Leslie Stevens-Huffman

Wednesday, 25 June 2008 20:00

Solid contracts

Executives are frequently diligent and detailed negotiators when consummating a real estate purchase contract or long-term lease. But even the most thorough owners and tenants do not pay enough attention during the next phase, when construction or tenant improvement contracts need review and approval. Many of these contracts begin as boilerplate documents created by construction-related associations and, unless they are meticulously reviewed and modified, owners may forfeit savings opportunities, sustain cost overruns and assume financial liability for the contractor’s debts.

“Almost invariably, the contract presented to the owner by the contractor is missing fundamental provisions required by law or good construction practices to protect the owner against preventable risks,” says Katherine M. Knudsen, a construction litigation attorney with Procopio, Cory, Hargreaves & Savitch LLP. “If the contract does not provide adequate protection, the owner’s financial liability can quickly grow to hundreds of thousands of dollars due to delays, the contractor’s failure to pay its subcontractors or other situations. To avoid or limit financial loss or liability, owners should address and allocate these risks in the contract.”

Smart Business spoke with Knudsen about how to avoid the hidden pitfalls in construction agreements.

What is the first step in negotiating a construction agreement?

Before contract negotiations begin, owners should check with the California Contractors State License Board to verify the contractor’s history and to make certain the contractor has an active license. Also, an owner should verify that the contractor has adequate insurance coverage, including comprehensive general liability and workers’ compensation, preferably from an A-rated carrier, and verify the contractor’s ability to obtain payment and performance bonds. Further, the owner should check references and investigate the contractor’s qualifications and experience. Next, have a construction attorney review the contract to protect the owner’s interests and to make certain the scope of work, the compensation and the schedule for performance are all spelled out in detail. It is imperative that the contract include a construction schedule identifying completion dates for each phase of the project so the contractor is held to a timeline.

What else should be included in a contract?

Contractors should be required to provide a schedule of values or a budget for the project to help ensure that the contractor stays within the contract price and to guard against overpayment. Further, the contract should provide that the owner may withhold 5 to 10 percent from each progress payment until the work is fully completed and inspected and the time for subcontractors and suppliers to record mechanics’ liens has expired. The contract should also have a clause providing the owner the right to receive timely audits, a full accounting for the project and documentation of expenses if the contractor is being paid based on the cost of the work.

Are indemnification clauses and lien waivers important?

Owners should make certain the contract contains an indemnification clause stating that if the contractor fails to pay its subcontractors or suppliers, fails to keep the property free from liens, or causes injury or damage to persons or property, then the contractor shall indemnify the owner for all claims, lawsuits, losses, attorneys’ fees and costs. In addition, the contract should also contain language requiring the contractor and its sub-contractors and suppliers to execute conditional and unconditional lien waivers and releases before receiving progress payments and final payment, making it less likely that any mechanic’s liens or stop notices will be filed against the property.

How can construction delays be prevented?

The owner may consider including a ‘no damages for delay’ clause to help safeguard against a delay claim the contractor may assert if the project is not completed within the agreed-upon completion time. On the flip side, the owner may want to consider the inclusion of a liquidated damages clause entitling the recovery or withholding of a set amount for each day the project completion is delayed beyond the date set forth in the contract due to the contractor’s fault.

What bonds should be required?

The general contractor should be required to carry payment and/or performance bonds on the project, although the premium for such bonding is customarily borne by the owner. Even with a competent, adequately capitalized contractor and a well-drafted contract, unforeseeable difficulties may arise on a project. Payment and performance bonds offer additional protection to the owner. Generally, a performance bond ensures that the construction of the project will be completed if the contractor is unable to do so and a payment bond ensures that the subcon-tractors and suppliers will be paid if the contractor fails to pay them.

These recommendations are just a fraction of what owners should include in construction contracts. The main thing to remember is that ‘contract due diligence’ should not end when the lease or purchase agreement is signed.

KATHERINE M. KNUDSEN is a construction litigation attorney with Procopio, Cory, Hargreaves & Savitch LLP. Reach her at (619) 515-3206 or kmk@procopio.com.

Monday, 26 May 2008 20:00

Beat the crunch

Is there a credit crunch? Based on the formal definition there is, because lenders are exercising much greater caution before granting business loans. However, banks actually have plenty of money to lend to qualified and well-prepared borrowers. While there’s definitely been a trickle-down effect from the mortgage industry, causing lending institutions to scrutinize business loan requests more carefully, CEOs can still secure funding by understanding the tighter requirements and using a more pragmatic approach to the market.

“It’s not that banks aren’t lending money,” says Jim Paul, senior vice president for retail administration at Fifth Third Bank (Tampa Bay). “CEOs need to have a better understanding of what banks are looking for and what’s behind their lending decisions because there’s more need for due diligence and preparation when applying for a loan.”

Smart Business spoke with Paul about the current lending criteria and how CEOs can successfully secure business loans.

What are banks looking for when evaluating loan requests?

Out of all the criteria, the most important is cash flow. If the banker doesn’t think the borrower has enough cash to service the debt, the request stops right there. They will also factor in the debt service costs when evaluating the company’s cash flow requirements and project whether the business will produce enough cash to make the payments over time. Many borrowers think that collateral can overcome cash flow shortfalls, but collateral doesn’t make up for shortfalls in cash. Banks are really not interested in taking over assets if a business fails to make its payments, so right now cash is king.

What else are lenders reviewing?

Lenders will review credit scores and how the borrower has historically used credit facilities. In privately held companies or partnerships, the personal credit scores of the owners will be reviewed, but the lenders will also be looking to see if the borrower has been using funding vehicles appropriately. For example, a line of credit is designed to meet short-term needs, such as paying bills or meeting payroll to bridge gaps in receivables. These funding vehicles were never designed for business expansion. So if the owners have been using credit lines for expansion purposes that will be a red flag to the lender.

Are intangibles reviewed?

Character is definitely the third thing lenders will review. It helps if you have a relationship with a bank, but if that’s not the case, the lender will look at the industry, the owner’s history, experience and reputation and how you approach the institution when requesting a loan as a gauge of your character and professionalism.

How can CEOs prepare before approaching a bank?

First, you’ll want to meet with several bankers to gauge the market and understand what lenders are looking for because having greater knowledge of the lending side will help you tailor your presentation and business plan to meet the requirements. The discovery process will also help you estimate both the type of loan and the loan amount your business will qualify for. Rates are still at an all-time low, but lenders are charging more for increased risk, and they are looking at worst-case scenarios to see how the borrower and the business might fare under a variety of conditions.

For example, if you’re applying for a loan to purchase property, you might need to secure key person life insurance to secure the loan or present your collateral and cash flow in a way that’s on target with what the lender is seeking. Let the lenders know exactly what you’ll be using the funds for and allow them to get to know you and your business, so they’ll be comfortable lending you the money.

What’s the best way to approach the lending institution?

The most successful strategy I’ve seen is where business owners approach a lending institution in partnership with an attorney and an accountant. You’ll also need a customized business plan tailored toward the lender’s requirements. It adds a great deal of credibility when a team of professionals collaborates in authoring and presenting the business plan, and a joint presentation makes lenders more comfortable because accountants can often address questions about cash flow and how the funds will be used. Borrowers can tap local resources, such as the business department at local universities or the Small Business Administration to help author a business plan if they can’t afford to partner with a local accountant and attorney. In today’s environment, success is commensurate with taking the time to understand the market from the lender’s perspective and then crafting your approach in such a way that it addresses all the lender’s concerns.

JIM PAUL is senior vice president for retail administration at Fifth Third Bank (Tampa Bay). Reach him at (813) 306-2511 or james.paul@53.com.

Friday, 25 April 2008 20:00

Give back and receive

Corporate charity is good for business. That’s because experts link companies that have high levels of productivity and retention to corporate cultures of integrity and community giving. Within the top-performing companies, an effective community affairs program serves as the glue that binds the company to the community and the employees to their company.

“Certainly, giving back to the community demonstrates strong social responsibility, and it also helps build the community that supports your business,” says Curtis Stokes, vice president for community affairs at Fifth Third Bank. “But, in addition, an effective community affairs program creates high morale, it helps marketing build a brand and, when your staff is out there in the community, it also generates positive media exposure.”

Smart Business, spoke with Stokes about the benefits of community affairs and what makes a program effective.

Why is community affairs valuable?

Through personal involvement, employees become the face of the organization as they immerse themselves into the community. When they bump up against other community leaders, they get the opportunity to transfer your company’s brand, mission and vision, and that interpersonal contact generates dividends. For example, an employee might meet another business leader at an event, and that person will suddenly remember hearing your company’s advertisement because that human connection pulls it all together for him. Employees also feel better about their organization and their role when they have the opportunity to represent the company at events outside of work because it provides balance. Statistically, it’s been proven that retention and productivity improve when employees are involved in the community because it gives employees a sense of purpose and pride, which builds morale and engagement.

How can senior leadership be involved?

Senior leaders can set the tone by serving on boards of nonprofit organizations. They not only lend their business and professional expertise to these organizations, but they help raise funds to support the cause, and personal involvement from senior leaders demonstrates that the company is committed to giving back to the community. At Fifth Third Bank, our officers are not only involved through board participation, but the bank provides financial support to the organizations where they serve. In addition, senior leaders get the opportunity to network with other executives and community leaders, which builds external relationships that benefit the company.

How can managers play a role?

Managers should serve on nonprofit board committees, where they can lend their expertise and also reap the benefits of networking. Nonprofit organizations frequently need participants for finance, audit or development committees, so accounting and finance professionals or members of the marketing department often volunteer to serve on these committees. To make certain the time commitment is beneficial for everyone, survey your management team members about their interests, and then match them to organizations that support your company’s visibility goals and philanthropic mission.

How can employees be involved?

Employees benefit the community and their company by volunteering their time in supporting local events, such as cancer walks or charity fund-raisers. Select three or four events each year that the company would like to sponsor and get everyone involved by raising money and sponsoring teams. Walks are often good events to sponsor because they are team-oriented, so employees can reach out and engage family, friends and customers, creating a circle of support and awareness for the event and your company. Also, having your company’s name associated with sponsorship creates good will within the community and a positive corporate image. We provide our employees with lapel pins when we support an event; people notice them and comment, which creates excitement about the event and positive conversation about the bank.

What are the best practices for dovetailing community affairs and marketing?

Jointly set a strategy that links your marketing program with your foundational support, community involvement, community development and other corporate giving programs. Once the strategy is set, establish selection criteria for the events and organizations your company will support that will give your organization the right visibility. Include the goal of supporting key customer relationships through joint involvement or the opportunity to place an executive at a board level in a nonprofit organization with high visibility. This step also helps companies target their annual giving through foundation grants or matching fund programs. Finally, use press releases to let the public know about your involvement and sponsorships and create internal campaigns to drive employee interest and energy.

CURTIS STOKES is vice president for community affairs at Fifth Third Bank. Reach him at curtis.stokes@53.com or (813) 306-2488.

Friday, 25 April 2008 20:00

Tough lessons

After the first set of case studies detailing the missteps of the banking industry prior to the recent avalanche of problems, there’s already one key lesson from the in-depth reviews of the industry’s sales management practices that should gain the immediate attention of all CEOs, says Scott Barton, Senior Consultant for the Sales Effectiveness and Compensation Practice at Watson Wyatt Worldwide. Barton’s top observation: Don’t wait until revenue growth stalls to review the ROI of your sales force.

“When the banking industry was in the midst of an unprecedented growth cycle, there just wasn’t much attention paid to sales force effectiveness,” he says. “Management was adding people and not caring about the return it was getting for its compensation expenditures, until net income plummeted. Now, there’s renewed interest in looking at what caused the disconnect between revenue and compensation expenditures.”

Smart Business spoke with Barton about learning from the banking industry’s renewed rigor around sales force effectiveness.

What was the first problem you found?

The first issues that created sub-par sales performance in the banking industry were poorly defined sales roles and a general lack of discipline in reviewing how the sales team was spending its time. We know from our research that top performing sales teams spend 20 percent more time in new business generation activities when compared to the time spent by average performing teams. This produces a much greater return for the associated compensation expenditure when compared with the cost for client maintenance or administrative duties. Management should review the sales staff’s time allocation between hunting and farming activities and make certain that variable compensation is calibrated to reward more generously for growth, and limit the staff’s activities that don’t directly correlate to new customer development and revenue growth.

Did adjusting the sales structure help?

Some banks are now breaking out their sales positions into roles that are strictly dedicated to either new business development or customer maintenance. What they found is that one person can handle larger volumes of existing customers, so the company achieves better revenue leverage for the allocated expenditure. Banking executives also found they could hire for specific attributes when hiring strictly for hunters or farmers, instead of hiring for a composite profile for blended roles, and they achieved better results from dedicated business development and customer maintenance personnel simply because of increased focus. This type of functional realignment also affords management greater visibility into the disparate cost detail and performance of the two groups.

Was there sufficient accountability for profitable business generation?

Many organizations wind up with a poor sales compensation ROI because the basis for variable compensation is business that does not contribute to profitable growth. Last year was a tough one for many commercial lending organizations, but you wouldn’t have known it by looking at some of their relationship managers’ pay checks. Relatively high base salaries and incentive metrics tied to overall asset volume meant a portfolio could be flat and unprofitable, but the relationship manager made good money. Similarly, new business development officers were paid on new loans, many of which ended up being bad bets for the bank. Management should ensure each sales person carries a goal that covers a portion of the company’s revenue or margin objectives. Commission-only plans, based purely on volume, are appropriate in some instances. But too often we see this disconnect between company objectives and sales rep pay, where goal-based plans at the rep level would have closed the gap.

What’s the best way to align sales compensation with company profitability?

Start by understanding how each sales role impacts revenue or margin. Establish individual goals based on these measures. For example, if a business development rep has considerable influence over revenue volume in an assigned territory, base the goal on revenue volume and the forecast of growth for the territory. Setting the goal on measures that do not impact revenue or margin, or financial measures over which the rep has little influence, won’t help the bottom line. Similarly, setting the goal too high, or providing only limited variable compensation opportunity, won’t sufficiently motivate the rep.

Does sales turnover impact profitability?

Some critical client-facing employee groups still churn at an alarming rate, which in turn creates customer churn. Low pay often results in poor morale and disengaged staff; we know from our research that profitable revenue growth is a function of having engaged and skilled staff. Develop and maintain an effective communication strategy that reinforces the alignment of business change with changes in customer preferences; offer junior-level employees career development and training to foster a longer-term perspective. Also, calculate the cost of lost customers and review your sales compensation levels to make certain it’s adequate for your exposure. It can be very expensive if a sales person leaves, taking a customer with him.

SCOTT BARTON is a Senior Consultant in the Sales Effectiveness and Compensation Practice at Watson Wyatt Worldwide. Reach him at (415) 733-4263 or scott.barton@watsonwyatt.com.

Wednesday, 26 March 2008 20:00

Fraud prevention in 2008

CEOs have long worried about financial losses from stolen or forged checks, so most executives have taken steps to prevent those types of losses by keeping checks in locked drawers and creating procedural safeguards. But with the advent of online banking and electronic financial services, today’s criminal is more likely to enter your company through cyberspace than the front door.

Phishing, which is a form of online identity theft that uses both social engineering and technical subterfuge to steal personal data and account information from users, can be hard to discern from legitimate banking institution communications. In some cases, bank and credit card brands are hijacked and used as part of phony e-mail schemes; the APWG reported the hijacking of more than 178 brands during November 2007. These two examples are only the tip of the modern-day fraud iceberg.

“There’s been a big increase in counterfeit items because of desktop publishing technology that allows hackers to replicate and print any company’s checks anywhere in the world, once they’ve stolen the information,” says Terry Akin, vice president and regional risk manager for Fifth Third Bank.

Smart Business spoke with Akin about how executives can protect their company’s assets.

What are other modern fraud techniques?

Anyone inside or outside your company has the ability to transfer funds to his or her personal accounts if he or she has the password and the signature information for your business accounts. Today, more companies wire money between accounts online through the use of a PIN by designated users, so the theft opportunities are greater. Some perpetrators use malicious software that downloads onto your desktop and secretly captures the information needed to access your accounts during transactions, or they steal the information by sending an e-mail from someone who appears to be your banker requesting the information.

What are some preventive measures?

First, keep all personal and business account information secured by locking up checks, codes, passwords and account statements and limiting the number of people who can sign checks. Also, make sure that users log out of computers when they are away from their desks, create a policy that passwords should never be stored in the computer’s cache and instruct staff not to respond to any e-mail request for bank account information. Requiring dual signatures, especially on large checks, is an excellent idea as is segregating duties, so one employee can’t complete all the steps in a payment transaction. Certainly, audits are a necessary part of a good prevention structure as is entering dummy transactions into the system from time to time, to see if they are discerned during the accounting process.

What security measures should the bank provide?

Many banks offer their business customers a security system called positive pay. Traditional positive pay is a system where banks verify checks presented for payment against a list of issued checks previously submitted by the company. There’s payee positive pay, which involves comparing the image of the payee name on the check to the payee name included on issue information provided to the bank.

Most financial institutions offer enhanced authentication procedures that require the person logging in to prove who he or she is, usually by asking a series of questions whose answers are known only to the user. In addition, there are other bank security measures available to business clients; one such system reviews banking activity electronically and generates exceptions that are kicked out for human review. Often, the banking relationship manager is familiar with the client’s typical transactions and can place a call to verify authenticity if the transaction seems out of the norm. Also, banks that specialize in business relationships will often customize review processes and authentication procedures based upon the customer’s request, and CEOs should alert their personal bankers to business changes.

How can CEOs protect data stored externally?

Today, more people are using laptops instead of desktops, which poses a unique security challenge, simply because someone breaking into your company can remove a laptop more easily than a desktop. More employees use laptops in remote locations away from the protection of the office environment and network security systems. Be sure to have a policy about what information can be stored on laptop hard drives and require that laptops are locked up when not in use. It’s not a good idea to have any accounting or banking information stored on laptop computers.

Last, be aware of the threats posed by wireless networks. Without an appropriate firewall, wireless networks may launch the company’s financial transactions into cyberspace where anyone can grab the information, access the account and transfer the funds.

TERRY AKIN is vice president and regional risk manager for Fifth Third Bank. Reach him at (615) 687-3104 or terry.akin@53.com.

Wednesday, 26 March 2008 20:00

Stem audit fee escalation

New audit standards go into effect this year for companies that have employee benefit plans subject to the Employee Retirement Income Security Act (ERISA), and who have 100 or more eligible participants. For many CEOs, audit fee increases will seem inevitable. But the audit tab doesn’t have to be significantly higher, according to Jennifer Cavender, audit manager for Audit and Business Advisory Services Group at Haskell & White LLP.

“Keeping your benefit plan audit fees down can be done if you’re willing to plan ahead and dedicate a little extra time to the process,” she says. “Many times, companies are billed additional audit fees above their engaged fee because of delays in the process or additional work that was not anticipated at the front end.”

Smart Business spoke with Cavender about the audit requirements for employee benefit plans and what CEOs can do to manage the cost.

When is a benefit plan financial statement audit required?

Generally, a plan is required to include audited financial statements with its Form 5500 filing if it has more than 100 eligible participants at the beginning of a plan year. This is an area where many companies have gotten into trouble in the past because they assume that they only need to include plan participants with account balances in the employee calculation, when, in fact, the calculation includes those who could participate but choose not to. A company that is moving in and out of the 100 eligible participant requirement should contact an accountant and legal adviser to analyze its status and determine whether an audit is necessary for their Dec. 31, 2007, plan year.

What are the audit changes effective for plans with a fiscal year ending Dec. 31, 2007?

The new audit procedures require auditors to really focus on the risks of the plan financial statements being misstated. In order to understand the plan’s risks, we must understand the plan’s internal control environment and the specific activity level controls in place. We must also consider the fraud risks associated with the plan and its operations. Once we understand the intimate details of the plan and its internal control structure, we can plan an audit that is tailored to the risks for the plan. This should help auditors to focus on what is key to the plan and its financial statements.

This is an opportunity for companies to really get value out of the audit process. These new standards will equip your auditors with the necessary information to provide you with valuable feedback on how you can improve the operations and management of your plan and reduce fraud risks.

How should companies prepare for the audit in light of the new standards?

Planning for the audit is the most important thing a company can do to keep audit fees at bay. If you are a company that has just reached the threshold and will need an audit of your benefit plan for the first time, you will need to engage an independent CPA that has experience auditing benefit plans and obtain a list of what that person will need well in advance. Next, communicate with your asset custodian and third-party administrator because these people will be furnishing most of the information for the audit. Maintaining a good relationship with them throughout the course of the year is vital because if you’ve forgotten something and need them to send additional documentation once the auditor arrives, they’ll be more responsive. Also, a good third-party administrator will keep your company informed about legal requirements throughout the course of the year and will help you meet the Form 5500 requirements on an ongoing basis. Last, companies need to have their internal controls well documented for the auditor in the form of narratives, flow charts or matrices.

What is the most important thing to remember when working with the auditor?

Start early. Benefit plan audits take a little longer than business audits because there are multiple parties involved and the asset custodians can become overwhelmed during peek times when everybody is making requests for information. Also, assign a company point person to the auditor who can answer questions and furnish documentation quickly. This is key to keeping fees down. If the auditor has to talk to multiple people in order to obtain every requested item, delays and frustration will result.

Are there any other benefits to employers for having a benefit plan audited?

A benefit plan helps a company attract and retain key employees because it positions the company as an employer of choice in the marketplace. While the audit may seem costly and cumbersome, it can provide assurance to the employees that their money is being handled correctly and responsibly. Consider sending an e-mail or a letter to your employees each year, letting them know that the audit has been completed by an independent CPA firm and that no irregularities were found; then thank them for their loyalty and hard work. By taking this extra step, CEOs can demonstrate good will toward their employees through the audit process.

JENNIFER CAVENDER is an audit manager for the Audit and Business Advisory Services Group at Haskell & White LLP. Reach her at jcavender@hwcpa.com or (949) 450-6200.

Wednesday, 26 March 2008 20:00

Consumers know best

Health care cost increases are rising at twice the rate of inflation for many companies, but not all. Watson Wyatt’s 13th Annual National Business Group on Health Study regarding employer-sponsored health care benefit programs reveals that the median two-year health care cost increase (for 2007 and expected for 2008) for all 453 surveyed employers in 2007 is 6.2 percent. While the poorest performing companies have a cost increase of 10 percent among the survey’s participants, the best performing companies experienced a two-year median cost increase of only 1 percent. What’s their secret? Consumer-directed health plans (CDHP) and programs that encourage employees to take control of their health.

“Employers can sustain a low cost increase trend by combining programs such as CDHPs with effective employee communication and appropriate financial incentives,” says Moji Saavedra, consultant for the Group and Health Care Practice at Watson Wyatt Worldwide. “Our research definitely shows that skeptics who are standing by on the sidelines and not adopting these strategies are missing out on significant cost savings.”

Smart Business spoke with Saavedra about how companies can benefit by adopting a consumer-oriented health care model.

What are other key findings from the survey?

What makes the survey results so significant is that the data continue to reinforce the findings from prior studies and the results are pretty compelling in terms of documented cost increase stabilization. The information shows that both CDHP adoption and enrollment rates are increasing; 47 percent of companies will offer a CDHP in 2008, which is up from 39 percent in 2007, and 42 percent of the companies offering a CDHP now have at least 20 percent of their employees enrolled in the plan. This trend is producing more stability in cost increases. In addition, the best performing companies are offering employees lower premiums for choosing CDHP plans, which is driving increased enrollment.

Why are CDHPs so effective?

A CDHP usually features a high deductible, such as $1,200 for employee-only coverage, along with a personal savings account that can be used to pay a portion of the medical expenses not covered by the plan. But, it’s not just the higher deductible that’s generating the cost increase control; the key is that the plans encourage employees to take responsibility for their own health and become better health care consumers by scrutinizing the treatment proposed by providers and making better informed choices. Many employers provide 100 percent coverage for preventive care before deductibles are met and go even further to offer financial incentives that encourage employees to proactively manage their health.

Are there compatible resources that drive CDHP effectiveness?

If employers want to realize the savings from a CDHP, it’s vital that they provide employees with the tools they need to be accountable for their own well-being. Offering a high deductible plan without the other components just isn’t as effective — it’s like giving someone with no driving experience a car but no driving lessons.

Your first goal is to have employees maintain their health, and your second goal is to have those with chronic diseases manage their conditions. CDHP companies offer high-performance networks or tiered provider networks, based on price and quality, and online quality comparison tools that direct employees to high-quality providers. One of the interesting findings in this year’s survey was the increase in employers that offer on-site health centers, which help coordinate care and promote greater productivity.

The bow that ties up the consumer-directed package is effective communication. The best performing companies are clearly communicating goals, benefits, program information and educational resources to their employees through an ongoing communications program that uses multiple mediums.

Are financial incentives effective?

All incentives are effective, and they are a vital component to a results-driven consumer-oriented health care model. Consider offering incentives for smoking cessation and weight management programs or cholesterol reduction plans. The incentives can be customized to fit the culture of each company, so whether you structure the incentive as a contest or offer cash or gift cards for everyone who achieves his or her goal, there is data to show that they are all effective.

What else do you suggest?

Use data to document your return on investment. Certainly, you want to begin by measuring your internal rate of return as you migrate toward a consumer-oriented health model, but also consider benchmarking against other companies by sourcing information from data warehouses. You’ll be able to compare your company’s key metrics, such as CDHP employee adoption rates, and expose where your savings opportunities might lie. The data now exist to prove that consumers can effectively manage their own health care when given the right tools and incentives. So CEOs should pay attention to the results because this might just be the long awaited health care cost management tool they’ve been seeking.

MOJI SAAVEDRA is a consultant for the Group and Health Care Practice at Watson Wyatt Worldwide, San Francisco. Reach her at (415) 733-4210 or moji.saavedra@watsonwyatt.com.

Sunday, 24 February 2008 19:00

Better board effectiveness

Many executives offer their expertise to the community by serving on the boards of nonprofit organizations.

While CEOs might be skilled and experienced with board interface from their responsibilities as chief executives, a different level of expertise is required when the roles are reversed and CEOs find themselves sitting in a board member’s chair.

“It’s important that board members understand their respective roles,” says Greg Moser, partner with Procopio, Cory, Hargreaves & Savitch LLP. “It isn’t unusual to find that board members, particularly in nonprofit organizations, have no previous board experience, so they need to be trained and educated to make sure they know how to support management and execute their roles as policymakers and don’t become micromanagers. In addition, board members have fiduciary responsibilities and the potential for personal liability, so it’s vital to understand both your role and your responsibilities when serving as a board member.”

Smart Business spoke with Moser about how nonprofit board members should support management and execute their roles and responsibilities.

What constitutes a board member’s fiduciary responsibilities?

The fiduciary duties of a nonprofit director are the duties of care, loyalty and financial oversight. Breaching any of those duties can subject the nonprofit board member, even an unpaid volunteer, to personal financial liability. Most commonly, an ex-employee or third party with a claim against the corporation will name directors in their suits. Directors will generally have immunity and be entitled to indemnification from the corporation as well as defense from their directors’ and officers’ liability insurer, unless they have breached one of their duties.

While there are no shareholder suits, oversight of nonprofits is provided by the state attorney general and often the nonprofit’s parent organization. Additionally, the nonprofit corporation can pursue individual board members who have violated their fiduciary duties.

What are the board member’s primary roles and responsibilities?

Board members are accountable for selecting auditors, overseeing the compensation of the organization’s executives and making strategic decisions, such as decisions to expand the organization either by acquisition or by devoting time and resources to a new service offering. In larger nonprofits, it’s the responsibility of the board to establish a compensation committee as part of their fiduciary responsibilities. The duty of loyalty includes both an obligation to keep proprietary information confidential and to avoid conflicts of interest. Board members also play a key role in labor-management relations by setting the tone and the philosophy for approaching employee relations and how the organization will be positioned in the marketplace relative to similar organizations, which has a profound impact on employee turnover.

How can board members support the organization’s management team?

The board should help decide the strategic direction of the organization, while the business plan should be crafted by the management team. By conducting a SWOT analysis, which stands for strengths, weaknesses, opportunities and threats, the board can provide an outside view of the organization and help management decide where to take the organization in an effort to optimize its strengths and minimize its weaknesses. Besides having the benefit of knowing how the organization is perceived externally, board members are often the best source for new board members, and having those recommendations come from the board reduces conflict of interest concerns for management. Board members should hold management accountable for the execution of the plan, but they should not be involved in the details.

How can board members get the requisite training?

Initial training for new board members should be conducted by management, who will provide an orientation, a tour of the facility and a general overview of board duties as well as the goals and history of the organization.

Retreats offer an ideal setting to conduct in-depth board member training and to work on the strategic plan. High-functioning boards will use an outside facilitator and take the opportunity afforded by the retreat to build relationships and to set expectations of one another because regular board meetings generally aren’t conducive to this type of interface. Boards should use information from the SWOT analysis to conduct crisis management and contingency planning, which might be required to survive unanticipated changes, such as a major cut in funding. The strength of the board really shows through when they are faced with a crisis and are called upon to lead the organization through difficult times. If the board has merely been rubber stamping things and going through the motions, it won’t be effective under crisis conditions. If the board members trust one another, understand their roles and can work together as a team, they’ll be able to lead the organization through any challenge.

GREG MOSER is a partner with Procopio, Cory, Hargreaves & Savitch LLP, advising a wide variety of nonprofit organizations, including hospitals, schools, and other charitable organizations and foundations. Reach him at (619) 515-3208 or gvm@procopio.com.

Tuesday, 29 January 2008 19:00

Balance of power

Bruce Geier has achieved a milestone reached by few other founders in the technology industry — his company has turned a profit every year for 26 consecutive years. In an industry that has been through more cycles than a dishwasher, Geier, president and CEO of Technology Integration Group, has outperformed and outlasted most of his competitors.

Although the company is classified as a minority-owned, small, disadvantaged business, it’s Geier’s opponents who may be at a disadvantage when they compete against him, mostly because of his balanced decision-making.

“I credit much of our success to our diversified business model,” Geier says. “It hasn’t always been easy. In the beginning, I was developing software, but people wanted hardware more than software, so I had to learn about hardware. When hardware margins fell, having revenue from services got us through. Over the years, we’ve offered a multitude of different technologies, and we’ve continued to evolve because we constantly have to find a way to get our solutions in front of the right audience.”

In 1981, Geier left a budding career as a tax and litigation consultant for a big eight accounting firm to risk it all in the burgeoning computer industry. As a computer science major, Geier could-n’t resist the urge to develop software in his garage when things were slow in the consulting business. He decided to pursue his strong premonition that computers would change the business world and launched the company. Since that time, TIG, which primarily provides IT solutions to the government as well as small and mid-size businesses, has grown to 19 branch offices, 325 employees and 2006 revenue of $281 million.

Here’s how Geier has conquered some of the biggest challenges facing his company to take it to new levels of success.

Create a winning plan

Success starts with a winning plan. “I think we’ve had a better business plan than our competitors,” Geier says. “It’s like an investment portfolio: You have to diversify and have a balanced approach — that’s what I’ve learned.”

Geier began offering a portfolio of technology services to clients long before most of the technology industry realized that margins on traditional hardware and software products were slipping. Consulting, programming and integration services not only offered value to customers, the services provided a way to improve margins and stabilize revenue during down cycles.

“Our goal is to sell multiple solutions to one customer,” Geier says. “I don’t favor jumping on the bandwagon too early because if the technology doesn’t catch on or becomes obsolete too quickly, you will alienate your customers. I say that I prefer to be on the leading edge not the bleeding edge of technology.”

To decide what new products and services the company should offer to clients and to support his middle-ground business offering philosophy, Geier regularly devotes time to evaluating emerging technology. He meets with the company’s practice leaders each month to review new offerings. One of the outcomes from the meeting is the development of a list of new products that might interest customers, while still meeting Geier’s criteria of providing staying power for the customer’s investment in the ever-changing technology marketplace.

“I think it’s important to have interplay between all of the team members when you make your decisions about what you want to offer customers because as the CEO, you have to get the opinions of the smart people around you,” Geier says. “You can’t be an expert on everything so you must rely on others.

“If we reach consensus as a group, then we move forward; if there’s disagreement, I like to handle those discussions through one-off conversations with the dissenting practice leader. Having a lot of conflict out in the open doesn’t do anyone any good because when people are upset, they can’t focus on work. As the CEO, you can set that tone by handling issues that arise off the record.”

Next Geier validates his team’s recommendations via direct customer input. TIG hosts vendor-led seminars for customers throughout the year that feature emerging technology. Geier uses seminar enrollment as a gauge of market interest in any new technology. Taking the additional step of validating the company’s offerings through clients keeps the new technology selections on target with customer appetites, and it reinforces Geier’s main value proposition for customers — he won’t recommend an unproven technology solution.

Encourage staff participation

Geier authors an annual budget and a business plan that establishes revenue goals for each type of product and service the company sells. Because of wide variances in the margins for each product and service, this type of detailed revenue planning maintains the firm’s profitability by achieving a blended margin that avoids the industry’s extremes. In addition, his plan projects a reasonable revenue growth percentage for the company each year.

Geier says that he favors measured growth as a way of keeping debt under control and reducing risk.

“I start with the VP of sales and I define the desired mix of business for the year, which gives us a blended margin for the total business portfolio,” Geier says. “From there, we transfer the desired mix of business down through the sales organization, which includes the branch managers, and then finally, we roll revenue targets down to each sales rep. This ensures that each person on the team has personal responsibility for achieving the corporate goal, and it makes it very clear what services we need to sell to be profitable.”

As reinforcement, Geier offers bonuses to managers and additional perks to the sales staff for hitting the targeted revenue goals that are specified in the business plan. For example, sales reps earn the opportunity to stay in a suite at the company’s annual president’s club achievement trip to Hawaii as an incentive for selling the right mix of business.

As a final step in reinforcing his revenue goals, Geier holds meetings each year for the firm’s sales, engineering and branch management groups, using the venue to roll out the company’s annual initiatives around business mix. The employee events actually serve dual purposes. Geier expresses his appreciation for the efforts of his team while connecting with the staff in person, and he also uses the time to get everyone behind the company business plan and the revenue goals for the year.

“As the leader, you have to achieve buy-in for your plan, and the key is that everyone has to understand their part and why you’ve made your decisions,” Geier says. “Our people can articulate our value proposition very clearly to customers, and we achieve our business plan because the staff understands it. They know that their performance is vital because they get a chance to hear the plan in person and ask questions. In addition, they are highly motivated by the incentives, which provide just one more step in assuring the results.”

Focus on retention

Geier’s success is also a result of another technology industry anomaly: His employees don’t often leave the company.

“We’ve changed our sales compensation plan only once in 26 years,” Geier says. “We haven’t lost a top sales rep in 15 years. To keep people, you’ve got to create a sense of pride within the staff, and to do that, you have to have a comfortable work environment. In some companies, people just get comfortable, and then management changes the rules by changing the comp plan. To me that’s just not a smart business decision.”

Geier says that 70 to 80 percent of the company’s total work force receives incentives through bonus plans, including the engineers and the collections staff. Allowing employees to have skin in the game also contributes to a sense of ownership throughout the company.

“I think it’s important to offer financial incentives to employees because it encourages the staff to take ownership and have some personal pride in the results,” Geier says. “You want to create a company culture that has an element of pride, and that culture will help you attract the kind of people who take pride in their work.”

Employees are invited to fun activities, like a bowling night, because it contributes toward a family atmosphere and helps people feel like owners.

“If I truly knew the secret to hiring great people, I would have retired long ago,” Geier says. “Anyone who tells you that they always make great hires is not being truthful, but I have always favored hiring a more experienced person who can step right into the position and hit the ground running. Even though we pay a premium for experience, I think the clients prefer working with someone with experience, and more experienced staff are definitely more productive when they work on projects.”

Geier also tries to find the seam between being overstaffed or understaffed when it comes to hiring decisions. That management-middle-ground hiring philosophy allows Geier to hire proactively while avoiding the burden of taking on overhead too quickly.

“I’m generally not of the mentality of ‘build it and they will come’ when it comes to hiring,” Geier says. “My mentality is more of a just-in-time approach to hiring.”

To achieve his goal, Geier establishes hiring priorities by position allowing a green light to new staff additions that can generate revenue and more careful scrutiny for additional head count in areas that represents overhead.

“I would hire any qualified sales executive at any location at any time provided they fit within our pay structure and don’t have any noncompete restrictions,” Geier says. “The same is true for certain types of engineers. That need is established by the senior management of the engineering group, and it’s often predicated by the needs of manufacturer partners or customers.

“I believe that if you make your underlings cost-substantiate any new hire, much of the decision to hire or not is pretty obvious. So what you really need is a good internal structure to evaluate their needs and justify those needs. I balance the decision by position and based upon the current utilization review by branch, especially as it relates to engineers.”

No matter what the challenge, it’s always a matter of spreading the risk whenever possible.

“Over the years, I’ve seen a lot of talented people leave the business because they didn’t spread out their risk but spread out their business,” Geier says. “When the technology bubble burst in 2001 and the hardware and software business went away, the services business pulled us through. I truly believe in a balanced portfolio, measured growth and that you have to be in the right place at the right time to achieve success.” <<

HOW TO REACH: Technology Integration Group, www.tig.com

Wednesday, 26 December 2007 19:00

Think global, act local

During uncertain economic times, business owners often find that a private banker’s holistic approach to their financial needs might provide the difference between success and failure. Private bankers are most effective when they take a 360-degree view of a client’s personal and business goals before recommending customized solutions.

Most personal bankers have the ability to offer products and services that meet clients’ needs for business succession planning, tax planning, investment growth, business financing or estate planning, but that’s only part of the success equation. A personal banker with little authority or autonomy to act or your behalf might compromise the results you need. It’s important for clients to inquire not only about the availability of services, but how the financial institution is structured, before selecting a private banker.

“Some financial institutions merely use private bankers as a means to gather assets, and some bankers only look at the personal investment side of the financial equation,” says Mark Rhein, Senior Vice President of Private Banking at Fifth Third Bank (Tampa Bay). “Clients only stand to benefit from a personal banking relationship when the banker understands what you’re striving to accomplish in all areas of your life, has an intimate knowledge of how those needs are intertwined and is empowered to act on your behalf.”

Smart Business spoke with Rhein about how CEOs can achieve a competitive advantage through a private banking relationship.

What is private banking?

Private banking is a comprehensive, advisory approach to personal financial management that gives clients a single point of contact for all of their financial needs. Private bankers work closely with their clients to provide customized credit and cash management services that typically include: checking and money market accounts, certificates of deposit, lines of credit, mortgages, credit cards, as well as investment management for stock and bond portfolios. They also act as the liaison between clients and the other specialized wealth management service within the bank, such as trust and estate-planning services.

What business advantages does a private banking relationship offer to CEOs?

Private banking should offer you quick and easy access to a local expert who can use his or her intimate knowledge of what you’re striving to accomplish in your business to tailor a comprehensive customized solution. For example, let’s say you want to launch a company expansion into Hong Kong. Your banker must comply with all banking regulations regarding the transfer of funds in and out of the country. Your private banker should be familiar with your sources of income and the regulatory environment surrounding wire transfers to and from Hong Kong and should be able to expedite the flow of international transactions. Through this type of service, CEOs can expand their business more quickly, and having a single contact for communications and accountability gives CEOs peace of mind.

Why does the hierarchy and structure of the banking institution matter?

When the bank utilizes a locally based operating model, the personal banker has much more autonomy to act on behalf of his clients and use his knowledge of the local marketplace to make customized recommendations. In fact, at Fifth Third Bank, while we use the same global products as other institutions, we just tailor them so they have a local feel. Having an established, trusted local relationship often means shorter response times, faster solutions and greater flexibility in meeting the client’s needs.

Why is a holistic view to account management beneficial?

Individuals who qualify for private banking are multidimensional people, so they need multidimensional solutions. For example, let’s say you are planning to retire in the next few years and perhaps you’re trying to save for your children’s or grandchildren’s educations. Given those objectives, you’ll need to create an effective business succession plan that will pass your company along to your children, while still providing a retirement income for you and your spouse. Achieving those goals might require greater asset protection, more insurance or the ability to save a greater portion of your income through tax reduction strategies.

What are the financial qualifications for personal banking?

Most individuals that qualify for private banking have a minimum of $350,000 to $400,000 in annual household income and $1 million in investment assets. There’s no fee for using the service and clients often benefit from preferred rates on savings and lending programs. Of course, one of the main benefits is the personalized service. At Fifth Third Bank, our personal bankers even make house calls on weekends and evenings, so we can accommodate the busy schedule and needs of our local CEOs.

MARK RHEIN is Senior Vice President of Private Banking for Fifth Third Bank (Tampa Bay). Reach him at mark.rhein@53.com or (813) 306-2497.