They say one man’s trash is another man’s treasure. So as big players in the orthopedics device industry, such as Johnson & Johnson, migrated away from rehabilitation and regeneration products, like knee braces, in favor of higher margin surgical implants, Les Cross, president and CEO of DJO Inc., swooped in and acquired the unwanted divisions.
Don’t look now, but Cross has built a pretty substantial business from the accumulated discards. In the past few years, DJO, which had 2007 sales of $492 million, has more than doubled its size and product offerings, primarily through picking through those unwanted pieces via mergers and acquisitions.
“A lot of the big companies view these products as low end,” Cross says. “The industry has been highly fragmented, with many entrepreneurial inventors choosing to move on after developing a couple of products. It’s not a very exciting industry, growing about 3 to 5 percent a year. All of these factors have made M&A a desirable growth strategy.”
But quick expansion by a midtier company through acquisitions can be risky, especially when you factor in DJO’s major merger in November 2007 with $450 million ReAble Therapeutics Inc. After all, without effective assimilation of newly acquired businesses, CEOs can quickly accumulate corporate debt while losing customers, revenue and sometimes even their jobs. But with five transactions under his belt, Cross has learned how to buy companies without breaking them by executing effective M&A assimilation plans that capitalize on all the possible synergies resulting from the deal. His process begins with figuring out what his company can do with the acquisition, handling the personnel transition and then maximizing the cost reductions that can come from bringing businesses together.
Understand what you’re getting into
Before making an acquisition, Cross says it’s critical for CEOs to honestly evaluate their management team’s ability to handle an acquisition and take on the extra work. Few companies have the luxury of a dedicated assimilation team, similar to the one at General Electric, and inexperienced, overtaxed managers will often neglect their day-to-day business responsibilities and fall victim to Cross’ assimilation failure scenario.
“Honestly evaluate your team because most CEOs don’t have capable managers just waiting on the bench,” he says. “Either strengthen your team or find consultants you trust to help with the assimilation.”
Next, CEOs should set a straightforward assimilation plan and timetable and then monitor the results. Cross writes a one-page strategic plan, because brevity makes it easier to communicate the plan’s goals and track the results. Then, he meets with his executive team each Monday to keep his finger on the pulse of DJO. He also spends a great deal of time communicating.
“The CEO’s job is to structure and consistently deliver the message outlining the priorities and the goals during the assimilation period,” he says. “Also remember that you need to communicate with all the stakeholders. Good communication creates line-of-sight between the CEO’s goals and the employees, which keeps everyone focused on the outcome.”
No matter how much experience and expertise a CEO might possess in executing post-M&A assimilation plans, even the most finely crafted strategies don’t always go as expected. Since the merger with ReAble, both DJO’s president and vice president of sales have resigned, causing Cross to wear multiple hats while searching for replacements. He says honesty is the best way for CEOs to deal with bumps in the assimilation road before setting a course correction.
“We wouldn’t buy a company unless we could see a clear path of what we were going to do with it, but we also make some assumptions in the process that may not be correct,” Cross says. “When that happens, face the truth, because you’ve got to know what’s truly happening. If you’re falling behind your timetable and there’s a flaw in the assimilation plan, admit it and then set a course correction with urgency. Do it today.”
Take charge of the personnel transition
“Assuming the due diligence has been done correctly, I believe most mergers fail for one of two reasons: either the cultures of the merging companies fight each other, or everyone focuses on systems integration and they forget how to run the business,” Cross says. “Beginning with day one following an acquisition, you have to protect the quality of the product and the service first.”
Cross breaks out post-M&A synergistic opportunities into two categories: cost-saving opportunities and increased revenue opportunities. He uses different strategies to exploit each opportunity, while simultaneously minimizing the top two perils he credits with producing assimilation failures. In some cases, he gets a bonus, because the strategy results in long-term cost savings and market share gains.
Take his post-acquisition human capital strategy as an example. Cross favors terminating most of the people in the acquired company because downsizing achieves cost reductions and eliminates the risk of clashing cultures. But he doesn’t release the staff immediately, so customer relationships and revenue streams are not only preserved but also expanded through sales of enhanced product lines.
“The key is to protect the customer base, so aside from the sales force, everything else pretty much goes away,” Cross says. “When you try to bring the cultures together, everyone ends up working in silos, and there’s a lot of resistance and internal competition. The risk to the strategy is in the planning, because the business must continue during the transition period.”
Many CEOs fear telling acquired employees they’re going to be laid off because productivity, morale and customer relationships may suffer during the critical transition period. Cross advocates open dialogues with the soon-to-be released workers and gives them plenty of notice about when their positions will be eliminated.
“I use an open, honest and fair approach with the people who are part of the acquired company,” Cross says. “They normally remain on the payroll for one year and know that at the end of that time their positions will be eliminated. My experience is that people respond well when they are treated fairly. While they may be sad that they’re leaving, they have plenty of time to adjust.”
Cross offers retention bonuses to workers who stay through the transition period as well as severance packages, because the incentive plans assure that most of the staff will remain in their roles and the business will run smoothly. In addition, retaining the work force of the acquired company for a year gives DJO’s management team the necessary time to transition operational functions so they don’t get derailed by Cross’ second reason for assimilation failure: focusing on systems integration and forgetting how to run the business.
Cross advocates one exception to his policy of terminating all acquired workers: He keeps the acquired company’s sales force. Building increased revenue through cross-selling opportunities and driving sales force productivity is the goal behind every DJO acquisition. To optimize the marketplace synergies and retain market share and customers, Cross says it’s vital to retain the sales force. But leading salespeople is often like herding cats, so Cross creates a marketing and retention strategy aimed at the sales team as part of his assimilation plan.
“You have to quickly win the hearts and minds of the inherited sales force, so they stay focused on the customers,” Cross says. “It can be tricky because sometimes the merger results in reduced sales territories, since you’re adding more sales staff. To get them on board with the changes, it’s important to emphasize the upside. For example, we’ve given our salespeople a continuous flow of new products, so they have a lot more stuff to sell. This industry is only growing 3 to 5 percent per year, but we’ve been able to translate that into double-digit compounded growth, and that’s a reason to stay.”
Cross counts on his VP of sales to do most of the heavy lifting when it comes to winning the hearts and minds of the salespeople, but he also crafts and delivers personal messages to the group because their retention and performance dramatically impact the return from the acquisition investment.
“In the past, I don’t think I personally invested myself enough in the process from the beginning,” Cross says. “As a result, I think our sales force and our customers were more confused about the transition than they needed to be.”
Take advantage of cost reductions
Besides the savings from a reduction in head count, Cross assumes he will find manufacturing cost-saving synergies because he relocates the acquired company’s manufacturing process to DJO’s plant in Mexico. But he doesn’t necessarily assume that DJO’s manufacturing process is superior. The goal is to improve or maintain product quality by adopting the best manufacturing process, even if the decision doesn’t result in immediate cost savings.
“We are Toyota junkies, so we believe in lean manufacturing, and we have one of the top 10 manufacturing plants in North America,” Cross says. “If we believe we have a better way to manufacture the acquired product, we’ll shut down the other plant and begin manufacturing the product in Mexico immediately. If we find the other company has a unique manufacturing method, we’ll build up inventory while the DJO operations team works to transition the process. Our goal is better, cheaper and faster — but it has to be better.”
Cross allows his operations team to make the manufacturing process assessment and the recommendation, and even if he can’t garner all the anticipated savings immediately, he says DJO’s continuous improvement process will eventually ferret out manufacturing process savings.
Manufacturing synergies are easy to spot according to Cross, while savings from cost of goods synergies are harder to predict. Often supplies are secured through long-term fixed price contracts, and current inventories must be depleted before new pricing can be secured using greater expenditures as a negotiating tool.
“Cost of goods synergies are tricky to forecast,” Cross says. “I would discount your estimates. In other words, if you planned on $10 million in savings, I’d expect more like $7 million to $8 million.”
The result of this careful process at DJO has brought substantial growth. After the company charged to $492 million in sales in 2007, its recent merger helped grow it again in ’08, as it pushed past $733 million in its first three quarters, with a realistic shot at $1 billion. That success makes DJO an industry leader within the orthopedic device marketplace, a $6.7 billion industry based on 2006 estimates.
Going through all the steps can be a bit tedious at times, but Cross has learned that sticking with it is worth it — and a successful destination requires that you take measured paces.
“I think, in some cases, I pushed change too quickly with the ReAble merger, and I’ve learned from that and taken responsibility for the mistakes,” Cross says. “But I’ve learned that being a CEO is a marathon, not a sprint. So I remain calm and take a long-term view to get through the assimilation process.”
HOW TO REACH: DJO Inc., (760) 727-1280 or www.DJOglobal.com
In today’s uncertain economic times, having a consistent, stable and secure source of revenue could mean the difference between sink and swim.
But, it’s difficult to predict how the market will affect a company’s clients and customers. A customer that’s consistently given you great business could be here today, gone tomorrow. According to Georgia Vasilion, director, public sector, Technology Integration Group (TIG), one way to establish secure, reliable returns is through public sector contracts selling your goods and services to federal government, state and local agencies, and education institutions.
“Public sector contracts can provide your business with a host of new client possibilities,” says Vasilion. “It should be noted, however, that these contracts require a substantial investment of time and resources, from finding the contract and agency that’s right for you, to drafting the request for proposal (RFP) response, to actually following through with the contract deliverables.”
Smart Business spoke with Vasilion about public sector contracts, how to find them and why they can be so valuable.
What is involved in public sector contracts?
Public sector contracts are generally divided into three main categories: federal government, state and local government, and education. With any of these, the agency will put out an RFP that your company can respond to. Most RFPs are long and detailed, so they require a lot of time and internal resources to digest. And, a public sector contract is not a quick fix, either. Sometimes it can take months or years to complete the process. If you want to get into a public sector business, you have to have buy-in from your entire organization, from management to sales reps who may have relationships with the agency you’re pursuing. To that end, it’s always best to focus on an agency that you do have some knowledge of or experience with. Look at the big picture and how your business will be impacted from top to bottom if you do win the contract. If you can’t fully perform against the contract, don’t pursue it, no matter how good it looks.
How can companies find public sector contracts?
There is a multitude of ways. Perhaps the best way is to visit FedBizOpps.gov (www.fbo.gov). This Web site features a host of open opportunities, and it’s easy to search for one that will best align with your company’s core competencies and business strategies. Again, these RFPs tend to be hundreds of pages long, so make sure you’ve got plenty of time to wade through it all. Other ways to find public sector contracts are relationship-driven. As stated, your sales reps often have associations or connections with different agencies. They can be great resources to find out what business opportunities may be on the horizon. Also, mine your manufacturers for possible opportunities. They may be working on an RFP with the agencies’ end users, and need a partner to submit the bid proposal.
What should companies look out for when pursuing public sector contracts?
Even if you’re going after a federal contract, there are usually state and local considerations to keep in mind. While state and local agencies have their own rules and regulations, such as needing a physical location or business license, these can be worthwhile contracts to pursue as well.
One of the most overlooked requirements in an RFP is the absolute necessity of following directions. RFPs will be very specific. There will be direction of what type of paper and font to use, and how many copies and how they want them bound. In short, agencies receive hundreds of proposals they are looking for any reason to throw yours out. If you can’t follow simple instructions, the agency’s evaluation team will assume you will not be able to deliver on the specifics of the contract.
Finally, you have to have a strong infrastructure. From putting the proposal together and securing the contract to actually following through on it, you’d better be able to deliver to expectations. Most contracts require that you set up some kind of reporting system, and will require you to meet delivery and customer service expectations. If you win a public sector contract and don’t have the infrastructure to make it work, not only will you lose that contract, but it’ll be pretty doubtful you’ll win another one in the future.
If you’re confident your company can handle the contract, what benefits and ROI can you expect?
Bottom line, a public sector contract can help get you into a constant revenue stream. You’ll be able to hit your numbers and keep your business moving forward, even in a tough economy. Having these contracts gives you peace of mind, knowing what will be coming in and going out in the future. Over time, these contracts will allow you to increase margins, which is not an easy task in today’s market. And, these contracts get you more involved with the agency you’re working with, so you’ll become more familiar with who that agency is and what it does, and you’ll be a known entity, thus giving you a better opportunity to shape and win future contracts.
GEORGIA VASILION is the director, public sector, for Technology Integration Group (TIG). Reach her at (310) 320-4934 x4962 or Georgia.Vasilion@tig.com.
It’s a foregone conclusion that your company and its employees need technology to conduct day-to-day business. Yet many companies don’t have a technology purchasing management solution in place, and some have probably never examined their technology purchasing and maintenance processes.
Companies spend a lot of money on technology devices and the consumables for those devices, yet, many times, purchases are made with no rhyme or reason, and thousands of dollars are wasted. Different departments manage different devices, devices are procured from various vendors, rental and maintenance costs are not identified or measured, and devices and their components are misused and underutilized. Thus, more and more companies are looking at consolidated purchasing solutions.
“The key is to understand your company’s total environment, simplify your technology purchases and save money,” says Becky Connolly, the director of computer and imaging supplies and accessories at Technology Integration Group (TIG). “Therefore, it only makes sense to partner with one supplier who can be your one-stop resource for all technology needs.”
Smart Business spoke with Connolly about how purchasing consolidation can help you cut costs, leverage your purchasing power and improve the bottom line.
How do you know if consolidation is right for your business?
Consolidation is right for all businesses, no matter how big or small. You need to look at your technology vendor as a partner instead of as a supplier. If you buy a computer from one company, why would you buy the peripherals from a different company? If you buy a printer from one company, why would you go elsewhere to contract service or buy the consumables from yet another company? Why not stop employees from renegade spending. Having one supplier to outfit your company with everything it needs makes sense and this consolidation will gain your company access to better purchasing power and will save money.
Consolidation allows you to leverage this purchasing power, giving you better prices on equipment and supplies, a full understanding of what you are spending and why and an entire big-picture view of your corporate environment. This shows you exactly what your spend is, so that instead of variable spending, you can approach spending with accurate fixed costs and savings.
Where do companies usually waste the most?
Companies often start off with small systems and continue to add pieces over the years as business grows. This usually leads to machines and technologies that end up underutilized or not used at all. If you ask some companies how many printers they have, for instance, they may not have a clue. Why pay for something that does nothing but collect dust?
With regard to printing, research from Gartner Inc., an information technology research and advisory company, shows that printing costs are 1 to 3 percent of a company’s gross revenue. Thus, despite all the talk about moving towards a ‘paperless world,’ companies are still printing everything. So a print management solution is a recommended part of any consolidation plan.
What is a print management solution, and how would a company implement one?
A print management solution is a key part of a consolidation plan. You and your chosen technology partner should work together to determine exactly what printing devices you need and why and when you’re going to get them. As part of this process you should consider a print management solution.
The first step in a print management solution is to identify where your biggest printing problems are, and then do what is necessary to eliminate those pain points. Your technology partner will conduct a comprehensive assessment to identify just how much you are spending and wasting on printing, including costs for devices, cartridges, toner and maintenance. Then, recommendations are made to help you find the solution that’s best for you. There are many ways to improve printing efficiencies. Sometimes, it’s as simple as a balance deployment plan, moving your current devices into areas where they will be better utilized. Another easy improvement is streamlining printer locations, reducing document flow or switching from costly inkjet printers to laser devices.
Usually, it will take time to change a company’s printing culture. The net result, however, will be increased productivity, less waste, less maintenance, streamlined supplies purchasing and lower overall costs.
Is there often resistance from employees when you make changes?
Most people are resistant to change, whether it be that they can no longer purchase their own supplies, that they now have to go down the hall to access a printer, or that certain software will no longer be used. When implementing a technology consolidation plan, you can’t just expect employees to adjust with no questions asked. Meet with each decision maker and each department to get feedback and buy-in from everyone. If employees understand what you’re trying to accomplish and can see the benefits that will come from a consolidation solution, they’ll be more likely to embrace the change.
BECKY CONNOLLY is the director of computer and imaging supplies and accessories at Technology Integration Group (TIG). Reach her at (800) 858-0549 x4100 or Becky.Connolly@tig.com.
When George W. Haligowski was offeredthe opportunity to serve as CEO ofImperial Capital Bancorp Inc. in 1992, itcame with a catch: The board wanted a 100percent return on its investment.
There was also the slight problem of thecompany having $100 million of its $400million in assets impaired, potential FDICaction was looming, and it was in the middle of the savings and loan crisis.
Haligowski knew he couldn’t control themacro events going on at the time, so theasking price seemed too high. He countered by offering a 50 percent return inthree years. If he failed to hit the numbers,the board could fire him. The board agreed.Haligowski was a crafty risk-taker, as thatgamble with the board paid off for bothparties. Following an IPO in 1996, hebought out the owners, giving them the 100percent return they originally requested,and then he set to work to turn the organization around.
To move forward, the chairman, president and CEO identified a niche opportunity, supported that niche and maintained patience throughout the process.
“The company was trying to be a lot ofthings to a lot of different people,”Haligowski says. “I think it just took afresh assessment from an outsider, andmy first thought was, ‘There’s no way wecan do all these things well. It’s a gambleto put all your eggs in one basket, butsometimes you just have to do it.’”
Find a niche
Haligowski says he had a competitiveadvantage entering the CEO role as abusiness manager with significant salesexperience, because he viewed opportunities through the eyes of a marketer,not a banker. After making initial overhead reductions of 35 to 40 percent andeliminating the thrift’s commercialbanking services, resources weresparse. Generating new revenue was theonly road to growth and profitability,but the larger competition was formidable. After assessing the competition,Haligowski found a weakness in theenemy’s front line, and simultaneously,the bank’s niche market and a newgrowth strategy were born.
“Nobody has a crystal ball,” Haligowskisays. “I completed a thorough opportunity analysis by being involved in the marketplace and not sitting behind the desk.The bank had limited resources, and wecouldn’t really compete against the bigger commercial banks. It was a classicDavid versus Goliath situation.”
He identified an underserved market inthe commercial lending space, writingloans for real estate entrepreneurs, andhe saw an opportunity to exploit theniche through better sales techniques.
Haligowski concluded that many banking industry lending officers were reallyorder takers in disguise, and they wereleaving midsized commercial loanopportunities on the table. He took a riskand dedicated 25 percent of the bank’sresources toward the niche lending market composed of entrepreneurial ventures, such as multifamily real estate andconstruction loans ranging from$250,000 to $7 million. He attacked themarket with financially motivated salesrepresentatives, who outmuscled andouthustled the competition.
“To exploit a niche, you survey theadvancing army and look for breachesin the line,” Haligowski says. “Thenyou test the market to see if it’s receptive to your pricing and service. Whenyou see that it’s yielding, you want topower into the market and run as fastas you can. Timing is critical when youhave limited resources. We’re a smallcommercial bank; our advantage isthat we can move quickly. We’re like aPT boat: We can zig and zag becausewe are nimble and we can turn on adime, but we’re not an aircraft carrier,so we can’t survive the Battle ofMidway.”
Support the niche
With a new niche focus, Haligowskithen worked to change the company’sstructure and culture in order to support loan origination activities, loanservicing and the unique lending needsof the entrepreneurial borrower.
As part of the cultural shift,Haligowski made the bank’s managersowners by giving them stock in thecompany. He also empowered thecompany’s loan officers by givingthem creative license to structureloans in nontraditional ways to meetthe needs of borrowers who are oftenrepositioning a property. The notion ofentrepreneurs working with entrepreneurs was a hit in the market, and thebank grabbed market share from itslarger, less flexible competitors.
“I consider my managers to be mypartners, not my subordinates,”Haligowski says. “I think an ownershipstructure is preferable for an entrepreneurial culture because you can pushpeople differently when they have astake in the outcome.”
Giving key managers ownership andproviding the bank’s sales staff withincentives has enabled ICB to achievehigh rates of organic growth whileavoiding the need to take on largeamounts of debt from acquisitions.Not only has this driven the company’sstock price and dividend, but it’s setthe bank apart from its larger commercial peers, who often rely on mergers and acquisitions as a growth strategy.
In 2000, ICB re-entered the commercial banking arena. The 2002 acquisition of Asahi Bank of California provided ICB with the operating systemsit needed to operate commercially, soit could subsequently offer commercial borrowers a complete package of banking services. Asahi didn’t have branches, so the acquisition gave ICB the opportunity to increase revenue, without adding brick-and-mortar overhead. Haligowski stayedwith his successful niche market strategy and expandedeastward, eventually opening 19 new loan originationoffices across the country.
ICB made another acquisition in 2002, launching itsentertainment finance division. The division providesbanking, advisory and collection services to the entertainment industry. The division follows suit with Haligowski’sniche market strategy, because its focus is financing independent films, some of which scored home runs at the boxoffice, like “My Big Fat Greek Wedding” and “Monster.”
Aside from their strategic value, Haligowski made theacquisitions when the price was right. When he shops foracquisitions, Haligowski is first and foremost a bargainhunter. He says it’s important to look at acquisitions carefully before moving forward, and he always asks if he personally would pay two to three times the book value for abusiness.
“There has to be a really compelling reason to make anacquisition, like you’re getting a really good deal or you’readding to your core competencies,” he says. “Otherwise,you’re just diluting shareholder value. I’ve never reallyunderstood paying for good will. I don’t understand how itworks.”
Given the recent trends in the banking industry,Haligowski and his team may need those Midway-like battle survival skills. Over the last four years, other banks followed ICB into the midsize commercial lending space,some offering lower rates and less stringent lending qualifications. Then the bottom fell out of the market completely, and demand dropped by nearly 75 percent. Whencompetitors launch a niche market invasion, Haligowskisays the best survival tactic is often to hunker downbecause competitors aren’t often dedicated to the spacelong term, and then commence a hybrid marketing strategy to protect some of your market share.
“It’s a misnomer that being a niche player limits growth,”Haligowski says. “You select a niche market because it’ssignificantly underpenetrated and because you have a limited share of the available market. So you can mitigate riskand continue to grow by expanding your share.”
Despite having opport unities to increase market sharethrough better execution, Haligowski says that the last 12months have been challenging and that the underservedcommercial loan market all but evaporated during 2007.He says that just as timing is vital when gaining an initialfoothold in a niche market, it’s equally important whenwaiting out a down period.
“You don’t want to go surfing when the surf isn’t up,”Haligowski says. “You have to right-size your resourcesand wait for the next wave of opportunity. The otherchoice you have is to meet the price competition head-onby writing some loans at lower rates, and then outsourcethe risk to a third party. I think a hybrid solution is thebest answer, because you’ve got your entire structurededicated to the niche market, and it will eventuallyreturn.”
Under his hybrid solution, Haligowski has continued topush his sales team toward increased market share in thecommercial loan market, and then selectively meets pricing competition while carefully scrutinizing the split of thebank’s loan portfolio. In addition, he incentivizes his salesteam toward cross-selling by selling existing borrowersancillary banking services.
During the recent difficult times, Haligowski hasremained close to the bank’s employees. He provides thema monthly status report, and he personally visits customers to thank them for their business and also visitstroubled properties the bank has financed. Haligowskicautions CEOs not to overreact to market changes and tostay the course if they want to be successful in niche markets.
“We have our entire company and the culture set to support the commercial loan market,” Haligowski says. “It’s ahighly fragile system built on trust, so to undermine thatwould destroy the very underpinnings that make the entirething work. You have to spend more time in the field during difficult times and let people know you are committedto staying the course. You have to support people andmanage their perceptions when things are tough becausethat’s when they need reassurance the most.”
Although the bank has suspended its dividend for theremainder of 2008, it has remained profitable thus far. Asa demonstration of his confidence and his penchant for risk-taking, Haligowski purchased more than 100,000 ICBshares on the open market so far this year, making him thebank’s largest individual, noninstitutional shareholder.Since buying the company and repositioning it as an entrepreneurial niche player, he has grown the bank’s assets to$3.6 billion last year, up from $3.4 billion in 2006.
“I think you just have to make a judgment about the bestway to go,” Haligowski says. “You can get everybodyinvolved in the decision, but the only way the employeeswill follow a leader is if you are clear in your position.Sometimes, you just have to take a gamble and set a strategy, but don’t take it lightly, because if you’re wrong, youcan lose your job.”
HOW TO REACH: Imperial Capital Bancorp Inc., (888) 551-4852 or www.icbancorp.com
Workers’ compensation claims can be a pain for both employers and employees. Employers lose out on manpower while facing a potential financial barrier. Employees suffer from a daunting ailment that sidelines them for short or long periods of time. The issue can easily be time consuming and confusing for both parties.
Steve Jacobson, a commercial insurance broker for Westland Insurance Brokers, says one way for employers and employees to find common ground on the issue is through constant training and educational programs. It’s also important for companies to implement a formal safety program in an effort to prevent accidents before they happen.
Smart Business spoke to Jacobson for a more detailed look at how companies should approach workers’ compensation insurance.
How can companies reduce workers’ compensation premiums?
The most important way is to work with a broker and insurance company who knows and understands how your business works. Regular claims reviews should be performed to make sure claims are being adjusted in the most timely and cost effective manner possible. The sooner a company can get a claim closed, the less it will affect future costs. By preventing or reducing the exposures that cause injuries, a company can assure reduced premiums in the future. Get management and employees involved. Prevention and education are key factors in future insurance costs.
What factors should companies consider when selecting an insurance carrier?
With the recent reform, many new insurance companies have recently begun writing workers’ compensation coverage in California.
When choosing a carrier, a company needs to select one that is financially sound and has an ‘A’ rating from the AM Best Co. Choose a carrier that has its own claims personnel, preferably located where the business is located. By doing so, you will get claims adjusters who know who the good doctors are and who the bad ones are, which will help in reducing fraudulent claims and increased costs on legitimate claims.
The better quality insurance companies will also have loss-control personnel, who will assist you for free with reducing exposure to losses and with employee safety programs. They also have employees dedicated to detecting and fighting fraudulent claims.
Can an employee incentive program be beneficial?
Employee incentive programs can be extremely beneficial in reducing the frequency and severity of a company’s claims. When employees feel that they have something to gain, they will work hard toward the reward. By making employees understand they are a part of the team, they will take ownership in the program. A company’s losses today affect its premiums for the next few years. The small costs of today’s incentive programs will save a lot more for years to come.
How can employers help employees understand the impact of workers’ compensation on a business ?
Employers need to educate employees on the effect the company’s losses have on their employer’s premiums. Employees need to understand that today’s losses affect a business’s premiums for the next three to four years. When you educate the employees and explain that if the employer has to pay higher premiums due to WC losses and that there might not be enough money for raises or bonuses, it gives the employees an incentive to avoid a claim or to get back to work as soon as possible after a claim.
A successful workers’ compensation program really has four partners that need to successfully work together: the employer, the employees, the insurance broker and the insurance carrier.
Has the cost for workers’ compensation premiums changed for California employers in recent years?
Starting in 2000, the California workers’ compensation industry began to see significant rate increases. Since the new reform has gone into effect, our policyholders have seen decreases on average from 65 percent to 75 percent over the past two years from a number of high-quality, ‘A’-rated insurance companies. Rates are continuing to come down, but keep in mind that the cheapest rate is often not the best rate.
How can employers reduce their exposure to loss?
Regular safety and employee training meetings should take place with topics that are specific to your industry. Claims can often be avoided with proper training before an accident. Employers should also have the broker’s or insurance company’s loss control representatives perform a walk-through a couple of times a year to survey the business in order to point out any exposures to losses that could be eliminated before they cause a loss. Material handling procedures and machine usage should also be evaluated frequently. Additionally, by providing safety equipment to employees such as back-braces, goggles, etc., some claims can be virtually eliminated.
STEVE JACOBSON is a commerical insurance broker with Westland Insurance Brokers. Reach him at firstname.lastname@example.org or (619) 641-3260.
When Eddie Fadel came back to Ashworth Inc. as president in May 2007, he knew it wouldn’t be an afternoon stroll on the golf course.
“The company had kind of lost its way,” he says. “There was a reason they wanted me to come back.”
While Ashworth still brought in $209.6 million in revenue in fiscal 2006, its on-course golf business — by far the largest of its six golf apparel segments — was down 28 percent that year and was already down double digits in the first two quarters of fiscal 2007, as well.
“Don’t confuse activity for results,” he says. “You have to look at results. If the results aren’t what they’re supposed to be, and they aren’t meeting your expectations, you have to ask yourself why.”
Part of that answer was attributed to what the prior administration looked at.
“I think they were looking at the wrong [metrics],” Fadel says. “I don’t think they understood the industry. ... I think that everyone on that level is going to look at some kind of metrics. It’s just are they looking at the right ones? To me, the right ones are the ones that count and produce results.”
The company had also ventured into noncore apparel arenas to try to compete with athletic companies.
“A lot of athletic brands have gone into high-tech fabrics,” Fadel says. “They snag, and they smell, and they’re hot to wear, and it’s not who we are. We’re not an athletic brand. I never got caught up in it, but the prior administration got caught up in it. They were a me-too company. They lost their way. They were trying to be like everybody else. They thought they were doing the right thing, but they did the wrong thing.”
To get Ashworth’s golf segment back on track, he knew he needed to make changes, so he went back to the basics.
“I’m a simple guy,” Fadel says. “There’s three ingredients — it’s people, it’s product and it’s brand. You have to focus on all three.”
Build a team
The first part of getting back on track was getting the people part in place, so Fadel first talked to department heads about why they thought their performance was down and whether or not they could improve.
“Sometimes, people will tell you, ‘I don’t know what to do to make it better,’ or you have people who have given up who say, ‘Well, I can’t do it,’” he says. “Then I’m going to find somebody who can. It’s OK to tell me that you don’t how to because we can figure out a way, but when you give up, I need somebody who can try.”
If you have people who don’t want to try, then replace them with people who will. While Fadel says he moved at least 30 people in, out or around the company, one of the bigger moves he made was bringing founder John Ashworth back to lead product design and direction. Having people at the top who can provide that direction is key.
“If we take from the product point of view, it’s essential that you have a visionary,” he says. “He’s a catalyst — that attracts a different quality of people.”
When people see you making personnel changes, it sends a message that things will be different, which helps you bring in better people.
“Once you get the first few pieces in place, then they know somebody else, who knows somebody else,” Fadel says. “A lot of it is word-of-mouth. That’s infectious.”
As you make changes, keep a few keys in mind.
“You have to have people that have the energy and passion and they’re doing this because they love doing it — not because they have to,” he says.
Get to know people in your organization so you can gauge who’s passionate and energetic.
“You have to connect with everyone in your organization,” Fadel says. “You never know where you’re going to find the next great person. They may be there, but you’re not using them properly. The way you do that is through communication.”
Once you have energetic people willing to try their best, then you need to hold them accountable.
“You should constantly be evaluating performance and making sure people are suited to the position they’re in,” Fadel says. “You shouldn’t just assume that they are.”
You can’t evaluate your people if you don’t know what you’re measuring.
“You have to set up the proper measurements,” he says. “It’s essential. Performance is an arbitrary thing. The worst thing that can happen in an organization is people think they’re doing well, but they’re not meeting your expectations, so you’re not working on the same metrics as far as performance.”
Create metrics based on what’s important to getting the job done.
“We don’t want to muddle along with mindless bureaucracy and spreadsheets,” Fadel says. “Sometimes people believe there is a mathematical equation. The way to set up the proper metrics is you have to talk about it, but you have to identify the things that make it work.”
Sometimes these things may not be as concrete as a sales goal for a salesperson. In those situations you have to look at other factors, such as timelines for projects and if those deadlines are met or how well someone stays within their budget. Even if you’re measuring a salesperson’s performance, look at other factors beyond just sales goals. Typically, customer satisfaction is important, so Fadel says to look at how often salespeople touch the customer with phone calls and meetings and then look at the results — the quality of sales and the product mix they sell.
“You set goals, and you work to achieve those goals, and then you monitor them along the way,” he says.
Build your product
Fadel’s first job was working as a caddy and then in the shop at a golf course in his Ohio hometown at age 15. One day, Sammy, the course pro, had to give a lesson when the IZOD rep was coming to fill the shop’s annual order, so he told Fadel to just order the same thing as last year.
When the rep arrived, he was annoyed that the pro wasn’t there, but Fadel told him he’d handle it and to bring in the line. Instead of ordering the same thing, he specifically picked everything. Over that next year, business improved, so when the rep came back the next year, he instead asked for Fadel, and Sammy eventually turned the whole shop over to him.
“I was the one in the shop selling the product to the members, so I knew what they liked,” Fadel says.
By offering better products, he was able to improve business then, and he knew that same concept would be key to freeing Ashworth’s customers from the state of polyester that they, the company and the industry were all frozen in.
“All industry experts will agree that the only way you’re going to make business better is through improved products — innovation,” Fadel says. “You have to have innovation. You have to have improved products. You can’t fake that. You can’t do it with hype. There’s plenty of product out there, so you have to have products that are better than your competition. You have to differentiate yourself.”
Ashworth traditionally had been a cotton house, and he had an inkling that they should refocus on cotton, but he needed to do some research first.
“Your customers tell you what you do best,” he says. “The results show.”
Fadel says to go out with your team on sales calls to talk to customers.
“Don’t just stay in your ivory tower and do it from spreadsheets,” he says. “Go and actually mix with the people that are part of that group.”
He says that the most successful companies have open communication.
“You may not like everything they say, and you may not agree, but still listen,” he says.
Listening is sometimes a challenge, and Fadel says that he’s a headlines guy, so he’ll often pinch himself to keep focused on everything the person is saying instead of waiting for the headline.
“Be patient,” he says. “Let people finish their thought. Don’t interject until they finish their thought. Quick to listen, slow to speak. Just let them talk and take your time.”
Also, ask questions, but do so without making them feel like it’s an interrogation.
“If it’s too forceful on the questions, it’s interrogation,” Fadel says. “Once you get them talking, you should ask questions that are led from the conversation. They may mention a fact about their business or something, and you can ask, ‘What do you mean by that?’ and you get more information on the areas that will be more meaningful in understanding their business.”
Once you get feedback and input from people, you have to figure out what to listen to and what to pass on.
“Write down some bullet points,” Fadel says. “You always start out with the end in mind. What is it that you’re trying to accomplish, and what information do you have that you think is beneficial to helping you accomplish your mission?”
Also look at why you do what you’re doing. If you ask why something is the way it is, and the response is, “Well, we always did it this way,” then you need to dig deeper.
“That leads me to believe that we don’t know why we’re doing it, so why do we think we did it before?” he says. “When you get to a point where no one knows, then you might have to change.”
After going through this process of talking to people, it confirmed Fadel’s gut feeling that Ashworth needed to deviate from the pack and refocus on cotton.
“There’s always people saying, ‘You ought to do this; you ought to do that,’ but you can’t do everything everybody wants you to,” Fadel says. “There’s a reason there’s chocolate and vanilla — you’re never going to please everybody.”
Improve your brand
By getting a better team of people in place and refocusing on its core cotton products, Ashworth turned the corner and drastically improved the third part of Fadel’s recipe for success — its brand image.
“The positive impact is they’re saying, ‘Ashworth is back,’ but it takes time,” he says. “We’ve improved perception. The new product line is exciting to them. The product line we’ve gotten on people’s backs, they can tell a difference, so that’s the positive.”
The numbers also confirm that. After stopping the bleeding and breaking even in the golf segment’s fiscal 2007 third quarter, the next three quarters all went up.
“To be up three consecutive quarters, shooting for the fourth, shows some consistency and sustainability, and I feel more confidence today than I did before,” Fadel says. “We’re a product company again. We’ve really elevated our brand and separated ourselves from our competitors.”
With yearlong product cycles, Fadel is finally seeing the seasonal lines with his signature on them, and he’s already looking to build on what he’s already improved.
“Don’t stand still,” he says. “You have to constantly elevate. Every season, say, ‘What are we doing better than we did six months or a year ago?’ I can tell you, there are a lot of things we’re doing better today, but there’s still a lot of room for improvement.
“You’re never done, and you’re always trying to get better. It’s like a golfer — if you shot in the 90s, once you shoot in the 80s, then you try to shoot in the 70s. Once you shoot in the 70s, you try shooting in the 60s. You’re always trying to get better.”
HOW TO REACH: Ashworth Inc., www.ashworthinc.com
An entrepreneur is someone who organizes, manages and assumes the risk for a business venture. Today, many entrepreneurs find their ventures don’t have the traditional boundary constraints. From inception, many new entrepreneurial ventures find they can compete across borders and capture emerging international business opportunities. Advancements in technology have allowed the economic environment to be characterized as “global.”
Smart Business asked Mark Ballam of San Diego State University about the state of international entrepreneurs in today’s global economy.
How do you define the term ‘international entrepreneurship’?
The growth of this ‘global economy’ has created opportunities for businesses to market products and services all over the globe. It also allows them to develop alliances and partnerships throughout the world. Integral to today’s global economy are entrepreneurs and entrepreneurially minded firms who see the world as their marketplace. We call these individuals ‘international entrepreneurs.’
Increasingly more entrepreneurial ventures are launching themselves as international businesses from the outset. We call these companies ‘born global.’ These firms bypass traditional domestic markets and bring highly innovative products to the world. The growth of globalization has created many new opportunities for these firms, and it has also introduced new threats. As such, the same skills needed previously by companies competing in the global economy are needed by today’s international entrepreneurs.
What is the study of international entrepreneurship?
Throughout the past decade, international entrepreneurship has become a key issue in international business studies. International entrepreneurship is the junction between international business and entrepreneurship and the relation to other business functions including marketing, management, human resources, finance and accounting. When studying international business topics, we learned that companies needed to understand the frameworks for international expansion. Firms had to understand how to develop and improve their international strategy. Market research and in-country due diligence are key, as is understanding how to find and establish relationships with potential overseas business partners. Also important is knowledge of other languages and cultures and their impact when conducting business in other countries.
How has this affected business research?
Continuing globalization of the marketplace has also sparked fascinating new research opportunities for academics. New ideas and concepts continue to emerge, especially in the area of international entrepreneurship. In the past, academic researchers who studied international business focused mainly on large multinational corporations and business methods that helped them succeed internationally. In studying entrepreneurship, academic researchers mainly focused on the creation of new ventures and the management of small- to medium-sized businesses in relation to domestic markets.
Now, because of the increasing number of new and innovative business activities that cross national borders, there are a growing number of topics that can be added to the research mix. This phenomenon developed because entrepreneurial innovation is increasing everywhere, and the new firms being established see the world as their marketplace. Interesting new research topics include cross-border entrepreneurship, innovation in new and small organizations, international environments in which new firms operate, and even family business and social entrepreneurship.
Also, these business issues are now being studied from a variety of perspectives, including economics, sociology and anthropology. Today, business professors are creating multicountry research teams to study how innovation and creativity as well as the role of entrepreneurship and government interaction affect new global businesses. The outcome of this wave of research is important theoretically, and it has direct relevance to business and the teaching of international entrepreneurship.
How are schools meeting this new need?
SDSU’s College of Business Administration introduced the new Global Entrepreneurship MBA program, which blends two of our most recognized programs, Entrepreneurship and International Business, and gives students a variety of skills needed for success in the rapidly changing global marketplace. Students travel to four different countries as they study in a one-year, comprehensive program that shows them, in a hands-on environment, how international business and global entrepreneurship is conducted.
Students begin their study with six weeks in San Diego and then travel for 12-week blocks to partner universities in China, India and the Middle East, finishing their last six weeks in San Diego. At each university, students link with their peers creating an international network of professional contacts. The program is designed to ensure the students gain a significant global edge while learning traditional business functions.
MARK J. BALLAM is managing director of the Center for International Business Education & Research at San Diego State University. Reach him at (619) 594-3947 or email@example.com.
But the achievement is even more astounding when you consider that AMN Healthcare is in an industry composed of hundreds of competitors that has evolved from infancy to adulthood in record time. While the industry continues to eke out organic growth, its maturing status encourages consolidation, so larger competitors are making acquisitions and nipping at AMN Healthcare’s heels.
Nowakowski’s secret for maintaining the lead is never looking back in the rearview mirror at the competition and always striving to be the pace car that others must follow.
“To maintain an industry leadership role, you have to be constantly looking forward, earn the business every day, make long-term investments and take chances with people,” Nowakowski says.
She likes to offer people career opportunities because, at one time, she was given that all-important first chance to prove her abilities before she had all the requisite experience, and she grew through the process. Nowakowski also differs from many of her peers in that she was promoted to the CEO position from within the organization. Starting as the company’s first chief financial officer in 1990, she later became division president, then company president and finally CEO in 2005. Now, she’s the leader of a NYSE-traded company that generated $1.16 billion in revenue in 2007.
Under Nowakowski’s leadership, AMN Healthcare has grown by increasing its service offerings and global recruiting strategy, and in addition to driving organic growth, the company made five of its eight acquisitions under her leadership. Today, AMN Healthcare operates under 12 distinct brands as a way to recruit the highly coveted nurses, physicians and allied health professionals it places on contract assignments.
Create brand diversity
Nowakowski joined what was called American Mobile Nurses in 1990, a growing privately held provider of travel nurses. Clients were beginning to express an interest in contract allied health professionals, and the industry was growing by expanding the contingent work force concept to other health care disciplines. The following year, the company grew organically by launching a mobile therapist division, and in 1998, the company launched the AMN Healthcare name. The expansion phase has continued including overseas nurse recruitment and the more recent acquisitions of MHA Group, a provider of temporary physicians and physician direct-placement services, and Pharmacy Choice, which provides temporary and direct placement of pharmacists.
“Clients were asking for contract physicians,” Nowakowski says. “The key is to listen to them, anticipate the market, and then get into the space quickly. Otherwise, someone else will offer the service. To be an industry leader, you have to be a single-source service provider to clients or else you give a competitor an opening.”
Today, AMN Healthcare provides a full range of staffing services under a multibrand recruiting model. While there’s an increased cost and a few challenges associated with executing the strategy, each brand attracts a different group of health care professionals, so there’s value in retaining the inventory of health care professionals and the placement team who garners relationships with the contingent workers, following an acquisition. Sometimes, there are multiple suitors for health care staffing firms, so how the CEO handles the transaction and the integration of the brands often dictates success in maintaining the brand identity and retaining the work force.
“The key to managing multiple brands and keeping them intact is to respect each organization’s differences,” Nowakowski says. “You can’t expect to change everything overnight, and you shouldn’t change everything. You should author the integration plan before the acquisition closes and involve the key leadership of the prospective acquisition in the assimilation strategy. The process builds trust and eliminates surprises. Agree upfront which functions and decision-making processes will be consolidated and which will remain autonomous.”
Agreeing about the future operating model as part of the due-diligence process keeps the acquisition from unraveling once the investment is made. Each AMN Healthcare brand has its own president and its own profit and loss statement, which ensures operating independence, and the structure appeals to selling entrepreneurs. Nowakowski favors integrating back-office functions, like accounting and risk management, while providing new acquisitions with tools that enable growth, such as improved Web sites and technology capabilities.
“Each brand has its own operating plan, which is approved by the board,” Nowakowski says. “Of course, we’re looking for them to fit in to the long-term company goals and cohesiveness around things like pricing and the types of disciplines they are providing, but they have a great deal of autonomy in how they conduct business. That maintains the brand’s independence and its ability to appeal to a different segment of the contingent work force.”
Put people first
While people are a vital component in the success of most businesses, in the staffing industry, the key is the quality of the workers placed on assignment. In addition, clients rely on the expertise of recruiters to make critical placement decisions. With people dictating the company’s success at every turn, relationship prowess and execution consistency not only sustain the AMN Healthcare operating model, they directly impact the company’s industry leadership position. Because AMN Healthcare must compete for acquisitions, contingent workers, recruiters and clients, Nowakowski is adept at handling people and leading the way with her talents.
“We were vying to acquire MHA Group and closing the transaction was a critical step for our organization because having physician placement capabilities was vital to becoming a full-service provider,” Nowakowski says. “There were several times during the negotiations when the deal was off the table. I think what finally helped move the process forward, is that I envisioned the deal through the eyes of the other party. The contract included a post-acquisition earn-out bonus for the owners, if certain results were achieved. They were concerned they wouldn’t earn the minimum bonus, so I finally agreed to a guarantee. I think, sometimes, you have to put your ego aside when things get off course and come back to what makes a good partnership, which is trust.”
Each brand has its own sales force, so it’s important to keep the business development team focused on winning the battle against outside competitors, not merely diluting revenue generation by competing for the same business against other AMN Healthcare representatives. Clients can also be confused when multiple brands are offered under a single company umbrella a reason why many executives often favor brand consolidation following acquisitions. Nowakowski relies on her people management skills to build a cohesive team focused on taking down the company’s outside competitors not each other.
“I think it’s important to discuss how the sales teams will work together as part of the acquisition discussions and involve the managers and the sales teams in the strategy,” Nowakowski says. “We use a cross-selling model, and the sales teams’ incentives are aligned, which encourages the representatives to help their counterparts. They visit the client in teams, presenting our offerings only under the AMN Healthcare brand. Going to the client as a unified team creates trust between the sales groups and message uniformity with the client.”
Building and developing an internal staff has been vital to executing the company’s growth plan, which includes competing for the attention of the more than 2 million nurses in the U.S., who have their choice of jobs. Nowakowski says the company went from 800 associates to 2,000 seemingly overnight, in part because staff chose to remain with the company after acquisitions but also because she delivers on her promise of providing career opportunities to up-and-comers. Last year, 40 percent of the company’s promotions were awarded to internal staff in accordance with Nowakowski’s belief that talented personnel should be given the opportunity to spread their wings.
“I moved one consultant from Deloitte over our payroll and billing system, and he created the entire infrastructure that pays and bills our 7,000 assigned clinicians every other week,” Nowakowski says. “I gave him the opportunity to run our allied health division, even though he had no sales experience, because I was so impressed with his work. Sometimes, passion and commitment can make up for a lack of experience.”
In addition, having the staff and resources to assimilate acquisitions effectively and continually assessing the adequacy of the company’s infrastructure to sustain growth is something she reviews every day because both are vital to maintaining the lead.
“You can’t effectively integrate an acquisition with staff who can only dedicate themselves to the task part time,” Nowakowski says. “It’s a full-time job to do the job correctly and to make sure people are working together cohesively. CEOs should evaluate their staff and infrastructure before attempting an acquisition to make certain there are enough capable resources to assure a seamless transition.”
Investment in continuous improvement
When staffing industry customers procure services, they have many options, so customers must be satisfied or else they will defect to a competitor, and there’s certainly no room for error when contracting health care personnel care for patients. Nowakowski says that continuous improvement and continuous investment go hand in hand, because error reduction and client retention allow CEOs to reduce overhead and rework costs, which frees up investment funds.
“Quality and continuous improvement are the fabric of the organization,” Nowakowski says. “To create a culture of continuous improvement, CEOs have to constantly talk about the importance of quality, monitor metrics and quality ratings, and provide staff with incentives that support the quality mission.”
To demonstrate her commitment to quality, Nowakowski explains each of her decisions to the company’s staff by illustrating how her choice supports her commitment to quality, especially when her decision supports quality but not increased revenue. For example, Nowakowski says she could lower the selection criteria for contingent staff, enabling recruiters to fill more requisitions, but that would send the wrong message about the importance of quality to the team.
In addition, AMN Healthcare conducts anonymous quality surveys among client and contingent professionals and Nowakowski monitors those results along with data that measures the company’s basic deliverables, such as the percentage of filled orders, completed assignments and order cancellations.
She also uses feedback from client and contingent worker focus groups to craft the company’s investment strategy. AMN Healthcare maintains 20 different Web sites geared toward the recruitment and professional education of each brand’s contingent workers. The company’s latest investment, supported by focus group feedback, enhances each site’s social networking capabilities, creating a portal that will get into the lives of the health care professionals.
The concept and the investment decision were partly influenced by industry leaders outside of staffing. Nowakowski says she learns from observing what leaders do in all industries to keep their companies in the lead.
“We watch Nike and Google and bring some of their best practices to the table here,” Nowakowski says. “I think CEOs can learn a great deal from looking outside their own company and industry for ideas and what keeps them ahead of the competition.”
Under Nowakowski’s leadership philosophy, there’s no doubt that growth requires capable people and ongoing business investment, but she says those things are even more important if the CEO wants to maintain an industry leadership position, which is garnered through a blend of organic and acquired growth.
“While I think long-term investment is vital to sustaining growth, so is remaining steadfast with your values,” Nowakowski says. “As time goes on, strategies will evolve, but a commitment to respecting the individual, quality and continuous improvement are the things that keep companies at the top of their game over the long haul.”
HOW TO REACH: AMN Healthcare Services Inc., (866) 871-8519 or www.amnhealthcare.com
Hampered by a steady rise in energy prices, a downturn in the housing market and woes in the credit market, the U.S. economy has been sluggish throughout the first half of 2008. The good news, however, is that despite this confluence of negative economic indicators, the economy has shown growth.
“The U.S. economy has been remarkably resilient,” says Dana Johnson, Comerica Bank’s chief economist. “It has grown nearly 1.5 percent at an annual rate over the first half of the year, despite a rise in energy prices, a fall in housing prices and a consistently disturbed credit market.”
Smart Business spoke with Johnson about his economic outlook for the coming months.
What is your economic forecast for the remainder of 2008 and moving into 2009?
The second half of 2008 is going to look a lot like the first half where growth averaged about 1 percent on an annual rate. As we move into 2009, I see the economy accelerating gradually. Six months from now I think the problems with the credit market will be less intense and the credit crunch will be less evident. I also think by the time we reach the end of the year we will have seen a partial reversal in the runup of energy prices particularly crude oil and gasoline.
We’re beginning to see more evidence that the plunge in building activity is beginning to slow and perhaps the bottoming-out process is underway. The drag from home building is going to become smaller as we move through the second half of the year into 2009. Finally, I think we’re going to continue getting good support to the economy from a narrowing of our trade deficit in real terms. The weakness in the dollar has been underway for about six years and decent growth abroad helps the trade deficit continue to be a source of support for the U.S. economy.
Do you anticipate continued turmoil in the financial and housing markets?
In the near term I certainly do. There are still tremendous concerns about the size of the losses that may result from further defaults, and there is no sign yet of a peak in default rates in mortgages. Until we see clearer evidence that the home price declines are beginning to subside, there is going to be a lot of concern about the condition of financial institutions that, in one way or another, are exposed to the housing market.
California has relied heavily on the subprime mortgage market. What impact will this have on housing prices in the state going forward?
House prices have already declined quite sharply, particularly since last fall, when the credit crunch cut off the flow of new jumbo and subprime mortgages. The decline in home prices has been sharper in California than in most other parts of the country. Over the next year, California home prices are probably going to under-perform against the national average by 10 percent. We are seeing a much more rapid adjustment in home prices in California in this episode than we did in the first half of the ’90s. In the past, adjustments have taken quite awhile, but this one is progressing quite quickly.
Do you expect oil prices to continue rising?
I have given up believing that I can forecast the near-term movements. I do believe that we have been in an overshoot episode. I also believe that any retracement in energy prices is likely to be quite modest compared to the run-up we've experienced over the past six years.
How will this impact the economy as a whole?
The spike in energy prices has created tremendous hardships for any heavy user of petroleum-based products. Overall, the energy price increases have created a drag equal to about $100 billion this year as compared to last year. This figure matches the order of magnitude of tax rebates that people have received. Without the tax rebates there would have been a much more visible impact of the run-up of energy prices on the economy.
One of the bright spots in the current U.S. economy is exporting. Do you expect this trend to continue?
Yes, I do. The dollar has been going sideways since March. It’s beginning to stabilize and when the Fed starts tightening, which I expect to happen sometime next year, I wouldn’t be surprised if the dollar begins to firm a bit. The dollar is very low compared to what it was a year ago, or six years ago, and is creating a good, competitive position for anybody producing goods and services in the U.S. and trying to sell them abroad. Growth abroad has slowed, but not as sharply as it has in the U.S. The combination of growing incomes abroad and the low value of the dollar signals that we will continue to see good growth in our exports in the coming six to 12 months.
DANA JOHNSON is chief economist for Comerica Bank. Reach him at (214) 462-6839 or firstname.lastname@example.org.
All businesses will be affected by AB 32, known as the California Global Warming Solutions Act of 2006, especially with rising electricity and fuel prices. The only unknown is the extent of the fiscal impact and whether efficiencies will offset the increased costs. AB 32 is considered to be the most aggressive mandatory global warming program in the world, so the earlier CEOs develop an understanding of it, the better off they will be.
It is possible to forecast AB 32’s final emission-cutting strategy by reviewing the 2007 ARB (Air Resources Board) draft recommendations, according to John J. Lormon, partner and chair of the Environmental, Land Use and Governmental Affairs Practice Group with Procopio, Cory, Hargreaves & Savitch LLP.
“California intends to publish its final scoping plan to reduce greenhouse gas emissions (GGE) through regulations, market mechanisms and other actions by Jan. 1, 2009,” Lormon says. “CEOs should pay attention because the first draft of the scoping plan was released in June 2008, and the final strategy will be adopted by the end of 2010. The law includes fines up to $1 million for corporations and criminal sanctions of up to one year in jail for individual offenders.”
Smart Business spoke with Lormon about the likely final regulations under AB 32 and what CEOs should do to prepare.
What areas are targeted by AB 32?
AB 32 targets a return to 1990 emissions levels by 2020 (as much as a 30 percent reduction from what the 2020 emissions would otherwise be). There are many AB 32 effects, including the following: increases in electricity, fuel, construction and manufacturing cost; land use and forestry conservation impacts; and consumer lifestyle changes.
What were the early recommendations, and how will they impact energy and fuel?
Electrical utilities must triple their investment in renewable energy sources, and automobile manufacturers will have to produce more efficient light duty vehicles (if the U.S. EPA grants California a waiver), which may cost more to buy but should cost less to operate. Buildings, both new and retrofitted, will have to be more energy efficient, so property and leasehold acquisitions must consider these requirements and costs.
Regulations similar to those required for vehicle smog checks will apply to mobile air conditioning units and make it illegal to self-repair a motor vehicle air conditioning unit. Tire pressure monitoring system will be installed in all vehicles sold in California to increase mileage and reduce emissions.
What recommendations apply to manufacturers?
Appliance manufacturers will be impacted by regulations both directly and through their supply chains. Reduction of ozone-depleting substances used in consumer products will require reformulation of everything from cleaning products to paint and other coating materials; perfluorocarbons emissions in semiconductor manufacturing will be reduced or phased out. Regulation of the cement industry will impact all aspects of the building industry and its customers.
Are there any other recommendations that will impact businesses?
The Governor's Office of Planning and Research (OPR) issued a new technical advisory on the California Environmental Quality Act (CEQA) and Climate Change. All projects subject to CEQA review must consider significant effects caused by GGE. California's clean car standards, goods movement measures, low-carbon fuel requirements and movement of water (which uses 20 percent of the electricity in the state) will all be subject to GGE regulation and price increases.
What should CEOs do to prepare?
Educate yourself. The effects of AB 32 will be significant and broad. AB 32 will change permit and recordkeeping requirements and purchasing decisions and practices; corporate disclosure requirements will be expanded to include GGE; due diligence in mergers and acquisitions will change, as will budget and financial planning. Risk analysis for D&O and CGL insurance should be reviewed for appropriate coverage. CEOs should set up AB 32 news alerts to track new developments and attend science, law and policy workshops to stay informed. The EPA Climate Change Business Guide can be found at: www.epa.gov/partners.
Document baseline emissions. On Jan. 1, 2008, certain large California emission sources were required to report their 1990 baseline emissions. Early action to reduce emissions is great, but to get credit for early action, inventory and document your company’s emission baseline before making improvements or purchasing new equipment.
Take advantage of emerging opportunities. AB 32 will use market-based mechanisms like a cap-and-trade program, where companies can sell emission credits at a market price. So if your company converts its vehicles to natural gas, for instance, you’ll have available credits you can use or sell. Also, new regulation frequently opens the door for new products, services and investments, but CEOs need to be educated to spot these new opportunities.
JOHN J. LORMON is a partner and chair of the Environmental, Land Use and Governmental Affairs Practice Group at Procopio, Cory, Hargreaves & Savitch LLP. Reach him at email@example.com or (619) 515-3217.