SBN Staff

You spent hours working on a new contract for your business, negotiating terms and swapping drafts of the agreement. But time was of the essence and in your rush to get started on the real work, once the terms were set, you and the customer neglected to exchange signatures on the contract.

The project started well enough, but then circumstances changed. The customer wants out of the deal and claims that there is no contract. You want to hold the customer to the agreement. That’s when you realize you don’t have a signed copy of the contract. What now?

Smart Business spoke with Christopher Dean, an associate at Novack and Macey LLP, about how to enforce an unsigned contract for services.

What is a services contract?

A services contract is, as the name suggests, any contract for the performance of services, as opposed to the sale of goods.

Does the distinction between services and goods matter?

It does. Almost every state has adopted a version of the Uniform Commercial Code (UCC), which contains provisions applicable to the enforcement of an unsigned contract. The UCC, however, generally applies only to the sale of goods, not to the provision of services.

If the UCC doesn’t apply, is the contract claim dead in the water?

Not necessarily. An unsigned services contract can be enforced in certain circumstances. The biggest hurdle is proving that a binding agreement exists, despite the absence of a signed contract.

Ideally, you’d have a fully signed document — it is close to irrefutable evidence that you and the customer agreed to the terms of the contract. But even if you don’t, the existence of a contract can be shown in other ways. The trick is gathering as much evidence as possible to show that a contract was formed.

What sort of evidence is useful?

Evidence will differ from case to case. Generally speaking, however, any writing tending to show that an agreement had been reached will be useful in proving that a contract had been formed.

For example, emails, memoranda, notes or even text messages might contain admissions from the customer such as, ‘We’re fine with these terms;’ or an unsigned copy of the contract with a note reading, ‘Here’s the final version.’

Of course, a writing signed by the customer is best, but even a writing by you concerning the contract can have some value. This is particularly true if it was the type of writing that invited — but did not result in — an objection from the customer, such as an email from you to the customer confirming the terms of the contract.

Is there any other evidence that might be useful?
Testimony from people with knowledge of the contract negotiations also may be useful. Testimony, however, is often treated with skepticism, especially when given by someone with a personal stake in the outcome. The key is to be as specific as possible in describing the negotiations and discussions that led to the formation of a contract.

In addition, performance can be strong circumstantial evidence of the existence of a contract — the longer the performance, the better. So, if it’s the case that you performed for only a day before the customer attempted to get out of the contract, the performance may not be very powerful evidence. But if you spent six months performing under the contract without objection from the customer, the customer will have a harder time denying that a contract exists, particularly if you were paid for your efforts during the period according to the contract terms.

Christopher G. Dean is an associate at Novack and Macey LLP. Reach him at (312) 419-6900 or

Insights Legal Affairs is brought to you by Novack and Macey LLP

The world of business today goes beyond the U.S. borders, so executive education programs like MBAs have a global component. For example, Woodbury University is part of a customized MBA program through the newly formed Carl Benz Academy for employees of Mercedes Benz and its affiliate companies.

Andre van Niekerk, Ph.D., dean of the School of Business at Woodbury University, says the program specifically serves employees in the luxury brand segment in emerging markets.

“There’s always a market for high-end brands, and that fully applies to the developing world,” he says.

Smart Business spoke with van Niekerk about the challenges and opportunities in marketing luxury brands in the world’s emerging economies.

Given the uneven recovery from the global recession, how open to luxury brands are today’s developing economies?

Virtually all luxury brands are jumping, or have jumped, into the developing world. That market — that collection of economies — is reaching a near-saturation point for some. To a large degree, it’s a matter of numbers; the size of the individual markets is key. If millionaires represent 3 percent of the population of China, for example, companies will pay attention.

Of course, if you step back and ask, ‘what is luxury?’ Your immediate response might be that people who have very little define luxury. In some parts of the world, two meals a day would be considered a luxury. There’s clearly a different context in the developing world, when contrasted with the developed world.

Having said that, however, luxury brands appeal to similar demographics worldwide. The people who buy and consume what are generally recognized as luxury goods, from clothes to jewelry to cars, are simply not as affected by economic downturns as the rest of the population. There’s just less price sensitivity.

Combined with quality and aesthetics, exclusivity is central to marketing a luxury brand. But the richer the world gets, the tougher it is to keep that exclusivity. Brands can artificially impose exclusivity by raising prices. Price, therefore, confers status — the status the brand affords the consumer. It’s an implied status, creating a desire to move up. The challenge for manufacturers is to keep customers brand loyal, wherever in the world they may be.

How do cultural differences come into play, as manufacturers introduce products and develop strategies to market them?

While many recognized luxury brands have a genuine global reach and can be considered universal, local tastes and accepted local norms matter. A specific handbag may become a roaring success in the U.S. but may not be as desirable in China. Or a specific color popular in Western Europe may not resonate somewhere else. Cultural nuances are often reflected in advertising, and it’s common for brands to reword and reposition ads for each market. Some nuances simply can’t be transplanted.

Status exists in every culture, and everyone has an ego, but the drivers for status differ across cultures. The U.S. is largely externally driven, as places like Newport Beach, Rodeo Drive or the Chicago Loop suggest. Other cultures are very circumspect — you don’t wear status on your sleeve.

What impact has the proliferation of luxury brands in the developing world had on those same brands in the developed world?

That trend has given rise to knockoffs. Counterfeit goods pose a huge problem for luxury brands, especially when the population at large may not be knowledgeable about what’s real and what’s fake. Knockoffs can ruin the brand by association. That’s why manufacturers confiscate and prosecute — they actively pay for that vigilance.

Things may be changing on this front, however. In a deal with China, Ralph Lauren agreed to overproduce by approximately 4 percent. Local merchants are allowed to sell the overproduction in controlled outlets at a slightly lower price. It’s a total win — a way to spread the brand successfully and locally, while helping to undercut the market for counterfeit merchandise.

Andre van Niekerk, Ph.D., is dean of the School of Business at Woodbury University. Reach him at (818) 394-3311 or

Insights Executive Education is brought to you by Woodbury University

The Jumpstart Our Business Startups Act (JOBS), passed in early 2012, mandates that the Securities and Exchange Commission (SEC) adopt rules to help start-ups and small businesses raise capital. Because of this, companies can advertise, market and publicly disclose that they are fundraising. The change also allows companies to raise up to $1 million from a large number of “nonaccredited,” or non-high net worth investors.

Smart Business spoke with Mark L. Skaist, shareholder and co-chair, Corporate and Securities Practice, at Stradling Yocca Carlson & Rauth about what this could mean for businesses.

Why does it matter that companies can advertise that they’re fundraising?

Companies need to either register their securities offering with the SEC or find an exemption from registration. Registration is often prohibitively expensive for start-ups, so most emerging companies rely on an exemption from registration, the most common of which is Rule 506 under Regulation D. This permits sales of an unlimited dollar amount of securities to an unlimited number of accredited investors and up to 35 nonaccredited investors.

However, in order to rely on this exemption, companies had been prohibited from offering or selling securities through any form of general solicitation or general advertisements.
By allowing companies to advertise their securities offerings to the general public, companies should have a bigger pool from which to solicit investments.

There are, however, two conditions companies must meet in order to use general solicitation and advertisement and sell securities under Rule 506. Namely, all purchasers in the offering must be accredited, which for natural persons generally means net worth in excess of $1 million, or annual income of at least $200,000. Also, the company must take ‘reasonable steps’ to verify that the purchasers are accredited.

How are companies supposed to verify that a purchaser is accredited?

The SEC has said that companies need to make an objective determination in the context of the given facts and circumstances. It has come out with a nonexclusive list of verification methods that can be considered ‘reasonable steps.’ The specific methods and types of information the SEC considers sufficient include written representations of investors combined with two years of federal tax returns; bank statements combined with credit reports; and written confirmation from a broker, attorney, investment adviser or accountant.

How are the proposed rules regarding crowdfunding supposed to work?

These proposed rules provide that companies may sell up to $1 million of securities during any 12-month period to accredited and unaccredited investors. They also limit annual crowdfunding investments by investors with annual income or net worth below $100,000 to the greater of $2,000 or 5 percent of the investor’s annual income or net worth. For investors with annual income or net worth in excess of $100,000, annual crowdfunding investments cannot exceed 10 percent of their annual income or net worth.

There are also proposed initial and annual filing requirements by the company doing crowdfunding financing, which may include financial statements, a business plan and tax returns. Companies can use intermediaries, such as brokers and funding portals, and may not advertise the offering other than to provide a notice directing potential investors to the intermediary.

Based on the proposed rules, which require that companies raising between $100,000 and $500,000 through crowdfunding provide reviewed financials, and companies raising more than $500,000 provide audited financials, it’s likely that the accounting fees alone are going to be a significant roadblock to many small companies relying on this exemption.

While it seems steps have been taken toward making it easier for start-ups and emerging companies to raise money, time will tell whether they have any real impact. In the meantime, businesses are popping up that are looking to get involved with these types of offerings, either by verifying that investors are accredited or by setting up funding portals for crowdfunding.

Mark L. Skaist is a shareholder and co-chair of the Corporate and Securities Practice at Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4117 or

Insights Legal Affairs is brought to you by Stradling Yocca Carlson & Rauth

In 2012, the energy sector spent $17.9 billion on global research and development, more than $6.6 billion of which was conducted in the U.S. Assuming small and midsize businesses perform 20 percent of the U.S. energy sector’s R&D, these companies could incur up to $1.3 billion in R&D expenditures, the benefits of which may not be fully realized because they underutilize the R&D tax credit, says Robert Henry, a partner in Tax and Strategic Business Services at Weaver.

In addition, the R&D tax credit represents a permanent tax benefit; it reduces the overall effective tax rate as presented in generally accepted accounting principles basis financial statements.

Smart Business spoke with Henry about new ways to utilize R&D tax credits.

What is the R&D credit?

The federal R&D tax credit is a mechanism to spur technological advances and hiring in R&D fields. It has expired and been extended multiple times, but has most recently been extended through 2013. With support in both political parties, it is likely to be continued.

In addition, many states offer R&D tax incentives in the form of state income, franchise, or sales and use tax credits and exemptions. Texas’s R&D credit will come back into law effective Jan. 1, 2014. Texas HB 800 provides a sales and use tax exemption or a franchise tax credit related to qualified R&D activities taking place within Texas. This will greatly increase the potential tax benefit available to taxpayers conducting their R&D within Texas.

How is qualifying R&D activity defined?

Internal Revenue Code section 174 describes research and experimental expenditures as activities intended to discover information that will eliminate uncertainty concerning the development or improvement of a product. The activity must:

  • Be related to the development or improvement of a product, inclusive of a technique, invention, formula or process.
  • Address uncertainty regarding the appropriate method or design for the product.

Activities deemed eligible by section 174 qualify for immediate tax deduction. They also may qualify under section 41, where they must:

  • Be technological in nature, based in hard sciences, such as geology or engineering.
  • Contain a sufficient degree of development uncertainty.
  • Contain the process of experimentation.
  • Have a permitted purpose that improves a business component, which includes a product, process, software, technique, formula or invention.

What oil and gas activities may qualify?

‘Wildcat’ exploration, the drilling of a well, the development of logistical infrastructure — really the entire exploration and production process — may qualify for the R&D credit. That also includes improved analytics and software that enables more accurate interpretation of reservoir studies. A pipeline company in the industry’s midstream sector may be more efficiently monitoring flows of oil and natural gas or overcoming adverse field conditions in placing a pipeline. Downstream companies may benefit from improved processes for purifying or refining natural gas or oil.

What costs are eligible for the credit?

Wages for employees engaging in qualified research, directly supervising qualified research or supporting it are eligible. A company may also deduct 65 percent of contract labor costs associated with qualifying R&D activities.

Tangible property costs used in the R&D process or in the construction of a prototype can be qualifying expenditures. Supply expenses, though, cannot include land or land improvements, or property subject to depreciation. Expenses for royalties, shipping or travel also cannot be included. In addition, special considerations apply for internal-use software.

In order to capture all eligible credit when R&D activities are identified, companies must track and record labor costs of internal employees, contractor and vendor expenses, and supplies or materials costs. A business that is aware of the manner in which these costs are tracked and accounted for will more accurately define what it can claim for an R&D tax credit.

Robert Henry, CPA, is a partner in Tax and Strategic Business Services at Weaver. Reach him at (800) 332-7952 or

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Cloud computing has grown in popularity because it can help boost productivity and reduce costs by allowing organizations and employees to work collaboratively over the Internet from the office and remote locations.

But that ease of access to your business applications and data brings increased risk.

“Cloud computing presents a number of risks, ranging from data leakage to cyberattacks on cloud computing vendors and their customers,” says Jim Stempak, a principal at Crowe Horwath LLP.

Smart Business spoke with Stempak about a methodology to periodically assess cloud computing IT security risks.

What risks are associated with cloud computing?

Whether you sign up for software as a service (SaaS), platform as a service (PaaS), infrastructure as a service (IaaS) or some combination of service models, your organization is exposed to risk because security is applied differently than in traditional noncloud IT environments. Additionally, your vendor might not have security standards on par with your own.

Some areas of risk are:

  • Cloud governance risk. Cloud governance refers to controls and processes for cloud planning and strategy, vendor selection, contract negotiation, implementation, operation and possible termination of service. Some companies rush into cloud computing and don’t properly assess risks and implement controls to mitigate them.
  • Weak identity and access management controls. Moving to the cloud can drastically change how customers control access to accounts and computing resources, thus introducing new security risks.
  • Unsecured data connections. With the cloud, much of the data communication takes place outside of your IT environment. It’s important to understand where your data is and assess vendor protection of data in transport and storage.
  • Workforce security risk. Often employees use personal cloud storage services such as Dropbox, Evernote, Google Apps, SkyDrive and iCloud to transfer and store work-related files without authorization or oversight from IT management. A recent Nasuni Corp. survey of 1,300 corporate IT users found one in five respondents put work files in personal Dropbox accounts. Personal cloud storage services lack enterprise-class security protection, and, in turn, could put sensitive data at risk and increase the chance your organization is noncompliant with industry and government standards.

How should a company assess its cloud security risks?

Companies should review all layers of risk associated with the specific use of cloud services in their IT environment. Start with a review of common controls, including cloud governance, identity and access management, and transmission security. A corporate cloud security assessment typically focuses on controls affecting cloud governance, such as cloud planning and strategy, vendor selection, implementation, termination and transition of cloud services; identity and access management, such as account setup, level of access and single sign-on; and secure connectivity, such as encryption, backup plans, logging and monitoring.

You also need to conduct a workforce assessment to identify unauthorized use of personal cloud services, which includes:

  • Network scanning — special software applications scan networks for the most popular services for storing and transferring data in the cloud.
  • Passive monitoring — applications track network traffic to uncover connections with website addresses associated with personal cloud services.
  • Log analysis — servers have log files that capture useful data about network activity to help pinpoint cloud services traffic.
  • Workforce survey — ask if employees are using personal cloud services for work and why. This can help you understand cloud service needs and identify potential risks.

Cloud computing changes the way people work and is here to stay. Organizations need to completely understand how they are using cloud services — in both known and unknown ways — before valuable data winds up in the wrong hands.

Jim Stempak is a principal at Crowe Horwath LLP. Reach him at (214) 777-5203 or

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No company is immune to fraud. You may have stringent internal controls, and rigorous hiring and training programs, but still employees may find ways to violate standards.

“It is not enough to have a strong personal ethical code. It needs to be communicated and enforced to become corporate culture,” says Mariah Webinger, Ph.D., an assistant professor of accountancy at John Carroll University. “When it comes to enforcement, you need to proceed cautiously to make sure you are achieving your goals.”

Smart Business spoke with Webinger about dealing with employee fraud.

What should you do if you suspect an employee of fraud?

First, sit down, take a deep breath and think. It is never a good idea to confront a suspected employee right away. You probably don’t have the evidence you need to prove either innocence or guilt. Confronting the employee puts them on guard and makes it even less likely you can get that evidence. 

Secondly, you could be wrong. Accusing a suspected employee can be very demoralizing to your workforce and creates an atmosphere of suspicion, forcing bystanders to choose sides.

Third, you never want to interview a suspect when you are emotional. Acting on emotion rarely makes good business sense, so give yourself a break to cool down before you make any decisions.

Finally, communicate the issue and the consequence internally, and perhaps to external stakeholders. When you do, try to stick to the facts and avoid value statements about the employee or the situation.

Does the type of employee misconduct affect consequences and communication?

All types of employee misconduct should be handled thoughtfully and not emotionally. However, the type of conduct will influence the consequence, which in turn will influence how it is communicated. If it is a minor policy infringement, it may be acceptable to have a reprimand as a consequence and an internal memo for communication.

Embezzlement or fraud should result in termination, regardless of size, since these violations are willful and never accidental. Also, fraud indicates an internal control weakness. These weaknesses need to be rectified and should be communicated.

Should a fraud perpetrator ever be retained as an employee?

The short answer is ‘no.’ Usually two reasons are given for wanting to retain an employee after a fraud: The fraud was a small amount or the person is a great employee. All frauds start small.  Keeping a dishonest employee on the payroll sends a message to your other employees that fraud is acceptable as long as it is small or if you are a valuable employee. No employee is as irreplaceable as your corporate culture. If they are a good person and a talented employee they will have a great career elsewhere. The consequences of violating an ethical code might be the most important business lesson they will ever learn.

When should you pursue legal action?

Collect your evidence first. Law enforcement is usually overworked and generally not an expert in business. It is unlikely that they will pursue something unless there is a very tight case.

When do you need to hire a forensic investigator?

Generally your current employees will be more efficient at collecting evidence than an external expert because they are more familiar with your company. However, if the issue is contentious or involves office politics, it is helpful to have an independent investigation.

Also, that the fraud was perpetrated suggests there is a weakness in the internal skill set. Usually fraud involves accounting and/or information technology. If you don’t have internal experts in those fields, try to hire a forensic investigator with that expertise.

Where can you find a forensic investigator?

Avoid the yellow pages. It is hard to differentiate between a good forensic investigator and an imposter. Ask your auditor or accountant. They may not be able to do the work for you because of independence issue, but they can usually refer you to someone who can. Also ask your attorney. Most likely they have worked with forensic accountants or business experts and can recommend someone. If all you have is a Web search or the phone book, ask for references and check them.

Mariah Webinger, Ph.D. is an assistant professor of accountancy at John Carroll University. Reach her at (216) 397-4225 or

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The bulk of the Affordable Care Act (ACA) will be implemented on Jan. 1, 2014. Even though large employers don’t necessarily need to go through the chess game of whether or not to offer insurance — pay or play — a number of new initiatives still come online.

The community rating rules, which limit how insurance carriers can classify small employer groups, the individual mandate and $8 billion insurer tax all will shape health care and premiums in the coming year.

“You’ve got to keep your eyes open, and continue to see what’s going on,” says Mark Haegele, director of sales and account management at HealthLink.

Smart Business spoke with Haegele about how to develop a year-end checklist of responsibilities related to health care reform.

What is the first thing an employer must do?

The ACA is not going away, so you must determine how the law applies to your business.

Let’s say you are contemplating offering in 2015 minimum essential coverage plans, ‘skinny plans,’ that just cover preventive care. Employers with 50 or more full-time equivalent employees may want to consider making this move in 2014, even though the employer-shared responsibility provision, or employer mandate, isn’t in effect. This prevents employees from getting subsidies and going through the new health care exchanges, or marketplaces, and then losing these funds in 2015 when you move over to a lower-level plan.

Consider any future health care changes, and how they will impact your employees for the next couple of years. You don’t want to aggravate staff and cause retention problems.

What’s important to know about your insurance?

Many people expect to see sharp spikes in health insurances costs and premiums after Jan. 1, 2014, which could be unsustainable. The $8 billion insurer tax, which likely will be passed onto employers in the form of premiums, is being calculated as a 4 to 6 percent increase. The community rating rules could drive premiums up by more than 60 percent if your insurance group is a young, healthy population. Out-of-pocket maximums have been limited to no higher than $6,350 for self-coverage and $12,700 for family coverage for most insurance.

The upcoming January 2014 health insurance renewals are the last to come into compliance before many large employers face fines. Consider where you are, and the steps it will take to come into compliance before your 2015 renewal.

Business executives need to analyze the costs and benefits of remaining with their current insurance plan or moving to self-funding, which has more freedom from regulations. Take the time to examine this regularly. No one is sure how the insurance market will react to ACA measures.

Beyond strategic decisions, what concrete actions need to be completed?

You need to make sure you sent out the notice to your employees about the new health care marketplaces, or exchanges, required as of Oct. 1, 2013. It’s a good idea to include this with your orientation materials to ensure all new employees are notified.

In addition, a Summary of Benefits and Coverage, an easy-to-understand summary of health care benefits, must be given to eligible participants at least 30 days before your plan year begins. Your insurer, health reimbursement arrangement provider or third-party administrator usually provides this.

Verify your employee-waiting period meets new requirements. A group health plan cannot make new employees wait more than 90 days for health insurance coverage as of Jan. 1, 2014.

Even though the employer mandate was delayed, large, fully insured employers should use 2014 as a trial year. Set up your tracking procedures for employee hours, especially those who work part time, so you can spot any problems. Because of the delay, the government will likely be less tolerant of any mistakes in 2015.

Health care compliance will continue to be a major concern for businesses. You need to make time to understand how the ACA will impact your company, even if it takes outside expertise to manage all your obligations.

Mark Haegele is director of sales and account management at HealthLink. Reach him at (314) 753-2100 or

Insights Health Care is brought to you by HealthLink

The greatest impediment to the successful resolution of a commercial dispute is the failure of both clients and attorneys to understand and think adequately about the extent, nature and amount of damages at issue in the dispute, says Eric N. Macey, partner at Novack and Macey LLP.

“While clients will invest huge amounts of time and money to focus on the merits of a case to prove they are ‘right,’ they either ignore or fail to give the same consideration to damages issues,” he says.

Yet, in order to resolve the dispute, management needs to properly evaluate damages so they can engage in meaningful settlement discussions or understand what they can expect to get or lose if the case goes to trial.

“Simply put, commercial disputes are about risk, and you need to monetize that risk early in the case to intelligently develop a strategy for the suit,” he says.

Smart Business spoke with Macey about understanding and evaluating damages.

What are the steps in evaluating damages?

Begin your damages analysis very early in the case. Talk to counsel about the various theories of damages available to you or your adversary. Are lost profits an issue? Do you want damages for monies that you gave to your counterparty that you now want back, or do you want damages for the costs you incurred by reason of your opponent’s conduct?

Identify various methodologies to calculate damages. For example, if you or your opponent assert damages in the form of lost profits, you need to identify with great specificity how that figure will be calculated. As part of that analysis, you will need to decide if an expert is necessary and also understand the physical evidence you will need to support your arguments.

Read contracts or purchase orders front to back, including all the fine print. Contracts often contain provisions that limit damages.

You need to identify whether there is any statute that impacts your damages analysis. There are many statutes that limit or expand damages. For example, if you manufacture and/or market consumer goods, you may be subject to claims under consumer fraud statutes like the Illinois Consumer Fraud and Deceptive Business Practices Act. That statute expands damages because it provides that a successful plaintiff can recover both punitive damages and attorneys’ fees. Similarly, Title VII of the Civil Rights Act of 1964 limits certain remedies. If your business is sued for employment discrimination under Title VII, that statute imposes limits on the amount of compensatory or punitive damages that a person can recover, which varies based on the size of the employer. Consequently, you need to include any statutory expansion or limitation on damages in your risk analysis when you try to monetize your exposure from such a claim.

What other factors could affect a case?

Be sure to think through mitigation of damages. If you or your counterparty brings suit to recover damages for breach of contract, the party asserting the claim has a duty to mitigate damages. This is called the doctrine of avoidable consequences and simply means that the party asserting a claim must take all reasonable steps to keep its damages from getting larger and larger.

Let’s say you are in the business of selling a certain type of customized computer hardware, and through your efforts, your business enters into a $2 million contract with a manufacturer that needs your technology. You deliver some of the hardware and get paid $1 million on the contract amount, but for some reason the manufacturer tells you it will not honor the balance of the deal. So now you’re stuck with the equipment and out $1 million. You sue for the $1 million. However, you still have a duty to mitigate your damages, which means that you must use reasonable efforts to sell the equipment to another manufacturer. If you do nothing in this regard, the court or jury can take this into account and reduce your damages even if you win the case.

In sum, do not blindly pursue or defend claims solely on the merits without evaluating what you may recover in damages or risk paying. Remember, commercial litigation is just resolution of a business dispute in another, albeit unique, forum with special rules. This does not mean that you forego monetizing your risk. It is imperative to do so to manage your case successfully.

Eric N. Macey is a partner at Novack and Macey LLP. Reach him at (312) 419-6900 or

Insights Legal Affairs is brought to you by Novack and Macey LLP

Challenging times present opportunities for organizations to perform detailed assessments of their operations. Performing operational assessments can help organizations identify, mitigate and take advantage of the risks that they face. These assessments focus on process design and execution risks.

“When properly performed, operational assessments identify areas where process design and execution risks are not aligned with an organization’s risk tolerance,” says James P. Martin, a managing director at Cendrowski Corporate Advisors LLC.

Smart Business spoke with Martin to learn more about operational assessments.

How can operational assessments help?

Organizations must achieve a diverse set of strategic objectives. This is accomplished by translating strategic objectives into what are often interdependent yet, disparate operational objectives.

Operational objectives include revenue growth, operational efficiency, compliance with laws and regulations, public perception, corporate responsibility and market leadership, as well as customer and employee satisfaction. Attainment of each requires the assumption of inherent risks.

Operational assessments focus on mitigating inherent process design and execution risks through the use of controls. Controls are employed to reduce an organization’s residual risk, or risk after control implementation, to a tolerable level.

What’s included in operational assessments?

Operational assessments examine whether an organization’s processes enable the achievement of strategic objectives. The first step is breaking down process design and execution elements into tasks performed by employees. This is often accomplished through employee interviews, as well as through observation in the workplace.

Once tasks have been identified, risks associated with the accomplishment of tasks are enumerated, as well as controls centered on mitigating risks. Risks are quantified by likelihood and impact. High-likelihood and/or high-impact risks are prioritized for mitigation in operational assessments, as they pose the greatest threat.

How can organizations decrease high-likelihood and/or high-impact risks?

High-likelihood risks can be decreased through preventive controls, while high-impact risks can be decreased by detective controls. For example, organizational training regarding fire hazards decreases the likelihood that a fire will occur. This is a form of preventative control. Proper placement of fire detectors throughout an organization’s premises decreases the potential impact should a fire occur. This is a form of detective control.

For risks that remain at a level too high for the organization to tolerate, new controls must be developed to bring residual risks in line with the organization’s risk tolerance. Otherwise, the organization should consider outsourcing the risk — for example, utilizing hedging strategies and insurance contracts that transfer risk to a third party.

What can be missed when performing operational assessments?

A key element that is sometimes missed by those performing operational assessments is the assignment of clear roles and responsibilities to team members who will oversee the creation and redesign of process controls. Without accountability, proper incentives are not present, and the operational assessment may struggle to achieve its intended results.

How do these assessments differ?

Risk assessments primarily assist organizations in preserving shareholder value, while operational assessments also help organizations grow shareholder value. More specifically, a risk assessment is really a deep dive into one component of an operational assessment. It involves the identification and analysis of potential risks that may impede an organization from achieving its strategic objectives.

By performing risk assessments across the organization, organizational managers can develop plans to mitigate the risks an organization may face, helping preserve its objective from potential threats and, hence, its shareholder value.

Actively identifying internal risks also can help organizational managers remove the opportunity for fraudulent activity.

James P. Martin, CMA, CIA, CFE, is a managing director at Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

The Ohio Bureau of Workers’ Compensation’s (BWC) Destination Excellence program allows employers to choose programs that best fit their risk management needs. It focuses on safer workplaces, return to work and savings options for administrative functions.

“These programs essentially offer discounts for things employers already do,” says Randy Jones, senior vice president of TPA Operations at CompManagement, Inc.

Smart Business spoke with Jones about Destination Excellence and how it fits with Ohio’s other premium discount programs.

What programs make up Destination Excellence and what are the discounts?

  • Industry Specific Safety Program — Complete one to three loss prevention activities related to your industry, depending on your total payroll, as well as an online safety management self-assessment. Activities include industry specific training classes, attendance at BWC’s Safety Congress & Expo and/or on-site field consulting with a member of the BWC’s Division of Safety & Hygiene. The benefits are an increase in workplace safety and the implementation of industry best practices. It offers a 3 percent discount.

  • Drug Free Safety Program — Prevent on-the-job injuries by integrating drug-free efforts into your safety program.  The benefits are an increase in workplace safety, productivity and morale. The basic program offers a 4 percent discount, while the advanced program offers 7 percent.

  • Safety Council — Regular attendance at safety council meetings in your community to increase awareness of workplace safety and health issues as well as affecting the frequency and severity of claims in your workplace. It’s a chance to learn best practices, increase collaboration among local business owners, improve public relations and increase safety. It also offers a 2 percent discount each for participation and performance.

  • Transitional Work — Program to return injured workers to productivity in the workplace by providing modified job duties and other methods that accommodate medical restrictions. There are 3-to-1 matching grants available from BWC to start a program. This could lead to lower injury downtime, improved employee recovery time and increased worker morale, all of which protect your workforce. It also offers up to a 10 percent bonus discount for using an established and approved transitional work program with applicable claims that have dates of injury within that policy year.

  • Go Green — Report your company’s payroll electronically and pay premiums in full on the BWC’s website. This reduces paperwork and helps the environment. It also means a discount of 1 percent of your premium, up to a maximum of $2,000 per policy period.

  • Lapse Free — Pay premiums on time without a lapse in coverage during the past 60 months and get a 1 percent discount on your premium, up to a maximum of $2,000 per policy period.

Are the Destination Excellence programs compatible with other BWC discounts?

While participating in the Destination Excellence program, employers can participate in the following programs:

  • Group Rating.

  • Experience Modifier cap.

  • $15,000 Medical-only.

  • Grow Ohio Incentive Program.

  • One Claim Program (private employers).

  • Early Payment Discount (cannot be combined with Go Green).

The Go Green and Safety Council discounts within Destination Excellence are compatible with the above programs, as well as Group retrospective rating, Individual retrospective rating and Large/Small Deductible. Small Deductible also can be used with the Drug Free Safety Program.

What are the enrollment deadlines?  

The private employer deadline is the last business day of February. For public employers, it’s the last business day in October. Employers wishing to participate in a Safety Council must enroll in a local program by July 31.

What’s the best way to calculate savings?

Contact your workers’ compensation third-party administrator to request a ‘feasibility study.’ It can help you evaluate how the programs could impact your costs.

Randy Jones is senior vice president of TPA Operations at CompManagement, Inc. Reach him at (800) 825-6755, ext. 65466, or

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