A subtle, but very significant, change is underway in the world of Sarbanes-Oxley compliance, specifically audits of Internal Control over Financial Reporting (ICFR). As a result of this change, many public companies will face additional compliance burdens and new exposures, even if they believe they have a well-established and stable system of internal control.
“Some public businesses may be completely unaware that even though they’ve had effective ICFR for years, this year may be a different animal,” says Eric Miles, a partner in Business Risk Services at Moss Adams LLP. “We’re seeing that controls or approaches that were fine in the past are now getting much more scrutiny from external auditors.”
If you have not yet had discussions with your external auditors about your 2013 ICFR compliance efforts, you may have a little time to get out in front these changes, he says. Many companies are already experiencing these changes in expectations and have found compliance to be very frustrating.
Smart Business spoke with Miles about why there’s activity change in ICFR compliance expectations and what you can do about it.
Why is there increased focus on ICFR compliance?
Over the last two years, the Public Company Accounting Oversight Board (PCAOB) has drastically increased its inspection focus on audits of internal control over financial reporting (ICFR) and as a result, virtually every major accounting firm has received reports indicating deficiencies in their audits of ICFR. The PCAOB was concerned about the pervasiveness of the findings, so much so that it published a special supplementary report in December 2012 detailing the most pervasive deficiencies identified in firms’ auditing of internal control over financial reporting during the 2010 inspections, and also including information on the potential root causes of the deficiencies.
The SOX ICFR compliance pendulum has swung back and forth over the years. When the SOX ICFR assessment requirement was first implemented, it yielded very rigorous and costly audits. In response to the litany of criticism, the PCAOB issued a new audit standard in 2007 (Audit Standard No. 5) to clarify expectations and ultimately to focus SOX ICFR efforts on areas of the most importance. What we are currently seeing is the PCAOB’s reaction to the mis-implementation of that standard. It appears that from the PCAOB’s perspective, the pendulum swung too far. As a result the PCAOB is trying to put more rigor into audits of internal control over financial reporting.
What is the biggest internal control problem?
Although the PCAOB noted several pervasive deficiencies, the issue currently causing the most consternation with companies is the design and testing of ‘Management Review Controls.’ These are controls, such as account reconciliations, budget to actual, etc., that theoretically allow several key risks to be mitigated with a single control. The PCAOB noted that the auditors’ evaluation of the design and operation of these controls has typically been cursory at best, such as an examination of a document for signature and date. As a result, many firms are now asking companies to be very detailed in the explanation of these controls, explaining aspects such as what triggers management’s attention, what management does when an item for investigation is identified, and how resolution of review items is documented. Further, firms are expecting management to maintain much more evidence of operation than in the past.
If your company has management review control problems, what can result?
There’s a real risk that organizations that heavily rely on management review controls are going to be surprised, even if their auditor has said for years the controls are fine.
With the new scrutiny, some external auditors may conclude there’s a material weakness. Ultimately that impacts the value of the organization. In any case, it takes a lot of time and effort to update documentation to get back in sync with your external auditor.
What should organizations be doing now?
The first step should be to have a proactive conversation with your auditor to understand whether their expectations have changed or are expected to change. There is a real risk that companies will substantially complete their own internal control assessment activities before fully understanding the scope of needed changes with their external auditors. As a result, companies may need to go back and update their already completed testing to comply with the auditor’s new approach. That’s far from ideal.
Once you have a better understanding of the external auditor’s needs, you need to understand what controls are considered to be ‘review controls.’ By taking an inventory of your controls, you may find that you have just a handful of management review controls, however, organizations that really embraced Audit Standard No. 5 will likely have more concerns.
For the identified controls, make sure your control descriptions include specific investigation criteria such as dollar or percent variance or other qualitative considerations, with clear precision thresholds. There needs to be evidence of control performance that can be tested through re-performance, not just through a review of signatures. If you can update your documentation in advance of external auditors coming in, it will save you trouble later.
Overall, be prepared for increased auditor activity, particularly with respect to walkthroughs and management review controls.
Eric Miles is a Partner in Business Risk Services at Moss Adams LLP. Reach him at (650) 808-0699 or email@example.com.
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Franchise owners have some particular obstacles to overcome when thinking about succession. Each one has a manufacturer or headquarters that has conditions for ownership and succession, so it’s critical to plan ahead.
“You can’t forget about dealing with developing bench strength, even when facing an uncertain future,” says Ricci M. Victorio, CSP, CPCC, ACC, managing partner at Mosaic Family Business Center. “It’s your bench strength — the pipeline of multigenerational talent — that drives you into success, even if businesses performance is transforming.”
Smart Business spoke with Victorio, who has helped automobile dealerships strategically plan for 15 years, about how franchise owners can fit the puzzle pieces together to pass their business on to the next generation.
What situation do franchise businesses face today?
Many franchises, such as auto dealers, have gone through massive restructuring to survive. But businesses had to watch for the tipping point — cutting the fat and not the muscle.
As we start to come through the recession, these franchises are carefully picking up the pieces and looking to hire the right people. They also are waking up to the fact that time is passing — no matter what the economy is doing — and strategic planning, team training and succession planning cannot be ignored long-term.
This is important for any business, whether a franchise or not, because even in tough times it’s necessary to keep a strategic eye on how you’re going to navigate the future.
How is franchise succession planning unique?
Any franchise that sells a product has to answer to headquarters or its manufacturer. It’s not like a typical family business, because if you’re holding a franchise there is someone above you dictating what the rules are to own that franchise. And if you don’t have business success or an approved successor, they can take it all away. You can’t even sell your franchise without approval.
In addition, you shouldn’t just focus on the development of the next generation. It’s not just talent. If you don’t have enough market share, if your customer service doesn’t meet standards or even if your building isn’t up to specifications, that may stop you from passing the mantle. Not having these in order upon the death or inability of a dealer to continue running his or her store would give the manufacturer a wedge.
How can franchise owners meet these challenges?
You have to present your succession in a pretty package with a bow on it. The strategic plan, the bench strength of your managers, your service, your sales, customers’ reaction to your culture and environment, and the education of your chosen successor all get scored.
Various manufacturers also have required successor development programs. For example, the National Automobile Dealers Association has an 11-month dealer’s academy where developing successors spend six weeks in training sessions and then have homework back at their dealerships for six weeks before returning for another week at the academy.
It can take five to 10 years to get everything in order. You have to think far out, so you may need to start working with an adviser as soon as your children come into the business. Remember, it’s not about being old and thinking about retiring, it’s about having a plan so you don’t lose the business.
Additionally, in a succession plan, you need a short-term contingency plan — what if you don’t come home tomorrow — as well as a long-term plan, such as your kids growing into the business. In the short-term, maybe ensure your general manager has been approved and certified by the manufacturer as a dealer-operator to protect your long-term legacy for the next generation. However, this may come at a price; if someone has qualified to be a dealer, they will want some ownership. An adviser can help you devise creative ways of bridging this succession gap.
Ricci M. Victorio, CSP, CPCC, ACC, is a managing partner at Mosaic Family Business Center. Reach her at (415) 788-1952 or firstname.lastname@example.org.
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Reducing your above-the-line income is a smart strategy this year as higher tax brackets go into effect.
Monic Ramirez, CPA and senior tax manager at Sensiba San Filippo LLP, says there are several income thresholds that should be managed, and planning should start now in order to avoid costly financial errors at the end of the year.
“Reducing above-the-line income will minimize the effects of the higher tax brackets and maximize the tax savings from deductions,” Ramirez says.
Smart Business spoke with Ramirez about strategies to implement immediately to position yourself for a more favorable tax bill in April 2014.
What are strategies for utilizing savings plans?
I advise clients to maximize their contributions to tax savings and retirement vehicles such as 401(k), 403(b), 457 plans, 529 plans, health savings accounts, simplified employee pension plans and Keogh plans. This year, high income earners who do not implement strategies to maximize their retirement and health savings plan contributions will be taxed on that lost benefit at a much higher rate.
Individuals and their tax advisers should revisit their decisions to contribute to a traditional versus Roth retirement plan. Distributions from Roth IRAs and Roth 401(k) plans are not subject to regular tax or the Medicare investment tax and, therefore, are a more attractive retirement savings vehicle for many individuals. However, if hovering around the threshold for the new Medicare tax, consider moving Roth contributions to a traditional retirement plan to create a tax deduction.
How will the tax increases impact planning for capital gains?
All capital gains are subject to the new 3.8 percent Medicare investment tax. Although long-term capital gains still maintain their preferential rates, high income earners received a 5 percent rate increase on those long-term gains on top of the 3.8 percent tax. Even worse, short-term capital gains are also subject to higher ordinary income rates.
By working with your adviser, you can better manage your tax rates on capital gains. There are tax deferral mechanisms that should be considered, such as a Section 1031 exchange or an installment sale.
An installment sale will spread the gain over several tax periods in order to minimize or entirely avoid the Medicare tax on investment income. Taxpayers should also consider realizing losses on existing stock holdings, while maintaining their investment position by selling at a loss and repurchasing at least 31 days later or swapping it out for a similar, but not identical, investment.
What other tax saving strategies should be discussed with your financial adviser?
In light of recent tax developments, it is important for individuals to work with their financial adviser to build a highly customized tax plan. Plans may include:
- Strategies to avoid at-risk limitations on flow-through investments. If a loss has been incurred, make sure it’s deductible.
- If self-employed, consider any capital expenditures that will be needed in the coming year. Favorable Section 179 deductions and bonus depreciation have been extended through the end of 2013 and can be used to minimize the impact of the new Medicare taxes.
- Consider moving investments into tax-exempt vehicles, such as municipal bonds, to avoid the Medicare investment tax.
While it might seem as if it’s a bit early to start tax planning, right now is the most important time to think about taxes because it may be too late to enact some strategies in December.
Monic Ramirez, CPA, is a senior tax manager at Sensiba San Filippo LLP. Reach her at (408) 776-8900, ext. 5524, or email@example.com.
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Today, social media surrounds almost every facet of our lives, including the workplace. While sites like Twitter, LinkedIn and Facebook offer many opportunities for companies to connect with customers and clients, they also can damage reputations when not addressed properly.
“Most companies see value in having a social media presence, but it is important to first develop a social media strategy and formulate a plan for how your business will leverage social media,” says Chad Spears, senior employee relations consultant at TriNet, Inc. “Address your social media policy first. Make sure all employees understand the parameters of what you expect in their communication on company-sponsored sites, as well as their personal use of social media during working hours.”
Smart Business spoke with Spears about what to address in a social media policy to avoid common mistakes.
What should a workplace social media policy include? Does it vary by company?
There are differences, depending on the company size or industry. A small public relations or marketing firm wouldn’t need the same policy as a publicly traded company that is more closely regulated. Every organization should first look at its existing policies, including code of conduct or Internet use, and make sure the social media policy is in line with what is being allowed and is consistent with other polices.
Also, make sure employees understand that even though they may not speak on behalf of their employer, their actions and statements reflect on the company. Inform them there should be no expectation of privacy when using company equipment or sites. As far as personal use on company time, that depends on the job level and organization type. Many companies don’t allow any personal use during business hours, but there is no one-size-fits-all solution. This should be determined based on company culture, and the type of work employees are doing.
Create a good policy that acts as a resource for questions or concerns. It should be a living document — social media evolves rapidly, so no policy will remain relevant without updates.
Who should be responsible for company social media posts?
A company should assign dedicated individuals to monitor content, which could be one person or an entire team, based on the size of your organization. The goal of social media is to get the company’s message or brand out to a broad audience, so encouraging all employees to participate is good. For example, employees could use LinkedIn to share articles they’ve written or showcase work. Have someone monitoring posts to ensure they’re consistent with the company’s marketing strategy, and to take corrective action when that’s not the case.
What common mistakes do companies make regarding social media?
One mistake is having a bare-bones social media page without dialogue or responses to customer questions or complaints. This can be more damaging than not having a social media presence at all. Make sure social media channels are updated and monitored, as they are the first line of contact for many customers and clients. Social media provides a unique opportunity to encourage two-way dialogue and solicit feedback.
Another mistake is making social media pages prepackaged, rather than making it an organic space. It’s a great opportunity to interact with customers, but many companies are too formal. Advertising what you’ve done can be good, but you have to make it fun — a place where customers are comfortable interacting with your company.
Give clients a reason to visit your page, other than to complain, by adding value. You could post white papers showing visitors how to navigate roadblocks, providing resources, not just touting accomplishments.
Companies also need to be cautious about disciplining employees for social media use. Courts have determined that employees may have the right to discuss working conditions online through social media, so consult with a human resources representatives.
Employees and customers are on Facebook and other social media. To harness the potential power of this army of ambassadors, establish a presence and set policies for appropriate use and how the company will be represented to ensure it promotes your company positively, consistent with your culture and brand.
Chad Spears is a senior employee relations consultant at TriNet, Inc. Reach him at (720) 291-1246 or firstname.lastname@example.org.
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The recession no longer seems to be affecting the technology market, as growth opportunities abound for tech companies.
“We’re seeing a very healthy environment for technology,” says Dick Sweeney, senior vice president and manager of the Northeast Market Technology Banking Division at Bridge Bank. “Within our portfolio of clients, we’ve had a number that in the past six to 12 months were acquired or are in the process of getting letters of intent, with transactions being done at pretty healthy multiples of income.”
Smart Business spoke with Sweeney about the technology sector’s status and what small tech companies are doing to foster growth.
Are funds readily available for growth?
There’s a healthy ecosystem now, especially on the growth capital side. Companies that are a little more mature than a startup — they have decent revenue traction and customer adoption of products and services — are looking for additional resources to expand sales and marketing, or open up international operations. There’s no shortage of funding sources for them on the equity side. They are attracting money from strategic investors and doing so on favorable terms with multiple proposals.
On the debt financing side, there’s also a good deal of competition. Banks are supplying funds, as well as partnering with equity and mezzanine lenders. Mezzanine financing is a hybrid of debt and equity financing where the lender has rights to convert debt to ownership if the company doesn’t pay the loan back in time.
Right now is an ideal time for companies looking into executing a growth strategy by putting more capital to work or exploring exit opportunities.
Do any tech sectors particularly stand out?
There are premium valuations in the customer relationship management space. For example, ExactTarget was recently acquired, and Neolane sold for a revenue multiple of more than 10.
Reoccurring revenue is currently the focus of management teams and investors, and these companies are receiving valuations, whether that means their private equity or exit value. From an investor side, the company has a stable base that is predictable. From a company perspective, reoccurring revenue is attractive because it helps avoid white-knuckle situations where you’re waiting for a very large, one-time deal to go through at the end of a quarter. Whether it makes it in that quarter or happens a day later can really impact your financial performance.
Why is the environment so healthy?
It’s a combination of things. There are some large corporate buyers with a lot of cash on their balance sheets that are looking to fill product holes through acquisition rather than trying to build. The stock market is also pretty healthy — it’s near all-time highs — and that is translating into high valuations on the private side as well.
Companies are being rewarded particularly for building reoccurring revenue streams into their business models. That certainly shows in the public markets that are getting premium valuations. Also, banks are offering different types of financing structures based on multiples of reoccurring revenue. This rewards companies that get away from perpetual license sales and toward monthly reoccurring revenue. It’s an ongoing trend that’s not slowing down anytime soon.
Is there growth outside of companies with reoccurring revenue streams?
There has been explosive growth in mobile advertising, with rates not seen in other sectors. A big land grab is taking place, and some companies are growing rapidly as a result. There are no 800-pound gorillas nor is there a single, dominant incumbent, so that presents opportunity for new entrants. These are mobile ad targeting technologies, mobile ad exchanges and business intelligence that will target ads based on a consumer’s location or other attributes.
Are there any problem areas of the market?
Clean technology continues to be a difficult sector. A lot of investors have looked to exit after some high-profile collapses in solar panels and biofuels. Companies received significant amounts of capital and were not able to deliver. It’s made it very difficult for others in that sector to raise financing, but overall we’re seeing a lot of great companies that are growing rapidly.
Dick Sweeney is a senior vice president and the manager of the Northeast Market Technology Banking Division at Bridge Bank. Reach him at (617) 995-1310 or email@example.com.
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Most companies want to grow — the issue is just how and when. However, determining an advantageous growth strategy can be challenging. Less than 1 percent of companies reach $250 million in annual revenue and fewer still eclipse $1 billion.
“Some companies boost revenue through organic growth, while others diversify their products/services or build strategic alliances,” says Yi Jiang, associate professor and associate director of MBA for Global Innovators for the College of Business and Economics at California State University, East Bay. “The key is understanding your options and selecting a growth strategy that fits your situation.”
Smart Business spoke with Jiang about what growth strategy executives should consider.
How have growth strategies evolved?
History and experience have altered the approach to growth. Vertical integration was a popular diversification strategy in the 1960s and 1970s. Companies boosted profits by expanding into upstream or downstream activities, seizing control of the supply chain.
However, the strategy’s popularity waned when large, multinational companies were accused of monopolistic practices. Many also struggled to manage unfamiliar entities.
Smart companies then turned to building a network of complementary offerings, creating synergistic expansion opportunities and economies of scope. Amazon.com boosted e-book sales with the Kindle. Sony grew to an entertainment provider with a wide range of movie and music products.
Who should focus on organic growth?
Niche companies with limited market penetration should focus on building brand equity before incurring additional risk by venturing beyond their core competencies. Organic growth maximizes existing resources and helps gain market recognition without diluting your brand. It’s a good way to show the strength of innovation to investors who are interested in paying more for a strong brand with a loyal customer following and continuous growth potential.
The downside is time. Executives must be patient, committed to the company culture and willing to make additional investments without succumbing to instant revenue gratification.
When should you look at strategic alliances?
Strategic alliance is a viable expansion strategy when the joined forces benefit all players in the coalition. Google TV is an example where a few strong players — Google, LG, Sony and Samsung — united to make a stronger team, contributing technology and resources and joining market power to develop smart television.
Bottom line: Why risk being left behind when you can be part of a winning team?
Are companies changing the way they integrate acquisitions?
We used to believe that fully integrating acquisitions was the best way to lower operating costs and reap financial rewards. But assimilation is tricky; executives often fail to meld disparate cultures and people.
Instead of making integration mandatory, companies should selectively and strategically integrate parts of an acquired organization. They may combine rudimentary functions such as distribution and accounting, while allowing areas of strength to flourish autonomously. For example, Disney wanted to strengthen its market position with young boys by acquiring Marvel Comics’ cast of super heroes — Iron Man, Thor, Captain America and the X-Men. However, if Disney execs forced Disney’s culture on Marvel, Marvel’s creativity would be stifled.
What should executives consider when selecting a growth strategy?
Time and timing are key considerations because organic growth and synergistic expansion tend to be slow and safe, while an acquisition or merger is risky but jump-starts new growth. Growth is rarely sustained when it results from knee-jerk reactions to unanticipated competitor moves or industry changes. Executives need time to build consensus and socialize their ideas. Half-hearted alliances or acquisitions often fail without the commitment and tenacity to work through the inevitable challenges.
Also, with alliance or acquisition, hope for the best but plan for the worst by developing an exit strategy to end the relationship and still be friends.
Yi Jiang is an associate professor and associate director of the MBA for Global Innovators program at California State University, East Bay. Reach her at (510) 885-2932 or firstname.lastname@example.org.
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At least in the San Francisco Bay Area, it’s as if the nation’s real estate crisis never occurred.
“It’s an anomaly. Primarily, it’s due to the location. This corridor is unique because of the jobs in Silicon Valley, the biotech companies and the job base in San Francisco. Salaries are competitive and that increases values in the housing and commercial real estate markets,” says John Dooling, a partner at Ropers Majeski Kohn & Bentley PC.
“Also, there’s no place to build. There’s little vacant land, and it sells at a premium. The real estate market has bounced back with a vengeance,” he says.
Smart Business spoke with Dooling about the state of the commercial real estate market and what that means for businesses looking to buy, sell or lease properties.
How are investors affecting real estate?
There aren’t many good places to invest money at the moment, so real estate is attractive. It’s not only smaller investors but also larger ones that are buying properties.
Investment properties are being bought up by hedge funds and large players, whereas there used to be more local buyers. Now, national players are coming in and buying what were considered smaller properties.
For leases, rental rates are approaching the highs of the dot-com boom. It’s very difficult for businesses trying to find a space, or if their lease is expiring, it’s becoming an expensive proposition.
Midsize clients are taking advantage of industrial space. If they can occupy the space, financing rates are attractive and U.S. Small Business Administration loans can help. So, there are some opportunities in the right sectors.
The large demand for commercial properties, especially apartment buildings, has driven capitalization rates down to historically low rates below 5 percent; they’re usually around 7 or 8 percent. But as interest rates go up, as anticipated, it’s going to be difficult for these buyers to get value out of their properties. Inflated prices and low cap rates reduce ROI.
What are some important considerations when buying or selling?
Obviously, location and price are important, as is creating a separate entity, often a single purpose LLC, to purchase the property.
From a legal perspective, you also need to do your due diligence. There is no standard transfer disclosure statement for commercial properties. If the building has one to four units, there is a statutory requirement that a transfer disclosure statement be completed, which does not apply if there are more than four units. So, a buyer must have a good property inspection; investigate the title, not just put the title report in a drawer; conduct an environmental study; and research the permit history of the building. Buyers could have an issue with a property years down the road that leads to litigation with not only the seller, but also involving a contractor in a construction defect lawsuit.
From the seller’s perspective, it’s important to disclose any material issues related to the property. Another concern is the contract. Preprinted contracts are more commonplace but still require careful consideration, including whether you want to arbitrate a dispute and liquidated damages.
Agreeing to the arbitration clause waives the right to a jury trial. That’s not necessarily the wrong thing to do, but it has implications. The arbitration process can sometimes be more expensive than court. Also, other parties involved in the transaction, such as a real estate broker or contractor, may end up being defendants and would not be bound by the arbitration clause, causing duplicate lawsuits. The point is that there are provisions in a standard contract that shouldn’t uniformly be agreed to and initialed.
Are any problems arising in commercial leasing because of the robust market?
Tenant improvements are always a big issue on the front end, and landlords are less likely to shoulder the costs now. Tenant costs are increasing, not only in terms of effective lease rates but also the cost of getting into a space. It’s important to have a good tenant build work letter that sets forth rights and obligations of the tenant and landlord relative to the build out.
Finally, as with any large transaction, it is prudent to consult with the appropriate professionals to assist you in your real estate transaction.
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It’s hard to label something that happened 17 years ago as ancient history, but in the world of technology, specifically the Internet, something that happened 17 years ago is beyond ancient. It’s practically prehistoric.
Remember something called Ask Jeeves?
Before this other company called Google came around, Ask Jeeves was one of a few serious players in the arena of search engines where Yahoo!, AltaVista and Lycos competed.
Today, the company no longer answers to Jeeves. Instead, it has simply rebranded itself as Ask.com, and is working to differentiate itself in the world of search.
“Like other companies of our mintage or vintage, we were challenged by what was happening in search,” says Doug Leeds, who became CEO of Ask.com, a 220-employee company, in 2009. “With Lycos, Excite, AltaVista, and all the others that were at the beginning, Ask had a different approach at that time. We were about questions and answers more so than about searching per se.”
Headquartered in Oakland, Calif., Ask.com is a global service used by more than 100 million users. When Google came in and tore up the market with what turned out to be a much better product in algorithmic search, it was sort of an existential moment for Ask.com.
“What do we do about that?” Leeds says. “Other companies couldn’t compete and folded, but we never saw our traffic leave us. People still came to us. The question we asked at Ask was, ‘Why? Why is it that people continue to love our products and our services when other contemporaries were pushed aside by Google?’”
The answer was and still is the fact that Ask.com relies on a different user proposition.
“We say, ‘We can answer questions for you,’” Leeds says.
People felt very comfortable asking a question on Ask.com or Ask Jeeves, much more than they ever did on Google.
“What I said in 2009 was, ‘Let’s double-click on that experience,’” Leeds says. “Let’s figure out how we can explore providing more value to users when they ask questions … because that’s what’s keeping us in business.”
With many of the Internet companies born in the mid-’90s no longer around, Ask.com has not only survived, but is thriving in today’s world.
Here’s how Leeds is growing Ask.com to the next level.
Find a better way forward
Since Google first launched in 1998, Ask.com has been able to rack up some significant accomplishments. And Leeds, who originally joined Ask.com in 2006, was behind many of those great ideas as a member of the product management team.
“That wasn’t too long ago, but the world still hadn’t been as Googly then as it is now,” Leeds says. “We were doing some amazing things in our product at that time. Our former CEO and I got together and we said, ‘We can build a better search engine and a better interface to search than Google can.’”
Leeds and his team were confident that one of the reasons Lycos, Excite and others failed was because they weren’t listening to what the marketplace wanted. Even Google, they felt, could be better and improved upon.
“We poured investments into this,” he says. “I’m not just talking about back-end technology, but how you display search results and what features you give to people to consume them.”
In fact, much of what you see on Google today, things people take for granted as being Google or Bing products — like related searches or having a homepage that gets you engaged — actually started on Ask.com.
“Those were things that we invented and that we did first,” Leeds says. “Today, every search engine does that stuff, but back then it was cutting edge stuff that no one else was doing.”
Ask.com got a lot of great press at that time and was being called the Google killer. But what happened was Google copied those features Ask.com was offering its users.
“Anything that we were doing would show up pretty quickly on Google and people would say, ‘I like Google because of its related search,’ and we’re like, ‘Ahh, that started here! We did that!’” Leeds says. “People also say, ‘I like Google because you can preview a page by clicking on a button.’ That was us.
“But nobody ever said, ‘I like Google because it gave me a good answer to my question.’ Even though we’re building incredibly good products here and it’s keeping us around, and people love us and are impressed by us, the timeframe for which we can win any customer based on those innovations was relatively small because they could be copied.
“The timeframe for which we could win on innovating in Q&A was much longer because Google was not being used that way.”
Create next level innovation
Since Q&A was Ask.com’s bread and butter, Leeds went to work on innovations that would make that a more valuable experience for Ask.com users.
“We built a user community,” Leeds says. “Right now, we have 180 million users worldwide every month, but they weren’t answering questions for each other. It was just ask a question to Ask and hope that Ask gives you back an answer sourced from somewhere on the web. We said, ‘There must be a way to harness 180 million people to answer questions for each other.’ So we built a community and it’s been pretty successful.”
What was a transformative moment for Ask.com was realizing it shouldn’t be spending energy and resources on search technology, because Google and Microsoft were spending hundreds of millions of dollars a year toward search.
“We’re trying to keep up and we’re not as good at that and people only really want that when we fail,” he says. “Only when we can’t answer their question do they want the Web search results. Let’s focus on how to answer their question and let’s outsource our fail state to some other company who makes that their core business.”
That’s exactly what Ask.com did in 2009, and it transformed the company.
“It transformed our focus,” he says. “It transformed our marketing and the story we wanted to tell about why people should use us. It re-energized our company. Our business results have really taken off in the years since then because of the focus on what our users were coming to us for.
“That isn’t to say they weren’t happy with our old service, I think because Google changed the world we had to change our product and changing our product was getting back to what we were originally good at.”
If Ask.com wasn’t going to focus on search technology, but rather on Q&A, the company had to figure out what it was going to do to give users a good answer if it wasn’t going to be a series of links on a page.
“What we realized, and what our challenge is today, is that we have to create both the technology and the content with which that technology can draw on to provide great answers to people right away,” Leeds says.
“Whether that comes from another page, but you extract the right information from it, or whether you are aggregating information from a bunch of great content, or whether you actually present that content itself on the page, that is the challenge. Don’t just give them Web results. Give them great content that they can consume.”
The biggest challenge Ask.com has is building technology that can deliver that content in a scalable way, and it relies on some of the same things that search does.
“We’re rebuilding some of the things that we originally cut, but we’re building them four years later and things have changed,” he says. “It’s about understanding the actual semantics of what people are asking using statistical analysis to look at pages and finding out that different sentences in different engrams or different terms are showing up in the same relationship on this page as they do in other places on the web, and using that to extract information. That’s the technological approach.”
The other approach Ask.com is taking is actually acquiring great content and bringing it onto a page. In September 2012, Ask.com bought About.com.
“About.com represents a collection of authoritative articles on topics as wide-ranging as the Internet,” Leeds says. “When we looked at that site we said, ‘This is really high-quality content that answers many of those questions that people are asking on Ask.com. If we own the content experience, and we could work closely with the people who are creating that content, then we can answer more of our own user’s questions. That About.com model is one that we are going to replicate.’”
Besides About.com, Ask.com also owns Dictionary.com and Thesaurus.com. It also partners with sites such as Urbanspoon and Life123. The focus of the company in the future is to grow that portfolio.
“Whether that’s by buying companies that create the content themselves or by doing content partnering, all these things are the focus for the company — getting a great content experience on Ask.com, meaning an answer to your question both in brief and in full,” Leeds says.
“What About.com showed was doing that has benefits for both Ask users and About.com users and creates enough real synergies within the companies that the financial performance of both companies is significantly improved, especially About.com.”
Always be looking for what’s next
While the About.com acquisition will do wonders for both About.com users and Ask.com users, Leeds isn’t stopping there. The most exciting thing looking forward is the plan he has for the Ask.com product experience.
“We are going to significantly transform the way our product is brought to our users — what it looks like, how it works, the focus on Q&A and the experience on mobile devices,” Leeds says. “Across the board things are going to be changing in ways that users will really feel, which some will not like, but most hopefully will love, and really position ourselves as the place to go to get your questions answered on the web.”
One of the things Leeds says Ask.com has to improve is creating an environment where you go to an Ask.com page and if the logo were removed you would still know you’re on Ask.com.
“It should feel like a question and answer service without having to see the brand Ask.com,” he says. “There are a few sites that do that. At Ask.com, we’re still stuck a little bit in this evolution from search into Q&A, and what I’m most excited about is pushing forward into the Q&A experience so that you could cover up the logo on the page and you would say, ‘This is Ask.com because it’s all about Q&A.’”
The key to that innovation, Leeds says, is constant willingness to be uncomfortable.
“The thing about innovating is it’s really hard to do incrementally,” he says. “You can optimize or improve incrementally, but you can’t innovate incrementally, which means you have to do something completely different and feel uncomfortable.
“You have to do different exercises every day to make yourself feel OK with feeling uncomfortable to build muscle in innovation. That’s our big challenge every day. You have to transform uncomfortableness, a negative feeling, into silliness and acceptance, which is positive.”
How to reach: Ask.com, (510) 985-7400 or www.ask.com
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The Leeds File
Born: Los Angeles
Education: Received a bachelor’s degree from the University of California, Berkeley, and a doctorate from Georgetown University Law Center.
What was your first job and what did that experience teach you?
I worked at a stereo store called Affordable Portables. It only sold the Walkman. I started when I was 16 and worked there through high school and college. I learned about business, sales, listening to consumers and translating that into a product need.
Who do you admire in business?
Jeff Bezos. I’m such a fan of what Amazon.com does. They keep extending. It used to be just books, and then it became every product on the Web and off the Web. Then they bought Zappos.com and Audible.com, and introduced the Kindle. Bezos started the company and took it from nothing to where it is now, and all the challenges you have at each life stage of a company and having to manage through that is insanely impressive.
The other person is my grandfather. He was an inventor, and he invented the flexible straw, the bendy straw. He patented that and built the machines himself to start a company and for 17 years he ran the Flexible Straw Co. It was impressive to see that, and that it all started with tinkering.
What was the very first question asked on Ask.com was?
No one has ever asked me that, but that’s a really good question. I’ll have to find that out.
What is a question you have asked on Ask.com?
Every time I see a mock-up of a new product or feature we are going to roll out, people use the same question as the sample question — ‘How do I tie a bow tie?’
Health care expense tops the list of executive concerns in survey after survey, year after year. And it’s no wonder — just during the past decade, according to the California Healthcare Foundation, health spending per capita increased by nearly 75 percent.
But we can arrest and reverse this omnivorous trend. America will stop overpaying for health care when employers stop making payments to health insurers.
Think about it: American workers buy every imaginable good and service without the involvement of their employers — except one. The only major employee purchase brokered by the employer is the purchase of health insurance. Not coincidentally, health insurance is the only type of insurance for which costs are rising out of control.
There’s a simple prescription for arresting health care costs and gradually reducing them, without raising taxes or reducing tax revenues: change the tax code to allow Americans to deduct the entire amount they pay for health care and health care insurance from their taxable income.
Consider payment options
Years ago, my company, like many other employers, began offering our employees the option to either continue in our company’s health insurance plan or to take as extra salary the amount of the premium we were paying to cover them. The option made it plain that when employees used company-purchased health insurance, they did so using their own money.
Everyone appreciated having the choice; many took the extra cash. Indeed, it has been my experience that many employees are better positioned to buy their own health insurance than are the companies for which they work. Employees know their own needs and those of their family, and having control over potential savings gives them an effective incentive to shop carefully.
Why isn’t this already standard practice? The culprit is the tax code. Health insurance is the only item of significant value that Congress has decided may be provided to an employee tax-free. And therein begins the problem.
Assume an employer spends $6,000 a year to buy health insurance for an employee. If the employer gave the employee $6,000 to buy his or her own health insurance, they would be taxed on the income, conceivably leaving them with less than $4,000 to spend on care. In other words, the tax code has created a situation in which employees have a very sound reason to want their employer to act as their agent in the purchase of health insurance.
Disincentive comes into view
But in handing the responsibility to their employer, employees lose their opportunity and incentive to shop for their best insurance option. Instead of having 100 million employees in a highly competitive market for health insurance, as we do daily for every other kind of insurance, we have a much smaller number of employers who are forced by practical considerations to buy expensive, one-size-fits-all plans in a much less competitive market.
To be clear, I am not advocating that employers not be allowed to buy the health insurance for their employees. I’m suggesting we remove the huge tax-code-created disincentive for employees to buy their own. Without that disincentive, more employers could give their employees the option to either stay in the company plan or take cash — and more employees would opt for the latter, becoming comparison shoppers rather than passive participants in the health insurance marketplace.
When millions of Americans start shopping for their own health insurance, we’ll see more and more creative options being offered at lower prices. And American businesses will retire rising health care costs from the current No. 1 position on the list of business worries.
Jerry McLaughlin is CEO of Branders.com, the world’s largest and lowest-priced online promotional products company. He can be reached at JerryMcLaughlin@branders.com.
Say the word “innovation,” and immediately you think about business legends like Steve Jobs and Jeff Bezos, as well as the companies they created – Apple and Amazon. Too often, however, we focus on the people who have been tabbed as innovators and the companies that develop those breakthrough products, services and solutions, such as Apple’s iPod and iTunes, or Amazon’s marketplace and unique ecosystem.
True innovation goes much deeper than a single leader’s vision. It is an all-encompassing philosophy that permeates an organization and defines its purpose for being. For me, at least, I prefer to think about innovation in its broadest terms, extending its definition to include corporate cultures and innovative management styles. Think about how Facebook and Microsoft are run, and how at both organizations employees are a key factor in the idea creation, or ideation, process.
Now, think about the breakthrough products that eventually went bust. Hopefully, you don’t have a basement full of Beanie Babies, boxes of Silly Bandz, or a home library filled with laser discs. It is more common to land on a singular breakthrough product that temporarily revolutionizes your industry rather than develop a product through a process that’s repeatable or scalable. And, just as true, no matter how innovative and creative your management team’s style may be, without the proper processes in place to push ideas through a system that takes them from mind to market, you’ll eventually have trouble keeping the lights on.
It all comes down to developing a culture imbued with innovation at its core. But this also requires having a servant culture in place where every person who works for the organization thinks about the customer first.
Consider San Francisco-based Kimpton Hotels, where employees strive to create “Kimpton Moments” by going above and beyond with guests and delivering memorable experiences.
Kimpton overcomes the inherent limitations for creating new innovative products that being a boutique hotel chain includes by approaching innovation through its employee interaction – and then rewarding employees for their creativity. For example, when team members put in the extra hours to ensure world-class service delivery, the hotel chain has sent flowers and gift baskets to their loved ones. And when they create an innovative service experience, the company rewards staff members with such things as spa days, extra paid time off and other goodies.
And then there’s the Boston Consulting Group, a management consulting firm that’s known for developing innovative business processes and systems for its high-end clientele. Part of BCG’s internal process is a focus on team members maintaining a healthy work-life balance. When individuals are caught working too many long weeks, the company’s management team issues a “red zone report” to flag the overwork.
Talk about innovation! And no product, service or solution was developed, marketed or sold.
And finally, few organizations are more innovative than DreamWorks Animation. But beyond plugging out groundbreaking animated movies, the studio’s culture embraces empowerment and innovation. Employees are given stipends to personalize their workstations so that they create whatever inspirational atmosphere they need to succeed. And, as the story goes, after completing Madagascar 3, the crew presented a Banana Splats party, where artists showed the outtakes.
Not only are these three companies known for being innovative in their respective industry spaces, they also share the honor of being members of Fortune’s 2013 “Great Places to Work” list.
So how do you take the first steps toward transformation or put those initial building blocks in place to begin the journey? There’s no magic formula, but there are some common traits – and they revolve around empowerment and establishing a culture that cares.
- Are open-minded and ask “What if?”
- Teach team members how to see what is not there and identify opportunities in the marketplace to take advantage of those gaps.
- Develop cultures where innovation thrives through open and honest communication.
- Flatten the organizational structure and recognize that innovation can come from anyone and anywhere.
- Make innovation, itself, a cyclical and continuous process.
Stop and take an internal assessment of your organization, your team and of yourself. If you can’t check a box next to each of these five traits, stop and ask yourself why. Then begin your own journey to greatness.