China is the fastest-growing importer and exporter for the United States. Chinese citizens are experiencing greater earning power, which in turn has led to huge demand for consumer products and services. The economic strength and population provide opportunities for American companies interested in doing business in China.
“There are three ways for American manufacturers to do business and make money in China: sourcing, manufacturing and selling,” explains Helen Huang, vice president and chief representative of the Comerica Bank Shanghai Representative Office, which opens this summer. “Most American companies understand the advantage of reducing costs via a China strategy, and more are realizing the opportunity to sell in China to its 1.3 billion people who now have more spending power.”
Smart Business spoke with Huang about the reasons behind China’s economic emergence, how a company should proceed if it is interested in doing business in China and what types of opportunities she foresees in the future.
What are some of the driving factors behind the tremendous economic growth that China has enjoyed?
The low labor costs and availability of skilled workers combined with favorable government policies have enabled China to become the No. 1 destination for foreign investment. In addition to exports, another important factor behind the tremendous growth is the need for massive infrastructure within China itself.
Also, China’s stable political environment has played a role. Since the 1970s, China’s government has changed its focus from political movements to economic growth. The central government has implemented policies encouraging trade, foreign investment and economic growth while maintaining stability.
In what ways does the Chinese business environment differ from the United States?
Historically, the Chinese economy was totally state controlled. Today, government at different levels can still have a big impact on businesses. The Chinese legal system is still evolving. The rights of each party in the economy are not clearly defined, and it is not easy to enforce one’s rights. Signing a contract doesn’t necessarily mean you are protected by the laws. If you don’t understand the culture, there will be misunderstandings. A typical Chinese is not as direct as a typical American. It may mean ‘no’ even when you don’t hear that word.
What advice would you give to a company that is interested in doing business in China?
In general, U.S. businesses should understand that China is a very different culture including the way in which business is conducted. You need patience, an open mind and a long-term view. It is probable that you need a local partner or consultant who understands Chinese culture and its business practices.
In addition, the regulatory environment is very different in China. Understanding government policies relevant to your industry and the type of business that you want to set up should be a very important part of research and planning of your strategy.
How can a company find suitable business service providers in China?
You can ask for referrals from your bank, CPA, attorney, and others who have had experience doing business in China. A credit reference system is not necessarily available. You will probably find that good business service providers come from introductions from a trusted source who knows the providers.
How should a company evaluate locations to set up an office or manufacturing facility?
Currently, most foreign investment takes place in three regions: Yangtze River Delta, Pearl River Delta and Bohai Rim. These three regions are the most developed areas in China with the best infrastructure, the most sophisticated business environment and the best trained professionals. Obviously, these regions are significantly more expensive than inland areas.
When evaluating locations, there are many factors that a company should take into consideration. Labor cost is one of them, but not the only one. Other important factors include close proximity to highways, ports and airports; close proximity to customers and suppliers; and local government incentives to foreign direct investment.
Over the next several years, what types of opportunities do you anticipate for American manufacturers in China?
China will remain an attractive location for manufacturing due to its low labor costs and improving infrastructures. The cost has been going up in coastal areas and Chinese currency is expected to continue to appreciate against the U.S. dollar, but manufacturing costs will still be much lower than in the U.S. The provincial and local governments are eager to attract foreign investments and therefore have very favorable incentives.
HELEN HUANG is vice president and chief representative of the Comerica Bank Shanghai Representative Office. Reach her at firstname.lastname@example.org or contact Glenn Colville in Comerica International Trade Services at (925) 941-1931 or email@example.com.
If someone told you that you could drop your operating costs by 40 percent, would you listen? If that same person said you could save between $70 and $150 per user per year in energy savings alone if you tried something new, would you try it?
A lot of companies are listening, and those same businesses are trying something new — cloud computing and software as a service (SaaS) — and reaping the many benefits, which start with the aforementioned cost savings.
“It’s about saving money, and there’s a tremendous amount of money to be saved, because if you look at IT budgets, nearly 80 percent of that budget, in many cases, is spent just to keep the lights on, which means the other 20 percent is the only money that’s actually able to be used to implement new technologies into the model,” says Jeff McNaught, chief marketing officer at Wyse Technology Inc.
McNaught’s company builds a device that replaces the PC, uses one-tenth the energy of a PC and connects you to the cloud. The device doesn’t make a lot of noise, but more important, it doesn’t cost a lot of money.
“When you look at cloud computing, operating expenses can drop by about 40 percent a year, and that’s real money,” he says. “These devices use one-tenth of the energy of the PCs. Now you’re really talking about saving real money.”
How cloud works
So the idea of saving that much money has caught your attention, and now you may be asking, “What exactly is this whole cloud computing thing anyway?”
Dave Hitz is the co-founder and executive vice president of NetApp, a company that sells enormous amounts of storage to people who need it. For example, Yahoo stores all of its e-mail accounts on his equipment, and the special effects for “Avatar” were stored on his equipment, as well.
“If you look at storage systems, they’re a lot like toilets — for two reasons,” he says. “No. 1, it’s where you put your shit. But No. 2, as long as they’re working, nobody cares. But when they stop working, they become the most important piece of equipment in the house or the data center. We don’t offer cloud services — we’re not a cloud service provider company, but if you look at the equipment that we sell, many cloud infrastructure environments are built on top of our storage as a foundation.”
From his perspective, Hitz sees two different definitions of cloud computing.
“Definition No. 1 of cloud computing is you no longer buy a computer,” Hitz says. “You access computing service over the Internet to somebody else’s data centers, and they spend the capital and they hire the people to build them and they do everything, and all you do is pay a monthly bill and access the service over the Internet. Style No. 2 of cloud computing is a completely technical definition, which has to do with if you’re going to build a data center, what does the architecture look like? And if the architecture has a lot of shared infrastructure, then people tend to call that kind of environment a cloud-computing environment.”
Using his first definition, cloud eliminates many IT headaches because how often do you have an overly positive IT experience?
“I imagine people would say their experience with IT has been less than optimum,” says John Dillon, CEO of Engine Yard Inc., a company that delivers an environment for software developers to write programs that run inside the cloud. “The reason is you spend so much money building all this infrastructure, that going the last mile, which is where you write the application that interfaces with the human, the user, doesn’t get the attention, doesn’t get the money and doesn’t get the investment.”
The idea of the cloud is essentially that you plug into the wall, and you get a whole data center.
“It’s IT as a service, just as you get electricity or water,” Dillon says. “In business, you, in most cases, don’t have your own power plant, you didn’t dig your own well, you didn’t build your own building, you don’t have your own fire department or police department. So why on Earth do we basically give power to a group to build something that has been built before in-house, and then hope it works?”
Dillon also points out that in the United States, capital expenditures are a huge expense. In fact, about 50 percent of capital expenditures in America are information technology.
“Unbelievable,” Dillon says. “How many people are getting the ROI on this? What’s happening with the cloud is some big companies are saying, ‘Look, I’ll build the data center.’ It’s changing who buys, why it’s bought, and it changes the capacity and the economic decision-making process around IT.”
When you look at how much money most organizations spend on their IT systems, these cost savings are a big driver and will, ultimately, be a game changer for business.
“Amazon, who is a leader in cloud technology, told me that they think it’s a $1 trillion a year potential business,” Dillon says. “So if there’s a trillion dollars at stake, that means every company within 50 miles of here is going to make a really big bet, and it’s so disruptive, because the buyers are going to change, and the sellers are going to change.”
The other benefit, aside from cost, is that you now have everything that is on your PC in one location that can be accessed from anywhere — not just from the PC itself.
“When you take your software and your applications and your data and you move it to the cloud, something’s happened,” McNaught says. “First off, the cloud is the data center of your company and you can always get to it. You’re connected to the Internet, so you can get there from home, from the conference center, from the airport. And guess what? Because it’s not on a PC with a hard drive failing and memory getting filled up, it’s protected. It’s backed up. It’s secure. So the cloud provides this real opportunity to take the things that make up our work life and, within five years, our home life as well, and move them to this one place where we can always find our stuff.”
The evolution of cloud
Dillon is amazed by cloud computing, and if you look at how it’s evolved and how it’s changing business, it’s hard to disagree with him.
“This cloud thing is the biggest thing that’s happened in technology since the IBM computer, and that’s pretty big, and at least as big as the Internet in terms of economic disruption, because it changes how and where we do our computing,” Dillon says.
He says to go back a few years and remember how every small and midsized business had a room with computers in it and maybe a server or two.
“As businesspeople, you probably didn’t understand what they were for, but you knew they were important and you wrote checks,” he says. “It was hard to be good at that, because you had a business to run, and presumably you were an expert at that business, and you used technology to be good at that business or best at that business, so it was a necessary evil.”
Over the last 10 to 15 years, a variety of things happened that became game changers. First, we got the Internet.
“Everybody is connected — not just a few people are connected — and we’re connected not just inside our companies but outside our companies,” Dillon says.
Second, access became ubiquitous with the advent of cell phones, BlackBerrys, iPhones and laptops.
Then access got cheap — almost free. It doesn’t cost you anything to go to Google and look up any information that you want.
“You think about that perfect storm that happened — we’re having an explosion,” Dillon says. “The applications that are being built today are no longer these little things you do inside the building. You don’t write a general ledger for 12 people — you’re doing something that interacts with employees, vendors, suppliers, and what you’re trying to do is provide those people with a wonderful experience.”
McNaught would add another element to that perfect storm — the PC itself. He asks if you really love your PC.
“I don’t mean what you do on your PC, but how many of you love the physical hardware incarnation?” he says. “The keys, the noise, the weight, the dragging it around, and, oh, by the way, if you drop it, it’s probably not useful the next day. It’s part of the business — people don’t want to buy these anymore. The cloud is really the place where you take the things that were on the PC, and you go put it there.”
McNaught says the data indicates that PC market share, which is about 94 percent now, will drop over the next decade to about 10 percent.
“It’s not because less PCs will be sold — maybe a few less, but it will lose its role as the core device we use to access our stuff,” he says. “You’ll see this huge proliferation has already started with tablets and mobile devices and mobile phones and the mobile Internet exploding now. The question becomes, how do I access my stuff? How do I access it securely? And how do I access it at the lowest cost?”
These are questions that most people would agree are incredibly important. In fact, these questions are reasons why cloud hasn’t been successful in the past.
“This had been tried before and it’s failed, because there were two things we couldn’t get right as an industry,” McNaught says. “Early on, we couldn’t make all the software that was important to your business work reliably. We walked into the hospital and the hospital says, ‘We have 400 applications, we can only make 350 work on the cloud. Where are the other 50 we need to execute?’”
The other factor was user experience.
“If you get, from the cloud, an experience that is the slightest bit less robust than the experience you get at home or the office today, what are you going to do?” McNaught says. “You’re going to go beat the living daylights out of the IT guy who suggested the cloud.”
But now, the technologies have changed, and these two pieces have largely been addressed. On top of that, security is stronger than with a PC, and that’s why companies large and small are now using the cloud.
“There’s an adage in the IT industry that when you introduce a technology that reduces costs, you’re giving up benefits, and if you introduce a technology that gives you big benefits, it costs you a fortune,” McNaught says. “The thing about cloud computing is that it fires on both cylinders — it reduces costs dramatically and delivers incremental benefits that you don’t get with the current model.”
With kinks being worked out to create a compelling and viable technology option, how companies do IT is starting to change.
“One of the big drivers of why this is happening and why all these benefits occur is because cloud computing is a lower-cost architecture,” says Brian Jacobs, founder and general partner of Emergence Capital Partners. “You can deliver more computing power to more users for less cost, and that is a compelling driver.”
How cloud can affect you
You may think this sounds great and believe that cloud computing is important to the future of business, but if you are skeptical, Hitz has a warning.
“I’ve had the opportunity to ask a lot of CIOs, ‘How is cloud computing affecting your business? How much cloud computing are you using?’” he says. “The most common answer I get is, ‘It doesn’t affect our business at all yet, and we’re not using it at all yet.’ I will tell you that almost all those CIOs are wrong. They’re already using it but not thinking right.”
He say that CIOs need to think differently and compares it to the early days of the transition from the mainframe to the PC. In those days, if you asked CIOs if they had a PC strategy, many said, “Oh no, that’s not part of what we’re doing,” but half the employees had PCs.
“When data started leaking out the door because somebody lost their PC, who do you think the CEO went to beat up?” Hitz says. “The CIO, and the CIO said, ‘Well, PCs aren’t really IT.’ Those are the CIOs that are gone. I predict the exact same thing is going to happen to the CIOs who think that cloud computing isn’t happening in their business. … There’s an enormous amount of work that CIOs need to start thinking about — how do I get my arms around all the cloud contracts that are being found in little places scattered around?
“It’s affecting a lot more than people are realizing, because they’re not defining it broadly enough. If they look at that broader definition, the stuff they’re already sort of doing or in denial about, that stuff is a pretty good road map to where the future is headed, just more.”
Not only is it affecting how your business will run, but it’s also going to change how new companies enter the market, meaning fewer barriers to entry for future competitors.
“Silicon Valley is very much a startup culture — there’s always something starting up here, and it’s important to note that cloud computing also changes the economics of a startup,” Jacobs says. “A startup today doesn’t need as much capital to get going because of cloud computing. A developer, who could be an independent contractor, an engineer who’s working at a day job and at night has a new product he wants to develop — he can log in to a platform as a service like Engine Yard, and they can start developing their product without a single dollar of investment. They can work for free developing the product until they’re at the point they can introduce it to the market.”
As a result, the venture capital industry is much different than it was 20 years ago. In fact, Jacobs’ company started in 2003 with the idea that more and more technology would be delivered as a service as opposed to being built by companies.
“Cloud computing and software service has really hit technology like a giant wave, and all of these business models are service providers — companies that are building technologies and not selling to their customers but operating it on behalf of their customers and charging their customers a monthly fee in exchange for that service,” he says. “That’s a different kind of venture capital and that’s the focus of Emergence Capital.”
Aside from all the ways that cloud computing will change business, it’s also changing how employees approach their jobs. While people can work from home in their pajamas, it’s often difficult, and in many cases, employees don’t have access to everything that they could if they were on their PC in the office.
“Cloud computing lets you access your work environment, and you’re on your couch — maybe in your pajamas — and you’re doing real e-mail and doing real work, and yeah, maybe your boss is getting a little more work out of you, but you’re doing it, quite honestly, voluntarily because you get to work in your environment, you’re not in the office, you’re not sitting in front of the computer in the office and you probably have better TV shows on,” McNaught says. “The technology that cloud computing provides is about saving cost and delivering additional benefits.”
To give you a real example, Hilton Hotels decided to close its physical reservation centers and send all of its reservationists home with devices that connected them securely to the Hilton system.
“What Hilton found was they could close all those buildings and save those costs of real estate, and they saved all the energy costs of running the PCs in the buildings, and they found the employees were happier, because they were working from home — maybe in their pajamas, but nobody could tell. They were working over secure devices, so Hilton didn’t lose any data, and they were working over a device that didn’t have the complexity of the PC, so they weren’t calling the IT staff out to their homes to fix this,” McNaught says. “Cloud computing allowed Hilton to save money in so many ways that satisfaction increased, and they found that people working at home would take a lower pay. They saved on all sorts of fronts. Cloud computing has a transformative effect on all kinds of business.”
Cloud computing is changing the way businesses start and operate, and if you recognize and embrace that, it can make all the difference in how successful your organization can be.
“The reality is, as companies try to find ways to grow and compete in an ever more challenging economy, you have to do something different to be different than your competitor,” McNaught says. “If everyone is using the same old client server architecture — the PC connecting to the server — you really don’t have many opportunities to compete.” <<
Mark Woodward is trading in-your-face sales pitches for a few extra finger exercises. That’s why, when you visit the website of E2open Inc., you’ll go three clicks in before you even see a product name.
Right away, though, you’ll learn about the broader problems that E2open aims to solve with its cloud-based supply chain management solutions that enable visibility, collaboration and control across large trading partner networks.
“Where many companies fall down is … [they] get really hung up with the details of their products and get enamored with the widget they’ve created,” says Woodward, president and CEO. “They go out and they try to sell the widget, as opposed to the business benefits of what that widget does for you. Where companies go from being marginally successful to really successful is when they change the focus from the product they’re selling to the problems that they’re solving.”
By getting his 300 employees into that mindset, Woodward led E2open to record revenue in fiscal 2010, up 20 percent from fiscal 2009.
Smart Business spoke with Woodward about understanding your market.
Keys to growing a company. One is just focus. You need to understand what it is you’re going to do and also be pretty focused on what you’re not going to do.
Something that we’ve done at E2open really well is understanding what the value proposition is for the customer, making sure that they understand the benefit. Before we go launching a lot of time and effort and resources behind pursuing an opportunity, we really put a lot of time and effort into qualifying that opportunity and making sure there is a business case. Make sure that you’re focusing your limited resources on the opportunities that are the highest probability to close.
A lot of people get really hung up on putting a little too much emphasis behind having a really fancy growth strategy. But if you’re really focused on growth, it’s really understanding the market you’re in, who you’re selling to, what your value proposition is and then just putting all your resources behind making that happen.
Gain an understanding of the marketplace. It’s through analysts, basic research and then talking to your customers.
Sometimes companies get caught up in thinking they know better and they know the problems that need to be solved without really doing very good market research or without talking to their customers enough. It’s really important to understand not what you think your customers want but really knowing that by having those conversations with your customers.
We’ll just start off with very open-ended questions like, ‘What are your problems?’ Not even asking about our particular area but just very high-level, top-of-mind: ‘What are you thinking about? What keeps you up at night? What are your greatest challenges?’
And then, based on that, start to bore in and even ask, ‘What vendors do you look to for solving those kinds of problems?’ As you get answers, get a little more specific. Customers are usually very open to telling you about other vendors they’re working with or problems that no one has solved for them yet. That can actually help in your product strategy, as well. I’ve learned about a number of really interesting new areas, things that we didn’t even get from analysts, just purely off of customers telling us about shortcomings they had with other vendors. So the customers give you a more real-world perspective, not just the marketing spin that the analysts are hearing.
Position yourself to meet those needs. You have to be careful so it’s not looked at as the sales guy looking for a sale. It’s multiple meetings with different people. That highest level meeting might be with myself or a chief technology officer or possibly head of marketing; basically, you’re just in there information gathering.
Then if you think there’s specific opportunity for the company, you’ll follow up — maybe myself but probably with the head of worldwide sales — where we start to bring in people that are more on the solution side of the business.
Customers don’t mind you selling to them if you have a solution. But there does need to be a separation between the process of information gathering for purposes that are not specifically related to a sales process, and then the sales process itself.
Decide which needs you’re capable of meeting. I would bring it back to [the executive staff] and say, ‘Here’s what we have found,’ and just open discussion up to the whole group, which will typically then lead to some assignments of tasks. We’re going to say, ‘OK, we need to now go prove out these two things. So you, vice president of marketing, go talk to XYZ analysts and ask their opinion on this. And you, head of my deployment services, go talk to three other customers and tell them what our point of view is on this and get their feedback on that.’
Then, based on that, we may make the determination, ‘OK, we now need to make a change in our product strategy,’ or, ‘In the upcoming releases of our products, we need to start moving in this kind of a direction,’ or, ‘We should go look at an acquisition in this particular area because it would take us way too long to develop ourselves into that space.’
How to reach: E2open Inc., (650) 645-6500 or www.e2open.com
Are you looking for equity investors to grow your business?
If so, I hope you’re not walking around wondering where you can find these investors. Because they’re pretty much everywhere.
Let me explain.
To begin, there are two main types of investors: individual investors and institutional investors.
Individual investors are investors who invest their own money in companies. They are better known as “angel investors.” Institutional investors, on the other hand, are investors who invest their company’s or other people’s money. The largest class of institutional investors for entrepreneurs are known as “venture capitalists.”
Now, the vast majority of entrepreneurs should be seeking angel investors and not funding from venture capitalists. Why? To begin, most venture capitalists won’t invest less than $2 million in a company, which is often too much money for a startup and would cause the entrepreneur to give away too much control of his company. And most venture capitalists won’t invest in companies unless they have already accomplished several milestones (such as having a developed a product, having secured customers, etc.). That’s why many venture capitalists fund companies who have raised angel funding first.
So, while venture capital might be perfect for an entrepreneur later, in most cases, the entrepreneur needs to first raise angel funding. The good news is that it’s much easier to raise angel funding than venture capital funding. According to the National Venture Capital Association, only 2,893 companies raised venture capital last year. On the other hand, according to the Center for Venture Research, 57,225 companies received angel funding. That’s 20 times the number of companies who raised venture capital.
In addition, those 57,225 companies were funded by 259,480 individual angel investors. And further, those 259,480 individual angels are just a tiny fraction of the total number of investors that can provide funding to entrepreneurs.
In fact, according to The Spectrem Group, there are 980,000 U.S. households with a net worth exceeding $5 million and 7.8 million U.S. households with a net worth exceeding $1 million (both figures exclude the value of the household’s primary residence).
That’s millions of potential angel investors. And the best part for entrepreneurs is that these are mostly “latent” angel investors. That means they don’t look at themselves or call themselves angel investors. And they don’t get bombarded with companies to fund. But, they have the means, ability and often interest in investing in entrepreneurs and emerging companies.
And why wouldn’t they? Virtually all of these investors have money in the public stock markets, which have provided flat or negative returns over the past 10 years, while over the same time, angel investments have earned an average of 27 percent annual returns.
So entrepreneurs are actually doing these investors a favor by having them invest in their businesses (if their businesses are solid, of course).
As you might imagine, most of the millions of latent angels in the United States can be easily targeted. They tend to live in certain ZIP codes. And the primary breadwinners are typically business owners and executives who are on multiple lists that an entrepreneur in need of funding can purchase.
A word of caution to the entrepreneur, however, is that the selling of securities in your venture is regulated by the Securities & Exchange Commission. So it is strongly recommended that you use appropriate legal counsel and follow the proper guidelines when raising angel funding.
But once again, the good news is that angel funding is all around you and is accessible to entrepreneurs with a solid business idea and plan.
Dave Lavinsky is the president and co-founder of Growthink (http://www.growthink.com). Since 1999, Growthink has helped thousands of entrepreneurs and business owners develop business plans and raise numerous forms of financing. He can be reached at firstname.lastname@example.org.
Stephen D. Mayer is the founder, chairman and CEO of Burr Pilger Mayer. He has more than 35 years of industry experience, during which he has worked with individuals and private and public businesses, and he has touched almost every area of the firm’s practice areas of accounting, tax, consulting and wealth management. His focus areas include audit services, mergers and acquisitions, individual tax planning, and wealth management.
Q. What can an accounting firm do to help its business clients come out of the recession in sound financial condition?
There are 80 million people out there who work with CPAs for their accounting needs, and between now and next week, almost all of them will think about whether they have enough money to retire, whether they can make the next payroll, whether they can hire somebody or whether they have enough money to put their kids through school. And whether we’re coming out of a recession, going into a recession or things are just fine, CPAs ought to be touching base with their clients as a form of preventative maintenance. We have also found that the longer and more intensely we are involved with our clients, the more value we are able to add.
Q. If businesses are in the market to change their firm, would now be a good time to do that?
Now is a good time to evaluate. It’s happening throughout the industry, and it’s happening with our clients, as well. For a lot of people, cost is a big driver. Cost may be important, but in the long run, value is much more important. When the doctor tells you that you have cancer and they have to operate, you’re probably not going to shop for the surgeon who is the low-cost leader.
Q. Have businesses worked more with their firm during the last couple of years?
In many cases, the answer is yes. Our clients are more concerned than ever about the level of taxes they are paying, regulatory challenges they are facing and the impact the recession has had on their business. This is a great time for CPAs to add value to their clients and for businesses to extract value from their firm.
Most executives are accustomed to carefully planning for the future of their business. But when it comes to planning for the future of their own wealth, these same executives are often not familiar with their choices or the potential risks of inaction. This can prove to be a big mistake, says Dexter Lowry, a certified financial planner at Union Bank in San Francisco.
“If you’re passionate about your business, you should be equally as passionate about protecting it in the event of your death or disability,” says Lowry.
Smart Business spoke with Lowry about how trusts can help protect your business and your family and how the right trustee can help ensure your personal and business financial plans are executed according to your wishes.
What is a trust, and how can it help protect your assets?
Very simply, a trust is a written agreement that provides the terms under which you wish your assets to be held and managed, and where you want them ultimately to be distributed. Once a trust is established, you then can systematically place all of your assets your home, bank accounts, etc. in the name of that trust. Then, you manage and control the assets until you become incapable due to death or disability. Your trust will also define when a person named by you will take over the role as your successor trustee. At that point your assets will remain in the trust and will be controlled by the language of the trust.
What are the benefits of establishing a trust?
First, you avoid time-consuming and expensive probate administration. The court and the attorney costs can quickly add up, plus the process is not a pleasant experience. It’s also very public, whereas a trust is a private document and assets are not exposed to public scrutiny.
Second, a trust protects your family from having to manage your assets should you become disabled or incapacitated. If you don’t have a trust in place, a conservator may need to be appointed by the court to manage your assets, should you become incapable. Once again, this is an expensive and public process that you can easily avoid.
Finally, a trust can help you reduce tax liability. In fact, many people view this as the prime reason to create either a living trust, which you create and fund during your lifetime, or a testamentary trust, which is created and funded after your death through the terms of your will.
Probably the most important thing to remember is that a trust allows you to make decisions from beyond the grave, but you have to put it in writing. You can include terms in the trust that tell your trustee how future decisions are to be made even if you’re not here to make that decision.
How do you determine who should act as trustee?
A great deal of thought should go into this decision. You can select a family member to act as trustee, but you should think about family dynamics and how this decision could impact everyone. One advantage of choosing a family member is that they will often waive the fee for serving as trustee, or charge a lesser fee than a corporate trustee. This is an important consideration for a modest-sized trust, because it preserves the principal and income for the family’s needs.
Another approach is to appoint a corporate trustee to provide objective advice and act only in the beneficiaries’ best interests. A corporate trustee will make decisions based on a clear set of guidelines, often by committee, and could be a bank or firm that has the ability to make in-depth, knowledgeable and unbiased decisions. This approach also helps to insulate family members from having to make difficult decisions about distributions from a trust.
Appointing a corporate trustee is also a good option when a family business is involved, and the heirs do not know how to run the business. Corporate trustees have experts in managing closely held businesses, real estate and other special and unique assets and these experts can advise and assist in the management of the business. If you anticipate liquidity as an issue in the continuation of the business operations, a comprehensive financial plan will help you determine whether it is wise to implement life insurance strategies to provide for the ongoing operation of the business.
In addition, a corporate trustee can also find resources to assist your spouse to ensure they receive the care they need after your death or to help a child or other relative with special needs who requires lifelong care. The trustee has broad discretion to pay income and principal and can be allowed to make medical decisions, make decisions regarding treatment that is affordable and appropriate, help control spending and decide objectively and rationally about a beneficiary’s short-term and long-term needs to allow the conservation of trust assets.
How can executives begin estate planning?
Start by calling your attorney to find out if he or she specializes in estate planning or can make a recommendation for an estate planning attorney. You may also contact your relationship manager at your corporation’s bank to connect you with their trust department. At larger banks, a wealth strategist can assist with preliminary discussions about planning and will join your personal team of financial advisers your banker, attorney and accountant to uncover, develop and implement investment planning strategies customized for you and your business.
Disclosure: Wills, trusts, foundations and wealth planning strategies have legal, tax, accounting and other implications. Consult a competent legal or tax adviser.
Dexter Lowry is a certified financial planner at Union Bank, N.A. in San Francisco. Reach him at Dexter.Lowry@unionbank.com or (415) 705-7173.
After two years of declining compensation, weary U.S. executives should be thrilled by projections of a modest increase in their average pay for 2010. But with shareholders, legislators and media watchdogs fixated on executive paychecks and layers of new regulations on the horizon, companies are still striving to fine tune compensation programs and strengthen the link between executive pay and performance.
A June flash survey of 251 companies by Towers Watson revealed that few were prepared to submit their executive pay practices to a shareholder vote as mandated by the new financial services reform bill. Although companies are waiting for further clarification on several provisions in the Dodd-Frank bill, more than two-thirds were taking action by proceeding with changes to executives’ annual incentive plans, and more than half were altering their long-term performance plans to ensure their programs do in fact align with performance and reward the right results.
“Now that the economy is improving, retention of key executives is re-emerging as a concern,” says Ann Costelloe, CFA, senior consultant for the Executive Pay Practice at Towers Watson. “Although preventing executive defections is a priority, companies must cautiously and thoughtfully alter compensation plans, given company goals and performance as well as the increase in regulations and scrutiny surrounding executive pay.”
Smart Business spoke with Costelloe about how companies are strengthening governance and addressing retention by altering their executive compensation programs.
What are the key regulations impacting executive pay?
The Dodd-Frank Act’s say-on-pay provision, among other things, requires public companies to fully disclose executive pay packages and conduct nonbinding shareholder approval votes at least once every three years, possibly beginning with the 2011 proxy season. Theoretically, shareholders could render a negative vote, making it imperative that companies proactively explain the rationale between the executives’ pay and the company’s performance and address shareholder concerns before they become issues.
Another key provision requires companies to disclose the median total compensation for employees and report the ratio of CEO-to-employee pay. While awaiting further clarification, it’s assumed that companies will need to substantiate higher ratios through better financial results or by demonstrating that their CEOs have greater experience, performance or capabilities than their peers.
Are there other significant regulations affecting executive compensation?
A provision in the Dodd-Frank law takes Sarbanes-Oxley up a notch by requiring clawbacks of executive pay in cases of fraud or criminal misconduct, and in situations where the company’s financial results were materially restated. Companies must develop policies to recoup improperly awarded compensation from current or former executives for three years preceding the required restatement filing date. Finally, a rule designed to prevent conflicts of interest requires members of the compensation committee, legal counsel and other compensation advisers to disclose their fees and be independent. Factors to assess independence are to be defined by the SEC.
How are companies adjusting executive compensation programs to comply?
The good news is that 49 percent of the surveyed companies expect to make modest increases in 2010 bonus funding for executives as a result of the improving financial conditions, while about a third expect to make larger long-term incentive grants. Although cost containment continues to be a priority, companies are being cautious about changes in pay and benefits, with only one in 10 respondents reporting that executive retention is not an issue. The survey revealed other trends in executive pay for 2010 and beyond.
- Grossing up parachute payments and providing perquisites like cars, spousal travel benefits and country club memberships
- Golden parachutes and hefty severance packages
- Change-in-control (CIC) protection and single-trigger CIC vesting of long-term incentives
- Supplemental executive retirement plans
- Employment contracts
- Incorporating tangible performance measurements into annual and long-term incentives such as operating profit, EBITDA, revenue growth and cash flow
- Incorporating nonfinancial operating measures into annual incentives such as strategic initiatives and satisfaction measures
- Stretch goals and increases in target award opportunity levels
- Higher grant values due to rising stock prices with fewer shares awarded
What else can companies do to stay in front of the new regulations and public perception?
First, embrace the changes by focusing your annual and long-term executive incentive goals and aligning them with the company’s performance through measurable goals. Next, address public scrutiny by clearly communicating your philosophy (and results) so your proxy and compensation discussion and analysis (CD&A) tells an accurate and compelling story. It’s vital to understand the hot buttons of shareholders and stakeholders and address them proactively in meetings. Research industry pay practices and conduct scenario modeling on proposed plan changes to understand how each element will perform under various conditions. Compare the total pay-out to other industry executives delivering a similar performance before fine-tuning your plan. Finally, watch for clarifications from the SEC while being mindful of the public perceptions that precipitated the regulations. Legislators won’t stop drafting new laws until they’re confident that executives have accepted their message about pay.
Ann Costelloe, CFA, is a senior consultant for the Executive Pay Practice at Towers Watson. Reach her at (415) 733-4244 or Ann.Costelloe@towerswatson.com.
Imagine if you had more than doubled your company’s revenue and employee count over the last five years. Imagine if you had increased your customer base by 80 percent and increased your annual profitability by 800 percent in that same period. And if you’re a public company, imagine if your stock had appreciated 300 percent, as well.
These numbers are Sohaib Abbasi’s reality.
When he took over Informatica Corp. (NASDAQ: INFA) as chairman and CEO in July 2004, the data integration company was on its way to finishing the year with $219.7 million in total revenue and a net loss of $104.4 million.
“At the time, Informatica was pursuing two distinctly different market options data warehousing and, the second one, analytic applications and business intelligence,” Abbasi says.
Abbasi had plenty of experience growing an organization, as he had previously worked at Oracle for 20 years, which he joined when it was a 30-person startup and where he was instrumental in growing the business from $4 million to more than $9 billion in annual revenue.
Using his previous experience, Abbasi created a clear vision for Informatica, and from there, he created a focused growth strategy that has resulted in revenue growth and profitability. Employee count increased from 800 in 2004 to more than 2,000 today.
All of this during a period when most businesses have struggled to stay above water and laid off employees. Here are the keys to how Abbasi did it.Have a vision
Before you can grow your company, you have to first know what your company is trying to ultimately do.
“The first step that we took was to refocus the company with a very clear mission to establish Informatica as the dominant leader in data integration,” Abbasi says.
Based on his experience at Oracle, he knew you have to be a leader to succeed.
“[You have to be] focused on a single category where you are the leader; you are in a strong position to redefine that market,” he says.
Look at what your company does best.
“It starts by asking what is core to the company and what is beyond the core,” he says.
He applied that filter to every strategy the company was doing and considering.
Based on his previous experience, he saw that Oracle had been a leader in the early stage market for databases and, as a result of that, had enjoyed healthy growth. As it tried to expand beyond that, Oracle learned the complexities of going into other market categories.
“Applying that lesson meant that if Informatica refocused on its core market, it would be productive to focus on how we could expand the core market, so our decision was to refocus on the core market and try to challenge ourselves on how do we grow that market,” Abbasi says. “Specifically what we asked was, ‘In what ways are customers gaining value from Informatica, and how can we deliver more value?’”
By looking at research, he saw that Informatica’s technology was traditionally used to aggregate data from a variety of databases to get better information and analyze trends.
“It turns out that our customers need to integrate data for operational purposes, as well, and by moving beyond analytical warehousing to operational data integration, we were able to expand our market fivefold,” he says. “ … By refocusing on our core market, we were able to take advantage of our pioneering leadership, and we’ve been able to redefine Informatica’s market every year.”Create a growth strategy
Once you know what you’re trying to achieve, then you can move forward.
“The second step that we took was to develop a focused growth strategy,” Abbasi says.
The strategy was a three-prong approach: The first part was to expand Informatica across all major geographic regions, the second was to grow beyond the data-warehousing market, and the third element was to advance the company’s technology leadership.
“The first element of a growth strategy needs to be around customers,” he says. “What is your growth strategy in terms of attracting and acquiring more customers? Are you focused on particular geographic regions or specific verticals?”
For example, he saw that Informatica’s customer base outside of North America accounted for only 30 percent of revenue it was too dependent on North America. He compared his revenue mix to that of more mature companies and realized that he could grow the revenue much faster outside of the continent, so he worked to try to gain more customers in those places. As a result, in the second quarter of this year, the company was now up to 36 percent of revenue coming from outside North America.
“The second element of any growth strategy is, ‘What value do you deliver to your existing customers and how will you expand that to deliver more value and more business purposes for your customers?’” he says.
At the time, just 20 percent of his customers used the company for more than data warehousing. By focusing on ways to expand this area as part of the growth strategy, today more than 50 percent of Informatica’s customers do so.
“The third element of a growth strategy is, ‘What are the technologies and services and how broad based of a product offering will you deliver?’” he says.
Informatica started by focusing on one product offering, but by expanding the core to embrace other technologies, it now has eight.
He says, “If you are executing well, your core will continue to grow.”
Abbasi also advises that you be prepared to modify your growth strategy.
“It’s essential to not only have a road map but to continually update the road map based on your progress and the changing IT landscape,” he says.
That’s been especially true during the downturn, so as part of the annual planning process, Abbasi and his team look at the technology industry as a whole on top of the data integration market so they can adjust the strategy if need be.
“At times, the operational discipline needs to be adapted to the changing macroeconomic environment,” he says. “We went through some unprecedented times of uncertainty as part of the great recession, and in our experience, if you go through those times of uncertainty, it is critically important to, very closely, monitor the changing circumstances and adapt the processes accordingly. In other words, the operational discipline needs to adapt, and in some cases, you need to change the planning horizon accordingly.”Be disciplined
Once you have a strategy in place, then you have to set up the organization to stay focused on it and fully understand it.
“With that focused growth strategy, we aligned the organization around those three growth strategy elements by coming up with corporate objectives and by coming up with metrics that we could measure how well we were doing against that,” Abbasi says.
One key was making sure employees knew what the company was trying to do.
“Have a framework where everyone understands what are the key corporate metrics and how does everyone’s contribution influence that,” he says.
He has defined several corporate objectives such as financial, market, technology, customer services, employee satisfaction, etc. that make up the mission and strategy, and he communicates those to employees. Every quarter in an all-hands meeting, he provides metrics to show employees how the company is meeting those objectives.
“Lay out a very clear vision and make sure that everyone understands what that vision is and make sure you actually take the time to verify that,” he says.
Abbasi verifies by surveying employees to make sure that they understand what’s happening. Ninety-four percent of employees responded and said they believed in the company’s vision and mission.
“You have to get that kind of awareness for what the vision is and a belief in that mission,” he says.
But you can’t just tell them what’s going on.
“The second [objective] is to articulate a very focused growth strategy and to make sure that the corporate objectives are stated in a way that not only do people understand what the focused growth strategy is, but they understand what their role is and how to contribute to that,” he says.
For example, customer service is one objective, and the goal is to rank No. 1 in customer loyalty. They measure this both for their customers and their competitors.
“It’s important to rely on an objective party, and it is equally important to benchmark against others,” he says.
So if that’s the objective, each department also has its own objective that contributes toward that. Customer support strives to make sure it lives up to the standards that customers have for it in terms of responsiveness. Product development will work to make sure that every product it puts out is the highest quality it can be so customers are satisfied. The sales team will work to build strong relationships with customers to make sure they understand what they’re buying so there aren’t surprises later.
“Within each department, each employee knows what their role is, and they know exactly, in what way, do they influence their groups, which, in turn, would contribute to the department, which, in turn, would contribute to the company,” Abbasi says. “The framework we came up with is not just the corporate level objectives but also how does that relate to the individual department and then individuals within those departments.”
As a result, 96 percent of employees said in the survey that they understood how to contribute to the company’s success, and 92 percent said they had the skills and capabilities to deliver their goals.
“Having that kind of alignment is critically important,” he says.
By implementing these three elements into the company, Informatica has enjoyed growth and success while many others have struggled. The company has also delivered a product every quarter for 16 consecutive quarters, which has led to its compound annual growth rate of 18 percent over the last five years even during the recession. On top of the $500.7 million in fiscal 2009 revenue, operating margins have increased from 5 percent in 2004 to 25 percent last year.
“I would reiterate the importance of having a clear vision, a focused growth strategy and exceptional operational discipline,” Abbasi says.
“The clear vision, the focused growth strategy and the relentless face of innovation have worked extremely well for Informatica.”
How to reach: Informatica Corp., (800) 653-3871 or www.informatica.com
Born: New Jersey
Education: Franklin & Marshall College; Lancaster, Pa.
First job: My first job was at a bakery, and I learned how to make jelly doughnuts. Not something that you want to share. I was 15 probably.
What did you learn that still applies?
That’s an interesting question in any retail business, it’s about being responsive to clients and quick to move. It was a fun experience, but it was pretty demanding. And really, every job that you have you have to take with a level of seriousness in order to be successful, and I think that that was as true in the bakery as it is today.
As a kid, what did you want to be when you grew up?
I wanted to be in anything in the theater. I had a love of the theater as early as I could remember and I was a performer. I was the kid at every school play. It took me until I was in college to realize that really wasn’t my greatest strength. I moved out of that, but that was where my first love was.
Right now, I’m on the board of directors for the San Jose Repertory Theatre, which has been a terrific experience for me in really getting back to that joy I had as a kid, and being on the business and administrative side is really a nice way to transition and also use the skills that I have in business and specifically from an audit perspective to benefit the theater so it’s been a great opportunity.
What’s the best advice you’ve received?
I think it’s from one of my early mentors at Ernst & Young, and that was around being open and receptive to any opportunity. I’ve been fortunate in my career, having been provided lots of different opportunities, some of which might have been out of the box, but by being open to those, it’s provided me with lots of different twists and turns in my career that I hadn’t anticipated. I think that was great advice to be open and receptive to anything and be willing to listen and think about what the future might look like with that opportunity.
What’s your favorite movie?
I have so many I do love movies. ‘West Side Story’ is actually one of my favorite old-time movies, and that was certainly an early one and started my love of the theater, and I go back to it a lot. It’s a little dated, but the music can’t be beat and I performed some role I think I was a Jet girlfriend at some point in that play in junior high.
Education: Bachelor’s degree from the University of Pennsylvania; law school at Temple University
What was your first job?
I mowed lawns. I was in the fourth grade. I took my mother’s push mower, and I mowed the lawns for as many neighbors as would let me. In those days, it was two bucks, and for a kid that was 9, that was good eatin’ right there.
What’s the best advice you’ve received?
I worked for a guy named Mark Tanoury at a law firm called Cooley. The guy’s brilliant. American Lawyer the magazine named him America’s top business lawyer about 10 years ago. He was a CPA before he went to law school. I tell you all that because the guy’s really, really that good, and working for Mark, I learned two things that were really important, not just to my business success but my happiness in business.
He’s such an incredible guy, and then he’d not know things, and he’d say, ‘I don’t know.’ He was so comfortable saying, ‘I don’t know,’ that I decided, as a mere mortal, that I did not know. And that was OK. The sky didn’t fall. Things didn’t stop. I didn’t get bad performance reviews. I could just not know. Now maybe I’d do something about not knowing next, but he’d just say, ‘I don’t know,’ and that was probably one of the greatest lessons ever. He never lectured me on it. I just watched him do it, and that was so liberating. I’ve used it ever since. Turns out there’s lots I don’t know.