crisis has left landlords hurting. Work with your broker to determine whether your landlord is currently facing or could face financial distress and how that affects the tenant improvements or possible free rent he or she promised.
Nonetheless, you should take the time to work agreements into your lease that protect your rights as a tenant if your landlord forecloses on the property and the lender takes over. Time and savings might also be found in the long run with contraction, addition and termination agreements for flexibility.
Flexibility is key for surviving this economy and that includes your real estate. Your broker will have a space planner who can help you efficiently design the space you’re in or determine which space best suits your company. Companies are saving money by going to open floor plans, narrowing cubical sizes and hoteling, which supports employees working outside the office and sharing desk space.
Whether you’re planning to buy, lease, move or stay, make sure you give yourself ample time at least a year but probably longer depending on size to ensure you’ve settled on the best choice for your company.
“If you start the process early, (your options are) twofold,” Ewald says. “One, to determine efficiencies and really the business plan for the company, but secondly, it’s to engage the market and allow you rself time to leverage and negotiate.”
Most business owners today will claim that safety is an important aspect of their business, but do they really realize how much their company’s safety culture impacts the bottom line? The way companies manage safety is what distinguishes them from their competition. Without the proper safety management, losses can occur at any time due to inadequate training for newly hired employees, unforeseen hazards, lack of internal accountability or, most often, as a result of focusing on getting the job done without making a safe environment a priority.
Regardless of the causes of accidents, the employer is legally and morally responsible for protecting employees from hazards and injuries in the workplace. The only way to protect yourself and your business is to put policies and programs in place to minimize those risks from happening and prevent future problems.
“Any time there are losses in a company, you face possible morale issues among employees and loss of production time to deal with the situation and subsequent investigations into the accident,” says Gerry McEwen, a safety/loss control representative with GMGS Insurance Services. “You also face employee downtime due to the loss and investigation. And if there’s a fatality, you will have to spend time and money on employee counseling. There will be major effects from such losses on the company overall, not just on the employees but to the bottom line.”
Smart Business spoke with McEwen about safety and risk management and the key components of effective programs.
What priorities should employers focus on to reduce safety risk and losses?
- Be responsible for your employees; treat them like they are your greatest assets. Train your new hires and existing employees, making safety one of the forefronts of your business. Let employees know you will provide a safe environment for them to work in.
- Hold all employees accountable. This includes everybody, from upper management all the way down the chain. If you do, everybody will benefit.
- Complete regular inspections to ensure everything is safe and working properly in your company.
- Establish proper engineering procedures and administrative controls.
What are the benefits of having safety and risk management programs in place?
Bottom line, your company will pay lower insurance premiums and reduced workers’ compensation costs. Insurance may pay the immediate costs of losses, but in the long run, a company always pays for its claims. Your employees will also be happier, more productive and morale will improve throughout the company. No matter what type of company you have, the happier the employees, the healthier the bottom line. Safety enforcement also becomes easier as employees see the benefits of maintaining the safety standards.
How do you educate your employees on safety programs and help them understand their importance?
Train your employees, and make sure they understand the benefits of your programs as soon as they are hired at the company. By making safety a precedent you will be able to more effectively train your employees and communicate your safety standards. Communicate the company’s commitment to the employees and to their personal safety. Encourage your employees to participate in evaluating the effectiveness of the training and improving your company’s safety program. If they help to create it, they are more likely to follow it. The ultimate result is for your employees to make your safety programs their safety programs.
How do you enforce and maintain these programs so they continue to reduce losses and risks?
Safety begins at the top and management must be 100 percent on board with the various programs. The programs will only be as effective as you enforce them to be. Once those written programs and procedures are in place, proper enforcement, accountability and documentation will keep your company and employees protected. Make sure you have somebody knowledgeable audit and evaluate the program’s effectiveness. Utilize all the tools available to you including internal and external resources. If your broker is focused on risk management and not just collecting insurance premiums he or she should be providing loss control services and also assisting in coordinating the loss control efforts of your chosen insurance carrier. Regardless, an employer must not merely rely on such outside sources to do the job; this moral and legal obligation cannot be delegated to others it is your job.
A key aspect in an effective safety program includes reviewing the supervisor’s inspections and employee discipline and accident investigation. Are investigations done procedurally to list excuses without finding the root causes of the accident? Do investigations produce positive solutions and do they actually implement the corrections? You have to make sure your company identifies the desired goals and objectives in the programs.
How do you deal with a loss or risk if it does happen?
Take immediate care of your employees at the time of the accident, especially if they need emergency attention. When you assure the injured employee and his or her family that they will be taken care of, you can avoid many unnecessary legal costs in the future. It is paramount to determine the root cause of an accident and not just put a Band-Aid on it. Once you determine the cause, communicate this to all your employees. Every accident can be converted into a safety lesson and this will minimize future accidents while further protecting the company’s bottom line.
Gerry McEwen is the safety/loss control representative at GMGS Insurance Services. Reach her at email@example.com or (949) 559-3372.
I heard the sound of the bone snapping before I felt the pain. It was the end of a grueling workout and my karate instructor had challenged us to finish by attempting a difficult technique. I knew I was too fatigued to perform well, but when the younger students eagerly responded, I foolishly followed my pride.
As I jumped into the air to perform a series of kicks, I failed to get enough height and landed with my leg beneath me, breaking the bone in three separate places. Seconds later, I was lying on the floor screaming in pain. It was a moment I will never forget.
Months later, I was in the doctor’s office looking at a new X-ray of my leg and comparing it to one from the day of the accident. All three breaks had healed, but their location was still clear because, in the place where each break had been, the bone was denser and showed darker on the film.
As the doctor began to remove my cast, I asked him the question that had been on my mind for weeks, “Will my leg ever be as strong as it was before?”
He stopped and looked directly into my eyes. “Don’t you know what happens when a break heals?” he said, smiling. “The bone heals stronger in each place where it was broken. One day, this will be your strongest leg.”
Are you feeling the pain today of a relationship that is broken or of trust you once had with your company or your boss that has fractured under the pressure of challenging times?
If so, then know this: The point of your greatest pain can become the point of your greatest strength. You must only follow the body’s example heal stronger.Heal stronger by learning about yourself
Today, I can easily see how I broke my leg. But seeing the factors that led to a break in a relationship is not always so easy.
I once lost a long-term friendship whose final moment was a single heart-wrenching incident. While I initially thought that this incident was the cause of the break, I now see that it was simply the culmination of differences that had been growing for some time differences that neither of us addressed and that ultimately became too great to resolve.
If you’ve recently broken with a company or received a step back in your title or income, look back to see what the real cause may have been. You may find that the signs were there long before the final moment, whether you were less and less engaged with the work you were doing, becoming increasingly frustrated with your co-workers or simply bored in a position that you had outgrown.
Whatever the cause of the final break, you could likely have created a different outcome if you had addressed the early warning signs more quickly. You can heal stronger by using this experience to learn about yourself and deciding how you will handle similar situations in the future, before they reach the breaking point.Heal stronger by changing your thinking
Weeks after my leg was completely healed, I was still unwilling to train to my full capacity. My body was ready, but my mind wasn’t. Each time I would prepare to use my leg in a challenging way, I would hold back, afraid that it would break again.
One day my teacher called me aside and said, “You can only do what your mind believes. Believe first, then do.”
It was advice that set me free to move forward.
In the same way, it’s tempting to hold on to the emotions surrounding the loss of a job or a change in position, replaying them constantly in your mind. As long as your keep your thoughts focused on the break, you will never completely heal.
Instead, begin to focus on what you’ve learned, on the talents and experience that you possess, and on the successful future that is still ahead of you. The more you focus your mind on these thoughts, the more you will believe them, and as my teacher said, the more you will be able to do.
Not long ago, someone asked which leg I had originally broken. When I had to pause to remember, I knew my healing was complete.
No matter how painful your break has been, you can heal stronger. And the strength you gain can be the key to a new level of performance and success.
Jim Huling is an executive consultant, a national keynote speaker and a professional coach. His leadership experience spans more than 30 years, including a decade as CEO of a company recognized four times as one of the “25 Best Companies to Work For in America.” Huling is also the author of “Choose Your Life! a powerful proven method for creating the life you want.” He can be reached at firstname.lastname@example.org.
This economy probably has your company facing heightened risks risks that you might not be prepared for and that could ultimately cripple your business.
The global economy is the No. 1 risk businesses say they face today, according to the Aon 2009 Global Risk Management Survey. But the survey points out that less than 66 percent of respondents have formally reviewed their major risks or have plans in place to deal with them, including the economic downturn.
Now is a crucial time to have a detailed risk management program in place. After all, budgets are tight, you’re looking for savings and managing risk can directly influence your bottom line.
“If you look at a typical firm, cost of risk might be anywhere from 2 to 5 percent of their gross revenue; in many cases, that’s going to be their second or third largest expense after rent and employees,” says Jeffrey Cavignac, president and founder, Cavignac & Associates. “So if you can reduce that, you can substantially drive dollars to your bottom line.”
Hiring an in-house executive to focus on risk may financially be out of the question. But a good insurance broker can help you put the puzzle pieces in place, starting with the questions that will lead to true solutions.Identify potential exposure
Like anything in business, a true commitment to risk management starts with the company’s leadership. Set aside time for your organization’s key players to sit and outline the different risks you might face, such as financial, property and casualty, and legal.
There are a number of assessments you can do such as risk mapping or enterprise risk management depending on the amount of detail and commitment you want your program to include. Regardless of what direction you are going, you should include your insurance broker in the conversation. Odds are his or her experience, benchmarking data and outside eye will lead to valuable questions. A good broker has dedicated risk management and claims services and will go through a checklist that will bring your risks to light.
“The broker should have a systematic questionnaire, and it’s time-consuming, but it needs to be done,” Cavignac says. “You’re going to look at any number of things from business plans to financial statements to leases to contracts. You’re going to want to walk the facility. You’re going to want to evaluate the equipment. But if it’s done right, it sets the groundwork for an effective risk management program.”
Once your risks have been identified, your broker can help you develop a strategy to quantify your risks and determine whether you should mitigate or transfer the risk.
The process is fairly systematic, but it’s also continuous. A true risk management plan involves constant monitoring. It’s worth the effort to work with your broker to match a timeline of monthly musts with your plan. Especially in volatile times like today, your company could face different risks than it did six months ago.
“If their brokers completed a full risk-management audit and they stay current with their business operations as well as their industry, probably an annual review for compliance is probably enough,” says Bill Litjen, risk management division president, G.S. Levine Insurance Services Inc. “But I think that review ought to be done probably six months before their insurance program renews because that midterm review will allow changes to be made to the insurance program if any are necessary.”Review risks
Your risk analysis is a great guideline for your specific needs, but there are a few areas of coverage the economy has made more relevant. And today’s evolving risks can be enhanced by geography and industry.
“Any number of factors will dictate how the company needs to apply resources to mitigate the risk,” Litjen says. “This economy is making it particularly challenging for the strategic and operational side of things.”
Business interruption and trade credit insurance are two areas to review. If a client can’t pay or your operations are halted, how will those scenarios affect your balance sheet if you’re already strapped for cash?
Insurance executives are warning that desperate times produce desperate people. If you’ve decreased your work force or plan to, keep in mind workers’ compensation and employee discrimination claims tend to rise in a down economy, as do employee crime and cyber theft. Now might be a good time to evaluate directors and officers coverage, employment practices liability insurance, crime insurance, cyber insurance and workers’ compensation coverage.
“I think more businesses today need to focus on protecting how they manage their business,” Litjen says. “In economic downturns, lawsuits are more prevalent.”Find cost-saving solutions
Insurance is one line item that hasn’t been immune to budget cuts. But before you start scaling back coverage, keep this in mind: We’re still in a soft commercial insurance market meaning insurance is a cheap form of risk capital.
A 2009 benchmark survey by the Risk and Insurance Management Society Inc. shows a lower average in premiums contributed to a 9.4 percent drop in the average total cost of risk per $1,000 of revenue.
If you’re worried about the size of your insurance allotment, call your broker now, review your contracts and review your risks. You don’t have to wait until your renewal in order to find savings or renegotiate your contract. Just remember, before you can responsibly lower costs, you need the details of what you are and aren’t covered under.
“In this economy today, you have to look at expenses as a return on investment,” Litjen says. “Those expenses that don’t have a positive return that you can avoid I think are being cut. Everybody is looking to sharpen their pencil that way, but I think if you look at your expenses in terms of return on investment, it makes it easier to decide what you need and what you don’t.”
Immediate savings can be found by passing risk to others, such as tenants or vendors. You also can play around with increasing deductibles to lower premiums or scaling back nonmandatory insurance. If the latter two are options, first weigh whether you can financially assume the risk or if the cost of managing the risk is cheaper.
One of the only ways to decrease the costs you can control is by reviewing your claims. You should have regular claims review meetings with your broker to see where prevention methods can be put into place. Your insurance carrier can help with loss control, such as safety training. Some brokers say clients recently have seen cost savings of 20 percent.
Part of the answer is building a long-term relationship with your broker and even carrier. Share with them details of your operations. Invite them to tour your facility. The more your broker understands your business, the better he or she will be able to provide holistic advice. And a lasting relationship with an insurance carrier can mean more flexibility and negotiation.
“If you establish a long-term relationship with a broker … and, equally as important, if you establish a long-term relationship with an insurance company, then if you have a bad year or a couple bad years, they’re more likely to stick with you than if you jump insurance companies every year,” Cavignac says. “Insurance companies value loyalty, and they price for it.”
If you stop for a moment to think about all of the risks your business is potentially exposed to, the list can be mind-boggling. A customer could not pay you for a large order. Your building could burn down. An employee could be involved in an accident resulting in a lawsuit. Your financial data could be stolen. The list goes on and on.
Because most CEOs prefer to focus on the positives and the growth that goes with it, many areas of risk are often overlooked or ignored. Industry experts will tell you that you need to be reviewing your risk exposure in all areas at least once a year. This should involve a comprehensive look at your entire business and involve all of your top people as well as your insurance agent or some other outside expert who can help guide you through the process.
As CEO, you need to not only ask the right questions to protect the business and those who work for you, you also need to follow up everything in writing to make sure there is a paper trail in the event that something goes wrong.
There are companies out there that market themselves as risk management specialists. Most are reputable and qualified, but some are nothing more than a marketing slogan. Odds are, you probably don’t have a risk management expert in-house. If your agent or broker isn’t interested in helping you with your annual risk review or doesn’t have anything to contribute that might be a sign the person is in over his or her head and you may need to look for a firm with expertise that better matches your needs.
As companies grow, it’s easy to outgrow your experts. Your needs as a midmarket company may be completely different than what you needed as a small company, and the experts who were so vital in the early days of the company may no longer have the expertise you need to go to the next level. It can be hard to make these changes, because a lot of times these experts are also your friends or people you have had a long-standing relationship with. But as CEO, you need to do what’s best for your company. If the friend has the experience and expertise, then great. But if not, you owe it to yourself and your company to find someone who can help you manage the risks that your growing business faces.
Once you find someone, make sure everything you discuss actually makes it into your policy. Have the person show you where in the policy each item is and make sure it reflects a coverage level that you are comfortable with. You should also expect comparisons of what coverage other companies that are similar to yours have so you can see how your package stacks up with the competition. Ask for the pros and cons of getting coverage for each area of risk you face.
There are many areas that you could handle on your own and won’t need to buy coverage. But others will pose so much financial risk that it’s not worth gambling your business just to save a few dollars in the short term.
When all is said and done, send your risk management firm a letter explaining that you are relying on its expertise to guide you through these hazards. This should make it clear that the firm shouldn’t assume you know what you are doing and that you will need its guidance. If something goes wrong, you will have it in writing that the onus was on the firm to provide the proper coverage.
In this economy, there are a lot of things that can go wrong and we’d all like to not think about them. But the CEO’s job is to think through the “what ifs” and make sure the business is protected against all of the risks that are out there.