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Wednesday, 30 October 2013 11:26

Is your next big thing built to last?

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My 7-year-old son Cole recently gave me a Rainbow Loom bracelet, which is made of linked rubber bands. It is today’s school-age children’s craze, and Novi, Michigan-based Choon’s Design LLC is churning out the kits at a record pace.

With more than 1 million units sold in the last 24 months, Rainbow Loom is the brainchild of Choon Ng, a former Nissan crash safety engineer who invented it while working on a craft project for his daughters.

And Rainbow Loom, it turns out, isn’t its original name. When it was created, it was called Twistz Bandz.

Timing is everything, and Twistz Bandz may have sounded a bit too much like Silly Bandz — the last “wrist” craze that swept the nation. Between November 2008 and early 2011, every school-age child in sight was wearing layer upon layer of Silly Bandz on their wrists. It was as hot a product as anything since Beanie Babies.

Twistz Bandz’s arrival, it seems, happened just as Silly Bandz ran into what every hot new product eventually faces: competition. Look-a-likes with similar-sounding names began flooding the market. They were cheaper, and you could buy them more readily at more retail locations. The core brand quickly diluted. So Ng did what any smart businessperson would: He changed the dynamics of the situation.

Thus, Rainbow Loom was born.

Enter social media

Within a few months, the product — which allows its young owners to custom-create bracelets — was gaining attention. Much of this was due to a full-tilt social media blitz, including videos on YouTube and an engaging Facebook page, where users could share their designs.

More recently, Ng has become vigilant in protecting his patent and U.S. trademark — battling all wannabe competitors from launching similar-sounding products and flooding the market to dilute his own brand.

His success — or failure — is yet-to-be determined. But his efforts will prove fruitless if he’s not already looking ahead to the next product. This is the dirty little secret to any hot toy craze and the core dilemma every business leaders faces: How do you remain relevant as consumers’ wants, needs and desires ebb and flow — sometimes as swiftly as the wind changes direction. 

Get beyond being a fad

Success in business relies upon building a sustainable operation that will outlast any cyclical “must have” product explosion.

There needs to be the creation of an idea continuum — an innovation factory, if you will. Innovative leaders must review, measure and adapt a company’s products, services and solutions to the changing whims of the marketplace. You need to talk to customers, vendors and prospects. And you need to regularly take the pulse of the market.

If you haven’t taken at least some of the gains from today’s success and invested it into research and development for tomorrow, you’re already losing ground. Today is today, and just like the disclaimers for financial investing warn — past performance does not indicate future results.

In the end, the only thing that matters is this: Is your next big thing built to last? Or, like every other craze that’s every hit the market, will your opportunities to remain relevant long into the future fade away after the competition creeps in and dilutes your market? ●

 

Dustin S. Klein is publisher and vice president of operations for Smart Business. Reach him at dsklein@sbnonline.com or (440) 250-7026.

When Rich Wilson joined CertaPro Painters in 2003, the company was taking in about $50 million a year in sales. That doesn’t seem like a bad number, but the residential painting franchise company had become stuck at that level, and there wasn’t much reason to believe it was going to change anytime soon.

As he started to talk to people to learn more about how the 50 employee, 340 franchisee operation worked, Wilson discovered there was an intense focus on how things were done at the company. The problem was that it rarely got beyond that foundational level of dialogue.

“They were great at creating pictures and eloquent language around how to get a lead or produce a job or hire a painter,” says Wilson, the company’s president and CEO. “But they had no relevance to what the franchisees needed to inspire them to grow. They were more concerned about writing policies and procedures about how to do mundane things in the field. They weren’t connected to the goals and aspirations of the franchisees.”

When Wilson joined the company, he was brought in with a very clear mandate.

“I wasn’t brought in to maintain,” Wilson says. “I was brought in to grow the business. In the first meeting I had, I asked them to rate the group dynamic on a scale of one to 10. We were at a 4.6, which was really bad.”

The culture had to change and Wilson used two words to define how he wanted it to happen: Results matter.

“We should know how our franchisees are doing versus their goals versus the marketplace versus competition,” Wilson says. “We need to find ways to inspire them to grow and then have programs that will actually help them facilitate that growth. So it was a sea change and a culture shift.”

Wilson wanted both employees and franchisees to think big.

“We needed people who had the competency, commitment and skills to be able to execute our vision of growth,” Wilson says. “They bought a franchise or came to work for us because they wanted to grow a business. If they just came in to replace an income or just be complacent and good with the status quo, I didn’t want them on the team.”

 

Sort out your players

Wilson may have drawn a line in the sand with employees at CertaPro, but he says he didn’t join the company with the intention of firing people.

“There were people who repelled the message that results matter and there were people who embraced it,” Wilson says. “Ultimately, with the people who embraced it we worked together to build a program that would drive the company forward.”

Wilson wanted to hear what was on everyone’s mind. He wanted to give those with concerns a chance to express them rather than just show them the door.

“I can look at a report and go, ‘OK, here are my conclusions,’” Wilson says. “But what really matters is the people who have to carry out the execution of all that. I need to understand where they are coming from. I may not agree with it, but I do need to listen and understand.”

About 40 percent of the staff did not buy in and left CertaPro within the first four to six months of Wilson’s arrival.

That’s a lot of turnover, and Wilson made sure to let others know every time someone decided to leave the organization. It wasn’t about criticizing people who were leaving; it was more about Wilson wanting employees to see transparency at every turn.

“In the absence of information, people think the worst of everything,” Wilson says. “So if I just had a conversation where someone was exiting the company, I’m going to be on the phone to at least my direct reports, and then I’m going to tell them to get on the phone with their direct reports immediately. Quick communication helps the culture.”

What also helps is letting those people who won’t buy into your plan leave, even if you think you can eventually get them to come around.

“If I think, ‘OK, I just need to keep this person for another day, another quarter, another month, whatever — that’s the wrong move,’” Wilson says. “I’m doing the wrong thing for the company and for that person. Who wants to have a job that really in your gut, you know you’re on the way out?”

This process, while difficult at times, gave Wilson an opportunity to move forward and build a plan with the people who were excited about the company’s growth strategy.

“I could come up with the best MBA plan in the world from Harvard Business School and say this is what we need to do and this is what we’re going to do,” Wilson says. “That’s not going to work anywhere near as well as the plan that the people who have to execute it actually participate in creating.”

 

Lead with a steady hand

Wilson had an objective in his mind from day one of what CertaPro could achieve in terms of profitability and when that goal could be achieved.

“I had an idea, a hypothesis of what the vision should be,” Wilson says. “But that was shaped and is still being shaped today through experience. The vision is an aspirational one, but you have to be willing to adapt to the environment and other opportunities and present them.”

In other words, the great idea you come up with today may not look as good to you six months down the road.

The thing that needs to remain steady for the sake of yourself and your employees is your strategic direction. So when Wilson wanted to focus on results at every level of the organization and engagement about how to drive those results, the strategic approach had to remain consistent.

“It’s a big deal when you change your strategy,” Wilson says. “We’ve altered it twice since I’ve been here in 10 years. When you start to respond with a knee-jerk reaction, you come across as muddled and no one knows where you’re going. It’s impossible for everyone to row in the same direction.”

One thing Wilson tries to do that has been helpful is being concise when talking about what CertaPro does.

“I give speeches all the time,” Wilson says. “The key is being able to passionately and genuinely describe your company in five to seven minutes. Being very clear on what the values of the company are, what the mission and vision are and what the objectives are. People use those words interchangeably, but I can tell you all four of them and I’m pretty certain 85 percent of the company can do the same. My goal would be to have 100 percent.”

Consistency will also prove helpful to you when you have to make a decision others don’t agree with, but you feel is in the best interests of the organization.

“I believe very strongly in collaboration and I don’t believe in top-down management,” Wilson says. “I want feedback, and I want most people to agree with where we are going.

“However, it is the CEO’s job to make a decision. If 30 percent or even 60 percent of people don’t agree with that decision, but you believe strongly it’s where you need to go, stand firm. Your job is to be the compass. If you’re not sure and you hesitate, obviously you’re not.

“You lead through influence, not power. If it’s in the best interest of the franchisee, and they are inspired to go in the direction you want them to go, they will go there. It’s the same thing with an employee. You could be lazy and say, ‘You’re going there because I pay your paycheck.’ But it’s so much better to inspire them to go where you want them to go.”

 

Don’t rest on your laurels

Wilson’s collaborative culture paid immediate dividends. The company grew by an average of 23.5 percent from 2003 to 2007.

“We were crushing it,” Wilson says. “But if we were arrogant enough to think that what allowed us to crush it from 2003 to 2007 was going to get us through 2008 and 2009, we would have failed dramatically. I always caution people to be very careful to not become arrogant and think you’re the best because of what you did yesterday.”

The team did adapt and the growth at CertaPro has taken off once more. Sales totaled $227 million in 2012. There are plans to have 50 new franchise locations opened across North America by the end of this year and Wilson wants to hit $500 million in sales by 2016 and $1 billion by the end of the decade.

“When people from outside the company come in and experience our company today, whether they are prospective employees, prospective franchisees or even customers, what they’ll comment on is our culture,” Wilson says. “It’s a culture of performance, of collaboration and of very hard work. But it’s also a fair amount of fun.”

 

Takeaways

  • Think before you act.
  • Limit your surprises.
  • Keep trying to get better.

 

The Wilson File

Name: Rich Wilson
Title: President and CEO
Company: CertaPro Painters

Born: Frankfort, Germany

Education: History degree, Dickinson College, Carlisle, Pa.

What led you to choose history? I was going to be a premed major, and I didn’t do very well in organic chemistry. I do love reading and I’m still an avid reader, so that’s why I fell back on history.

What was your first job? My first paid job was landscaping and farm work. I cut lawns and baled hay for $2.15 an hour.

Who has had the biggest influence on your life? Probably my mom. She died when I was 20 after a horrible divorce. She had brain cancer, but she really held it together for my two siblings and I. In terms of tenacity and temerity, she found a way to live until my college graduation.

What is your favorite book? “Atlas Shrugged,” by Ayn Rand. It’s about self-determination, rugged individualism and getting stuff done yourself and not counting on the government.

What person would you like to meet? It would probably be Gandhi. The courage he had to face down the British Empire was phenomenal. He inspired so many people like Martin Luther King Jr. I’d love to understand the thought process and the mettle that it took to embark on what he did. It was incredible.

 

How to reach: CertaPro Painters, (800) 689-7271 or www.certapro.com

Inspiration and innovation are traits that no successful business can do without. The ability to rise above the daily grind and see the big picture is the mark of a true leader. But no company can coast on the dreams of one or two individuals alone.

Cultivating a corporate environment where inspiration and innovation abound takes planning, communication and, yes, a willingness to fail every once in a while.

One of the key foundations for innovation is your company’s culture. Your brand is one of your most important assets in the marketplace, but it is also the driving force behind your employees’ sense of purpose; without a clear mission, and a work environment that reinforces your core values, it is easy for workers to become disengaged at best, disaffected at worst.

At Petplan, our team has taken great pains to make our brand experience inclusive of our employees. We pride ourselves on having the best-rated customer service in the industry, and so we also take care to make sure our employees feel heard and appreciated when they have concerns.

Immersing your workers in your brand experience makes them feel like a real part of the business, and when they’re invested as stakeholders, creativity, problem-solving and innovation happen naturally.

Keep the lines open

As challenging as busy schedules and competing priorities can be, it is absolutely essential to remain accessible to employees. The next big idea could come from anyone, but if you’re not around to hear it — or worse, if your team doesn’t feel they can come to you to share it — you are missing out. Encourage your workforce to ask questions and share ideas, and keep an open door to upper management. Listen, try new things and reward those who put themselves out there to make suggestions.

This is where it gets tricky, because letting people innovate means letting go; you have to be willing to risk failure (and avoid pointing fingers!).

In the early days of Petplan, we had an employee make a $14,000 blunder while trying something new. At the time, that sum nearly gave me a heart attack. But in the end, the direction we went was the right one — and had we not taken that risk we wouldn’t be where we are today.  Learning from failure and course correcting as you go will help balance risk and reward as you innovate.

Finally, you have to continue to inspire your employees if you expect them to innovate. Teach them, train them, foster networking, give them opportunities to pursue continuing education, offer them the chance to do something outside of their typical job responsibilities, and sometimes, simply let them play.

The best businesses are built not just by the people who lead them, but by the individuals who clock in every day and give it their all. Create space for your employees to share their ideas and the next industry-changing innovation could be right around the corner!

Natasha Ashton is the co-CEO and co-founder of Petplan pet insurance and its quarterly glossy pet health magazine, fetch! — both headquartered in Newtown Square, Pa. She holds an MBA from the University of Pennsylvania Wharton School of Business. She can be reached at press@gopetplan.com. To learn more about Petplan, please visit www.gopetplan.com/about-us

Today’s debt markets are positively skewed in favor of the borrower more than at any time in recent history. This opportunity is due to central banks keeping interest rates at historic lows, capital flows coming out of Europe seeking safety and return, U.S. commercial banks and alternative lenders competing for loans, and an improving economic outlook in the United States. Companies should be actively considering how debt fits into their current capital structure and future plans for growth.

Alternatives getting traction

Coming out of the financial crisis in 2010 and into 2011, banks were slow to lend to any company other than the most creditworthy. This disposition opened the door for alternative lenders who were quicker to respond to an improving economic environment. Over the course of the last year, the trend shows commercial banks loosening their constraints on lending as they are now tasked with bringing in more clients and providing more credit availability.

Large corporate issuers are responding

The issuance of U.S. corporate debt exceeded $1.36 trillion in 2012, a 34 percent increase from 2011, and 21 percent higher than any year in the last 20 years.

Fixed-income products are in high demand by the largest national investors like China, pension funds and individual investors. In fact, one can argue that they invest at an effective loss. With current rates below inflation, investors are showing their preference for yield, accepting a notional loss with Treasury Department yields trading below the implied consumer price index.

Other debt instruments have experienced similar trends

The demand for yield-bearing instruments, combined with an improving economic environment, has caused lenders to ease credit to provide the supply to meet the market’s demands. Companies of all sizes now have improved access to debt financing with attractive pricing, availability and terms.

As an example, high-yield bonds (those with credit ratings of CCC- and below) have a historical average loss rate of 4.3 percent over the past 17 years. Today, the high-yield index is trading between 5 and 6 percent, only 0.7 to 1.7 percent above its traditional loss rates.

That net spread does not primarily reflect a lower risk profile for these companies, nor is it tied to the underlying strength of the economy, as much as it represents the demand in the marketplace and an undersupply of interest bearing products.

This lack of supply has driven down pricing, improved terms and provided greater availability, well below the risk-adjusted pricing and implied spread over the past 17 years.

What does it all mean?

Today’s combination of historically low interest rates, favorable lending terms and high borrowing availability may not continue beyond the next year or so. The Federal Reserve has committed to keep rates low through 2014, but not much beyond that. 

Many economists are beginning to voice concern about the long-term implications of keeping rates low. For businesses that have good reason to deploy debt to grow their companies, reduce their personal risk by executing a dividend recapitalization or sell their business, this is a good time to take the steps necessary to secure a successful outcome. Lenders are making it easier than ever to borrow money as long as it is done wisely — now is the time.

Joel Magerman is the managing partner and CEO of Bryant Park Capital. During the course of his career, he has been involved in closing more than 75 transactions as both a principal and an investment banker. For more information, visit www.bryantparkcapital.com.

Owners of privately held midsize companies are increasingly using performance-based bonuses as a key way of compensating executives.

“Companies will pay for performance, but they want to see value,” says Tyler A. Ridgeway, director of Human Capital Resources at Kreischer Miller.

“Whether it’s a CEO, CFO, COO, vice president of sales or vice president of marketing, it’s about how they can create value for owners in an organization. If it’s a CFO, for instance, it’s not just about crunching numbers; it’s about being a strategic business partner,” Ridgeway says.

Smart Business spoke with Ridgeway about performance-based bonuses and other trends in executive compensation.

Why has there been a trend toward performance-based pay?

A lot of companies have been through tough times, but they’ve also learned to better operate their businesses. Many have available cash right now and are wondering whether to incentivize the current team, pursue an acquisition, launch a new product or upgrade their talent.

For some who’ve decided to incentivize the current team, one option has been to reward their top performers by creating phantom stock or stock appreciation rights plans. These plans can motivate key executives to stay, and also reward them as the company grows.

If they’re hiring an executive, the interview process is now much longer than it was five years ago because they can’t afford to make a mistake. When they upgrade talent or bring in a new CEO, companies want the entire management team involved in the decision. As a result, the chosen executive candidate can build trust and rapport with management before they even start. This allows him or her to hit the ground running.

Companies want to make new executives happy from a compensation perspective, but they don’t want to give away everything. So, they’re designing packages that provide long-term rewards. They’ll negotiate a base salary everyone is happy with, and then determine how to link the bonus to company performance.

How do phantom stock and stock appreciation bonuses work?

Companies are increasingly using these plans that put a percentage of an increase in revenues over a specified period of time into an executive’s retirement plan.

With these plans, the executive doesn’t own equity in the company but shares part of the increase in value. These vehicles reward executives for growth and profits with a focus on specific goals and objectives that need to be accomplished.

Are companies trending away from any particular types of compensation?

Mid-market companies — $20 million to $500 million — realize there is a talent war and know they need to pay for top talent. However, they want to share risk. One way to do this is by offering more in bonus compensation than salary. Executives might be asked to accept less cash upfront in return for the potential upside in bonus compensation and earn-outs.

Some owners might be reluctant to negotiate upfront agreements relating to severance because they may have been burned in the past, such as having to pay severance to a sales professional who was not driving revenue. While many companies do not proactively offer severance, depending upon leverage, executives can have success in gaining some change of control protection.

Most companies are trying to avoid employment contracts as well. Instead, the offer letter now summarizes expectations and includes some measures of protection.

All of this comes back to companies expecting value creation from their new hires. When an executive joins a company, it’s difficult to know upfront exactly where or how he or she will add value. But if the executive helps generate leads that double revenue, for instance, companies are willing to revisit compensation because they want to reward that behavior.

Companies have become more transparent — owners are more willing to allow key team members to know the company’s cash position, and understand why bonuses are down if it’s not a great year. Their philosophy is that everyone is in this together, and, if the business grows, everyone will win.

Tyler A. Ridgeway is a director, Human Capital Resources, at Kreischer Miller. Reach him at (215) 734-1609 or tridgeway@kmco.com.

Learn more about Kreischer Miller’s executive search and human resources consulting services.

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A letter of intent, memorandum of understanding or term sheet — all essentially the same — is intended to be a nonbinding expression of the parties’ intended business transaction, creating a framework for putting a deal together.
It’s useful for a merger, acquisition or other combination, stock purchase, joint venture, real estate sale or lease, purchase or licensing agreement, or business contract.

Business owners usually aren’t in the business of doing deals, so it’s better to address the salient, material business points upfront in a simple, understandable way, says Peter J. Smith, a member at Semanoff Ormsby Greenberg & Torchia, LLC.

“The last thing you want is to go through an entire negotiation, do your due diligence, get your financing and then find out there’s an issue that becomes a deal killer,” he says. “You’ve now spent tens of thousands of dollars in time and expense on a deal that doesn’t, or won’t, close.”

Smart Business spoke with Smith about why using a letter of intent makes sense.

What is the purpose of a letter of intent?

It allows the parties to see if there is a basis for, and to document as a preliminary matter, the terms of a deal before expending time, energy and money. It’s better to determine if you can reach an agreement on the basic framework before you and your organization spend significant time, plus out-of-pocket expenses for attorneys, accountants, inspections, application fees, appraisals, travel and more.

The letter of intent also lays the groundwork for the transaction, including areas businesspeople don’t consider at first like non-competes, non-solicitations or indemnification. If it is sufficiently detailed and anticipates all major points, a letter of intent limits future negotiation, surprises and issues that could derail the deal, making the transaction more efficient and likely to close smoothly.

How detailed should a letter of intent be?

Unless there is a specific reason not to, a letter of intent should be as detailed as possible. The more you can include, the less there is to argue about later.

Sometimes business owners want a quick, one-page agreement that doesn’t get too hung up on the details. However, parties tend to be more agreeable and reasonable at the letter of intent stage. Plus, in my experience, the more detailed the letter of intent, the more likely the transaction is to close. Letters of intent also help minimize the ‘difficult lawyer’ problem, when counsel wants to continually negotiate the deal or make so many changes that the deal doesn’t come to fruition.

How can you negotiate important points if you have only done limited due diligence?

You can ask for the information upfront to resolve the issue, which is probably the best solution. If this is not practical, use a range or formula, or you can raise an issue, but leave the details for after due diligence.

What good is a letter of intent if it’s not binding?

Though not legally binding, a letter of intent has a psychological impact. It memorializes the understanding of the parties, and most people don’t want to be seen as breaking their commitments. Parties should sign a letter of intent, even if there are no binding provisions, solely for the emotional effect.

Nevertheless, a letter of intent often contains binding provisions such as confidentiality, no shop, non-solicitation of employees or customers, good faith negotiations or best efforts. It may provide a timeline for deposits, break-up fees or other provisions that become binding over time.

A letter of intent also can be provided to third parties to evidence the parties’ commitment and terms of the deal, perhaps in support of financing applications, approvals, etc.

In addition, you may not want to read a 30-page agreement, line-by-line, that is full of legalese. That’s why you pay a lawyer. With a letter of intent in place, counsel can say, ‘Yes, the agreement says the same thing as the letter of intent, and here are the five additional things you need to know.’ A detailed letter of intent helps you understand the deal better and results in a smoother, more cost-efficient transaction.

Peter J. Smith is a member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 or psmith@sogtlaw.com.

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The growing prevalence of cloud computing has driven astronomical growth in the amount of data center traffic passing through networks. A 2011 survey projects this traffic to hit 468 Exabytes in 2016. To put that in context, worldwide Internet traffic surpassed one Exabyte for the first time in 2003.

The fuel behind this widespread adoption is cloud computing’s cost-effectiveness. With a “pay only for what you use” pricing structure, midsize companies can ramp up or down with minimal startup costs. In addition, there are tax benefits to having cloud computing as an operating expense, rather than a capital expenditure.

However, one factor stands in the way for many businesses — an outdated network infrastructure that is unable to operate efficiently using cloud-based systems.

Smart Business spoke with Kevin Conmy, regional vice president, Business Services, at Comcast Business, about how businesses can use Ethernet to maximize cloud computing, and the competitive advantage it brings.

Why are some companies unable or slow to take full advantage of the cloud’s potential?

The first hurdle to get over is the trust factor. Business owners are hesitant to hand over sensitive information and transactions to a third party. But as the use of cloud applications becomes widespread and the ease of the applications themselves make them harder to resist, more and more companies are jumping on board.

The second obstacle is often the company’s network and whether they are using the public Internet or a private Ethernet.

While a public Internet service is cost-effective and accessible from just about anywhere, the flipside to that is increased security risks that are a very credible concern.

Latency — the time it takes for data to make a round trip between two points, such as from your office to the data center where the cloud application is hosted and back — is another problem when using a public connection. Some applications, such as email, can tolerate longer latency, but others like video, are latency-intolerant.

How is private connectivity, Ethernet, better matched to cloud services?

For mission-critical applications hosted at a data center or cloud provider, private connectivity provides secure, high availability and low-latency access.

Ethernet technology, which has been around for 40 years, has become the de facto technology in offices around the world, linking computers and servers together in a high-speed local area network (LAN). A metropolitan area network (MAN) can link computers over a larger area, like between buildings in a metro area, with low latency.

One service provider manages the Ethernet traffic and applications within the private network, resulting in better security and performance. Companies still have the ability to integrate Internet traffic, but the low latency causes remote offices, and even those applications hosted in third-party data centers, to feel like they are on the LAN.

Data centers and cloud providers generally don’t provide dedicated network infrastructure with their cloud offerings, but they are reporting that clients are increasingly purchasing dedicated high-speed fiber connections from separate service providers for accessing these cloud services.

Do businesses leaders understand how important it is to have the right network services?

A recent CIO/Computerworld survey found that 70 percent of IT executives considered reliable, high-capacity bandwidth as a transformational or strategic asset, up from 42 percent two years ago. The majority of respondents believe high-performance connectivity increases productivity and efficiency. It’s clear that business owners increasingly view high-performance network services as a prerequisite for future growth.

Kevin Conmy is a regional vice president of Business Services at Comcast Business. Reach him at (215) 642-6457 or kevin_conmy@cable.comcast.com.

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The employee benefit procurement process, sometimes called marketing, has changed little over the past 25 years. This continues to frustrate many organizations looking for transparency, and potential cost savings, when procuring life, disability stop loss, dental, vision or pharmacy benefit management coverage.

Formal Requests for Proposals (RFP) may travel by email, but the underlying process is the same; insurance carriers simply send an image of the paper proposal that they would have dropped off years prior. The interpretation, presentation and, most importantly, negotiations haven’t changed, says Matthew R. Huttlin, vice president in the Employee Benefits Division at ECBM.

Almost a decade ago, a major insurance scandal in New York uncovered bid-rigging and anti-competitive activity within the opaque procurement process.

“The industry agreed to reform and become more transparent, which they did to some extent, but procurement activity remains a bit of a ‘black box’ process that continues today,” Huttlin says.

Smart Business spoke with Huttlin about the future of employee benefits procurement — a reverse auction.

What problems still exist today?

The process is clearly still antiquated and fraught with opportunities for mistakes. Business owners often negotiate without solid documentation. Broker/consultants, as well as their clients, continue to see proposal mistakes, missed deadlines, inaccurate proposals and presentation revisions.

Also, insurance carriers market to their strengths, as opposed to conforming to client requirements, which may lead to misinformation, more work, mistakes and increased costs.

How can business owners better obtain employee benefit coverage lines?

An online version of a reverse auction, or Dutch auction, cuts to the heart of the problem by introducing technology to the process while maintaining the business owner’s control of the outcome. This type of auction works opposite of a normal auction — instead of bidding up the price of an item, the auction bids the price down.

What are the benefits of this method?

This process is:

  • Prescriptive — RFPs are standardized, specifying the client requirements. Carriers respond using pre-determined plan specifications.
  • Efficient — Carriers get complete, consistent data on which to act with agreed upon timelines.
  • Transparent — Clients receive documentation on every step from the initial offers to the final pricing.
  • Effective — The online system delivers the RFP to more markets, garnering more accurate quotes that are immediately posted for analysis.

How exactly does this reverse auction work?

There are four phases to the procurement. In the RFP development/submission phase, the RFP is placed on a secure website under a standardized format and peer reviewed to ensure accuracy. Once released, carriers are notified to go to the website to obtain all of the relevant information to prepare their proposal.

During the technical evaluation/initial-pricing phase, carriers post proposals into the system for evaluation. The broker/consultant reviews the vendor confirmations and deviations to the requested scope of services, confirming plan design features, alternatives and administrative capabilities. The carrier also posts its initial pricing.

Then, all carriers receive feedback as to their ranking by their initial pricing in the financial evaluation/secondary-pricing phase. Actual rates aren’t shared. Over the course of a set period, usually two days, carriers can revise their pricing offers. Every time a new offer is submitted, all carriers are notified of the new ranking order.

Once the financial evaluation is complete, clients review the detailed results in the evaluation/selection phase. This review can include finalist presentations, site visits, etc. The client maintains full control over the selection process. Business owners aren’t required to select the lowest bid, but rather the carrier that best fits their requirements.

This high-tech approach is an efficient and effective way to handle procurement that provides accurate, transparent and documented results while driving prices down in a timely fashion.

Matthew R. Huttlin is a vice president of the Employee Benefits Division at ECBM. Reach him at 610-668-7100, ext. 1312, or mhuttlin@ecbm.com.

For more information about risk management, visit ECBM's blog.

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It became so quiet, so fast, that you could have heard a pin drop in the conference room at Independence Blue Cross.

Daniel J. Hilferty had been talking to his team about health care reform and the ways it could impact the 7,472-employee health insurance provider in the near future.

“So I’m in the middle of giving my point, and I’m being forceful,” says Hilferty, the company’s president and CEO. “And Paul Tufano, our chief counsel says, ‘Dan, I disagree, and this is why.’ The whole room went silent. He articulated a point of view that when he was finished, I came to realize that my position was flawed, and he was right. I admitted it in front of the group, and we went with his position.”

After the meeting, Tufano approached Hilferty, unsure what his leader’s response would be to his words of disagreement during the meeting.

“As we’re walking out of the room, he says to me, ‘Are you OK with that?’” Hilferty says. “I said, ‘OK with it? I wanted to hug you. This is what we’re trying to build.’”

Hilferty was excited that his team was showing it wanted to help Independence Blue Cross prepare employees and customers for the changes coming to health care as part of the Affordable Care Act.

“We have a strategic goal of being recognized by 2016 as the best performing Blue and a magnet to partner with other Blues in all sorts of business,” Hilferty says. “The challenge is to put a strategy in place that our board of directors and our senior management can get excited about and rally behind.”

This wasn’t about politics for Hilferty. He simply wanted his people to be ready to respond to whatever changes were enacted. Still, while he is careful not to jump too deep into the political fray when it comes to health care reform, Hilferty is a firm believer that something needs to change with health care in the United States.

“If you look over the past decade, the cost of health care in this country is now 16 or 17 percent of the gross domestic product,” Hilferty says. “If the costs are left unchecked, they could be 20 to 25 percent of our GDP. And you have more than 50 million Americans uninsured. Those two statistics alone point to the need for change in our health care system.”

But it wasn’t Hilferty’s job to solve America’s health care problems. His focus needed to be on preparing Independence Blue Cross for whatever changes were on the way.

 

Get prepared

The Affordable Care Act, also known as Obamacare, had become a hot topic of conversation in 2010. Hilferty’s employees, however, needed to be able to do more than just talk about it at the water cooler. It was going to be their job to help customers adapt to the changes reform would bring to health care.

“We started a series of meetings throughout the company that educated us,” Hilferty says. “We had people who became experts and we brought in external experts who would educate us on what reform meant, what we needed to do to prepare for it and what the timelines were to get ready.

“We took all that, broke into subgroups and developed plans and resource allocation through budgeting to map out how we were going to prepare for reform.”

Organizations that effectively adapt to major changes are able to focus on three keys in their transition strategy. The first key relates to corporate culture.

The cultural aspect begins with leaders and their awareness that just because they are the leader, they are not blessed with the right answer for every question.

“We want a feeling within the meeting room and around the organization where everybody feels comfortable with being open,” Hilferty says. “This isn’t about any one of us. It’s about achieving what’s best for our customers. We’re a traditional top-down organization, and we had to make people, regardless of their position in the company, feel comfortable about respectfully disagreeing or offering a different point of view.”

The situation at the meeting between Hilferty and Tufano was a prime example of what Hilferty wanted to see.

“Is it a perfect science?” Hilferty says. “No. But we’ve realized we’re a stronger company because folks are willing to weigh in with divergent points of view. Even though they might not win the day, they tend to get lined up behind whatever the final solution is because they feel like they had a voice.”

You’ll give people that voice by stepping back a bit when it’s a topic you’re not as familiar with as your department experts are.

“You’re the leader in setting the vision, organizing the company and getting everybody to sign off on a strategic and financial plan,” Hilferty says. “I’m not an expert in human resources and certain areas that go around that. So it’s about listening to those who have that expertise, who have that training and who understand the dynamics related to personnel and human resources and understand how to effectively achieve the company’s goals. Be willing to listen.”

The other keys are discipline and communication.

“Be disciplined at making sure you are being honest with yourselves, with each other and with the team about where you are ahead of pace, where you’re having difficulty and where you are spending more than your allocated budget to do things,” Hilferty says. “Do that in a way that is open, isn’t critical and keeps the focus on accomplishing the overall goal.”

 

Be up front with people

As Independence Blue Cross moved into some of the operational changes that would need to be made to be ready for health care reform, it became clear that efficiency would be really important.
“The biggest issue for us as a health insurer is there are new taxes, primarily a premium tax that will cost us tens of millions of dollars a year in additional federal taxes,” Hilferty says. “One of the key things we focused on related to that was using technology to really get the real-time data we needed to work with providers, our members, doctors and other health care professionals. We needed to improve our processes through the use of technology. When you do that, it can have an impact on people.”

It’s that impact, especially when you start talking about achieving workplace efficiency, that can stir fears in employees. Hilferty did not shy away from that possible outcome, but he did offer a plan to help people caught in the middle of the transition.

The plan would begin with offering employees, whose position was eliminated, the training they needed to move into a new position within the family of companies that Independence Blue Cross belongs.

If that new opportunity was available through a company that Independence Blue Cross has agreed to partner with, an effort would be made to “rebadge” that employee to work at the other company.

“We’ll work with the new company and hopefully you can transition to work with them,” Hilferty says. “If at the end of the day, there isn’t a position you’re interested in and there’s not a rebadging opportunity, we want to have a comprehensive effort whether it’s in terms of a severance package or outsourcing professional services that would assist you to advance your career somewhere else.”

Don’t make the stress of change worse by trying to sugarcoat it or by hiding behind false promises that will never be kept. Be upfront.

“It’s not easy to do that,” Hilferty says. “But in order to be competitive and be a really effective organization, we needed to face those challenges and we’ll continue to need to face those challenges.”

 

Reduce your stress

With an issue as complex as health care reform, it’s easy to get lost in all the details, deadlines, facts and figures that come with it. You’ve got to make sure you and your people don’t work yourselves to the point of being unproductive on the job.

“You have to enjoy what you’re doing every day,” Hilferty says. “When your work is finished, go home and get refreshed. Turn your BlackBerry off. Focus on your friends, your community, your pet ­— whatever it might be. When you come back, you’ll be more refreshed and ready to tackle it. We’ve really worked hard over the past three years to build that culture.”

As employees at Independence Blue Cross await the next few months and years for the changes in health care reform and the Affordable Care Act, Hilferty says he’ll stay focused on letting the people on his team at the $10.5 billion health insurer do their jobs.

“I’ve always gone into a position believing that if you have the right culture and you allow people to bring their strengths to the surface and you encourage them to be part of the process using their strengths, people do things that they never thought were possible,” Hilferty says. 

 

Takeaways

  • Prepare for the job.
  • Help people fit in.
  • Avoid burnout.

 

The Hilferty File

Name: Daniel J. Hilferty

Title: President and CEO

Company: Independence Blue Cross

 

Born: Darby, Pa.

 

Education: Bachelor of science degree in accounting, Saint Joseph’s University, Philadelphia; master’s degree in public administration, American University, Washington, D.C.

 

What was your first job and what did you learn?

When I was 12, I was a dishwasher at the Chatterbox Restaurant in Ocean City, N.J. I learned early that if you work well with the waiters and waitresses and you are polite to people, your job gets done more effectively. We’re about collaboration and truly being a leader in health care innovation. This is all benefiting the organization.

 

Who has been the biggest influence on you?

There are two people; the first would be my mother. My father passed away when I was 3. I was the youngest of five. My mother raised and educated all five of us and instilled the value of hard work and sticking together and working together. The second is a man who I had the good fortune of working for. He was the president and CEO of Mercy Health System. His name was Plato Marinakos. He taught me the value of creative thinking and team building.

 

Who would you most like to meet and why?

I mentioned that my father passed away when I was 3. I would love the opportunity to sit down and have a beer with the guy and just understand what made him tick. It would just be fun for me to understand who this guy was.

 

How to reach: Independence Blue Cross, (800) 275-2583 or www.ibx.com

Twitter: @IBX

Facebook: facebook.com/ibx

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