Matt McClellan

How much insurance should you carry for your business’s property?

It’s always a tricky question, filled with uncertainty and with several variables to consider. On the one hand, purchasing insurance limits that are high enough to make you feel comfortable can be quite costly. On the other hand, if your business property is hit with a large loss, you want to know that it will be protected.

“The goal is to make sure that if your company is faced with a loss, you have an adequate limit in place to cover that loss,” says Nancy Hamilton, an account executive with ECBM Insurance Brokers and Consultants.

Even after you have examined all the angles and found a limit you can afford that protects what you need it to protect, you must stay vigilant, because what may be an adequate limit today may not be enough in the future.

Smart Business spoke with Hamilton about how to choose an adequate insurance limit to cover your business property.

Why is it important for companies to choose an adequate limit to cover their business’s property?

In the event of a loss, you want to have an adequate limit to cover the loss. You want to have sufficient coverage and limits to be able to resume operations as quickly as possible.  You want to be able to have your business back in the same position as prior to the loss. Many companies do not have the cash reserves readily available to cover all of the costs associated with a loss.

If you currently have a loan, or are considering one in the future, that is another reason to have an adequate limit in place. Many loan documents require businesses to show proof of proper coverage and limits in order to meet the loan requirements.

How can companies determine an adequate limit for their specific property?

Proper property valuation is critical in determining an adequate limit. There are various tools that can be used to calculate the value of the property to be insured, such as original cost of construction with adjustments for inflation, current construction costs and real estate appraisals.

There are also replacement cost estimators that provide important calculations to help businesses determine their valuation. These calculations are based on the square footage of the building and the building’s construction, including the types of materials used in the construction and type of building such as a commercial office building, manufacturing building, industrial building, etc.

Business income worksheets are used to calculate or estimate your organization’s exposure to a business income loss for the purpose of establishing your limit.

How does a business’s geographical area affect property limits?

Construction costs can vary depending on the geographic area of your business. For example, construction material may be readily available in some areas. However, during a major catastrophe, constructions materials may be in high demand, which can drive up costs significantly. A shortage of supplies in your area may extend the length of time that you are out of business.

How is property valuation determined, and what factors are used?

The value of your business assets needs to be considered. That includes your building, if owned, your business and personal property, as well as any potential loss of income, continuing business expenses and additional expenses you may incur after a loss.

You need to consider how long it will take for your business to get back up and running at the same level as prior to a loss.

What time frame should be considered when determining loss of income?

You need to consider your worst-case scenario as to the length of time to be back in business. Items to consider are type of loss, extent of loss, and supply and demand for labor and materials. The longer it takes for your business to get back up and running, the more costs you are going to have associated with the claim.

How can companies with multiple locations determine an adequate limit for their properties?

Companies with multiple locations can use one blanket limit or loss limit to cover all locations.

There are several factors to consider when determining an adequate limit for multiple locations. Are your locations in close proximity of each other? If you have a large concentration of locations in the same geographical area, you could have a significant impact from a single event. However, if your locations are spread out, then the risk of a single event impacting multiple locations is not as likely.

Establishing an accurate value for each location will help you determine the maximum possible and probable loss. Once the value of each location is determined, you can select a blanket limit or loss limit to cover all locations.

How often should a company have its locations evaluated?

It is recommended that the valuation of a business’s locations be reviewed at least on an annual basis. Some factors can change over the course of a year, and those changes need to be reflected in a new limit. Inflation and construction costs, in particular, can have a huge impact on the valuation of a business.

Nancy Hamilton is an account executive with ECBM Insurance Brokers and Consultants. Reach her at (610) 668-7100, ext. 1263, or

The importance of disaster recovery has not changed. However, the term itself and the impact a disaster can have on your business has changed dramatically, especially now that businesses rely so heavily on technology.

“Not too long ago, a disaster could simply be defined as inclement weather,” says Joe Hovancak, manager, Enterprise Ethernet Division, Comcast Business Class. “Today, the term takes on a whole new meaning.”

Smart Business spoke with Hovancak about the changing field of disaster recovery and how to be ready when disaster strikes.

How has disaster recovery changed and how can a business develop a recovery plan?

Today’s businesses are not limited to just natural disasters, such as floods, storms and fires. There are also man-made disasters like computer viruses, sabotage, negligence, software failure, power outages, gas or chemical leaks. Those factors all have to be encompassed in disaster recovery.

Conducting business today demands a much greater reliance on technology and communications solutions. Being without either of them is significant. That is why disaster recovery plans are now a fundamental part of business to protect a company’s sensitive information and production environments from catastrophic outages and ensure that your organization stays up and running, no matter the situation.

Businesses should start by identifying the business processes that are the most critical. Then, they must determine what the impact to the business would be if those processes were interrupted or failed. For example, how much would it cost your business if you experienced an outage? You have to consider lost revenue, time to recover, any impact to your reputation and your brand and, depending on your industry, even financial penalties for noncompliance with regulatory requirements such as HIPAA, PCI and SAS70 Type II.

Once you understand how a disaster can impact your business, then you can prioritize your business processes and begin to identify the means to maintain your uptime. So if you lose utility power, do you have a contingency plan in place to failover to a back-up power source? If you lose communications do you have an alternative communication provider contracted to re-route traffic? If you experience a denial-of-service attack, do you have a back-up and recovery solution in place to recover your data?

What steps should companies have as part of their disaster recovery plan?

Develop a business continuity plan to address events that cause disruption to your business. Review and revise the plan annually as changes to the business develop. Designate a company disaster recovery coordinator to develop and implement a corporate response and recovery plan along with a current contact list of all team members. Then, distribute that list to all employees. Outline how your critical resources, e.g. power, telecommunications and computer equipment, can be restored. Again, it’s crucial to identify your critical business services to include:

  • Communications — voice and data
  • Facility — power, cooling and security
  • Administrative, product and customer support

Ensure that you have a plan in place to keep those critical services functioning. Identify an alternate work location and administrative procedures, and media communications.

Some people create a recovery plan, but then never look at it again. You have to update, test and validate the plan regularly to make sure it works. If you have an alternate carrier to cover your communications, test the failover on an annual basis to confirm they can support current bandwidth requirements.

Make sure all departments are informed about the plan and receive necessary training.

Why is backing up communications important?

As leaders in the industry, Comcast’s Doak Field, senior director, Enterprise Fiber Services, and Steve Schmitz, vice president of Business Services, drive the message of delivering superior customer experience and assisting customers with growing their business. If your communications were interrupted or if your data were compromised, can you deliver superior customer service, achieve your growth  goals and recover critical files and applications? Not backing up your communications and data can adversely impact many parts of your business, from sales to customer confidence.

What can be done to prevent a complete shutdown of communications?

You have to develop, implement, update and test your disaster recovery plan on an annual basis to avoid the loss of communications. Understand your carrier network. When looking at a backup solution, make sure you invest in a true redundant network connection. For instance, your main network carrier utilizes a Tier 1 provider and your backup carrier is a company that may brand itself as a redundant carrier, but its network rides on the same Tier 1 backbone and it resells services. You may think you are on a redundant path, but if a disaster occurs and the Tier 1 provider is affected, both connections will go down.

Make sure your primary and failover connection is from a true redundant Tier 1 provider. Many companies still rely on legacy technology, but today everyone’s business is growing faster than the speed of T1s (1.544 Mbps). Today, private fiber optic networks are providing the reliability, security and faster speeds that companies are demanding.

When looking for a partner, make sure they provide high network availability, minimal latency and low packet loss, and that they have a self-healing, redundant core network architecture. Then, if there is a break somewhere there is a true redundant route to use. Also, look for manageable services that grow with your business and provide bandwidth in flexible increments from 10 Mbps up to 10 Gbps. And one of the most important elements is to ensure that your communications partner owns and operates their network from the first to the last mile. One great place to look for true network redundancy is Comcast Ethernet Business Services.

Joe Hovancak is a manager of the South Florida Enterprise Ethernet Division with Comcast Business Class. Reach him at (954) 514-8650 or

For 30 years, Crawford Media Services, Inc. has offered premium post-production services and media management solutions to domestic and international clients. Turnkey solutions for television, film, interactive media and digital archival are only a few of the company’s specialties.

In January, the company moved to a new 80,000-square-foot facility with eight 3D-capable editing and graphic suites, a 40-seat Dolby-certified theater for screening, mixing and color correction, as well as several state-of-the-art editing and audio facilities. While the facility allowed the company to stay at the cutting edge of its field, it required more from its telecommunication provider.

“For our business to thrive in its new location, we needed a high-speed, high-capacity fiber optic connection that would allow us to work efficiently with large files and a provider that had the communications backbone to support the tremendous amount of data we process on a daily basis,” says Matthew Kraft, CIO of Crawford Media Services, Inc. “And we needed a diverse network for redundancy, because preventing downtime was one of our largest concerns. It was a tall order.”

Smart Business spoke with Kraft about how his company found a solution that worked.

What were the challenges that Crawford Media was facing?

The main challenge we were facing was that we needed a provider that could meet our increasing technology needs. We had recently separated from our parent company, and we were moving into a new building. Our business requires a large amount of bandwidth, and it depends on reliable high-speed Internet access, so having the right technology in place is crucial for the business’s success. So, we were looking for a service provider that was not only robust in terms of coverage, but was able to deliver us Ethernet private lines, which is a core of our business in the metropolitan Atlanta area, at a very cost-effective and consistent price point. The provider we were looking for would have to check not only those two boxes, but also would build in redundant and diverse paths into our environment to prevent downtime, because downtime is the enemy of our business.

How did Comcast Business Class help address those needs?

Comcast Business Class was ideal in that they delivered on all three of our business needs with their Ethernet Private Line solution, and that is why we selected them as a service provider. They built out our fiber infrastructure and gave us access to multiple high-speed, high-capacity 10 Gbps lines, and provided us with very strong coverage in the metropolitan Atlanta area for our Ethernet private line circuits.

The diversity of their network infrastructure also provided the redundancy we were looking for in a carrier.

How did those particular changes help make running your business better?

We were moving into a new facility, so it was crucial to the success of our present and future business that we build out a strong connectivity base to move files around. That’s important because the backend operation of our business is the ability to do that. That’s where Comcast Business Class’ Ethernet Private Line solution was key. We basically built a new facility and made Comcast Business Class the centerpiece of that from a fiber delivery perspective.

Why are strong coverage and limited downtime important factors to consider?

We have the need for strong coverage because we serve data center clients in the metropolitan Atlanta area. Because of security reasons, we have to have private Ethernet lines to them. Dedicated Internet Access (DIA) connections, even with Layer 2 VPN architecture, are usually insufficient. We have a need to move large files to our clients, and Comcast Business Class has very strong Ethernet coverage. That was another important deciding factor.

We operate a data center business in addition to a post production business. Downtime costs us money because it costs our clients money. There is a lot of competition in the post-production business, so if you have a reputation of being down often and not being able to deliver files and content and you have directors and producers sitting around waiting for files, then people are not going to want to work with you.

In all aspects of our business, downtime is death. That is why we selected a provider that could meet strong service guarantees and had the backbone to do so.

How did you determine the right solution?

I met with enterprise account executives at Comcast Business Class and other providers and told them what I needed: diverse paths that are independently operated from multiple head nodes, protected fiber build out, and X amount of initial capacity.

So we priced the solution out, factored the solution into what I needed and we built it out over the course of several months.

How long did the build-out process take, and what were the steps involved?

We started the conversation and discussions at a regional level, then those discussions moved up to the corporate level. It took about two or three months to finalize the agreement and it took about another 60 to 90 days to finalize the build out. So, all told, it was a six- or seven-month process.

Matthew Kraft is CIO of Crawford Media Services, Inc. Reach him at (678) 536-4874 or

As retailers consider ways to control cost and increase revenue, many are achieving those goals by creating a captive insurance company.

Captives exist to underwrite the risk of their parent and affiliated companies, and can provide many benefits to retailers, says Adrian Richardson, managing director of Aon Risk Solutions, Global Risk Consulting.

“The concept is not new,” Richardson says. “Companies have had their own insurance companies financing their risks since the early 1900s. The idea was considered alternative then but has become a mainstream part of how insurance programs are put together.”

Smart Business spoke with Richardson and Kevin J. Pastoor, CPCU, managing director of Aon Risk Solutions, about how captive insurance companies can help retailers, as well as those in other industries, control costs and increase revenue.

Why should businesses consider joining or creating a captive insurance company?

Businesses should consider joining or creating a captive because captives can be an efficient methodology to finance their retained loss costs. The first step for a company that is considering moving from a guaranteed cost program is to determine whether it makes sense to retain risk.

Do you have a frequency of losses that is reasonably predictable? If so, it’s unlikely to  make sense for you to dollar swap with the insurance market. Paying $1 in premium and getting, say, 60 cents back from an insurer in paid losses might not be the most efficient way of insuring your risk.

Once you have a captive structure in place, you can build from an initial platform and consider what else to do with that insurance structure. How can you expand the use of the captive to not just simply finance retained loss costs in an efficient manner? How can you start creating some kind of revenue growth?

What are some ways retailers are expanding the use of their captives?

Many companies provide warranties or guarantees to their products. These  might be part of a program in which both administration and risk is assumed by a third party.  The opportunity could exist where these programs can be restructured so your captive insurance company accepts the risks associated with the warranty or guarantee.

If a retailer is using a third-party  warranty company to administer and underwrite the entire program, then there is no risk to the retailer. However, if there is a cost to the customer for the warranty, the retailer may have less control on customer experience and the whole revenue stream. In addition, the risks associated with the revenue stream are transferred to a third-party provider. It could make sense for your captive insurance company to take on that risk, control the program and customer experience more tightly and capture some of the profits being made by the third party.

Another way retailers are expanding the use of their captive insurance company is through the provision of supply chain insurance. Most retailers have several suppliers providing them with materials and goods, and as part of that cost of supply, suppliers have their own insurance programs. In many instances, the programs are smaller than the retailer’s. Retailers are therefore putting together suppliers’ risks programs and financing them through their captive. That method can remove some of the insurance costs to the supplier.

How can you tell if using a captive is the right choice for your company?

There are trigger points. How comfortable are you managing retained loss costs? Are your business’s retained loss costs at a level where you can absorb some of the frictional costs associated with a formal structure?

A captive structure is a formal mechanism to finance these risks. You are creating an entity or becoming part of a legal entity that is financing these risks, so there will be frictional costs associated with it. Understanding frictional costs and whether your retained loss costs are of the size that makes one of these options worth pursuing is a key aspect to this decision.

How can a risk consultant help companies make that decision?

A risk consultant will look at your program design and try to optimize it based on risk transfer costs and analyzing your loss costs. The consultant will do this to find the optimal level between risk transfer and risk retention.

You also should determine the best way to warehouse those retained loss costs. Can the company pay it from revenue? Do you want to set up a formal vehicle to finance those loss costs? Do you have subsidiaries or legal entities that all pay different premiums? Can you consolidate these costs through a single captive structure? These are some of the issues to examine with a risk consultant.

Review your options and the realistic costs. There might be collateral requirements, such as fronting costs. I recommend working with your consultant on a comparative exercise to determine whether a captive insurance company would help you derive the most efficiency in costs.

How can a company determine which type of captive insurance company to use?

There are a spectrum of captive structures, ranging from the wholly owned, single-parent captive in which a single entity owns 100 percent of the risk, through group-owned captives with multiple owners pooling their risk.

The single-parent captive is likely to be for those businesses that have taken the step of risk retention and are already retaining significant loss costs. Their costs are the size that it makes sense for them to create a full, wholly owned captive.

As a baseline, for a single-parent captive, annual operational costs are likely to be in the region of $75,000 to $100,000. You will want to absorb that cost within the financing of your retained loss costs. If your company is not large enough to take frictional costs on board of a single-parent captive, it might be opportune to consider a group captive scenario or perhaps other related structures, such as a cell company.

Adrian Richardson is managing director of Aon Risk Solutions’ Global Risk Consulting. Reach him at adrian. or (212) 441-2020. Kevin J. Pastoor, CPCU, is managing director of Aon Risk Solutions. Reach him at or (248) 936-5346.

The relentless pace of business automation and Internet commerce has led to a staggering increase in the amount of data that businesses need to store. And that growth has created a corresponding need for businesses to expand their IT capabilities.

However, a direct investment distracts from your core business and can cost up to $10 million for buildout and $5,000 per square foot for operational overhead. That’s why many companies are opting to outsource their IT through colocation.

“Colocation is all about economies of scale, focusing on your core competencies as a business and letting someone else handle the data center aspect,” says Joe Sullivan, senior director, colocation product management with SunGard Availability Services. “From a financial perspective, it allows you to take a large cash outlay or capital expense and convert that into an operating expense.”

Smart Business spoke with Sullivan about how to decide if colocation is right for you, and what to look for in a colocation provider.

Why are companies considering colocation?

The No. 1 reason companies consider colocation is to avoid making IT a core competency of their business. The second major reason is to gain the economies of scale you get from sharing a facility with others. Instead of having to build and maintain your own facility, you can leverage another company to do it for you and share those costs with other customers that you might not even know.

Some companies already have their own data center, but their current facility can’t keep up with their business’s growth. Adding a second site to handle the growth is one reason companies consider colocation. Disaster recovery planning is another reason. Companies may need an alternate location to protect against infrastructure downtime, either from natural catastrophes or hardware failures.

What are the key factors to consider when picking a colocation provider?

There are five key factors. First is how much power a customer needs, not only today, but in the future. The business is based on power costs, as well as the cooling needed to cool that power. That drives a large portion of the cost structure and facility capacity, so it’s the No. 1 thing providers ask customers.

The second factor is environment size. Do you need a cabinet, two cabinets, or do you need a cage to store your data? Think of cabinets and cages as storage lockers and apartments. You might only need a locker, or you might need an apartment, depending on how much you have. Basically, a collocation provider rents highly powered, highly cooled and fully redundant storage lockers and apartments.

Geographic location is important, as well. Many customers like to be close to their facilities. They want to touch and feel their data and make all the changes themselves. Others want their provider to be as far away from their main facility as possible, because their main concern is disaster recovery. Those customers ask about colocation facilities in St. Louis, Denver, Phoenix and Dallas, because those sites don’t have as much natural disaster activity.

Fourth is connectivity. You may call it bandwidth, telecom or fiber, but it’s all connectivity. This is important because you are going to need to get your data out of those storage lockers or apartments to somewhere — either back to your facility or to your customers through the Internet.

Last, what services do you need on top of colocation? Some companies just provide space, power and connectivity. Others provide services such as data backup, storage, security monitoring and intrusion detection on your servers, and services such as cloud applications.

You need to make a decision up front on whether you may want those services at some point, because if you are outsourcing your colocation, you may end up outsourcing other services, as well. If that’s the case, you want to make sure you choose a provider that has the capability to do that. The services you need on top of colocation today or in the future should be a big factor in your choice of provider.

What questions should you ask a potential provider to determine if it can meet your needs?

What facilities in the geographies we are interested in have the space and power that we need? That’s the first question. Because you’re not going to care if a provider has 55 locations and only three of them are in the geography you want and none of them have space and power available to meet your needs.

Next, get into resiliency questions. Typically, customers will look for companies that have fully redundant power systems. At every point in the process of the power coming from the utility company, through two feeds into the building, hitting two power plants, one system should be able to fail over to the other. In the event that anything in that chain fails, you have fully redundant systems.

That is a large differentiator between providers. Some are fully redundant and some have single points of failure. What the customer needs to determine is whether those single points of failure are acceptable for the applications they are running and for the price discount you would get.

Then you get to pricing. Not all prices are created equal in colocation. You might not be getting the same thing, even if it sounds the same. You might have two providers, one who advertises a cabinet for $1,000 and the other for $1,500. It may seem like the $1,000 cabinet is the better deal, but the $1,500 cabinet might give you three times the power density, which would make it a better deal.

You should ensure transparency in pricing from a provider, and always make sure you understand what’s included and what’s not included.

Joe Sullivan is senior director, colocation product management with SunGard Availability Services. Reach him at (303) 942-2937 or

The process of discovery — when the parties involved in litigation exchange information relevant to the case — has adapted to fit the way business is done today. Is your company ready for e-discovery?

“Times have changed,” says Melissa Evans, an attorney with Jackson Lewis LLP.  “We are not living in a paper world any longer. Instead of office memos, you have e-mail. External communications that once would have been sent by U.S. mail are transmitted by e-mail. Even the fax has taken a backseat to e-mail.”

Traditionally, discovery in litigation entailed consulting paper documents that typically were segregated into labeled folders and file drawers. With electronic information, particularly e-mail communications, that level of file organization is rarely found. The combination of an increased volume of data with a failure to establish an organized system for file maintenance can potentially lead to problems if a company is faced with litigation.

Smart Business spoke with Evans about the challenges of e-discovery and what employers can do to prepare themselves for a potential lawsuit.

How is e-discovery different from traditional discovery?

The critical difference between traditional and e-discovery is volume. We retain information electronically in far greater volume than we ever would dream of doing with paper. This includes a substantial amount of information that is of no value to the business or to any litigation involving the business, such as e-mails announcing employee birthdays.

These files often continue to linger on your system. Electronic information is not like a piece of paper that you can toss in the trash. Just because you hit ‘delete’ on your keyboard doesn’t mean the file is gone. Another difference is the ease with which electronically stored information can be altered, which makes it difficult to maintain its integrity.

What can an employer do to prepare for e-discovery?

Every organization should have a standing document retention policy that governs how long documents are maintained and how they are maintained. Most policies address the former, but not always the latter. How the documents are maintained can become critical if the organization is taken to court.

Organizations keep information for their own purposes. But when you hold on to information longer than required by law or necessary to business functions, you create an ongoing ordeal for yourself if you should ever be sued. The costs of e-discovery can overwhelm litigation budgets. The best way to streamline the process is by having a document retention policy and enforcing it. Depending on which federal, state and local laws it must comply with, every organization faces certain obligations with respect to the preservation and retention of information. There are statutes of limitations on how long certain documents have to be retained, and those should form the basis upon which a company implements a document retention or document preservation and destruction process.

How can employers determine what information should be retained?

In an ideal world, electronically stored information (ESI) would be labeled and stored with the same precision traditionally applied to paper records. So if you send an e-mail, the subject line should be used not only to notify the recipient but also as a label for that information so it can be sorted and stored appropriately, creating a virtual filing cabinet.

ESI is a big problem because it is not until you are served with a complaint that you know with certainty that litigation is coming. The obligation to preserve potentially relevant information, both ESI and paper, is triggered when litigation is ‘reasonably foreseeable.’ This creates a subjective assessment of when the duty to preserve arises. For example, if your business manufactures a mechanical pump and you receive calls from people saying your pumps are exploding, a court might say it was reasonably foreseeable at that point that a products liability claim was coming. However, it is more likely that the duty would be triggered after a formal complaint is filed, but not necessarily a court complaint.   Once you get notice from a federal or state agency that a claim has been made, your duty to preserve is likely triggered.

What consequences do employers face if potentially important evidence is unavailable for e-discovery?

While a reasonable document retention policy will protect an organization from sanctions for spoliation — the term for destruction of evidence — the failure to suspend document destruction after litigation commences can lead to a host of issues, including entry of judgment against the defendant. Thus, if the defendant is found to have willfully spoliated evidence, the courts can decide the case without the presentation of evidence by the defendant and an adverse judgment may be entered.

How can employers avoid that outcome?

When an organization receives notification it has been sued, the first step is to notify the IT department so that attempts can be made to avoid loss of information. Many organizations have set up an automatic purge of e-mails. The computer designates information for destruction based on the date it was received. There is no human eye assessing the value of the data, or if it is very important for the business or for potential litigation. As a result, you need to suspend those automatic purge functions if you receive a lawsuit, or even just the threat of a lawsuit.

Simply receiving a letter can be sufficient to trigger that ‘reasonably foreseeable’ clause. Waiting too long to suspend the policy allows documents to be lost because you didn’t take the appropriate steps to preserve them for e-discovery. The ultimate sanction is triggered by willful violation, but courts have given severe sanctions in several cases in which the loss of information was due to simple negligence.

Melissa Evans is an attorney with Jackson Lewis LLP. Reach her at (412) 232-0135 or

Friday, 30 September 2011 20:01

How to take advantage of trade cycle financing

Interest rates vary throughout the world, and companies that do business internationally can use this knowledge to their advantage.

“Buyers and sellers really need to know the interest rates in the country of their customer and the impact on their trading partner’s cost of doing business,” says Craig Schurr, a senior vice president and the International Banking Division Manager with FirstMerit Bank. “As cost of finance directly impacts cost of purchase,  sellers really need to know their customer’s cost of borrowing and if financing is available to them. When armed with that information, you can create a partnership with the companies with which you do business  and use the overall financial concepts of the trade cycle to benefit one another.”

Smart Business learned more from Schurr about how companies can take advantage of trade cycle financing in international business.

How does trade cycle financing work for importers and exporters?

From the moment an exporter receives an order until the exporter gets paid for the order, someone is using cash to finance that period of time. That is the concept of the financial trade cycle. Everyone knows the old saying that time is money. The trade cycle is all about time, so it is really all about money, too.

If I get an order as a seller on the first of the month and I don’t get paid until the 30th, I’m financing that 30 days with cash that I have in my company, and I know intuitively I’ll pay some interest for that money (because money is not free). Or if my company is short on cash, I may borrow from the bank.

So there is a financial impact from the moment the buyer places the order with the seller until the seller gets paid. And once the buyer pays the seller, the buyer begins its own financial trade cycle.

For instance, imagine I run a steel company. I buy coal from a coal company to make my steel. My financial trade cycle lasts until the steel is manufactured, sold, and I get paid. Then I can consider my trade cycle for the coal complete.

While financial trade cycles exist in all buyer seller business they are more protracted for companies doing business internationally and much more financially impactful. So to summarize, an exporter’s trade cycle starts the moment it gets an order and it ends when it gets paid. For importers, the trade cycle begins the moment it pays and lasts until it can convert what the seller sold it into something that makes it money.

How can importers and exporters benefit from the trade cycle?

An exporter needs to finance its trade cycle, and needs to take into account what its buyer is facing. Let’s focus on an exporter in the U.S. selling to India, where interest rates just went up and are much higher than in the U.S. As an example, a U.S. company can currently borrow working capital from the bank at a prime interest rate (currently 3.5 percent)  to manufacture goods. However, the cost of borrowing for the company in India could be upwards of 15 percent.

The U.S. company has a 3.5 percent cost of finance in its trade cycle until the company in India pays for its purchase. Once this happens, the purchasing company has a 15 percent cost of funds to take into consideration until it converts its purchase into something that generates cash to complete its trade cycle.

If you, as the seller, don’t want to incur that 3.5 percent interest rate, you could ask the buyer for cash in advance and you have no cost of finance; your customer absorbs all of it. However, that may be an unprofitable scenario for the importer as now it is financing your trade cycle with expensive 15 percent cost of funds. If I can borrow at 3.5 percent as the exporter, and I know my buyer is paying 15 percent, I wouldn’t ask for cash in advance because it wouldn’t be very customer-friendly. Instead, I may work with the buyer so we could somehow employ my 3.5 percent to finance our trade cycle. That is one way buyers and sellers who work together can take advantage of the trade cycle.

Now let’s say I am a U.S. importer, and I’m buying from India and my cost of finance remains 3.5 percent and the seller’s cost is 15 percent. I know fundamentally that if they’re doing the same thing I would do as a seller, they’re embedding the cost of their financing in their price. I intuitively know the price I am being quoted by the seller includes a 15 percent cost of financing. So I may suggest to the seller that, if I pay with cash in advance, I should get a discount on the price because I’ve saved the seller the need to borrow from the bank.

Both buyers and sellers stand to benefit from understanding how different interest rates impact trade cycle financing. If you can work with your trading partners to understand the borrowing rates of the company you’re doing business with, you can work within the trade cycle as a business partner, instead of just in a simple buyer/seller relationship.

Where can companies find international interest rates?

There are at least two places companies can look. Visit the foreign currency exchange market website ( for a world interest rate table, which has the current interest rates of central banks (what banks charge other banks), and also has a summary of 23 major countries listed by region.

Another interesting and informative source is the Central Intelligence Agency ( The CIA collects extremely useful business data. There is information available for businesses in every country in the world, including the rate at which companies borrow within each country. Companies in the U.S. should take advantage of these resources.

Craig Schurr is a senior vice president and international banking division manager with FirstMerit Bank. Reach him at (330) 384-7325 or

Thursday, 01 September 2011 14:02

How to approach ethics in the workplace

For many companies, the issue of ethics is pushed to the back burner while executives focus on more tangible business concerns.

However, there are many reasons that employers should take ethics seriously, from exposure to costly lawsuits to allowing a workplace culture in which no one knows what is and isn’t allowed.

“Ethics and employment practices are interrelated and attention to both should be paid by employers of all sizes,” says Amanda Shults, chief marketing officer for Clark-Theders Insurance Agency. “Employers must understand their exposures and options to manage the risk.”

Smart Business spoke with Shults about how to approach ethics in the workplace and why ethical behavior matters.

How important is the issue of ethics in the workplace?

There is a difference between acts that are unethical and those that are illegal. Employers must determine how those types of acts will be tolerated within the organization.

Many factors must be considered when running an organization: preparing budgets, hiring, creating procedures, etc. Striving for high professional and ethical standards in all business activities and in its stakeholders needs to be at the top of that list.

It is very important for business owners to keep in mind that an emphasis on high ethical standards and the ability to exhibit best practices go hand in hand.

How can employers ensure that employees take ethics seriously?

Employers should take steps to create a workplace environment that promotes a culture of support and respect for all. That includes having written ethics standards or codes of conduct that are read and signed by each employee annually.

Acceptable ethical practices may vary from one person to the next, so employers should give clear instruction of what is expected when an employee discovers unethical behavior, including whom they should contact and how it will be managed. Some employees may feel uncertainty, or even fear, about what to do in the event that they discover unethical behavior within the company. Employers should provide multiple avenues, some anonymous, to report unethical happenings in order to prevent that uncertainty and fear.

Another way to promote the importance of ethical behavior is by providing meaningful and relevant training on the importance of ethics and how to handle ethical dilemmas. It is sad but true that most employees will experience some type of unethical act. Because of this, it is important to offer resources for employees who need advice on how to handle situations that may arise.

What are some strategies to protect a business from unethical behavior?

In an ethical workplace, employers must consider the impact of their employment practices, as lawsuits in this area should be a major concern for employers of all sizes. You can’t manage the risk if you don’t understand your exposures and options.

The three most common employment-related lawsuits today are wrongful termination, discrimination and sexual harassment. Unethical behaviors such as intimidation, harassment, bullying, bribes, theft and Internet usage can lead to these types of lawsuits.

Two solid strategies that go hand in hand to protect your business are comprehensive employment practices that include ethical standards and employment practices liability (EPL) insurance, a policy that defends your company against a suit or that pays the claim should you lose.

Emphasizing ethical behavior through communication and education will allow employers to rely on the skills and abilities of their people to make the right decisions.  Although workshops, training, or insurance policies targeting employment issues may seem like another expense, they can ultimately reduce your overall cost of doing business by preventing an allegation, suit or claim.

What can employers do to change the culture if ethical behavior has not been a priority?

Communication is vital in promoting ethical behavior in the workplace. An employer could begin with a simple position statement about the significance of ethical behavior. Once everyone hears that message, the company can begin to look at its current practices and identify areas that need attention or that may already promote ethical behavior.

Next, determine resources that you may have to assist in helping you develop best practices that promote ethical behaviors, both internally and externally. The more people who are engaged in the process, the more likely it is that there will be enthusiasm and appreciation surrounding the efforts to create an ethical environment. In addition, rewarding ethical behavior and punishing unethical acts consistently is recommended for effective ethical practices.

If an employer is comfortable doing so, encourage employees to share ethical dilemmas they encounter, the options and consequences they considered, and the solution they chose. Ask if they are satisfied with their decisions, or whether their choice keeps them up at night.

Finally, lead by example. Actions are stronger than words, and your employees will take note of your behavior.

What results can employers expect from implementing these strategies?

As with the old saying, ‘Birds of a feather, flock together,’ organizations that promote high standards of ethical behavior may experience better recruitment and retention of the best people. Additionally, these changes may strengthen the reputation and brand of the organization, promote open and frequent conversations on ethical issues, support and empower employees, align daily work activities with the overall purpose of the company and ultimately cultivate a more satisfying work environment for all.

Amanda Shults is chief marketing officer at Clark-Theders Insurance Agency Inc. Reach her at (513) 644-1278 or

Thursday, 01 September 2011 11:13

Innovative solutions for higher education

Running a large educational institution poses a unique set of challenges. From the duty of care requirement, to campus safety, to bedbugs in the dorms, school administrators have to keep track of a lot more than just the average student’s GPA.

“One of the issues regarding colleges and universities is they are very complicated organizations,” says Anne Mulholland, director of Aon Risk Solutions’ Higher Education Alliance. “They tend to be very focused on institutional responsibility. Most complex entities tend to be that way because there are so many aspects to control.”

Smart Business spoke with Mulholland; Angela Tennis, COO of Aon’s Higher Education Alliance; and Joe Perry, vice president of Aon Risk Solutions, about how new solutions available to administrators are improving safety for colleges and universities.

Why are educational institutions particularly susceptible to risk?

Schools have a lot to consider. There are now students coming to school with mental or developmental issues who never would have been able to attend school in the past, but now can because of new medications.

Alcohol is still a huge issue in educational institutions. Some schools have nuclear labs, 100,000 seat arenas, or students traveling abroad, and each of those areas pose different risks.

What types of risks should concern those involved in higher education?

Student safety is a risk that everyone needs to be aware of. Consider the past 12 months, with man-made disasters such as the spring uprising in the Middle East, or the Japan earthquake and tsunami, and the resulting potential nuclear disaster.

When parents send their child to school, they trust that the college or university will meet its duty of care and take care of that student. They expect that if their child travels abroad that the college will have thought of any contingencies that may come up. Schools often turn to risk management companies to help answer that duty of care.

It’s difficult to underestimate how seriously schools take this, because the single biggest nightmare is having a student injured or killed.

When you have a mass loss, like a campus shooting, it can hang over the institution for a long time, and not just from a legal standpoint but from a cultural standpoint. It’s a malaise that’s hard to shake for years, and it carries a reputational risk, as well. Schools have done a lot of work to help make their campuses safer and more capable of being locked down.

Also, products such as Aon WorldAware can help keep people safe when they travel internationally. The program is an online country information service that tracks not only students but faculty and administration as they travel abroad. It is a coordination of whatever insurance the school has combined with the resources of the program.

The system does pretrip planning and training regarding culture, safety, political environment and recommended security procedures. WorldAware responds to both small issues, like a lost passport, and large issues, such as medical evacuation.

What are some other higher education risk issues?

Another issue is bedbugs. They can be a major headache for anyone in the hospitality industry, but specifically in dormitories. Typically, there is a heat process to remove them, or sometimes you’re just told to burn all your clothes.

Aon has developed a joint initiative with the leading pest control provider, which uses a methodology that freezes the affected area and reduces property damage. It also reduces the time necessary for rooms to be out of commission. A major residence hall infestation can cause the residence hall to be unavailable for months, creating quite a juggling act for the university.

How can administrators facing these risks manage them?

Enterprise risk management is a way for them to think of their risk, because it is a less silo-focused approach. It has the benefit of trying to capture all the risks the university faces in one overall analysis. One of the biggest questions is, ‘How do we know what we don’t know? How do we know what’s on the horizon?’

ERM is a good paradigm for organizations to use to interpret their current risk profile and what new risks may be coming at them. Then they can build a business plan to avoid it, mitigate it or deal with it.

Can other types of organizations use this approach to risk?

It is a framework that is useful not just for colleges and universities but for any complex organization. There is no one-size-fits-all approach to ERM.

ERM is not an insurance product; it’s a way of thinking about risk. It’s a major way to look at risks with a comprehensive focus.

Your risk management partner can help develop strategies to avoid the perception of ERM being an add-on, or something a consultant dreamed up. To work properly, it has to come from the culture itself, so it has the best chance of being successful. The analysis and implementation strategy have to fit the organization’s culture, or it’s just not going to work.

Anne Mulholland is director of Aon Risk Solutions’ higher education alliance. Reach her at Angela Tennis is COO of Aon Risk Solutions’ Higher Education Alliance. Reach her at Joseph J. Perry is vice president at Aon Risk Solutions. Reach him at (248) 936-5272 or

If your company becomes involved with a pollution-related claim, there is a good chance your liability insurance will not cover it. There are several steps you can take to determine if your company needs extra coverage for such claims.

“First, a company has to establish whether there is any pollution coverage in its policies, then it must find out what that coverage is,” says John P. Azpell, AVP, director — client services at ECBM Insurance Brokers and Consultants. “Then, the company will have a better idea of what standalone coverage might be worth pursuing.”

Smart Business spoke with Azpell about how much pollution coverage is written into your current policies, and what types of exposures fall under this coverage.

How can a company determine whether it has pollution coverage in its standard policies?

The obvious answer is to contact your broker for a full review of the coverages available under the standard commercial insurance policy. For instance, the basic unendorsed general liability policy excludes pollution in its entirety, with very limited exceptions.

Those exceptions generally have to do with the release of pollutants from a heating, air conditioning, or dehumidifying system, or the release of pollutants from a hostile fire. ‘Hostile,’ in this case, means not a furnace but an accidental fire on the premises. If that fire causes the release of pollutants into the ground, then that resulting property damage and bodily injury will be covered. But the actual cleanup of pollutants is typically not covered in a standard general liability policy.

Why is it important to check your company’s policies for pollution-related coverage?

An unendorsed policy has those limited exceptions, but many insurance carriers add a total pollution exclusion endorsement to the policy, which can eliminate even those exceptions for coverage. Business owners should look for those total pollution exclusions, which can come in more than one format.

There is a total pollution exclusion that does exactly what it sounds like -- excludes all exceptions. Another is a total pollution exclusion with a hostile fire exception. That endorsement will exclude everything, even the release of pollutants from an air conditioning system, but it will cover pollutants from a hostile fire. The bottom line is that the business owner has to be aware there is a very good chance that its insurance carrier has added an endorsement to the general liability policy that further narrows, or even eliminates, any exception to the pollution exclusion.

What about pollution coverage in automobile insurance?

Commercial automobile policies also have strict pollution exclusions, with some exceptions. For example, if your vehicle is involved in an accident, and gasoline or hydraulic fluid that is used to operate the vehicle escapes as a result of the accident, coverage typically would be provided. However, if you are in the business of hauling gasoline or hydraulic fluid in a tanker, for example, that escaped pollutant would be excluded from the standard unendorsed automobile policy.

If you are a fuel dealer, gasoline supplier, or similar chemical company, there is no automatic coverage in a commercial automobile policy for the product you’re hauling. However, there are endorsements that can extend coverage for such operations. Only the cargo you’re hauling is excluded from the standard commercial automobile policy. If one of your insured vehicles was involved in an accident that resulted in the release of chemicals or gasoline being hauled by the third-party’s vehicle, the resulting claim would likely be covered by your commercial automobile policy.

What type of pollution coverage is typically written into property policies?

Commercial property policies generally contain very limited pollution cleanup coverage on your own insured site. Coverage is generally limited to $10,000 and must result from a covered loss. So it doesn’t provide coverage if your oil tank is leaking into your ground, but if a fire or some other accident that was covered under your policy occurred and caused a pollutant release as a result of that covered loss, the commercial property policy would provide up to $10,000 in cleanup coverage. Many carriers would consider increasing that limit, so it’s worthwhile to discuss with your broker if that can be increased.

What should companies that need more coverage do?

If your company is in the business of selling fuel oil or chemicals, it is important to have some pollution liability separate from the limited coverage available under standard policies. The types and amounts available under the standard commercial packages are very limited. However, there are specialty coverages available from many sources to cover more comprehensive pollution exposures.

Not only companies in the business of selling or transporting hazardous materials have exposure that is not covered under their standard policies. Contractors are also particularly vulnerable. For instance, a contractor may release a pollutant as a result of its operations on a third-party site. There is specific specialty coverage available for that exposure.

How would a company get started with seeking more comprehensive coverage?

Contact your broker for coverage details and quotes for specialty pollution liability and cleanup coverage. You don’t have to be in the business of manufacturing, selling or transporting hazardous material to need pollution coverage. If you have storage tanks for heating oil or propane, the release of those pollutants would not normally be covered under standard commercial insurance policies. You need to seek specific coverage, through site pollution coverage or specialized tank coverage. These coverages are readily available in the insurance market.

John P. Azpell is AVP — director, client services with ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100, ext. 1329, or