Reductions in force are fraught with potential legal landmines. Even the most sensitive of employers can find themselves defending discrimination claims after a RIF. And any time that you have a difficult economic environment, you see a dramatic rise in employment-related claims.
“There are a number of issues that arise in different phases of a reduction in force,” says Larry Feheley, chair of the labor and employee relations area at Kegler, Brown, Hill & Ritter. “One of the important things is that employers allow enough time to plan and implement a RIF properly. It’s not something that you want to do like a financial fire drill.”
Smart Business spoke to Feheley about the legal implications surrounding a reduction in force and how to avoid liability.
What are the first steps when considering a RIF?
It’s important to identify what’s driving the reduction. Is it redundancies resulting from a merger? Is it a change in the business model? Or is it that decreasing revenues can’t support current expenses? The answers to those questions impact, first, whether alternatives to layoffs may be available and, secondly, the legal issues that you’re going to have to confront in the context of the RIF.
Part of planning the RIF appropriately involves the consideration of whether or not all the nonpersonnel costs have been eliminated. Owners may think they have to reduce their staff because they have to cut their personnel costs. But sometimes they don’t factor in the cost of the layoff itself. Obviously there’s severance pay, unemployment benefits, etc. But there are costs from employee morale or lawsuits or charges that you have to defend. Sometimes you lose good people and you’re not in a position to immediately pick back up when business turns around.
Some companies have tried mandatory furloughs, reduced salaries or wages, or reduced hour schedules. Each of these alternatives has its own separate, but frankly manageable, legal issues. Taking these steps before jumping into a dramatic layoff keeps the work force intact, but spreads the burden across a number of people in what is hopefully a temporary situation.
What are common mistakes employers make when approaching a RIF?
The most common mistake I see is that supervisors are allowed to select people for a layoff viscerally — through a gut feeling about whom the best employees are. The key is to develop defensible criteria on which to uniformly evaluate individuals in the workplace. The reference point of all of that is what the organization is going to look like after you’ve done the RIF. And, concomitantly, what the skills and abilities are that you’re going to need in this new business structure.
It’s important to set up criteria of what skills and capabilities you need, and then to evaluate current employees against those skills in a business-related way. Try to make it as objective as possible and stay away from things like ‘attitude’ and ‘teamwork’ and those kinds of subjective qualities that can often be seen as stereotypical.
All too often, the process isn’t documented. If there’s a challenge to a RIF, an employer is asked: ‘How did you select the people to be laid off and to be retained?’ In my 30 years of practice, I’ve found that judges, juries and civil rights commissions believe that in today’s world, if businesses make important decisions, they are written down and there’s documentation.
How should an employer go about implementing the RIF?
Determine how the news is going to be communicated to people. What will each employee be told? How will the process of people leaving their office be managed? There ought to be a prepared script or a plan.
A RIF is a traumatic event for the employees who survive. Their friends are gone; everyone is wondering who or what is going to be next. So without making promises that you can’t keep, you have to try to create a sense that the worst is over and you can work together and get through this to allay some of that fear and sadness.
You may also need to communicate either ahead of time or in the course of this with your key customers, investment partners or banks, maybe the media, depending on how prominent you are in the community, and perhaps some governmental unit.
What are some of the legal issues presented by RIFs?
It’s unlawful to select somebody to be laid off because of a legally protected characteristic or activity. The most common is the well-known litany of EEO protected classes: race, color, creed, sex, national origin, age, disability, veteran or military status. But it also includes the person who made a sexual harassment claim, the person who took FMLA leave, the whistleblower or the person who filed a workers’ compensation claim.
Depending on the size of the layoff, you may be required by the federal WARN law to give written notice 60 days in advance to the employees laid off. This often brings its own issues, because giving notice can cause a great deal of attrition, and you still have to somehow manage the business for 60 more days.
An employer offering severance or any other type of benefit to the departing employees may require a release or a waiver of claims in return. Under these circumstances, you want the employees to promise that they won’t sue the company in return for benefits that you’re giving them, but there are a number of hoops that you have to jump through to make sure that you do that validly. For example, there’s a federal law called the Older Workers Benefit Protection Act requiring that you include a number of specific things in the release agreement and that you give the affected employees a special notice that describes the contours of the RIF.
Corporate governance is more than just a means to comply with legal requirements; it’s taken on a whole new role in whether a company will be profitable or even survive. Today’s focus on a robust set of corporate policies and procedures is paramount to maintaining the health of businesses as they emerge from the recession.
According to Richard Snyder, director in the audit and accounting group at Kreischer Miller, if businesses aren’t already diligent about their corporate governance, now is the time to get there.
“Set a strong tone from the top down with the leadership of the company,” he says. “That will really add value as the company moves forward and looks to grow in the future, especially coming out of these current economic times.”
Smart Business spoke with Snyder about how business leaders can take the reins to increase their company’s value, competitive outlook and security.
What issues do stakeholders need to pay attention to right now concerning corporate governance?
In light of the recession, it’s time for boards and upper management to take a new look and address areas of concern in their business. This means tailoring their governance structure and processes to the current needs of the company, as they may have changed due to adjustments in the company’s current business outlook.
Many businesses have struggled over the past several months. Some have downsized, sales may have decreased and revenue streams may have changed. Some companies may be reinvesting in themselves or looking for new avenues to increase revenue. They also might be going through significant cost-cutting measures.
You want to make sure the internal controls and the policies and procedures are still being adhered to by all members of the organization.
Another area to revisit is the composition of your board, the competencies of the board members and whether they add value to the company. Family-owned businesses may want to add outside board members independent of the family to bring stronger competencies to their business.
Companies should re-evaluate the effectiveness of the internal controls currently in place. This includes ethics policies, such as whistleblower policies, corporate code of conduct and conflict of interest. Having these types of policies and procedures in place helps to set the tone from the top.
What are the consequences for companies that do not make governance a priority?
These companies could end up missing valuable opportunities as the economy slowly rebounds in the next year or two. They should take the time to look at the business risks they face, make changes to their business operations and add quality people to their boards and upper management.
It’s a great opportunity to improve the board composition or find new, talented C-level executives in the pool of talent that’s currently available.
Past scandals with certain public companies really demonstrate the need for strong governance and the need to have strong policies and procedures in place to help prevent individuals from overriding corporate controls. It does depend on the makeup of the company, however. Is it a family-owned business, or is it a public company?
Family-owned businesses may have different priorities than a public company that dictates what ownership may want to achieve. But there’s always value in a strong board of directors and having independents present who can add value and bring issues to the table that they encounter outside of the company and in other markets.
What role do owners, upper management and boards play in governance?
One of the key aspects is making sure that owners, shareholders, boards of directors and upper management have their goals aligned. They need to implement a short-term and long-term strategic plan for the company.
How should companies involve their accountant in governance?
The auditor must remain independent from a company but can have a significant role in reporting to the highest level of corporate governance within a company, which may be a board of directors or a subcommittee of the board of directors, such as an audit committee. Aside from financial statements, there are various communications required by auditors that should be reported to the board of directors. The auditor also plays a role in making sure the financial statements are completed in accordance with appropriate accounting standards.
Auditors and outside accountants can also add value by making suggestions concerning the board composition, for example, whether it makes sense to add independent outside members.
It’s important that auditors meet with audit or finance committees, board members and owners before an audit begins so that there’s an understanding as to the expectations and the timing of the audit. They need to address any questions that the committee may have.
The auditor should inform the board and audit committee if there are any new changes in accounting standards and what the impact to the company may be. Lastly, they should review with the committee the results of the audit at its conclusion.
Richard Snyder is a director in the audit and accounting group at Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
When Kreischer Miller’s Christopher Meshginpoosh encounters a company struggling with liquidity issues, he also usually finds another common problem: deficient or nonexistent financial forecasts.
By employing sound financial forecasting, a company can better anticipate and react to changes in the marketplace.
“Effective financial forecasts are an integral part of a company’s risk assessment process; if you haven’t identified the risks impacting the business and their potential economic impact, then there’s a gaping hole that could lead to dramatic swings in financial performance and liquidity,” says Meshginpoosh, director in charge of the Audit & Accounting Group at Kreischer Miller. “In a difficult or unstable economic environment, effective financial forecasts can mean the difference between building a thriving business and suffering an economic calamity.”
Smart Business learned more from Meshginpoosh about how business owners should approach their forecasting methods at a time when the outlook may be tenuous.
In such a volatile economic environment, what are the benefits of forecasting?
First of all, it’s important to understand that even minor fluctuations in key variables can have dramatic impacts. For example, a two- to three-day change in the average collection period for a highly leveraged, low-margin business can be the difference between solvency and insolvency.
In a volatile environment, it is vitally important to understand the variables that impact business performance, as well as the potential impact of changes in those variables. By building robust forecasts, management can anticipate a variety of alternative scenarios and develop contingency plans to mitigate the probability of negative outcomes.
For instance, a company can evaluate the potential impact of delays in the collection of receivables or reductions in availability under line-of-credit arrangements. If the potential impact is significant, then the company might enhance credit controls or delay unnecessary expenditures in order to mitigate the potential impact.
What is the downside of relying solely on traditional budgets?
Many companies develop budgets once a year based upon their outlook for the business at the time the budget is developed. However, even in relatively stable economic environments, unforeseen issues impact businesses throughout the year and lead to variances from original budgets. The more significant the changes in the business are, the less valuable the original budgets become and the higher the probability that an unforeseen event could have a dramatic, unwanted impact on the business.
The current economic environment has underscored the risk associated with limited forecasting tools. Many companies assumed that revenue would continue to grow at the same rate and that customers would continue to pay in the same patterns, only to find that sales fell well short of expectations and credit risk increased dramatically. These factors, combined with high near-term fixed costs resulted in covenant defaults, cash flow deficiencies and bankruptcies.
What are the significant elements to consider when developing a forecast?
It’s important to understand the key performance indicators at your company and what variables have the biggest impact on your overall performance. A forecast is not just a finance tool but an operational tool, something that you build based on detailed knowledge of each business unit or product line.
The metrics that are used to drive the forecast should be the same metrics that senior management uses to monitor ongoing performance and the same metrics that business unit managers are held responsible for managing. And a good financial forecast should include explicit identification of fixed versus variable costs, because the magnitude of the near-term risk to a business is often a function of the level of its fixed costs.
Finally, forecasts should reflect a focus on key risks impacting the business. For instance, while fuel prices have been more stable than they were a year ago, they still have the potential to have a dramatic impact on many businesses.
Because of this potential impact, many companies might consider developing forecasts that reflect alternative assumptions regarding future fuel prices in order to determine whether the risk necessitates the use of strategies such as hedging.
How can businesses develop a financial forecast?
First, it’s important to ensure that forecasts reflect the disparate nature of each business unit or product line. This means taking a close look at each significant element of the business and involving the relevant managers in the forecasting processes.
Next, it’s important to evaluate existing budgeting and forecasting processes to ensure that the processes include the definition of key variables and the evaluation of alternative scenarios. Additionally, if processes do not include periodic reforecasts of your expectations, then there is also a risk that material unforeseen variances could adversely impact the business.
Finally, it’s essential to ensure that forecasts include income statements, balance sheets and loan covenant calculations in order to ensure that financial performance, financial condition and liquidity are properly assessed.
The good news is that forecasting tools are widely available, ranging from spreadsheet-based tools to more complicated forecasting modules that interface with existing accounting and ERP systems. By carefully developing a robust forecast using one of the many types of forecasting tools available, companies can minimize the risk of unwanted outcomes, as well as maximize the probability of achieving critical business objectives.
Once in place, the virtualized infrastructure allows the organization to be far more flexible than with a traditional data center, meeting and exceeding the growth needs of business.
“Virtualization allows you to complete the same workload with a smaller footprint, allowing you to respond to the ever-changing needs to today’s businesses more quickly than with traditional systems,” says Jayson Stokes, director of the Technology Solutions Group at Park Place International. “Provisioning new servers can take minutes instead of weeks, failing over to a secondary data center can take hours instead of days and higher uptime can be achieved over traditional systems.”
Smart Business learned more from Stokes about how virtualization can create efficiencies and save money.
Why are businesses embracing virtualization efforts?
With virtualization, your data center becomes more efficient and resilient. The economic reality is that, when presented with two quotes — one based on a virtualized data center and the other a 1-to-1 server quote — the quote with virtualization, though possibly more expensive upfront, ultimately will save the customer money in the long run.
Say you’re paying money for a colocated facility where you’re paying for floor space. If you have one less rack, your monthly fees go down. The real hard costs are maintenance on the hardware you purchase because, with virtualization, typically you’re buying less hardware. You also don’t need as much cooling because you’re running fewer systems. The soft cost savings come from ease of administration, allowing you to be much more flexible in implementing new applications and new servers.
Whereas with a traditional set of systems, if you have new applications or you’re bringing on another facility that you’re going to host, you would have to go through the budgetary process, purchase the equipment, procure it, deliver it and set it up, which can take many weeks. With virtualization, you still would have to go through the budgetary process, but effectuating the equipment instead of taking weeks could take less than a few hours. So your efficiencies are really gained there in labor and administration.
How does virtualization improve business continuity?
Virtualization extends into the desktop and even into the storage platforms, essentially turning your operating systems into a series of files, which are easily portable, allowing for a more swift transition to a secondary data center in the event of catastrophic failure.
With hardware your recovery procedures have to be tailor made for each application that you have and the recovery process can be very labor intensive. A true disaster recovery is going to be very complex. Because virtualization takes those servers and essentially reduces them to a series of files, you can leverage things like storage area networks (SAN) controller-based copy to replicate your servers from one location to another. For VM ware, for example, there’s something called site recovery manager (SRM) that virtually automates your fail over and fail back. This is, again, taking those series of files and leveraging the SAN copier or controller-based copy utility function to replicate your environment.
Furthermore, it can be largely automated and tested on a regular basis without disrupting your existing environment, which is the single most difficult thing to do in traditional scenarios. A disaster recovery plan isn’t valid unless it can be successfully tested.
How can an independent service organization (ISO) help a business with its virtualization?
Most ISOs can help businesses reduce costs, as their pricing is typically less than the original equipment manufacturers (OEMs). Many OEMs will likely have a single perspective based on their set of products, whereas an ISO will have a more holistic approach and a larger suite of products from which to choose. An ISO also can provide continuity with a single point of contact for the many needs of the business, and may typically have more real-world experiences that customers can leverage.
How can companies find out if virtualization is right for them?
There are tools out there that are used to assess a company’s existing environment. Say a company has 300 physical servers. A demo can analyze its existing network to find out that the 300 servers can be virtualized into 10 physical. And then you plug in numbers like floor space and cooling costs and maintenance costs and it creates a report that projects the return on investment. Usually companies will see an ROI in 6 months or less.
With this total cost of ownership report, companies can discuss on every level of the business the benefits of virtualization. And that’s the key — to get buy-in at all levels. There are applications that are not appropriate for virtualization, and that tool will help you see that as well.
When you get the people on the ground excited about the administration you can really sell the financial team on the hard costs and the return on investment. You can really get everyone in the organization excited about virtualization because everyone sees the benefits, especially the people who focus on those areas.
Jayson Stokes is the director of the Technology Solutions Group at Park Place International. Reach him at (800) 729-0313 or email@example.com.
More than ever, businesses are looking for ways to streamline processes, add value to marketing initiatives and ensure the customer is always king. A customer relationship management (CRM) program is a tool designed to create the efficiencies and process improvements that companies need to get through tough times as unscathed as possible. It provides a way to not only track sales and marketing information but also to track progress.
“The research that’s coming out right now shows that, while 2009 is a low capital expenditure year, a CRM program is near the top of most companies’ budgets as something they’re going to put in place if they haven’t already,” says Chris Spears, director of business development at Arke Systems. “Even in a down economy, this year CRM has been Microsoft’s fastest-growing software package.”
Smart Business asked Spears to provide an inside look at what makes a truly effective CRM program.
What makes CRM a growth initiative for companies in this market?
A lot of companies have downsized or reduced their overall sales staff and are putting CRM in place to retain productivity. When a salesperson leaves, all the leads that person was working on and all the information he or she had about accounts leaves with him or her. If a company has tracked that information over the course of that person’s employment it has the ability to go back in and see who the person was talking to and what the communication has been thus far.
The CRM system is really meant to cover a 360-degree view of a customer, from before they’re a customer through how you market to them, what material they are receiving from you as an organization, and then how you handle it when they start to express interest.
The back end of a CRM system involves the service requests coming in from those clients, which helps the service organization keep track of which clients are very intensive in their needs and understand the cost perspective. It also helps the account or sales manager going to a client site because they can access the client’s history and see the service requests it’s had in the past, what areas they should avoid, as well as the areas they need to cover with the client.
How does a well-designed CRM program improve sales processes?
The first step with implementing a CRM system is to look at the existing sales and customer service processes. If you’re automating some of the steps of a bad sales or customer service process and putting it into an electronic format, it’s still a bad process. It’s another matter if a company can recognize the flaws and wants to start gathering data so that it can make improvements.
Once companies start tracking all of that information they can then go back and look at the analytics to statistically see how clients responded after receiving a piece of communication. If you never heard from them again, what was it about the communication that scared them off? CRM enables companies to improve their sales numbers by reviewing how their current process is working and then making improvements to it
How adaptable is the CRM software?
You can evolve the system and the terminology that’s used throughout the system to mimic your business and how it approaches its accounts, contacts and opportunities. For example, in customer relationship management, the ‘customer’ could be a patient. You can rename the CRM system so that it matches your industry or even make it very specific to your company terminology.
Right now, the standard CRM automatically tracks communication like e-mails being sent to clients or calls made on a phone that’s connected to a computer. As CRM technology advances, you’re going to be able to make a record of when a contact calls a cell phone or track when you send out a Twitter. It’s going to expand into the different areas of communication that you want to be able to track.
How can businesses make sure they’re getting the most ROI from a CRM program?
The No. 1 problem companies have after implementing any CRM system is user adoption; a company just spent tens of thousands of dollars on this tool that should make everyone more productive, but nobody uses it. You have to be able to explain to the people who see it as just another tool they now have to use why this is important to the business. This involves walking them through the system and making sure it fits into their own process. Regardless of how resistant some employees may be to technology, almost everyone uses Outlook for e-mail, and the CRM system plugs right inside of Outlook so you don’t even have to leave your e-mail system to use it.
While tracking the information does require a little bit of legwork every time you talk to someone or every time you find a new opportunity, the benefit is that the CRM program doesn’t allow you to forget anything. It’s not like a notebook that you can lose or forget to look at before an opportunity has come and gone, and it alerts you to inactivity around specific opportunities or high-value clients.
Chris Spears is the director of business development for Arke Systems. Reach him at (404) 812-3123 x120 or
The relationship of the chief financial officer and the chief information officer in an organization is critical to its success. Both the CFO and CIO must be in sync on best practices and processes and keep clear lines of communication open. Each has a distinct role, complementary to the other. Most importantly, they share the responsibility of investing in value propositions for the organization.
“The company’s vision and goals should be the shared focus that keeps the CIO and the CFO on the same page,” says Bill Dvorak, CFO with CIMCO Communications. “If they’re working toward the same end, results will come easier.”
Smart Business learned more from Dvorak about how the CFO and CIO can work together to improve their organization’s processes and outcomes.
How has the role of the CIO changed over the years?
Historically, the CIO has reported directly to the CFO. However, the role of CIO has evolved strategically to support high-impact functions within the organization. From my experience in large companies, IT now reports to the area that has the biggest impact to the company. For example, IT might have a very strong reporting relationship to product development if the company decides that the product group’s needs are going to be a driver of key business results and therefore the IT resources. In a different organization, that relationship might be the operations, sales or customer service departments, but it depends on the company’s focus.
What should the relationship between the CIO and CFO entail?
The balance between the CIO and the CFO comes from defining the value proposition for the money that’s being requested by a particular department. For example, if the operations group feels it needs IT resources, the CFO’s and CIO’s roles are to ensure that the organization is obtaining the full value from that expenditure. At times, the CFO can be seen as not wanting to spend the money, when in reality it is a decision based on the value that investment will bring to the company. More enlightened CFOs want to get the biggest bang for their buck. The CIO should definitely share this conviction. Most of the time, projects are evaluated through a return on investment model. However, it can be a little more esoteric — it could be something that’s going to give value in terms of perception in the marketplace or customer recognition. These are tougher to quantify and can require more work to ensure that you can still measure the value it brings to a company.
How can the different departments best communicate?
Consistency of process and procedure is a good way to cement a solid working relationship between departments. Repetitious, well-thought-out processes take the stress out of departmental inter-workings and can improve communication between them. Benchmarked business processes are far superior to letting individuals create their own work-arounds, which can be time-consuming and costly. Both IT and finance should provide support and structure to these processes.
To support these processes, IT has a functional responsibility for understanding the business needs of the user group. IT should not just write down instructions and think that will accomplish the job. Conversely, the operational areas need to think through and be very clear about what the necessary requirements are to achieve the desired end result. To propose high-level ideas and provide no details behind what needs to be accomplished can be very counterproductive.
How can the CIO and CFO effect change in their organization?
The key for good interdepartmental relationships is shared vision, shared goals and clear communication throughout the entire organization — which is a very important responsibility of upper management. If you expect people with cross-functional responsibilities such as IT and finance to work as a team, the things you do as an organization have to promote teamwork. If you say you’re a team and you don’t reward as a team or you don’t manage in a way that promotes teamwork, you won’t get team-work, no matter how much you talk about it.
BILL DVORAK is the Chief Financial Officer of CIMCO Communications. Reach him at (630) 691-8080 or firstname.lastname@example.org.
With most companies preoccupied with how to contend with the current economic instability, who has the time or resources to bother with the hassles of regulatory requirements? Unfortunately, compliance with Sarbanes-Oxley (SOX) and the Health Insurance Portability and Accountability Act (HIPAA) doesn’t take a backseat when times are tough. Now more than ever, companies need to achieve secure processes and environments to avoid audits, fines, and lost or compromised data.
“These are mandatory requirements, so it isn’t as if a company can choose not to implement processes that are executable,” says Ed Kenty, president and CEO of Park Place International. “The key advantage to working with an independent service organization (ISO) is the road map it can put in place for an organization to meet those requirements.”
An ISO, besides providing your company with post-warranty maintenance on data center equipment, helps protect your company’s critical data and information.
Smart Business learned more from Kenty about the SOX and HIPAA requirements to which companies need to comply and the ways an ISO can help.
Who needs to be concerned with SOX and HIPAA requirements?
Most publicly held companies are at the mercy of these regulatory commissions, from small businesses to Fortune 100 companies. All their customer data — in some cases, personal information — is located in their data centers. Everything that’s critical and everything that’s being regulated is controlled within the data center. HIPAA and SOX regulations go across all verticals, from health care and finance, to legal and government, regulating data protection, backup and recovery, storage and data, how information is handled, firewall and security.
Is it usually external audits or internal recovery problems that lead to compliance issues?
It’s a combination of both. First of all, these regulatory commissions will audit these companies to make sure they’re in compliance. Companies all have certain things they have to do over certain time frames.
For example, health care institutions are being required to have disaster recovery strategies in place. There are no true deadlines to when disaster recovery strategies are supposed to be put into place, but the goal is to become JCAHO (Joint Commission on Accreditation of Healthcare Organizations) accredited as soon as possible. They must have some secure site outside of their facility where they can back up and restore their operations to give them that layer of protection if something should go wrong. They have to have a sound backup and recovery strategy and a disaster recovery system that they can enact quickly.
When it came out, HIPAA contained a lot of new security and patient protection regulations. But, the regulatory commissions didn’t expect organizations to have all of this in place immediately. They realized that a) that would be physically impossible and b) it would be fiscally imprudent for a hospital to be able to do it all at once. So they put all of these institutions on a timeline and have given them a certain amount of time to become compliant. Each year that goes by, there are certain deliverables and milestones that they all have to meet.
SOX presents a vigorous set of standards, particularly around data storage, which includes storage protection, access and retrieval, and disaster-proof on-site storage. In the case of an audit, you have to show the SOX auditors that this process works. So not only do you have to have the infrastructure in place to support it, you’ve got to have a demonstrable process around it.
Do you run into many clients who are simply unable to manage their own compliance?
With the economy the way it is, money is tight for health care institutions, many of which are not for profit. They don’t have the large staffs and resources that they used to have to understand these obligations and put a plan in place to meet these requirements. Particularly in the health care space, a third-party ISO will be familiar with the HIPAA requirements and will have professional services staff that provides consulting to these institutions to let them know where they stand. ‘Third party’ is the key here.
Becoming compliant with HIPAA and SOX (and staying that way) can be a very extensive process. It’s all about speed of data recovery, time to get operational and data protection that will make sure there’s no chance that a customer’s social security number or other personal information can get in the hands of somebody else.
What other advantages can an ISO partnership offer?
An ISO specializes in operating with critical information that is heavily regulated. So that has to be considered when somebody is making a choice to align with a service partner. They need to know that the partner is not just going to be plowing through their data center destroying information.
An OEM’s (original equipment manufacturer) goal is to sell new hardware when setting up a disaster recovery site. Whereas an ISO might suggest that an organization refreshes its operational equipment, with whatever brand of equipment that fits its budget and needs. Also, an ISO can use the old hardware to set up a disaster recovery site in another location and tie everything together.
ED KENTY is president and CEO of Park Place International. Reach him at (800) 931-3366 or email@example.com.
It’s no secret that the cost of construction is on the rise. Increases in the cost of materials, equipment, energy and labor all have an impact on project costs. Naturally, the bigger the construction project the bigger the price tag. Project owners are looking for ways to reduce costs without cutting corners. For the right project, insuring it under an owner-controlled insurance program (OCIP), or wrap-up program, can be a viable way to save.
“In an OCIP the project owner provides the insurance for the project. Buying one large insurance program in this way can be significantly less expensive than having each contractor provide its own insurance,” says Ryan Rosta, producer with The Graham Company. But, he warns, in order to see any savings, the OCIP has to be run with the utmost diligence, with an emphasis on loss control and aggressive claims management. “The administration is critical to ensure a successful OCIP.”
Smart Business learned more from Rosta about the benefits that can be provided by an OCIP and the elements that need to be in place in order to reap those benefits.
What is an OCIP?
It’s a method of insuring a specific construction project, where the owner purchases the liability insurance coverage for the project. The insurance provides coverage for the owner, the construction manager or general contractor and all contractors and sub-contractors enrolled in the project.
What insurance coverages are included?
The liability coverages typically provided in an OCIP are workers’ compensation, general liability and excess liability. These coverages are supplemented by builder’s risk coverage, which provides coverage for the building or property under construction. Depending on the complexity of the project, it may be wise to consider additional lines of coverage like professional liability and pollution liability.
What are some of the advantages to this type of program?
An OCIP can provide better ‘protection’ for both the owner and the participants working on the project. Because you’re designing the insurance program for a specific project, you can usually purchase coverage with higher limits of liability than may be available to the individual contractors and subcontractors involved.
By purchasing the insurance for the entire project, the project owner can leverage the economies of scale achieved by a bulk purchase. You also have the flexibility to purchase the insurance for several years, if not the duration of the project. So if the market fluctuates, you have pricing stability for however long the project happens to be.
More importantly, you are providing improved safety and loss control through the use of one project safety program. A strong safety program means fewer injuries and less lost time from a project. Claims management personnel should also be working hand in hand with safety and loss control to aggressively manage and minimize the impact of any claims that do occur.
Another advantage to an OCIP is the ability to include smaller, local, minority or disadvantaged contractors. Many times these companies do not have the internal personnel to meet the necessary bid specifications. The OCIP will provide the safety services and resources to these companies that would not have had them otherwise. This means more work for more companies.
Who might consider an OCIP?
In order for an OCIP to make sense, in our experience, the project has to be a minimum of $100 million in construction costs. If a project is less than $100 million you tend to lose the economies of scale because there’s less that you can negotiate and less that you can impact in terms of the cost of the insurance. The potential for savings increases as the construction value of the project increases.
What are the risks of this approach, and how can they be managed?
The whole idea behind an OCIP is to save the project owner money. A well-run OCIP can provide the project owner with a savings of 1.5 to 3 percent of the hard construction costs. But if you don’t have the right partner being the broker in this case that can administer the project, the costs can get out of hand.
This insurance is typically written on a loss-sensitive basis so the fixed costs are just one component of the entire program. This means that if you don’t have good safety and loss control your losses and claims expenses can quickly get out of control. Lack of administration and poor safety and loss control services are the reasons OCIPs fail. When this occurs, an OCIP can end up costing millions of dollars more than planned.
Success starts with putting one unified safety management program in place that everyone who’s enrolled in the project meaning the contractors and subcontractors adheres to. It should include standards that exceed the OSHA minimums and include things like pre-employment and post-accident drug testing. All of this is laid out up front so that there are no surprises for contractors when they’re on site doing the work. Then you have to have a qualified loss control professional on site on a regular basis, especially when you’re doing more complicated parts of the project, to really enforce it.
RYAN ROSTA is a producer with The Graham Company. Reach him at (215) 701-5249 or firstname.lastname@example.org.
An entrepreneur running a small company knows what to keep tabs on while running the business. As a
company gets larger, it becomes more important that the department heads start reporting on these functions so upper management can have a glimpse at those metrics that keep a business successful. This is where having an executive dashboard in place can keep CEOs and their business on track.
“It’s important not only to track history to see where the trends have been, but, more importantly, a dashboard should help you predict and/or positively alter the future,” says Bill Dvorak, Chief Financial Officer with CIMCO Communications. “When you’re looking at the dashboard, you can understand the history and can help determine what direction your business is heading based on those quantitative metrics.”
Smart Business learned more from Dvorak about the benefits of setting up an executive dashboard.
What should a dashboard measure?
It’s the barometer of how the business is doing, monitoring the key areas that you want to watch as you review the business operations. The dashboard should be pulled together by functional department and it ought to include the crucial items being measured in each department to judge performance.
For example, sales results for the vast majority of companies would be a department you want to be watching very carefully. To be most effective, you also want to have predictors, such as sales department activities.
Every item in the dashboard ought to be a mutually agreed upon set of metrics by senior management and the functional department heads. Overall, you should measure the areas that are most critical to meeting your business goals.
What information may be gleaned from a dashboard?
A dashboard lets you look for variances, either positive or negative, against expected results. If you had a customer satisfaction score that you were watching, for instance, and you started seeing it decline, the dashboard would give you the opportunity to investigate and react before customer churn got out of hand. Or, if you see the number of quotes in the sales funnels decreasing, you can address issues in the sales department before your annual revenue projections get seriously off track.
How should it appear to the user?
In my opinion, a dashboard should fit on a sheet of paper or on one computer screen. A true dashboard is similar to what’s in a car — it’s something you can just look at and pick out key elements. There ought to be a simple way of flagging problems and seeing things that are out of line.
The reports themselves should be intuitive. You want it to be easy for the readers to glean out the information that is pertinent to them. The trends should be clear so that variations jump off the page.
What are the benefits of having a dashboard in place?
There are a number of areas where a dashboard can positively affect the success of an organization. I believe that most people want to do a good job and they want to be appreciated for the job that they’re doing. When lacking metrics, senior management tends to pounce on the things that go wrong, but there’s very little positive reinforcement for the things that are going well. If you have a good set of metrics, it’s pretty easy to identify those metrics and send out a note or give recognition to those people that are performing at a high level.
If you’re asking employees to measure results, then they know it is critical to the business and it reinforces the importance of their work. It also sets clear expectations. If you expect a customer satisfaction score, for instance, to be a certain number, employees know how they have to perform to meet those goals.
How can a dashboard be set up?
If you start with the core assumption that the areas being measured are important to running a department, division or a company, then the information better be readily available. It’s a matter of finding an easy tool to accumulate the information and putting a process in place to manage it. There are software packages that allow you to input metrics into a financial system. However, if you need to start simply, you certainly could do it on an Excel spreadsheet.
One of the biggest challenges can be accuracy of measurement due to quality of data. So start with the metrics you can get easily and then work on the harder ones. When you begin to see the trends in the data, it will help clarify the other areas of improvement. Most importantly, your dashboard will be providing a clear, honest look at your business performance.
BILL DVORAK is the Chief Financial Officer of CIMCO Communications. Reach him at (630) 691-8080 or email@example.com.
When selecting a site for business operations, or considering a move, the availability of government economic incentives might just help in the decision-making process. In an effort by the state to remain competitive, incentive programs serve the purpose of boosting business in the right locations, creating a win-win situation.
Smart Business spoke to Victor Murray, senior vice president of CresaPartners, Princeton, New Jersey, about how incentives can affect where businesses chose to reside.
How might incentives fit into site selection?
The four major corporate resources capital, people, technology and information are constantly being transformed to accommodate the core businesses that they support. By contrast, the fifth corporate resource (real estate) is far less flexible and requires considerable research, in-depth local knowledge and tactical forecasting in order to address the dynamic needs of the other four resources. Most incentive packages attempt to offer a broad array of incentives that can address each (or many) of these resources, since once a site has been selected the prospect of leaving anytime soon is not likely.
My collegue Tim Myllykangas, a principal in our CresaPartners office in Boston, works with incentive programs there and says that, although not always the top criterion at the first phase of a typical site selection project, once a short-list has been developed, incentives can rise to the top as a key factor for selecting the finalist community. Unfortunately, he says most CFOs place a zero value on corporate tax credits, which then reduces the overall incentive package value of some cities/states by 25 to 75 percent. Above-the-line incentives can make or break a final decision since start-up costs are so significant for most projects.
What kinds of incentives are available?
There’s an interest on the part of the state to encourage redevelopment or revitalization in places where it wouldn’t normally occur, so their incentives are really tailored to that. Many incentive packages are put together with equipment and employee investment tax credit programs, like they do in urban areas where there’s high unemployment and low inventory of unchallenged sites.
There are incentives tailored to spurring geographic diversity and urban redevelopment, like opportunity zones. Pennsylvania has ‘keystone’ opportunity zones and they’ve used that with significant success in going to geographically remote areas, like the Scranton and northeast areas, to try to encourage businesses to locate there.
Business employment incentive programs (BEIPs), what we have in New Jersey, are really grants focusing more on the hard assets, like the employment and personnel side. They are offered to companies that are either expanding within the state or who are considering relocating here. In a BEIP, a company can be refunded 10 to 15 percent of the taxes that it pays if it’s in a smart growth area. Or, in an area where they really want to encourage growth, it might be refunded 80 percent of its taxes. There’s various limits depending on whether it’s in an area where the state is really encouraging growth.
Which businesses are good candidates?
Some incentives are tailored toward the larger organizations 250 people or more and at any given time the states do change those entry levels for where you can participate. Qualification can vary based on the industry. Sometimes programs are tailored toward technology companies; others are tailored more toward manufacturing or offices.
Are there limitations?
That’s something that changes on a fairly infrequent basis but it can change. Some of the programs are victims of their own successes, in that it encourages more and more people to participate. Some of the states do cap their incentives because of tough times. They want to continue them, but realize that it comes at a cost. So there is a tendency to start limiting what they can contribute or offering some incentives in lieu of others based on where their financial resources are.
How can companies learn more about programs available to them?
The world of incentives has become very complex in recent years and the need for sophisticated specialists with experience is critical to maximizing your opportunities. At CresaPartners, we’ve seen many companies think they did a great job getting $3 million in incentives, never knowing they could have received $5 million if they’d had specialists on their team focused on the detailed process of negotiating multiple programs in parallel, as well as multiple cities and states. A preliminary estimate or range of potential incentives can be provided quickly by consultants once basic project parameters are known.
One way is to go individually to the different regions that you’re considering or the different state economic development groups. There are also trade associations and real estate adviser groups that specialize in tax and incentive programs. We recommend engaging a qualified professional that can be a single source who has access to all of the areas you might be considering. Dealing directly is also time consuming. And without a proper confidentiality program in place, you let the entire community, not just your intended audience, know that you are out in the market looking; your anonymity is lost and you’ll get barraged by economic groups in every state pursuing you.
VICTOR MURRAY is senior vice president of CresaPartners, Princeton, NJ. Reach him at firstname.lastname@example.org or (609) 452-8200.