“The trouble is, many companies are misclassifying workers without even realizing it,” says Russell Stein, vice president of finance for Principal Technical Services. “It is important for businesses to understand the employee versus independent contractor distinction. Correctly classifying workers before they perform services can save a business from confusion, hassles and possible fines down the road.”
Smart Business spoke with Stein about what businesses need to know in order to properly classify their workers.
What is the difference between an employee and an independent contractor?
The determination of whether a worker is an employee or an independent contractor is based on common-law rules derived in part from the IRS 20-Factor Test. The determination depends primarily on the extent to which the business receiving the services has the right to direct and control the worker with regard to what is to be done and how it is to be done. An employer generally has the right to control how an employee performs the service. Independent contractors determine for themselves how the work is to be performed.
When in doubt about how to classify a worker, it is best to classify him or her as an employee. It is the hiring company and not the individual who has the burden of proving that the classification is correct.
Can you summarize the IRS 20-Factor Test?
The questions on the IRS 20-Factor Test can be grouped into three categories: behavioral control, financial control and type of relationship.
Behavioral control An employee is generally subject to a business’s instructions about when, where and how to work. An employee may receive training to perform their work in a particular manner. Independent contractors can work off-site, determine their own work hours, and determine which work methods are most appropriate. They are also free to delegate and/or subcontract work to others.
Financial control An employee is paid based on the number of hours worked or on a fixed salary. Also, an employee typically is provided a work space, equipment, tools and office supplies. An independent contractor is generally paid for results, not the amount of time worked. Contractors also incur expenses related to work space, equipment and supplies like any other business owner.
Type of relationship An employee may receive benefits such as health insurance, paid time off and retirement plans. An employee can quit at any time and can typically be released ‘at will’ by the employer. An independent contractor is legally obligated to complete projects according to contract provisions and can only be dismissed for failing to do so.
What are the consequences of misclassifying an employee as an independent contractor?
Unintentional misclassification of workers violates both federal and state laws. The IRS can demand a penalty of 20 percent of the amount of taxes that should have been withheld, plus 1.5 percent of wages. The employer is responsible for payment, and no amount may be recovered from the employee. The employer would also be liable for its share of FICA and unemployment taxes that should have been paid, plus interest and penalties. Then after the IRS concludes its audit, the employer may face penalties at the state level as well.
Intentionally misclassifying workers carries stiffer penalties the full amount of income tax that should have been withheld, the full amount of both the employer and employee share of FICA taxes, and interest and penalties computed on far larger amounts than in the case of unintentional misclassification.
Are there other risks besides tax penalties?
Misclassification of workers can result in lawsuits in which an individual hired as an independent contractor later claims to have been an employee.
Let’s say one of your independent contractors is injured in an accident or suffers a catastrophic medical problem. Chances are that he doesn’t have workers’ compensation insurance, and he may not even have health insurance. This individual could sue your company, claiming to be an employee rather than an independent contractor. If, by the IRS 20-Factor Test, he should have been classified as an employee, your company could be held liable for his medical and lost time expenses.
RUSSELL STEIN is vice president of finance for Principal Technical Services. Reach him at (888) 787-3711, ext. 24 or r_stein@PTSstaffing.com.
Smart Business spoke to Kevin Teeters, vice president of marketing with Mpower Communications, to detail this new world of information technology and the connection between IT and other services.
What customer preferences can businesses track using information technology?
Product Life Cycle By incorporating advanced data-mining techniques, businesses are able to determine what customer segments are most likely to purchase new services based on industry, horizontal application, seasonality or any combination of those various factors.
Customer Migration Comparing customer models to standard deviation metrics that have been established, an accurate forecast can be provided to determine revenue threshold levels that quickly lead to up-ticks in product migration. These models can be looked at from several perspectives, including applications, industry and employee size. These models provide the relevant information to help determine which customers may fall into ‘danger’ zones where their growth momentum is quickly outpacing their current telecommunications services. Special attention is paid to this group to provide the support necessary to keep them in line with their growth.
Customer Needs Using the metrics from care centers, models are built to realize better customer need assessment. Now companies know what the highest priority request is from a specific demographic, and know how to quickly provide the appropriate response that manages the customer’s situation.
How can that technology help improve customer relations?
When a customer comes aboard, an extraordinary amount of attention is paid to capturing as much of the customer’s specific details as possible. This is consistent, from simple contact management to providing schematics of the customer’s network in one or multiple locations. This way, there are several layers of contacts for multiple situations that may arise and a full data file to help manage any expectations in regard to potential problems that could arise. The higher the quality of the data a company begins with, the better the customer’s experience will be over the long term.
Give me an example of how IT can track a customer from initial sale to the end of the relationship.
When an account executive begins a conversation with any potential customer, that customer’s details are kept in a data file that ties directly into the main customer management system. If the business decides to partner with Mpower, the information carries through our entire provisioning process, as well as any changes the customer may make to his or her account in the future.
How does IT factor into the emerging VoIP (Voice over Internet Protocol) market?
With VoIP, we’re finally starting to see a true convergence of telephony and IT services. Owners of businesses of all sizes realize several advantages from the implementation of VoIP services onto their IP network.
Highest among them would be control over costs, flexibility in terms of managing their calls, reporting capability in user management from a desktop, and the ability to have one common platform and a common dialing plan regardless of location. For instance, a company with a phone center in India, headquarters in Anaheim and locations throughout California can have one inter-company dialing plan for all of them. That is hard to do without the incorporation of telephony and IP networks.
Another advantage is the ability to combine voice and data on the same IT network. VoIP provides a very fluid ‘pip’, which is more efficient than the traditional circuit-switched network used commonly today. Data applications are easily layered on an all-IP network. Voice is packetized and becomes one of the data applications.
Who should business owners consult when considering incorporating IT tracking technology?
Most Integrated Communications Providers (ICPs) that provide hosted IP Telephony and IP services would be able to provide solutions in this regard. When a business is first starting to move in this direction, we generally look to one of our VoIP or IP trunking services as the framework to build upon. Small companies naturally want to avoid large capital expenditure typically needed for more advanced systems such as legacy PBX and IP PBX telephone systems. Still, they desire the next-generation services that VoIP and IP trunking can provide in regard to tracking and such. Providers that are going after the smaller business market are taking what larger enterprises enjoy typically and pushing their services downstream to smaller and smaller businesses.
KEVIN TEETERS is vice president of marketing for Mpower Communications in Pittsford, N.Y. Reach him at (714) 453-6705.
Bachelor of science degree, electrical engineering, Marquette University
Design engineer at General Electric Medical Systems
Whom do you admire most in business and why?
Jack Welch. While I experienced the performance and cultural changes introduced by Welch when I was at GE, in leading my own businesses throughout my career, I have come to value the importance of simple, strategic concepts of market leadership, Six Sigma and global enterprise he espoused at GE.
What is the most important business lesson you’ve learned?
Define a future for your company that customers value and understand, that employees can genuinely get excited about and your shareholders want to invest in. Business success is the result of all three and will lead to greater gains.
In contrast, settling for average results and maintaining undifferentiated customer loyalty will readily destroy shareholder value in the long run, regardless of the product or technology.
What has been your toughest business challenge?
Newport’s photonic technology is used in many markets such as research, microelectronics and telecommunications. While we are a larger, financially strong company today, our growth during the 1990s was interrupted by the almost simultaneous external influences of the collapse of the telecom bubble in 2000, Sept. 11 and a severe downturn in the microelectronics market.
My biggest business challenge was keeping Newport on track to weather these storms and investing in the future. Obviously, that happened, and our strategic growth remains intact.
Describe your leadership style.
My style of management is informed, collaborative and empowering. I believe my role is helping Newport see its future and then resourcing that roadmap.
I believe in reward-for-performance tools to achieve that end. We operate primarily as a meritocracy, where goal-setting and achieving results foster personal and professional career growth.
“The fact is, 80 percent of all positions are filled without ever being advertised,” says McCambridge. “The most talented individuals are well-known in the industry and therefore get calls all the time. They don’t need to answer ads, and chances are they will never see yours.”
Smart Business spoke with McCambridge about hiring strategies that can be used to locate the most qualified individuals, discern which ones are a good fit for your company and entice them to join your organization.
How do you find job candidates without running ads?
Network, network, network. If you’ve already done your homework, you’ve built an extensive network of people in your industry. You’ve been involved in organizations and societies whose members include leaders in your field. You’ve gone out of your way to make new contacts, collecting business cards at meetings and networking events.
Now that you’ve built your network, use it. Make a list of any contacts who might know someone with the qualifications you’re looking for. They could be business associates, recruiters, even current or past employees. Contact these individuals, ask about potential candidates and ask if any of their associates might be able to help locate candidates as well.
If you haven’t yet built such a network, get started today.
What are some strategies for building a network?
The goal is to meet as many people in your industry as possible. If you make an average of one new contact each day, you’re on the right track. Make an effort to attend events that will allow you to socialize with others in your field. Events may be sponsored by professional organizations, trade associations and business councils. The important thing to remember when attending these events is not to spend time talking with friends and co-workers. Time spent with them is time taken away from your primary purpose making new contacts to build your network.
It may seem obvious, but each individual added to your network is a potential source of other new contacts, and so on, and so on.
Another resource to tap into would be your local university. Offering to mentor students or give guest lectures provides an opportunity to meet talented individuals entering your field in the future, as well as the professors who can be on the lookout for talent for you.
How can companies make sure they’re hiring the best candidate for a job?
That’s a very important question. Too often in today’s fast-paced business world, personnel decisions are made quickly with minimal information about the candidate. Managers tend to spend more time investigating the merits of new software than new employees.
In light of today’s labor shortage and the war for talent, now is the time to carefully consider each hiring decision. If a candidate has an impressive resume and interviews well, ask yourself whether he or she fits in with your company’s culture. Will this person get along well with your current employees? Is this the type of person who inspires those around him/her to perform at their best? These qualities can’t usually be assessed in an interview. The best way to tease out this information is to invite the candidate to a social function dinner or a ballgame with future co-workers. Yes, this involves added investment of both time and money, but it’s an investment that will pay off in the form of increased productivity and decreased turnover.
How can the most talented individuals be convinced to accept a job offer?
We’re talking about individuals who are in high demand. In fact, most of them are currently employed, which means you’re going to have to steal them away from another company (hence, the expression ‘war for talent’). Many of them are satisfied with their current situation, and you’ll have to actively recruit them and entice them to change jobs.
Obviously, compensation will be a huge factor, but candidates will also be interested in other benefits, both tangible and intangible, that you can offer. Health insurance, 401(k) and paid time off are traditional benefits. More progressive ideas include flexible schedules, job sharing and telecommuting.
JENNY McCAMBRIDGE is an account manager and staffing consultant for Principal Technical Services. Reach her at (888) 787-3711, ext. 32, or jmccambridge@PTSstaffing.com.
The 51-year-old CEO of Herbalife International of America Inc. is an avid endurance sport athlete, and when he’s not participating in a triathlon, Johnson is working to make Herbalife a healthier enterprise. Since coming on board in 2003, Johnson has taken the $1.3 billion company public, managed a major debt offering, conducted a secondary offering and refinanced the capital structure.
Johnson spoke with Smart Business about his changing view on business leadership, the value of experience and problem with charisma.
Develop your vision.
We just put together a vision, mission and values for our company. We rolled this out as a program worldwide. Senior management became trainers of this. It’s almost like the Ten Commandments.
They become an operating methodology for the company. We do the right, honest and ethical thing. We make decisions in our work based on facts, not on hearsay. We work hard and hold ourselves accountable. We strive for excellence. That’s part of our value system.
We apply facts. It’s good to have guts, but you need to go back and look at ‘How are we making this decision?’ Everything comes back, eventually, to the core principles of what we have out there.
Trust your gut.
I used to think leadership was 50 percent fraternal getting people to work with you and for you and seeing the vision and 50 percent technical some strong skill that you have and applying it to the market. In today’s world, there is a third piece of leadership guts, an instinct for where you are in a situation with somebody, when to apply pressure, when not to apply pressure, to have a feel for the meeting.
What is that person’s mental makeup for the day? Sometimes you have to talk people off the ledge. And you don’t want to be pushing when you’re trying to pull them in.
Lead with wisdom.
There’s an instinctual part of what I’m learning in life, and especially business, that is ... wisdom. You get it over time. There are some great young leaders, but they have some way that they operate that’s very standardized. As you get a little older, wisdom plays a part of it. And wisdom is guts.
Don’t mistake charisma for leadership.
We mistake charisma for guts sometimes. People are drawn to (some executives), but they may not be drawn to something in depth.
They might be drawn to something that is slightly shallow. It might be looks. People are biologically drawn to each other by looks or voice or style or clothes. Someone who has a little depth, someone who has been around the block a few times, has a much more powerful presence than someone who just has presence.
Deal with your weaknesses.
This is a clich, but it is a strong one: Hire strength to your weakness. It’s something that I’ve employed all my career that has worked out pretty well for me. Time will be the real judge of it.
I didn’t come up through finance or accounting. Had I known what I know now, I’d have gotten a finance degree. Numbers are the core of any business.
I’ve self-educated myself over the years to be as articulate as I possibly can be about financial matters. But this is a world of high finance, especially as companies get larger and get involved in foreign markets and debt markets.
Know the rules.
The public company sector in today’s world requires a massive amount of reporting in a massive amount of areas. Areas that you wouldn’t think have public scrutiny now have a major amount of public scrutiny.
Shareholders have a right, and it’s a good right, to know everything about a company. In the past, as a somewhat private company, we didn’t have to have a mass of people doing quarterly accounting for us. We do now. We didn’t have to have ‘Qs and Ks and 8-Ks’ going out every time we sneezed. We didn’t have to be as thoughtful about every statement we made to everybody about everything.
Give back to the community.
I’m over that halfway point in life. At some point, you’ve got to start giving back. The sense of the founder of this company was to give back. Even at a young age, he put into place our family foundation with the idea of giving back.
I’m going to measure success in this company on a lot of things. Of course, they’re going to be financial and have Wall Street metrics to them without a doubt. The real success we’re going to have is when people look at the Herbalife brand and don’t have any suspicions. They’re going to say, great products, great people, great company, great community service.
Nobody owns the nutrition brand. ... I want to own it. We want to own the idea that the mission of nutrition is Herbalife.
Learn from the past.
Don’t discount any of your experiences. I am constantly amazed how every experience I’ve had in life I’ve been a paperboy, cut lawns, shoveled snow, ran a restaurant, a disc jockey, worked in the entertainment industry, published a magazine.
There were points in my life when I thought I was not on the road to success. I didn’t have one of these undergraduate, graduate, Wharton MBA to become the CEO. I didn’t have that track. I had a much less typical track.
The more I found out, the more leaders I encounter, most of them did have pretty untypical tracks. There is a misnomer that there is some planned ascension program for people. Take every experience, gather it in and try and find some horizon point on it.
Don’t give up.
When you’re working your butt off and toiling away up through some management rank that may be middle management, and you don’t think there’s any big picture beyond it, don’t be so sure that there’s not. Every experience adds value to who you are.
Keep it simple.
What’s lacking in business today is simplicity. People are striving to make things complicated when people should be striving to make things simple. Let’s stop impressing people with all the information we have, and let’s get down to the essential points. Then let’s let communication add the things that we’re missing.
We confuse things. We make simple things confusing. Business is not that complicated. It’s usually a product, a process and a consumer.
HOW TO REACH: Herbalife International of America, Inc. (866) 866-4744 or www.herbalife.com
Also known as qualified retirement plans, profit-sharing plans are established by employers to provide employees with opportunities to save for retirement.
“Keeping good employees can increase company profits,” says Glenn Gelman, managing director at Santa Ana-based Glenn M. Gelman & Associates CPAs, “while also reducing the high cost of recruiting and replacing valued employees.”
Smart Business spoke with Gelman about how companies can fold profit-sharing plans into their overall business plans and use them to retain good workers while maximizing profits.
Why should companies be thinking about profit-sharing plans right now?
Profit-sharing plans serve as great employee retirement planning tools and as golden handcuffs in that they can have vesting restrictions that force employees to stay a certain period of time before they can obtain all their benefits. They also allow for retirement of key executives and open up spots for younger executives.
Right now, the majority of profitable companies have either a profit-sharing plan or a pension plan in place.
How can these plans serve as tax tools?
Qualified plans ‘qualify’ for favorable tax treatment under the Internal Revenue Service Code. As long as they meet the requirements for maintaining such plans, employers and self-employed individuals can deduct contributions made to the plan. Employees aren’t immediately taxed on the contributions made on their behalf, but at retirement when distributions are made. Employers may make additional contributions on a pre-tax basis, to certain types of plans such as 401(k) plans and earnings on retirement plan funds accrue on a tax-deferred basis as well.
At the time that the contributions are made, the income grows tax free within the pension plan.
How do these plans work?
In a profit-sharing plan, up to 15 percent of each employee’s eligible compensation can be contributed to a trust held for the benefit of the employees, including those shareholders who are owners. The amount contributed to a profit-sharing plan cannot be discriminatory, meaning it cannot favor highly compensated employees. However, if properly structured based on age or classification of employee, these plans frequently yield a significant benefit to highly compensated employees despite the discrimination rules.
What benefits can companies expect from using profit-sharing plans?
These plans improve employee morale and provide security for older employees. They also add nontaxable compensation for each employee, or at a minimum the tax is deferred and can be used within a 401(k) plan or as an addendum to a 401(k) plan to further increase employee benefits.
What challenges come with using these plans?
When complicated pension plans (such as defined benefit plans) are used, they often yield a higher percentage of benefit to the highly compensated. However, they are also less flexible and often require mandatory annual contributions.
How can a company get started with a profit-sharing plan?
The first step is to find a third-party administrator also known as a TPA who will not benefit directly from the investment side of the equation. These are professionals who prepare tax returns, design the plans, administer the plans and send out the participant statements, but they do not invest the money. They are the best people to design a plan because they don’t have a conflict of interest, whereby many large institutions will gladly manage your plan for free because they are going to earn commissions on plan investments.
What advice would you give a firm looking to start a profit-sharing plan right now?
In designing a plan, a company should look not only at how much is allocated to the highly compensated employee, but also how flexible the plan is in terms of mandatory contributions. There are also esoteric plans, such as the 412(i) defined benefit pension plan, which invests in annuities and life insurance. These plans take seven to 10 years to recover the tax surrender charges or the penalties for cashing in early on the insurance. I would also consider an Employee Stock Ownership Plan, which is a form of a qualified plan, if succession planning is a major concern.
GLENN M. GELMAN, CPA, MSD, is managing director at Glenn M. Gelman & Associates CPAs in Santa Ana, Calif. Reach him at (714) 667-2600 or email@example.com.
“‘Al punto’ means ‘to the point’ in Spanish,” says Bottger, president and executive creative director of the agency that is focused on marketing to Hispanic consumers. “And it’s something still today that’s very relevant to the way we do business. ... When we set out to do business we said, ‘Either we can explain how we do things, either we can gain our clients trust by showing how we think, or we don’t.’ And part of that had to do with being to the point.”
By being transparent with clients and fostering creativity throughout al Punto, Bottger and partner Peggy Goff have grown revenue from $42 million in 2004 to $52 million in 2005.
Smart Business spoke with Bottger about how his agency connects with Hispanic consumers and how he maintains a culture of creativity and open debate.
How should a business target the Hispanic market?
They need to look at this market as they would at any other market — as an investment. I would like them to say, ‘If I put one dollar in, how many dollars am I going to get out?’ If you don’t care where the dollars are coming from, then we have taken the most important step.
After that ... they have to be more open to do things that they are not comfortable with because this market is different. Sometimes the consumer in many ways reacts different to certain products or services in the same geography and at the same time as the general market.
Third would be, do not approach this market as a test. There’s 44 million Hispanics [living in the United States]. There’s more Hispanics in the U.S. than [there are people] in Canada. You would not go to Canada and say, ‘Hey, let’s do a couple of million dollars and see what happens.’ You would not launch a product in the United States with a mentality of, ‘Let’s see what happens.’
The word test is a four-letter word, because the moment you say it is a test, you are not committed to the results.
How do you make sure people will fit in to your culture?
I do get involved with all the hires, and I do like to spend time with the candidates. Regardless of their level, I love to take them out for dinner, lunch or coffee.
I like to talk to them about their personal lives in the sense that I want my employees to have a life. I want my employees to have something to bring to the table, and if you do not have a life, you cannot bring anything to the office.
My style is ‘in person.’ I need to understand how people behave in public, how people relate to other people in a social setting. Of course, we ask all the questions about the task.
And then a lot has to do with how much willingness this candidate has to give the best — how much inner fire they have. Even though they may not have the experience, [they need] to overcome the lack of experience with desire to do the best and desire to show that they can do the best.
How do you foster creativity?
We don’t hire clones. We are always hiring people to bring a different perspective. We love to hire people that haven’t just worked in advertising but people who have worked in different areas.
Several people at the office have had their own business and succeeded or failed. To me, it doesn’t matter in many ways, but ... that showed two things — the desire of being entrepreneurial and doers, to not just wait for somebody to tell them what to do.
They know how hard it is to run a business, so they don’t take a client for granted. They know they need to earn the client’s business every time.
Sometimes that has led to some very heated debates, which is fine — I encourage those. The fact that we don’t hire clones means that everybody’s different and brings a different perspective.
It is an environment where people are not told what to do every day. We expect them to lead their own projects and their own tasks.
How does open debate benefit you business and your clients?
The consumer is not one homogeneous person. So we cannot expect one way to do business, one way to approach our marketing solutions. The debates are very important in the sense that it brings the best out of everybody.
I would be very concerned if everybody agreed with each other. That means two things: Either we’re not thinking hard, or that means somebody’s being quiet, not bringing their points across.
HOW TO REACH: al Punto Advertising Inc., www.alpunto.com
Look a little closer, and you can chalk up Mazzo’s calm response to a carefully crafted plan, some key leadership decisions and a board custom-made for the task.
AMO, a medical device manufacturer, was spun off from Allergan Inc. as a public company in 2002 and has grown its revenue from $543 million in 2001 to $920 million in 2005; its recent guidance projects 2006 revenue to exceed $1 billion. Much of the revenue bounce is attributable to two large acquisitions made in an eye-popping six-month stretch of 2004.
In June 2004, AMO completed the acquisition of Pfizer Inc.’s ophthalmic surgical business for $450 million, and by November of that year had an agreement to buy VISX Inc., a global player in laser vision correction, in a deal valued at $1.3 billion.
Mazzo says a clear articulation of the company’s strategy from the outset has allowed it to make key acquisitions to complement its catalog of optical products and organic growth.
“When we first spun out, we put together a foundation strategy plan. We identified areas where we knew we had product gaps, either because we didn’t have a rich pipeline or we were at a competitive disadvantage,” says Mazzo, a 27-year industry veteran. “Then we looked at trends that were going to be upon us in that three-year timeframe.”
If the company didn’t have a product that would be ready in time to address those trends, it started looking at potential acquisitions to fill the gap.
AMO’s first major acquisition was the ophthalmic surgery business from Pfizer. Mazzo says the acquisition went exceptionally smoothly, but he didn’t allow that lull him into thinking that bringing the business into the AMO fold would be easy.
“When you say you want to do acquisitions, that’s easy to say,” Mazzo says. “The second easiest thing to do is to write the check, but the most difficult is the integration.”
A majority of Pfizer’s human resource assets were outside the United States, mostly in Europe, so the integration issues went beyond systems and infrastructure. Mazzo, who has lived and worked in Italy and Great Britain, knew that AMO had to account for cultural differences to make the integration successful. Even within Europe, Mazzo says, the differences in culture can be striking.
Prior to the acquisition of the Pfizer business, Mazzo assembled an integration team that consisted of representatives from all major business functions within the organization. The team worked on the integration full time. Mazzo put Holger Heidrich, AMO’s head of European operations and European himself, in charge of the integration. Heidrich was familiar with the cultural sensitivities and the business climate in Europe, ranging from workers’ counsels to the regulatory environment. Mazzo took away Heidrich’s regular full-time responsibilities for the rest of the year so he could concentrate on the integration task, with his and his team’s salaries and bonuses tied to their performance on the integration task.
“You can’t make integration a night job,” says Mazzo. “We all had to pick up some of his responsibilities. We put him and the team in charge of the integration.”
The goal was to make the transition seamless for the customer, says Mazzo. AMO salespeople were trained in the Pfizer products, and former Pfizer sales personnel received comprehensive training in the AMO product lines. All of the acquired company’s customer service functions were transferred to AMO.
The second purchase, the acquisition of VISX Inc. in 2004, posed a different integration challenge and opportunity.
Ophthalmic surgeons tend to purchase all of their products from a single source, so the marriage of AMO and VISX offered the opportunity to expand the VISX products line globally. VISX’s assets were entirely in the United States, where the company held a 60 percent market share. The AMO distribution and marketing structure were leveraged to expand the VISX line internationally, using distributors where there were existing relationships and selling directly to the end-user where those ties were strong.
“We replicated the VISX model internationally, so it’s not just about selling the technology but also providing a service to completely surround the practitioner with the highest level of support, including a drive toward increasing his or her marketing skills to, in turn, drive more patients into the office,” Mazzo says.
Mazzo put a member of his senior management team in charge of the process. An integration team similar to the one put into place for the Pfizer integration was formed, and again, this became the team’s full-time responsibility.
Preparing the organization
Mazzo says the acquisitions would not have been made without the company’s commitment from the start. Key to the growth plan was putting someone in a position where they could have their hands on both the acquisition activity and the internal product development to prevent duplication of efforts. Mazzo hired Jane Rady, now vice president, strategic and corporate development, and an executive with both R&D and business development experience, to coordinate acquisition activity and organic growth.
“By having R&D, as well as corporate development, report to Jane, she then knew where we were going to spend our internal R&D dollars so we wouldn’t spend money in areas where we were going to go out and acquire,” Mazzo says.
“She was also in charge of the strategic plan, so I really encumbered her with three major responsibilities because they were so linked.”
In an age when corporate directors can be slow to put the stamp of approval on deals that even hint at putting them in jeopardy, Mazzo knew that AMO’s board would have to have some industry experience. So he assembled a board of individuals who could appreciate the potential of a given product or prospective acquisition and who would have the confidence and background to make fast and effective decisions.
Assembling a knowledgeable board would allow Mazzo to pull the trigger on a deal before it slipped out of his hands.
“I was able to select the board and purposely went out for medical device specialists, people that understood medical devices, which helps you understand ... your acquisition target,” says Mazzo.
To cement the relationship between the board and senior management, Mazzo matched board members with a management team member and encouraged them to interact between board meetings, leveraging the experience of the board and keeping them apprised of what was occurring in the business. The arrangement has proved to be a valuable one, particularly during the acquisitions, when complex issues can arise and large amounts of information have to be absorbed and considered by board members to make critical decisions.
“Each one of my board members ... has a direct relationship with one of my direct reports, both as far as updates on the business as well as for mentoring,” says Mazzo. “I’m not there at all. There are frequent direct conversations. So the board had an opportunity to stay abreast of the situation. I could not afford ... to wait for an educated board, to wait for a meeting every three or four months.
“So they’re having periodic conversations, not only with myself but with my direct reports. They were sensitized to the strategic issues and the necessity for us to move fast.”
That was particularly valuable during the six-month period when AMO was making two acquisitions. A board without a high degree of confidence in the plan and awareness of the situation might have balked at back-to-back acquisitions.
“The landing gear wasn’t even down yet, and we already started to do another acquisition,” Mazzo says. “If we hadn’t fully engaged the board, both from a strategy standpoint and how (the Pfizer acquisition) was going, there was no way that any prudent board would say, ‘Oh yeah, go ahead, do another acquisition,’ especially for a very young company and a very young team from an experience standpoint,” Mazzo says. “As they became more comfortable with my direct reports ... that’s added to the confidence that that integration could be accomplished.
“So when they all come back and meet periodically at the board meetings, they understand the same issues, what we’re doing well, what we’re not, so consistency adds to the credibility.”
Finding the deals
Finding good acquisition targets means knowing where to look and figuring out if they make for a good fit. Every month, AMO holds a major business review, at which a small group including Mazzo, AMO’s general counsel, the head of R&D and the chief marketing officer look at business opportunities, including acquisition possibilities. If a potential acquisition passes muster, they bring together a small team to study it.
Mazzo maintains a sounding board of medical professionals that he consults with on a regular basis to get a sense of how the businesses look and feel from a practitioner’s perspective.
“I have a group of 30 physicians that I call every other month, 15 one month, 15 the next month, that I bounce these technologies off of,” he says. “That helps us identify quickly, from a customer standpoint, if this is going to work or not.”
With two large and successful acquisitions under his belt, Mazzo says that others that come down the line can be as smoothly integrated into AMO as the first two. And with a positive buzz about the deals in the industry, Mazzo says AMO gets the inside track on deals that it might otherwise miss.
Says Mazzo, “As you become successful with acquisitions, you hear about a lot more opportunities.”
How to reach: American Medical Optics Inc., www.amo-inc.com
Those are just three of the reasons why Orange County commercial properties are so valued. Two others are proximity to major tourist attractions and the multitude of recreational amenities in most parts of the county.
With a population of 3 million seeking more property for residential and commercial development, serious buyers and renters must start changing the way they approach the real estate market.
“Orange County is still experiencing healthy job growth, and the availability of land continues to diminish,” says Wayne Lamb of CRESA Partners. “For instance, the Platinum Triangle in Anaheim is demolishing old industrial buildings and replacing them with high-density residential, shopping and office buildings.”
Smart Business talked with Lamb and Jeff Shepard, both partners at CRESA Partners, about the present and future of commercial real estate in Orange County.
Is the commercial real estate market in the O.C. a seller’s market?
Lamb: There are definitely fewer properties on the market, and the most desirable spaces have a lot of competition. Rental rates are going up, and other concessions are going down. One of the things that landlords are realizing is that they don’t have to fund all of the tenant improvements required to move a tenant into a space so more and more tenants are having to self fund.
How does the market affect potential buyers or tenants?
Lamb: It’s imperative that the real estate consultant prepares budgets in advance of commitments. Also, most tenants have to make quicker, more decisive decisions but not foolish decisions. Rising costs for tenant improvements, utility costs and increasing rental/lease rates make the market very difficult to predict the ideal time to for a tenant to renew or relocate. Concessions are decreasing, and multiple companies are competing for the same space.
Shepard: Buyers or tenants have to get creative. The real estate adviser needs to provide strong leadership by helping tenants realize that not as many concessions will be granted, so they have to pick the most important ones and focus on them.
Is this tight market a cyclical phenomenon?
Shepard: I have experienced several up-and-down cycles over my career. The primary driver for a tight market is job growth in relation to the amount of new space being built. If job growth remains robust, then the market will stay tight until landlords can complete enough new projects to ease demand. It typically takes a developer two years to deliver a new project to the market, so expect the next 18 months to remain tight.
How does the market affect the professional real estate agent?
Shepard: The consultant has to be more focused on every single transaction every single day. The adviser has to over-communicate with every client and be willing to give a strong opinion as to when the right time to act on the transaction and when it’s time to stop negotiating.
Advisers need to be very creative in the strategies they employ to deliver favorable results.
Lamb: A strong professional will have a broad arsenal of strategies and tactics. Each transaction or circumstance is truly different, based on the clients’ needs. People’s leases expire when they expire, regardless of whether it’s a good or bad market, but the professional who truly is looking out for his or her client may want to recommend a short-term solution until the market softens.
Will the commercial real estate market in Orange County remain tight for some time?
Lamb: Orange County is still experiencing healthy job growth, and the availability of land continues to diminish. The county is transitioning from suburban markets to urban markets. Virtually every submarket has experienced rising rates, skyrocketing land prices and decreasing vacancy if you can even find land.
Shepard: I think tenants are in for another 18 months of escalating rents and decreasing concessions followed by a stabilizing period. But I don’t think we’ll see a dip in prices or availability any time in the foreseeable future.
Don’t waste any time.
When you come into a crisis situation, you have to act quickly. You have to have a lot of confidence and take risks.
Sometimes you don’t have time for detailed analysis, so you have to have confidence in your judgment and experience. Time is money.
Get as much information as you can, involve the management that is closest to the issue and make a decision after getting their thinking and input. Not making a decision only causes you to delay the opportunity to impact company performance.
Coming into a crisis, you look at everything. Nothing is sacred. You enlist all of the management to look at every expenditure, every commitment.
We took every expense category on the income statement and looked at all the detail of what was included in the category to see if it was essential, and if not, we evaluated the impact of doing away with it. We looked at each piece of business that we had, and if it wasn’t profitable, at renewal we implemented rate increases to make it profitable. And if the client didn’t agree, we let the business go.
It takes strong teamwork from all management with the CEO and CFO deeply involved and willing to make the hard decisions.
Get in the field.
To be successful, you’ve got to get in and really understand your business and understand the details of your business. It’s just a matter of rolling up your sleeves and digging in and understanding. Don’t hide yourself in a corporate shell.
You know your employees that are on the front line. You get to know your customers, and in our case, your brokers and consultants that help sell your products. Markets are different, have different needs, different competitors, different client needs, so if you don’t get that input, you can easily make a wrong decision.
I believe in a very flat organization structure. So, there’s not lots of layers and tiers and things, so you can stay close to your customers. Communication is quick, it’s clean, it’s not distorted by lots of people’s prejudices along the way.
Recognize good performance.
One of the ways you keep people is not only give them an opportunity to perform, but recognize that performance. We have what we call the Service Excellence Club.
Somebody who does something above and beyond what would normally be expected of their job may become a member. Customer feedback is one of many criteria that drives who gets into the Service Excellence Club. If we get a couple or three kudos about a particular employee’s help to a customer or member, that employee most likely will be brought into the club.
In there, they get some special benefits. They get periodic reinforcements in terms of we may give them gift certificates or some additional time off or something like that. So it isn’t a one-time thing. We continue that recognition and keep reinforcing it.
(Recognition) is what people need. People want to do a good job. And if you do a good job and somebody recognizes that you’ve done a good job, that’s very motivating, and so you keep seeking that recognition.
Set the bar high.
If we’ve made a mistake, we’ll stand by it even if it means we’re going to lose money. And if we make a mistake, our goal is to identify it and fix it quickly.
But we have a culture of we try to stress that we are easy to work with and we’re responsive to your needs and we try to have zero errors. We are realistic to know that zero errors probably will never happen, but it still can be your goal. (Customers) can see that we work hard to not make errors.
Most anybody can duplicate our products, can duplicate a network of providers, can do the mechanical parts. But if we can provide a better service and support of our product, we can differentiate ourselves from our competitors.
We constantly monitor the availability of our member services and client services and broker services people.
How quick does the phone get answered? What is the abandonment rate? (We monitor) all of those kinds of mechanical issues to be certain that our service levels are there.
We also believe enough in it that we publish a quarterly report card on ourselves and how we’re doing servicewise as perceived by our customers and clients. We pay an outside agency who surveys a sample of our members, our insured people, as to certain aspects of the service they’ve gotten from SafeGuard, as well as from our providers.
We seek (feedback) and we get a lot. We get letters now and then from clients or brokers or even providers or a member who says, ‘Jane Doe who helped me with this problem did an outstanding job.’ Once in awhile, we’ll get one that’s the other way that says there was a problem. And that one we’ll follow up on aggressively.
Be forthright with employees.
We communicate openly both to our people and to the other company’s people. When we did the acquisition of the Health Net Dental and Vision business, we met multiple times with all of the employees so that they knew along the way exactly what was going to happen, when it was going to happen, how it was going to happen, and there were no surprises.
Rumors are always the bad stuff, never the good stuff. We’re open and honest with the people in an acquired company. And if they say, ‘Will there be layoffs?’ if there are going to be layoffs, we will say yes.
And if they say, ‘Do you know who?’ we usually don’t know who early on, but we share that information. We have found that it’s better when people know, because the unknown is always worse than the known.
HOW TO REACH: SafeGuard Health Enterprises Inc., www.safeguard.net