At first glance, that all seems like great news for CEOs. Upon closer examination a familiar problem may be re-emerging. New insurance carriers frequently offer lower rates to initially attract new customers, but if their motive is to make a quick profit and run, or if they lack the sufficient resources to handle the complexities of workers’ compensation in California, the cyclical nature of the industry may find them leaving as quickly as they came.
“The last time we had a soft market for workers’ comp coverage in California, when the cycle ended and the claims started hitting, many of the carriers became insolvent or left the state all together taking their clients’ experience rating data with them,” says Pat Reilly, commercial insurance broker with Westland Insurance Brokers. “Costs escalated because it was a nightmare closing claims with carriers that became insolvent.”
Smart Business spoke with Reilly about how CEOs can benefit from the current soft market and not repeat past mistakes.
How has workers’ comp reform affected the market for insurance coverage?
Reform has made it easier to control the cost of a workers’ comp claim. There have been benefits from structural changes such as new calculations for permanent disability and changed parameters around the litigation of claims and in settlement structures. It takes as long as two to three years for the effects of reform to be realized, but when combined with very proactive and aggressive loss-prevention efforts by clients, the results are finally here. This is attracting new players to the coverage market.
At least 12 new carriers are trying to establish a California presence. In some cases, these new insurance carriers are simply marketing extensions of insurance companies that exist only on paper. I would estimate that at least 10 percent do not have fully functioning claims departments or loss-control units, so they are set up to sell the business but not to service it.
Why be concerned about purchasing coverage through one of these carriers?
The last time we had a soft market, many carriers were writing coverage. But when the conditions changed, they left the state without filing modification experience data for their clients with the state bureau. I acquired one new client when this happened and it had been running an 80 percent ‘mod,’ which translates to a 20 percent discount from standard rates. When its carrier defaulted, there was no way to document the modification, so the coverage reverted back to full rates. The short-term savings from the less-expensive carrier was quickly negated by the cost of coverage at a ‘zero mod.’
What factors should CEOs consider when selecting a workers’ compensation insurer?
First, the carrier should be ‘A’ rated so you know it is financially stable. Preferably, it has experience in California through both up and down cycles. This demonstrates the company’s commitment to the market and its ability to withstand the natural swings associated with workers’ comp.
Second, it should have local claims and loss-control functions staffed by a team that understands all of the regulations surrounding workers’ comp in California. Defending claims and conducting surveil-lance in cases of suspected fraud are all highly regulated activities here. If these things are not done correctly, you can quickly see claim pay-outs escalate, which will chip away at any short-term premium savings. Or, if you end up hiring a loss-control expert because the insurance company doesn’t have a local representative, you also won’t realize the savings you had anticipated.
Third, do you homework before switching insurance companies and check references by asking to speak with clients who use the company’s claims and loss-control services and who have been with the carrier for a few years.
What role should my insurance broker play in helping with carrier selection?
Your broker should be able to provide a substantial list of ‘A’ rated insurance companies for you to choose from, and it should be able to supply references of other long-term clients it has placed with the carrier.
It’s a soft market for all carriers, including the ‘A’ rated ones. Now more than ever, brokers should be able to help CEOs realize value for their insurance dollar. In some cases, value might include a premium reduction, while in other cases value might be achieved by taking this opportunity to upgrade your insurance carrier. There has never been a better time to find workers’ compensation value in California.
The report goes on to state that while fraud happens in all businesses, among firms that used preventive measures such as fraud-prevention training, surprise internal audits and an anonymous tip line for reporting suspected fraud, the dollar amount of the average loss was less than half than firms without the measures.
“Occupational fraud is hard to detect because, by its very nature, the act itself is concealed,” says Patrick Ross, principal with the Audit and Business Advisory Services Group of Haskell & White LLP. “Having the proper anti-fraud controls to prevent, deter and detect fraud based on the specific risks of your business is important in reducing potential losses.”
Smart Business spoke with Ross about how CEOs can take action and set the right tone to help prevent occupational fraud.
How common is occupational fraud?
Given the numbers reported by ACFE, it is much more common than many people think. Many times, it goes unreported in an effort to avoid bad publicity, or executives do not want to deal with the effort involved in prosecuting the crime. Also, because there is no universal definition of fraud, knowing when it occurs is typically not a black-and-white issue. If the boss takes a few inventory samples from the warehouse, is that fraud? Or what about doing personal work on company time? It can be hard to prevent occupational fraud unless the company has clearly communicated what is expected of its employees.
Why is fraud hard to detect?
The average length of time that occupational fraud goes on before being detected is 18 months, and frauds are often committed by trusted employees. An important element of fraud is the need to cover up the act. Also, because so many more business transactions are electronic today, there is less of a paper trail that can be followed. For some frauds, the extent of losses cannot even be determined.
Given the rapid changes in business, CEOs need to make sure their fraud-prevention process changes with their business in order to keep fraud from happening. It’s like a water leak in your house; it may start out small but if you ignore it over time, look out.
What steps can CEOs take to help prevent fraud?
First, conduct a risk analysis of your business looking for potential vulnerabilities. For example, if you run a cash business, look for ways that the cash could be siphoned off without your knowledge and make sure that job responsibilities are properly segregated. Review your controls with fraud prevention in mind and then actually test those controls to make certain that they are working. Conducting random audits is important; the surprise element embedded in the process can help deter potential fraud.
Second, the CEO should establish an investigation plan before needing it. The plan usually involves your corporate attorney, internal auditors or if you don’t have the necessary internal resources hiring an external certified fraud examiner.
What role should CEOs play in fraud prevention?
It is important to define what constitutes fraud and publicly state that it will not be tolerated. To deliver this message, the company should have a defined code of ethics. CEOs should set the tone from the top and lead by example because employees take cues from senior management in terms of what’s appropriate. For example, if the boss uses company vehicles for personal use, then is it OK for me to do the same? There are three elements that need to be present for fraud to take place: (1) the opportunity to commit fraud; (2) the rationalization on the part of the perpetrator that it is ‘OK’ to commit the acts and (3) perceived pressure by the perpetrator such as personal financial need. CEOs can play a major role in eliminating two of the three elements.
What actions should CEOs take if they suspect occupational fraud has occurred?
The first step would be to follow your investigation plan. Not following certain procedures of forensic investigation or not taking the proper legal steps could lead to a fraud perpetrator not being held accountable. When fraud is suspected, emotions often come into play, so it is best to let the professionals handle this. CEOs should be supportive of the investigation process and be prepared to take any necessary disciplinary action including termination and pursuing criminal or civil legal action.
PATRICK ROSS is a principal with the Audit and Business Advisory Services Group of Haskell & White LLP. He has more than 13 years experience in public accounting in Orange County. Reach him at (949) 450-6362 or firstname.lastname@example.org. For more information visit www.hwcpa.com.
One concept that is gaining popularity among CEOs is outsourcing some of the human resources functions. By removing purely administrative functions, the remaining staff can spend more time on human capital strategies and hopefully support a greater number of company employees without adding to their own staff.
“There are many reasons behind the outsourcing movement,” says Christoph Jenkinson, senior solutions specialist for the Employee Service Delivery Practice at Watson Wyatt Worldwide. “The globalization of many companies along with the need to comply with increasing regulations is bogging down many HR departments. Outsourcing is a solution to the challenge.”
Smart Business spoke with Jenkinson about the solutions created through HR outsourcing and how CEOs can lead the change.
Why are more CEOs outsourcing human resources functions?
They understand that the transactional portions of the human resources functions bring little strategic value to the organization. As the global war for talent heats up, CEOs want more creative energy and accountability for human capital plans to emanate from HR. CEOs want HR to develop and oversee policies, develop strategies, and be drivers of employee satisfaction. Payroll processing, for example, requires little creativity, so it often makes sense to outsource it. Within human resources, many of the sub-units have operated in silos, and that has created process redundancies and duplicate costs.
Also, outsourcing as a business concept has matured and so has executive management’s confidence in it. Originally, the concept was applied to noncore, noncritical functions. Now, business leaders have seen that success can be achieved by outsourcing noncore but critical functions such as payroll and time-card processing.
What HR functions are being outsourced?
I mention payroll because there have always been numerous providers of outsourced payroll processing, and they work efficiently and cost effectively. One of the barriers to outsourcing this company-wide has been the increased globalization of companies and their work forces. We are now starting to see an emergence of universal pay plans, and the world seems to be adopting a general payroll standard with slight variations for each country. Following that trend, we are starting to see payroll processing suppliers go global.
In the past, there was also a mindset that global payroll processing was complicated, so many managers were ‘hands-off’ and left payroll processing to each country leader. With Sarbanes-Oxley compliance requirements, it is important to know what is going on everywhere with payroll and take accountability.
Can employee benefits be outsourced successfully?
The outsourcing of employee benefits is gaining popularity among CEOs. The increased regulations imposed under the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Health Information Privacy Act (HIPAA), for example, mean that human resources must constantly stay up with the changing laws and keep the company in compliance.
Small or medium-size firms can often reduce their costs when insurance coverage is purchased through a third party, such as a staff leasing firm, by leveraging their buying power. Even in the cases where outsourcing is cost-neutral, there are other advantages to outsourcing the administration of benefit programs and the burdensome legal compliance activities.
What should CEOs do to lead outsourcing change?
Senior executives must be involved in the decision to outsource and be on board with the change. CEOs should be involved in taking the steps that generally comprise an outsourcing decision roadmap, like defining business and functional requirements, defining decision criteria, preparing an RFP, developing a vendor evaluation tool and conducting due diligence.
It is important to know what adds value to your organization and to have a vision of where you want to see HR spend its time and energies. While payroll and benefits are the most commonly outsourced functions, the outsourcing of many other HR functions such as full recruitment outsourcing and technology outsourcing is starting to emerge. Through greater scalability and by affording the time for HR to focus on becoming a strategic partner to business unit leaders, the outsourcing of human resources functions is gaining traction among CEOs.
CHRISTOPH JENKINSON is senior solutions specialist for the Employee Service Delivery Consulting Practice at Watson Wyatt‘s San Francisco office. Reach him at (415) 733-4144 or email@example.com.
Gerald Dinkel fights a war on two fronts every day.
He was hired into Cubic Defense Applications in 2000 and moved into the president and CEO position six months later, just as the defense division of Cubic Corp. was finishing an unprofitable year.
While his firm assists combat efforts by providing training systems, integrated services and communications products to U.S. military forces and allied nations, it was losing its own battle with the bottom line.
“The way I would characterize it is that we had multidimensional problems,” says Dinkel. “We had just lost money on a major contract, and once I was here, it became apparent to me that we had poor relationships with our customers. There were lots of historical events that pointed to a lack of focus on our customers, and we had recently lost a number of contracts to the competition.”
Dinkel began his discovery process by spending time with staff, evaluating people and the culture, and looking for the hidden reasons behind the recent lack of growth and loss of contracts. He also gathered information by speaking with the firm’s customers.
Dinkel is an engineer by trade, so after assessing the challenges, he drafted his battle plan in a systematic and organized fashion. Moving Cubic Defense Applications back to financial health would require a cultural shift, a more aggressive posture in developing new technology and better customer relationships.
Developing a passion for customers
One of Dinkel’s early assessments was that the corporate culture didn’t value customers. So in addition to looking at the management structure and leadership team, he immediately launched a parallel mission to change the attitude of employees. “Without customers, we don’t have any business, and we need them more than they need us,” says Dinkel. “Relationships with customers are vital. It may not get you the business if you don’t have the lowest price, but that relationship can break a tie.”
To transfer his vision of improved customer relationships to the staff, Dinkel spent time in one-on-one sessions with managers, expressing his desire for change. He also made examples out of those who didn’t want to follow the new direction. The competition was growing and profitable, and Dinkel began to surmise that his company had stayed with its current technology solutions too long. “In order to be successful, we needed to achieve things that had not been done before,” says Dinkel. “We were going to be creating and delivering services for the first time, and in that process, you can sometimes have difficulty with delivery. If you have a problem and you have the customer working with you, they will help you solve that problem rather than leaving you.”
To navigate change, Dinkel relied heavily on moving people to new roles and on his ability to be a persuasive and effective leader. Most of the staff he started with is still with the organization but in different positions.
As he evaluated people and made his decisions, an openness to change became his litmus test.
“As a CEO, you have to have confidence in your judgment when it comes to people,” says Dinkel. “I looked at people’s attitudes. Some are open to change, and some are just not flexible and don’t want to be bothered with it.”
Because he didn’t know the staff yet, Dinkel sought internal opinions about who would be the best candidate to become project manager over the troublesome contract that had produced a bottom-line loss and an unhappy customer the prior year. Again and again, the same name kept coming up. “I wanted a project manager who understood the technology and could turn the customer situation around by fulfilling the contract through tremendous attention to detail,” says Dinkel.
With that change, he moved a major item off of his to-do list, and the contract has since been profitable.
“There was some pent-up demand among some of the staff to be more entrepreneurial and creative, so I was able to unleash that,” says Dinkel. “I also brought in people that I had known from prior assignments.”
Dinkel acknowledges that incorporating leaders who have prior relationships with the CEO can be a double-edged sword.
“I know that they are perceived by others to be ‘FOGs,’” friends of Gerry, says Dinkel. “They actually have more pressure on them because if they fail, I fail. In the end, I will be judged on whether the people I brought in actually make the organization better.
“Sometimes, you have to change the people in order to change the culture because cultures don’t change overnight, and as the CEO, that culture will outlive you. Before, it had become an intimidating, closed type of culture. Now, we have a fairly open culture.”
Prior to Dinkel’s arrival, Cubic Defense Applications was organized into five operating units, each headed by its own president and CEO. Dinkel says that the groups were working in silos, and many operating functions were redundant.
His vision was for three divisions, organized by function, which allowed for greater sharing of information and focus on the customer. Dinkel eliminated the top positions and took the parts of each unit that were similar, such as engineering, and consolidated them. He says that although there are pluses and minuses to organizing along a matrix structure, in this case, it was the right way to improve performance, creativity and speed to market.
Matrix structures are common in organizations that utilize project management, blending a conventional vertical hierarchy for reporting with a traditional horizontal project management structure that encourages cross-communication and accountability. “I like a matrix structure because it gives you checks and balances and eliminates redundancies, while encouraging peer-to-peer challenges,” says Dinkel. “We had also become very tactical, and my goal was to move us to a more strategic posture. In order to achieve that, we had to break down the silos and the fiefdoms.”
The focus on three functional areas and the elimination of silos drove innovation and increased the volume and pace of new technology developments and releases. That move drove new sales to existing clients and repositioned the company from follower to leader. “Recently, I thought that our business development people were becoming too short-term-oriented,” says Dinkel. “So I moved them into one centralized organization away from the business units. They still have a relationship with the business unit, but they have a separate reporting structure.”
Dinkel says some of his staff laud his ability to anticipate future market demand, likening him to Wayne Gretzky, who described his prowess in hockey by saying, “I skate to where the puck is going to be, not where it has been.”
Dinkel attributes his vision to unleashing internal creativity through management changes, the matrix structure and spending time in front of customers. “The Department of Defense actually publishes forward-looking information which helps to anticipate the new technology needs,” says Dinkel. “I also spend a great deal of time in front of customers. In particular, the international customers value a personal visit from the CEO, and they will share with you where they are headed.”
Annually, he takes his management team off-site to look at long-term strategic planning by reviewing the data in anticipation of emerging customer needs.
The increased rate of new technology releases has positively impacted both the top and bottom lines. In 2006, CDA had revenue of $563 million, an increase of more than $100 million over 2004.
One of Dinkel’s final changes involved moving CDA to become a high-performance organization.
He implemented the principles of Capability Maturity Model Integration (CMMI), a process improvement approach that also plays a role in generating new business. “One of the reasons that it was important for us to become CMMI-certified is because the customers demanded it,” says Dinkel. “There are certain things that you can’t bid unless you have that certification, and as a mid-tier supplier [a defense contractor with revenue up to $1 billion], we needed to demonstrate that we were a high-performance organization.”
Dinkel says that often, CEOs assign process improvement initiatives to staff. In this case, he embedded the responsibility with his line managers, a move that he says placed the accountability for improving productivity and results directly with those most responsible for the outcome.
He named the initiative “competitive superiority” to serve as a constant reminder to the team of the real outcome they hoped to achieve through the process. “I really don’t like the term ‘total quality management’ because I think it became a buzz word overnight, and it really doesn’t describe the outcome that you are trying to achieve,” says Dinkel. “I wanted to put the onus on the functional organizational team to make these improvements. There is a cost associated with always bailing out a project, and I wanted people to see that job security is not achieved by running a continuous series of fire drills. The result has been that projects are running more predictably, there’s been a reduction in cost, and we’ve been more consistent in executing our plans with fewer errors.”
While there has been much improvement at CDA under Dinkel’s leadership, he is still refining the processes and says he needs to stay one step ahead because the business of defense is constantly changing. “I came here because it was a fairly diversified company, and I have no loss of enthusiasm for the opportunity,” says Dinkel. “I’ve had the chance to establish my own management culture and to build a team. I think the success that I’ve had goes back to the people I admire; you build a team and then you say, here’s what we’ve got to do. “In my view, the main ingredients for success were already here; the organization rose to the occasion.”
HOW TO REACH: Cubic Defense Applications, www.cubic.com
The U.S. Securities and Exchange Commission (SEC) has proposed changes to the current requirements imposed on management by the Sarbanes-Oxley Act (SOX) relating to the assessment, documentation and testing of a public company’s internal control over financial reporting. The Public Company Accounting Oversight Board (PCAOB), likewise, is reassessing the auditors’ responsibilities on auditing such information.
On Dec. 13, 2006, the SEC issued proposed interpretive management guidance relating to the internal control of financial reporting. A few days later, on Dec. 19, the PCAOB issued, for public comment, a proposed revised auditing standard relating to the auditing internal controls over financial reporting. Each item is open for public comment for 60 days.
“Staying informed on the latest developments in corporate governance is vitally important to CEOs,” says John Poth, partner in the Audit and Business Advisory Services Department with Haskell & White LLP.
Smart Business spoke with Poth about why these changes are good news for CEOs.
What are the purposes of the new proposals?
The desire is to ‘right-size’ both requirements to obtain the intended benefits of each without requiring unnecessary work or costs. The SEC and PCAOB hope to establish new requirements for each that are less time-consuming and are scalable to smaller public companies, as well as large accelerated filers.
Why are these changes occurring now?
These proposals are in response to the first two years of the SOX requirement that public company management document the internal controls over financial reporting and the requirement that auditors audit this information and feedback received by the SEC and PCAOB relating to the requirements.
Can you briefly summarize each of these lengthy proposals?
The new SEC-proposed guidance to management is based upon two key principles. First, management should evaluate the design of the implemented controls and determine if there is a reasonable possibility of a material misstatement in the financial statements that would not be prevented or detected in a timely manner. Second, management should collect and test evidence that the controls in place are indeed working, based on the company’s assessment of the risk associated with those controls.
It emphasizes that management should use a top-down, risk-based, principles-based, flexible approach. Smaller public companies can tailor their evaluation of internal controls to fit their size and complexity while also meeting the needs of larger accelerated filers.
The SEC proposal provides guidance in four key areas: identification of financial reporting risk and controls implemented to address those risks; evaluating the operational effectiveness of those controls; reporting the overall results of management’s evaluation; and necessary documentation.
The PCAOB-proposed new auditing standard would focus the auditor on matters that are most important to internal control, eliminate unnecessary procedures, and make the audit more suited for smaller and less complex companies.
Some of the proposal’s key elements are emphasizing the risk assessment process; directing the auditor to the most important controls; clarifying the role of materiality; removing the audit requirement to evaluate management’s process; and permitting the consideration of knowledge obtained during previous audits.
What are the intended benefits to public companies from these changes?
If these proposals are approved, they should have the impact of focusing both management and auditors on material items rather than time and expense on items considered not reasonably possible of resulting in a material error in the financial statements. In addition, it is intended to help smaller public companies implement SOX without such a strong perception of an unfair burden. The intent is to reduce time and cost.
How much time and expense will be saved?
The answer to this depends on where a company is in the process.
For smaller companies that are not yet subject to the 404 requirement, it merely defines what needs to be accomplished in the process which will still likely be costly, but less than it would have been before the proposed revision to the requirements.
For companies already subject to SOX 404, this is going to depend on the approach taken in the past by both management and the auditor and the new requirement that only certain key controls need now be considered. Once these proposals pass, assuming they do, key management personnel need to meet and determine what is needed and then consider appropriate meetings with auditors and other outside advisers to discuss the issue.
JOHN POTH is a partner in the Audit and Business Advisory Services Department with Haskell & White LLP. Reach him at (949) 450-6390 or firstname.lastname@example.org.
If you happen to be wandering the aisles of one of Dixieline Lumber Co.’s 11 home center stores, don’t be surprised if the person who offers to help you is Joe Lawrence, president of the company.
When Lawrence says that he likes to lead by example, he can point to numerous instances of doing just that. That’s because at one time, he’s held most of the positions in the firm since starting as a lumber handler 23 years ago. “I have personally worked a lot of the positions, so I have a great understanding of the business,” says Lawrence. “Our management team has an open-door policy with our people and our customers. We expect each other to be in the field interacting with our people and exchanging ideas and gathering feedback. I see myself as one of the guys.”
His affinity for people makes him a likeable leader, but it’s Lawrence’s skill in managing employees, his hands-on involvement in their growth and development, and his passion for customer service excellence that have been the underlying reasons for his success in helping to guide the organization even before assuming his current role in March 2005.
Lawrence says that much of the credit for his success lies in his management structure, and his style of management transparency and empowerment that has enabled his team to stay focused and productive, and to grow.
Command and control doesn’t live here
Lawrence involves seven of his key executives in a management committee that authors and executes the business plan for the company. He considers one of the additional benefits of the system to be staff development. “I’m not a micromanager,” says Lawrence. “I prefer an open-forum style of management, so we meet as an executive leadership group formally once a month and then individually on an informal basis throughout the work week.”
The agenda typically includes a review of the financial results and projections, as well as preparing the annual presentation of the business plan to the rest of the management team. The most significant outcome from the committee has been much of the strategy for expansion and diversification of the business model, but it’s Lawrence’s leadership that sets the tone.
“The plus of having an open discussion is that we can reach a general consensus,” says Lawrence. “We have a debate if need be, but there are ground rules. The comments have to be professional, not personal, and I don’t allow generalities for comments; they have to be specific.”
Lawrence also acts as referee, and in the case of an impasse, final arbiter.
“I will let the debate go on, because first of all, I want them to own the result, and second, I want them to come to a consensus,” says Lawrence. “I think that some disagreement is healthy. For example, I don’t expect the sales folks and credit [department] to always agree as to what is an appropriate level of risk. The group has to be trusting and a bit thick-skinned at times and sometimes opinions are expressed that may not be consistent with the thoughts or expectations of others.”
With a major corporate goal of expansion of the firm’s footprint outside of San Diego, the committee reviews the demographics of the expansion, identifies the targeted customer base and sets the sales strategy. That formula resulted in success when Dixieline initially broke into the San Bernardino market by expanding into Colton. Later in 2006, Lawrence took advantage of his weekly one-on-one meetings to provide some staff development related to the expansion. “I like to teach my managers that they have to be adaptable,” says Lawrence. “Many people want things in black and white, but that’s not the way things in leadership usually are. I try to get my managers to play out the ‘what ifs’ in advance. As an example, after our Colton expansion, there was a downturn in the local housing market, and the business slowed. “Some members of the committee wanted to diversify the business model. In one-on-one sessions with them, I asked what message that move might send to our customers or competitors. We have since found other business to bolster that location.”
Success through people
Dixieline has more than 1,100 employees, and historically, most of the talent needed for the firm’s expansion has come through internal promotions and a highly structured employee development system. That strategy is still a large part of the culture, and because it is so important to the human capital plan, it is overseen by Lawrence. “I like to be able to dangle the opportunity for upward mobility in front of new hires and, of course, I use myself as an example,” says Lawrence.
All employees have a formal development plan, and the pipeline of internal candidates is reviewed each month at the management committee meetings. Each location has a separate turnover target based on the line of business and each position.
Turnover for the lumber and home center industry for 2005 was 35.7 percent, while Dixieline had a turnover rate of 23.5 percent. For just the retail side of the business, the industry average in 2005 was 57.2 percent, while Dixieline posted 32.3 percent turnover.
The goal is to achieve less than 30 percent turnover in the business centers and to average no more than 30 to 35 percent turnover on the retail side. By doing so, the company keeps a consistent employee base that is more knowledgeable and spends less money on recruiting and development.
Lawrence says a command-and-control environment hampers people’s growth, and continuing to develop good people means letting them learn and think on their own without overseeing their every move. He says his deliberate choice of management style enables internal promotion and the people development system that has gotten Dixieline to its present status. “I believe people want to be involved in building the business and contribute to the overall success,” says Lawrence. “If we are always told what to do, not only will we not grow the business, but we will stagnate the growth of individuals.”
Shopping for attitude
“Today’s builder wants a one-stop shop,” says Lawrence. “That has necessitated the need to make acquisitions outside of our core competency, so now we are looking at and evaluating building materials distributors, and shops that manufacture doors and trim.”
In addition to looking at the numbers, Lawrence visits every prospective acquisition to assess its philosophy on customer service and quality, because it is here where he finds the true fit. “I look for acquisitions where their business has a synergy with our core business and their executives share our core beliefs about customer service,” says Lawrence. “We want to retain many of their people, and I often find that if they don’t have a strong sense of customer service ingrained as a philosophy, it’s hard to teach.”
Success for Dixieline on the consumer side of the business has come through positioning the firm as an alternative to big-box retailers such as Lowe’s and Home Depot, something Lawrence also credits to strong customer service. “Having roots as a family-run company helped to create our culture of customer service,” says Lawrence. “I believe that consumers like to have choices. We have more people out on the floor so we run a more expensive model, but we also run at a higher margin. I believe in the ‘Moments of truth’ philosophy in customer service because every transaction is important to us.”
Lawrence is referring to the popular customer service mantra that espouses that each interaction between a customer and the company’s frontline personnel creates an opportunity for the customer to leave with either a negative or positive perception of the company’s service, based on his or her experience.
To begin the process of dedication to excellence, all new staff members begin customer-service training on their first day of employment, followed by product-knowledge training accomplished through vendor presentations.
The results speak for themselves.
“Since 1980, there have probably been close to 20 big-box locations that have opened in San Diego,” says Lawrence. “In spite of their growth, we’ve been able to more than triple our business during that same time. I think it’s a misnomer that you can’t run at higher cost and be successful just based on the financials. It’s all about the throughput analysis.” On the retail side, Lawrence measures transactions per labor hour, using a different target for each location, as well as staff turnover, because that affects a customer’s experience. And the firm has achieved a reputation as a preferred employer with dedicated employees who have been promoted through the ranks.
While many firms have gotten out of the retail hardware business, Lawrence has jumped in, adding the consumer market to counterbalance homebuilding, as well as adding solutions for the remodeling, custom homebuilding and repair markets. In 2005, the firm had record sales of just over $400 million, led by the home-building segment.
Lawrence was a visionary and an initiator of a diversified business model long before he became president of the organization. Initially, Dixieline was solely dedicated to supplying lumber and materials to builders. As he moved up in the organization, Lawrence watched the economic cycles take a toll on the company, its customers and employees.
In convincing the owners to diversify, Lawrence established himself as a future leader and set the company on a course of economic stability. His takeaway from those experiences includes lessons in persuasion and persistence. “I was persistent about my beliefs,” says Lawrence. “I found others internally who shared my vision, and together, we created a nucleus of the same vision to diversify and grow outside of San Diego and become a regional player in the entire Southwest area.”
Dixieline’s success attracted attention, and the company was bought in 2003 by Lanoga Corp., which was, in turn, bought last year by Pro-Build Holdings Inc., a subsidiary of Fidelity Capital.
The experience of being acquired twice after so many years as a family-owned company has had its advantages and its learning moments. While there is additional support for the vision of becoming a regional player, Lawrence sees the education process as having benefits for both sides. “What I have learned from this is to be open to listening to new ideas and new ways of doing things,” says Lawrence. “However, what we bring is knowledge of the local marketplace and how to be successful here, and that’s a competitive advantage. I think we will thrive by learning from each other. “Day-to-day, we are still a local company, and the burden is on us to grow our strategic plan. I am always an optimist. There is always a way to make something work; you just have to work harder than the next guy.”
HOW TO REACH: Dixieline Lumber Co., www.dixieline.com
Corporate mergers and acquisitions occurred at a frantic pace in 2006. In a report issued Nov. 6, outplacement firm Challenger, Gray and Christmas stated that deals for the year had totaled 9,461 and were valued at $967 billion. Though final figures were not available at presstime, the number of mergers and acquisitions in 2006 almost surely surpassed the 2005 year-end total of 10,309 deals valued at $1 trillion.
M&A activity has been fueled by a large influx of private equity, and many mergers are undertaken for larger profits through increased operating efficiencies or the addition of complementary product or service lines. While many plans look good on paper, success often starts in the technology trenches. “After the investment bankers and lawyers have gone home with their money, the ‘sexy’ part of the deal is over and people have to roll up their sleeves and make this work,” says Blake Sellers, president and CEO of Avvantica Consulting LLC.
Smart Business spoke with Sellers about what CEOs should understand regarding technology’s role in post-acquisition success.
What differentiates the pre-acquisition and post-acquisition periods?
Usually when you hear about M&A activity, it’s the ‘pre-deal’ goings-on that get all the press. In most cases, CEOs pay a premium for what they are getting because it’s required to close the deal and they believe the acquisition is worth it. After the transaction occurs, you start to hear phrases like ‘merger integration’ and ‘synergy capture.’ These phrases describe the expected financial gains resulting from the two entities coming together. This is where the rubber starts to meet the road, because technology integration is vital to gaining the operating efficiencies or market synergies that were contemplated before the deal started.
As an example, we’ve recently worked on merger integration issues for a health care company that provides diagnostic imaging services. In this situation, the integration approach that we took for ‘customer-facing’ processes and systems (e.g. patient services) was very different from the approach for ‘back-office’ processes and systems such as finance, accounting and payroll.
What’s the role of technology during post-merger integration?
There are four key components to creating a successful post-acquisition integration plan: people, process, data and technology. And technology usually serves as the foundation of this plan.
From the back-office perspective, the key goals are usually centered on reduced operating costs and/or increased control. So issues like centralization and shared services often come into play for functions like finance and accounting, HR and procurement. For public companies, Sarbanes-Oxley requirements must also be considered.
For ‘front-office’ or customer-facing processes, the objectives are more typically focused on increasing market share and/or improving the customer’s experience. Once again, the integration projects will have to address issues that include people, processes, data and technology; while shared services or centralization are less likely to be considered. For these areas, defining and implementing a set of common processes and systems on a decentralized basis is often the more appropriate approach. Without these types of changes, it’s almost impossible to manage the combined company on a consistent basis.
What are the best practices for executing a technology integration plan?
We can learn a great deal from companies like Cisco and GE because they do this all the time. However, they have the luxury of having M&A teams that are dedicated to merger integration. They also are usually acquiring much smaller firms. When you don’t have an experienced team, or the merger involves two companies that are more equal in size, I recommend setting up an integration steering committee and a program management office (PMO).
The integration steering committee should be composed of company executives such as the CFO, the VP of HR, VP Operations, etc. This group provides the overall governance function, establishes the vision, and makes most of the strategic decisions. Once this group is established, you are set to lead from the top down, so the next step is to set-up the PMO.
What role does the PMO serve?
The PMO does all of the master planning, organization and provides hands-on expertise to the individual projects that make up the overall integration program. It defines the scope of work, the time lines, work plans, organizational charts and the sequence of the projects. Ideally, many of the firm’s own managers will participate in the PMO or manage individual projects that are overseen by the PMO. If the company does not have the internal expertise to create a PMO, this function can be outsourced to experienced contractors or consultants.
BLAKE SELLERS is president and CEO of Avvantica Consulting LLC. Reach him at email@example.com or (214) 751-2820.
Beginning in 2007, CEOs of private companies will begin to feel the effects of the Sarbanes-Oxley Act (SOX), as new audit standards and practices are imposed that will interject business owners into the middle of the process.
The accounting failures of companies like WorldCom and Enron have had a substantial impact on the accounting and governance practices of public companies. In 2006, eight new audit (aka “risk assessment”) standards were issued. Designed to improve the quality of audits and make the process more effective, the new standards require greater involvement and personal accountability on the part of the CEO for information provided to auditors, even when the company’s stock is not traded on Wall Street.
“The change applies to private companies of all sizes,” says Rick Smetanka, partner with Haskell & White LLP. “This is an example of audit reform going through the public-company veil and piercing the private-company world.”
Smart Business spoke with Smetanka about what private-company CEOs can expect from the changes and how they can prepare to comply.
What do CEOs need to know about the changes in audit standards for 2007?
Accompanying the enactment of Sarbanes-Oxley in 2002, the authority for issuing audit standards for public-company audits was taken away from the American Institute of Certified Public Accountants (AICPA) and ultimately given to the Securities and Exchange Commission (SEC).
The recent changes in private-company audit standards reflect many concepts already adopted in public-company audits. They were conceived with the goal of improving the quality and effectiveness of private company audits. CEOs need to understand that prospective audits likely will be more focused on internal control, business risks and specifically tailored audit tests.
How will this change the way audits are conducted?
One impacted area is risk assessment. Now it will be necessary for the auditor to spend more time with the CEO and understand the key processes and controls the company has in place, in order to review and assess the effectiveness of the internal control system.
As an example, a controller at a small company may handle the complete flow of financial transactions, such as entering vendors in the system for payment, cutting checks, creating general ledger entries and performing bank statement reconciliations. As this is not ideal from a control perspective, we might recommend introduction of a key control to separate certain of these incompatible functions.
Further, in order to complete the balance of the risk assessment, the auditor will need to have a more thorough understanding of the business and the environment in which it operates. With this deeper understanding, the auditor will be better able to design specific audit tests that address identified external or internal business risks, such as competitive market forces, pressure from investors or lenders to satisfy financial benchmarks, or product obsolescence risks.
How can CEOs make certain their company is in compliance?
That responsibility falls principally to the auditor. After the CEO contracts with the audit firm, it is up to the financial professionals to know and execute the standards and to educate their clients with respect to changes in the audit process.
At the conclusion of the audit, the CEO should expect the auditor to present a letter summarizing deficiencies in the company’s internal control. Implementation of the new audit standards will require more time on the part of the CEO in order to share his/her perspective of the business and related risks, and more time on the part of the auditor to gather such information and assess it. While this might mean that audits will be lengthier and incur more billable hours, the private-company CEO will benefit from the opportunity to strengthen and streamline internal controls and business processes.
What actions can CEOs take now to be ready for these changes?
First, they can conduct an internal review of key processes and controls with the purpose of assessing the strengths and weaknesses of their system, and as a way to become familiar with the key controls they rely on and areas where the organization may have gaps in controls.
Second, they should adjust their expectations of the audit process, knowing that it will take more time and more involvement and commitment from both the CEO and the company’s accounting team.
Third, they should understand the spirit in which the recommendations are given. The accounting profession certainly has taken its lumps in recent years, but our goal is to improve our clients’ businesses and make them more effective and efficient.
RICK SMETANKA is the partner-in-charge of Audit and Business Advisory Services with Haskell & White LLP. Reach him at (949) 450-6313 or firstname.lastname@example.org.
With corporate contributions to 401(k) plans diminished to about 1 percent of payroll, an unforeseen problem has incubated over the past 30 years. Now faced with inadequate savings, rising health care costs and a decade of poor stock market returns, baby boomers are delaying retirement. The current situation will ultimately drive up payroll and benefit costs and curtail productivity unless private sector employers change course and get involved.
“Employers need to realize they can’t get out of the pension business; they’re in it whether they like it or not,” says Lee Morgan, consulting actuary with the Retirement Consulting Practice at Towers Watson. “They must take steps to help aging employees retire with dignity or suffer the financial consequences.”
Smart Business spoke with Morgan about the situation facing baby boomers and how employers can influence the bottom line by helping veteran employees plan for retirement.
Why are baby boomers delaying retirement?
The problem is that 401(k) plans were designed to augment not replace traditional retirement plans, and now a perfect storm of events has created financial conditions that the average employee just can’t navigate. And at some point, the Keynesian-style government spending that is propping up the economy and retiree savings, as well, has to end. This will cause aging workers to stay on the job even longer. Consider these facts:
- A 65-year-old couple retiring in 2010 will need $250,000 to pay for medical expenses throughout retirement, according to Fidelity Investments.
- Two-thirds of people aged 65 and over will need some level of long-term care in their lifetime, which runs around $75,000 to $80,000 per year. For couples aged 65, there’s a 50 percent chance that one will live beyond 92.
- The average net worth for those in their 60s in the U.S. is under $200,000. Our savings rate pales in comparison to Japan, where citizens had traditionally saved up to 20 percent of their income, or China, where the traditional savings rate averages around 40 percent. Even though current Japanese savings rates have dropped considerably due to the financial crisis, U.S. savings rates have historically been far below those of most industrialized countries. At this point, it is clear most U.S. employees are ill equipped for anything close to the traditional retirement lifestyle they may have envisioned.
Why should employers get involved?
In their quest to reduce costs, employers relinquished control over the timing and pace of employee retirements. Our statistics show that at least 3 percent to 5 percent of the current work force is unproductive and not engaged, yet firing underperforming veteran workers can be problematic. Age bias charges filed with the EEOC during 2009 were the second highest on record as monetary relief for victims totaled more than $376 million. To make matters worse, a reduction in boomer spending is partially responsible for the current economic malaise, as only those covered by traditional pension plans will feel free to spend their paychecks. In fact, consumer spending had reached more than 70 percent of GDP before the financial crisis, which is very high by historical standards, in part caused by Keynesian-style government spending and home equity lines of credit, which have dried up. As people live longer, only countries with financially secure retirees will be able to sustain economic growth.
In brief, it seems likely employers will either have ‘retirees’ on the payroll (not able to retire) or receiving a traditional pension. Those ‘retired on the payroll’ will have implications for productivity and ability to retain younger employees.
How can employers assist baby boomers?
First, offer financial planning services and education so employees can estimate how much they need to retire and save accordingly. Planning must be personalized and include a range of scenarios that contemplates a reduction in Medicare benefits and a realistic return on investments. Remember, the return on the S&P 500 has been roughly zero over the last decade and turns negative when you account for inflation. Second, review your company’s benefit plans and investment options. Employees may be able to address some of the risks of retirement by purchasing long-term care insurance or annuities.
What’s the best way to keep aging workers engaged and energized?
Employers need to bolster their engagement by continuously investing in their growth and development and offering them new and exciting challenges. Sometimes older workers have ample institutional knowledge but lack the technical or strategic skills to be fully productive. Japanese companies continually refresh their work force because they’ve learned that recycled workers are less expensive and more productive than new hires. Embracing that notion requires a cultural shift by U.S. employers.
Are employers considering a return to defined benefit pension plans?
The only viable long-term solution, if you want to allow employees the option of retiring at 65, is to bring back defined benefit pension plans. Also, younger workers may start considering careers in public service rather than the private sector, which may preclude businesses from hiring the best and the brightest. While CFOs worry about meeting future funding needs, the current pension shortfalls were created by investing in ways inconsistent with eliminating pension risk. Employers have the liberty of structuring a plan they can afford, but investing properly. Investing pension assets in bonds, which is more common in the U.K., can eliminate stock market volatility and facilitate long-term affordability. The data suggests that employees are struggling with self-directed retirement plans, so employers will be in the retirement business whether they like it or not.
Lee Morgan is a consulting actuary with the Retirement Consulting Practice at Towers Watson. Reach him at (858) 523-5553 or Lee.Morgan@towerswatson.com.
Facing a severe and protracted economic downturn, chief financial officers are worried about controlling costs, sales executives are worried about retaining and motivating sales staff, and everyone is worried about declining revenues, customer defections and eroding market share.
To alleviate the concerns, seasoned sales executives dipped into their stash of proven recessionary tactics to set interim sales goals and revise compensation plans before hunkering down for the duration. Now that the economy is stabilizing, those recession-induced plans may yield unintended consequences such as over-rewarding lower-tier performers while shortchanging their hard-charging counterparts. Employers must take steps to recalibrate sales compensation programs and revise performance expectations to comport with 2010 market conditions.
“Companies don’t want to be stuck with a 2008 sales compensation program in 2010,” says Matthew Lucy, senior consultant with the Sales Effectiveness and Rewards practice at Towers Watson. “Companies are realizing it’s time to reassess their incentive plans in light of the new economy and build for growth.”
Smart Business spoke with Lucy about the hazards of latent sales compensation plans and the best ways to motivate and reward top performers in a recovering economy.
What should employers consider when reassessing sales compensation programs?
Start by reviewing your company’s revised go-to-market strategy and ensure sales rewards and compensation plans are aligned with the company’s current goals (as opposed to the goals of a few years ago). For example, companies may choose to scale back heavy discounting practices in order to bolster margins, after bowing to market pressures for nearly two years. Include profit elements in revised sales compensation plans to encourage representatives to raise prices and sell value over cost. And though there’s rarely a shortage of opportunities for competent business developers, expect increased competition for their talents in 2010. It will be critical to compare your company’s compensation plan against competitors to ensure you can stave off turnover or acquire additional sales talent to meet post-recession business objectives.
Which additional design elements drive performance?
Employers need to ensure that their plan mechanics (for example, thresholds and targets) are set appropriately for the new economy. Companies often lower bonus thresholds during a recession to motivate employees, or they link sales bonuses to company results in order to control costs. But those tactics may simply increase total compensation without increasing revenues and, worse yet, they may benefit poor performers at the expense of top performers. Additionally, payouts for meeting team goals or MBOs can fail to encourage personal performance, which is fundamental to healthy revenue growth. Consider modifying quotas or individual performance goals to benefit sales representatives at all performance levels without compromising plan integrity; use contests and spiffs to help fill the gaps if the recovery sputters.
How can sales managers establish realistic measures and quotas in an uneven economy?
Accurate quota setting is the most overlooked way to reduce costs. Simply setting accurate quotas may reduce overall compensation costs by 10 percent to 20 percent without altering plan designs. Use these tactics as part of a comprehensive quota development methodology.
- Shorten time horizons. Setting quarterly quotas or allowing midterm adjustments on annual goals will enable more accuracy in a shifting economy.
- Bottom-up quota development. Individual sales goals are often apportioned from full company objectives, which can lead to unrealistic targets. Quotas need to be a collaboration of top-down and bottom-up quota development. This process should uncover territories that can shoulder more of the growth burden as well as those that may be tapped out.
What’s the best way to use contests and spiffs?
Competitions are the perfect tool to launch new products and services, bolster eroding margins or ease the sting from a temporary setback in the economy. Contests should last three to six months and offer winners a modest reward, because they should not be used as a substitute for effective sales compensation plans and quota setting practices. In fact, set aside no more than 5 percent of the total incentive budget for contests and spiffs at the beginning of the year and consider limiting awards to representatives achieving most of their sales quotas or exceeding performance thresholds to reinforce the importance of meeting goals. Drive the point home by centralizing contests to keep renegade managers from offering rewards that deviate from the company’s core strategy or diminish fundamental sales achievement.
What other tactics drive sales performance?
This is the perfect time to revisit the productivity of your sales force. Finding ways to force sales personnel to decrease administrative tasks and increase face-to-face selling time and other revenue-generating activities is a sure method of driving sales. Companies may have eliminated sales support personnel during the downturn or delayed investments in tools like CRM software, mobile devices or lead databases, but it’s easy to assure the return on these investments as long as sales quotas are increased proportionally.
Matthew Lucy is a senior consultant with the Sales Effectiveness and Rewards practice at Towers Watson. Reach him at (310) 551-5603 or email@example.com.