Employers have had to make some tough decisions to survive the economic conditions they have been faced with this year. Some companies eliminated benefits, while others downsized.
While making these difficult choices, it’s not always clear if companies are leaving themselves exposed to employee-related liability, fraud, or other unexpected expenses. Doubts about any changes in the business structure can be mitigated by working with a Human Resources Organization (HRO).
“Business owners should consider how working with an HRO will improve their cash flow and whether it’s going to reduce their overall expenses,” says Rob Wilson, president of Employco Group Inc., a division of The Wilson Companies. “Because in this economy, those are two key areas on every business owner’s mind.”
Smart Business spoke with Wilson about how working with an HRO can help business owners run a leaner business while improving cash flow.
What challenges have companies been bringing to outsourcing organizations?
The definition of HR outsourcing has definitely changed in this market. Two years ago, HR outsourcing was more focused on helping small to medium-sized companies grow by offering competitive health benefits and consulting employers on recruiting, retention and performance appraisals.
Now the focus has shifted from growing the company to scaling down and learning how to run a leaner operation. While downsizing, business owners need to know how to decide which employees to keep, who to let go and whether or not they are creating any employment practice exposures. For example, certain employees might be in a protected class and laying them off could put an employer at greater risk. Conducting exit interviews and proper documentation of layoffs are also key in decreasing the risk of exposure.
Additionally, companies are looking at how to best utilize flex weeks and unpaid furloughs and reduce hours.
Employers are also turning to HROs on the issue of leveraging the cost of benefits. Some are stopping their match on 401(k)s altogether but are still offering the option for employees to contribute to their retirement fund. Many employers are turning to HROs for advice on how to still offer benefits at a reduced cost to the company.
How are companies’ needs for an HR department changing?
You’re definitely seeing the HR department downsized in many companies. Many employers are cutting their HR departments in order to keep more production-oriented people.
However, companies still need HR representation and guidance even though the department may be eliminated in order to avoid employee lawsuits and fraudulent workers’ comp claims. By outsourcing their HR, employers are getting experts in the HR field to help them through the downsizing process.
How can working with an HRO help a company increase cash flow during these hard times?
Instead of paying the workers’ compensation premium deposit and health benefit premiums in advance, a company working with an HRO pays on a per-payroll basis. This allows you to control and limit your expenses to a per-payroll basis, which increases cash flow to sustain your business operations.
Companies also pick up a variety of other services, such as loss control and risk management. The cost of working with an HRO is manageable, because typically an HRO charges a percentage of the company’s overall payroll.
What types of companies can benefit from working with an HRO?
Traditionally, companies with 10 to 150 employees have benefited from working with an HRO by utilizing the large buying power for health insurance. Now that the driving factor has shifted from companies wanting to get their health insurance costs down to the broader concept of trying to get their overall labor costs down, any type of business can benefit from business outsourcing.
Business owners can get a cost-savings analysis to see where they can improve not only management of employee benefits but also areas where they may be weak or can eliminate positions or tighten up the organization. It’s becoming more and more an overall strategy as companies are driven to run leaner while increasing efficiency.
How can a company choose an HRO that’s a good fit?
Business owners need to do their homework and pick an HRO with a solid track record and good references.
- Look at the services offered and see if it’s a good fit for what the company needs right now.
- Pick a local company to ensure it is accessible to your team, whether it’s face-to-face meetings, payroll delivery, exit interviews, loss control, etc.
- Choose an HRO that is flexible because companies may not need all of the services right now. Look for companies that offer a la carte options to their clients where services are not bundled. A client may only choose to utilize the payroll service without health benefits, health benefits without payroll, etc.
- Most important, choose an HRO that understands your current state and is able to work with you to prepare for the upswing.
Rob Wilson is president of Employco Group Inc., a division of The Wilson Companies, which handles human resources outsourcing, staffing and insurance for 400 small and medium-sized Midwest companies. Reach him at (630) 286-7345 or email@example.com.
Technology initiatives are tied more to employee productivity and morale than you may realize.
Without the tools to communicate effectively, streamline tasks and avoid the dreaded bottleneck, an already time-strapped work force can completely lose its momentum.
“In this economy, the very first impulse is to stop spending and not do any new projects,” says Mary Rodino, Chief Marketing Officer with CIMCO Communications. “The most important issue right now is for companies to take the time and money to invest in technologies that actually make a difference in productivity.”
Smart Business spoke with Rodino on how to use technology to keep your employees connected and your businesses successful.
What obstacles are employers — and employees — encountering this year?
When employers are not hitting top-line revenue numbers, they have to consider budget cuts, layoffs or furloughs. The impact on employees is that there’s a greater fear of losing their jobs and an increased workload for the ‘survivors.’
Those people who aren’t laid off are expected to pick up the pieces and there instantly becomes an incredible pressure to retain existing customers, while obtaining new customers. It’s a classic example of more for less: employers expect more productivity and greater loyalty from their employees for the same amount of money, or even less.
How can a business use technology to make organizational improvements?
Many technology solutions today really streamline and improve processes for an organization, but that doesn’t mean every solution is right for your company. My recommendation is to start looking at workflow, bottleneck areas and manual tasks that can be automated. Take a deep dive into the process chain, from first customer interaction to billing, and see what areas could really benefit from that technology solution.
One technology that could give you more flexibility, as well as cost savings, is multiprotocol label switching (MPLS). If your company has several remote locations that send data back and forth, MPLS allows you to connect the locations directly instead of going through the headquarters’ server, where there may always be a bottleneck from 10 a.m. to 2 p.m. All of your locations can communicate and send applications to each other seamlessly. The benefit is that improving data flow eases communication between your internal users and allows them to work more efficiently and stress-free.
How else can a company use technology to improve efficiency?
Another highly efficient and prevalent technology is hosted Voice over Internet Protocol (VoIP). With this application, every employee, even executives and sales reps who are traveling, can really be connected all the time. VoIP technology enables enhanced mobility features that allow employees to get all of their phone calls and messaging without missing a beat.
When companies choose a hosted VoIP solution, they do not have to worry about maintenance contracts, upgrading their phone PBX, or deploying their own internal IT resources.
In addition, many service providers offer very attractive leasing programs for IP phones so that companies don’t have to make any capital investments. The key takeaway with VoIP is that companies can really focus on their core operational competencies instead of managing technology.
What advice would you give business owners who say they can’t afford technology improvements right now?
If you can’t afford large technology initiatives, there are still other options. Be creative and consider initiatives that don’t require a large investment. Conferencing is a good example of a technology that doesn’t require a large investment and can still reduce your operational costs.
Whether it’s voice conferencing or Web conferencing, this technology is an ideal way to decrease the costs of meeting in person. Conferencing can’t always replace a face-to-face meeting, but instead of meeting face-to-face every month, perhaps you only have in-person meetings once a quarter.
The savings to the company can directly affect the bottom line, and employees are more productive as they reduce time away from the office and their families.
Many companies provide conferencing as a pay-as-you-go service so you are never paying for something you’re not using. In addition, you are connecting employees who can virtually be anywhere and reducing your travel expenses.
The best advice I can give is to work with a technology partner. Make sure that you are working with a partner that will really look at your company’s business objectives. Your technology partner needs to understand what drives your business and what your goals are so it can identify the best solution.
A good technology partner will ask the right questions, listen to your needs and not just promote a product or service. It will provide solutions that improve productivity which, in turn, will empower your employees and enhance your profitability.
Mary Rodino is the Chief Marketing Officer with CIMCO Communications. Reach her at (630) 691-8080 or firstname.lastname@example.org.
When partnering with an ISO (independent service organization) for IT and data center needs, business owners have a lot to consider. They don’t want to rely on an organization that only provides the best service to its largest clients, or even at the best price. Nor do they want to be sold equipment or services they don’t need. And how can they be sure that the ISO can properly handle their hardware and specific business requirements?
“It goes back to being honest with the customer and providing the flexibility to put together the best service package for them based on what their needs are,” says Ed Kenty, president and CEO of Park Place International.
Smart Business learned more from Kenty about what businesses should expect from an ISO and the importance of your provider’s credibility.
What are the IT challenges that businesses struggle with the most?
If you’re in a data center environment and you’re running multiple platforms and applications, it gets a little contentious when you’re dealing with multiple vendors. Customers really like being able to pass that off to a third party who can just manage all those vendors on their behalf. The thing customers like most about working with an ISO is they get that single point of contact, or ‘one throat to choke.’ Companies may have multiple contracts in some cases with multiple billing frequencies and need multiple people to administer their IT. With one vendor providing all of those services, you get one bill monthly, quarterly or annually and you get one place to call when you have a problem. That, more than anything, solves a lot of the problems for a business’s IT community.
What kind of service should companies expect from their provider?
For most OEMs (original equipment manufacturers) or large service providers, the primary focus is selling new hardware. They don’t provide advice or consultation on what kind of capacity a company has within its data center. Companies are then constantly pushed to refresh their hardware even when it’s not necessarily required. Other than the convenience of keeping hardware under an OEM warranty, there’s nothing compelling that would require companies to do that.
ISOs are hardware agnostic and don’t push a hardware solution. Often, an ISO will encourage you to stay in your existing platform, while upgrading your disk and your CPS speed and giving you more memory. An ISO provides services such as storage assessments, storage network, and tuning and monitoring. They can see if a storage device is overtaxed and reroute some data to another storage device. There are ways to meet companies’ needs without throwing new hardware in to solve every problem.
Why are these types of service-related issues a problem for many companies?
If companies have to do everything we’ve mentioned themselves, it ties up resources that they quite frankly don’t have. Every IT community out there has been overtaxed and overburdened or has reduced its head count. They need a partner that can come in and help them navigate their way through the technology changes. Being their primary service provider, an ISO is basically augmenting their IT staff.
How does a third-party provider’s credibility factor into its capacity to deliver reliable service to clients?
The whole question of whether or not a third party has the capability to provide support has really been neutralized by the OEMs themselves. Because if you look at the major platform OEMs — Sun Microsystems, Hewlett-Packard, IBM, Dell and others — they use ISO subcontractors for most of their service agreements. They don’t have large IT service organizations running around the country solving customer problems any longer. The days of proprietary hardware and software and only having certified OEM technicians working on the hardware are long gone. They don’t deliver service with their own direct-badged employees any longer, which neutralizes the perception that third parties can’t handle problems as efficiently as the OEMs can.
Still, when working with an ISO, you have to ask for strong reference accounts in your business’s territories. Companies should ask, ‘Who in my geography are you supporting on this equipment?’ An ISO can’t tell potential clients that it can do something without providing them evidence and references.
How can companies ensure their provider is meeting their business needs?
Everything is measured based on the SLA (service-level agreement), so if the client signs a contract with an ISO and it’s for seven-by-24 support, four-hour response (7x24x4), then that’s what the client should expect to get. When entering into an agreement, the expectations should be very clear. And if the provider fails to meet the SLA requirements, then it’s just going to lose the customer.
So it’s not a question of expectations. It’s based on what the customer really needs. He may think he needs the highest level of support on a device, but he may actually only need next-business day support. He may have a different set of needs depending on the devices the company is running, and an ISO shouldn’t try to oversell products or services. A good ISO will recommend the right solution based on understanding the IT environment. It’s about being flexible to work with a client or a prospect to really define what they need, versus what we’d like them to pay for.
When Kreischer Miller’s Mario Vicari talks about how to approach business in challenging times, he uses an analogy of rocks beneath a boat in a river. The rocks — weaknesses in a business model — are always there beneath the surface, but they are not visible when the tide is high and business is good. But when the tide drops, these “rocks” are exposed and can do damage.
“When the external environment changes and business activity drops, it exposes the weaknesses in a company’s business model,” says Vicari. “What worked in the past, when things were going well, may not be the best strategy now. A recession is an opportune time to get back to basics and fundamentally evaluate and change your business for the better.”
Smart Business spoke with Vicari about how to adjust your business model to the new external environment.
What differentiates the businesses that survive a recession from those that fail?
The key is the point of view of the owners in how to look at your business in a recession. The best companies are looking for opportunities instead of focusing on the negatives. A business owner can either shudder in fear reading the daily headlines, or go on the offensive and look for opportunities to make changes to improve his or her business so it not only survives the downturn but comes out of the recession as a better company. When business is flush and sales growth is high, many businesses lose track of the fundamental things that they should be paying attention to. With top-line growth under pressure, companies have to focus on other areas of their business to improve profits and have to look for efficiencies to improve results because you cannot rely on external growth. Many great companies come out of recessions in a better position than when the downturn started because they use it as an excuse to make fixes to their business.
How should owners approach their business differently in lean times?
Businesses have to drastically change their planning assumptions and monitor their business more closely in a downturn. Historically, many companies use top-down planning — meaning that most of their budget drives off of what they expect with their sales growth assumptions. This is a dangerous way to plan right now. There are too many external factors beyond your control that can negatively affect a company’s top line. Companies must use a bottom-up approach and plan based on looking at their cost levels, head count and waste to determine which cost pools are necessary or discretionary and where they can be more efficient. After gaining clarity on costs, companies should engage in scenario planning so that they are prepared to take action if business levels decline. That simply means determining in advance the cost adjustments a company is prepared to make based on different revenue scenarios so that it can react quickly if sales levels change for the worst. This is a defensive strategy toward planning, but it is based on managing the things you have control over and not relying on things that you don’t — like sales growth.
How should companies address head count in a down economy?
One of the greatest opportunities that companies have to improve their business in a recession is to upgrade their people. With so many layoffs, the talent pool is strong and the employer has the bargaining power. Most companies have nonperforming employees that they know they need to address. Now is the time to address underperformers and replace them with stars. There are many displaced workers right now that are in that position through no fault of their own. Many of these people may have been high performers at their last job and are just victims of a tough economy. Finding and hiring these people is arguably the single biggest improvement that companies can make right now that will have a lasting positive effect on their business.
How can companies address reducing waste?
When I think of waste, I think of Parkinson’s Law. Parkinson’s Law is based on a theory of work researched and published by Professor Cyril Northcote Parkinson in 1955. This research was performed a long time ago but is universal and applies to all businesses today. The law states, ‘Work expands so as to fill the time available for its completion.’ It is human nature for people to make the amount of work they have to complete fit into the time that they have available to complete it. What it means in the real world is that most businesses can get the same amount of work done with the same level of quality with fewer people. Excess people and process waste are the biggest areas of waste in most companies, and addressing them can have an immediate impact on the bottom line.
What other external risks should companies pay attention to?
One of the heightened areas of risk that companies need to closely manage is the credit risk associated with their accounts receivable. I would estimate that the average company’s accounts receivable is subject to two to three times the normal level of credit risk right now. There are many companies in the U.S. that are struggling or in bankruptcy, and these events have a ripple effect throughout the economy because all of the troubled companies have vendors that are affected. Companies have to stay much closer to their cash right now because of this increased exposure. Companies should re-evaluate their credit and collection process and increase the level of resources and attention directed toward collecting receivables. No matter what, receivables are subject to credit risk, but now is a time to minimize that risk by having less money on the street.
Any employer considering self-fundingfor health benefits or workers’ compensation needs to understand thebenefits as well as the risks. While there arecertainly savings to be had by not workingwith an insurance company in the traditionalsense, companies have to consider whetherthey’re comfortable handling their worst-case claims scenarios without this safety net.It’s also important to manage the programwell to see the kinds of cost savings companies are anticipating.
“The ideal thing is to hire an independentfirm to help evaluate various proposals andoptions and help train the internal people tosupervise the program on a day-to-day basis,”says Rob Wilson, president of EmploycoGroup, a division of The Wilson Companies.
Smart Business spoke with Wilson to get ahandle on the benefits, risks and responsibilities that go along with self-funded insurance.
How does self-funding differ from fullyinsured plans?
Under the fully insured plan, you incur apredetermined expense called premium totransfer the payments of claims to an insurance company, whether it’s workers’ compensation or health insurance. The insurancecompany will typically pay your insurancebroker a commission, make a profit and havesignificant cash flow while earning investment income.
Under a self-funded plan, the business owners incur all the expenses, including payingthe claim and paying a third-party administrator to adjust the claim; anything left overgoes to their bottom line. They’re eliminatingsome of the expenses that they incur if theyfully insure their program. They don’t have topay a broker commission or pay dividends toshareholders. It’s a way of reducing theirexpense if they can measurably control thepotential for losses.
How can businesses control losses?
With workers’ compensation, you can doeverything possible to fight fraud, maintain asafe work environment, supervise theemployees very effectively and keep a well-run organization. There are a lot of controlsthat you can implement to reduce your exposure and reduce your costs when self-funding. In contrast, when self-funding medicalinsurance, you can’t control the health ofyour employees or their dependents. Youmay not know if somebody has a health condition or a child with a long-term health problem. When you’re hiring someone, you can’task during an interview about someone’smedical history.
Should a company that is self-funding consider stop-loss insurance or reinsurance?
With this insurance, a business owner mayhave a maximum loss of $50,000 or $150,000,and then the insurance company takes overall excess payments from there. With healthinsurance, you can limit a claim to $1 millionas far as benefits to employees. And withworkers’ compensation, you’re regulated bythe state on what the employee is entitled toreceive if injured on the job.
You’d want to look at buying stop-loss orreinsurance to try and limit your exposure oneither a per-claim basis or an aggregate basisfor your overall plan. For health insurance,it’s important because of all the unknowns.But even with workers’ compensation, youface a risk with self-funding.
How can businesses know if self-funding isright for them?
We typically would not look at self-fundinga workers’ compensation program until thecompany’s standard premium is in the areaof $250,000 or higher. Because all it takes isone claim and there goes your entire savings.For health insurance, you can probably consider self-funding with a low stop-loss if youhave maybe 35 or 40 employees. Lower thanthat it’s not typically practical. With 50 or 100employees, you’re going to have a low stop-loss, limited to a $10,000 or $20,000 claimwith an overall aggregate. The whole theoryof self-funding is that you should be spending enough dollars to absorb those claims.
Even when a company self-funds theirhealth insurance they still have to determineif what they’re paying for all the insurance-related costs — the excess coverage, the lifeinsurance and third-party administrator — iseffective.
Companies also have to consider thepotential cost to them if the program goespoorly and they’re suddenly hit with five orsix serious claims. For example, if youremployees know the company is going to layoff 50 people in the next 30 days, you maysuddenly see a rash of soft-tissue backinjuries. With health insurance, that’s less ofa problem, but for workers’ compensation,you just have to look at your past record andwhat your plans are for the coming year.
Are plan structures different with self-funding?
As a business owner, you still have thesame flexibility to duplicate the benefits thatyou have. But instead of having a $2 millionannual limit for employees or families, youcan say you only want $1 million. You cantheoretically say you’re not going to pay forcertain procedures. You can design a program that meets many of the employees’needs but, more importantly, enables thebusiness to sustain its operations. Becausethe idea is to reduce your expenses.
ROB WILSON is president of The Wilson Companies, which handles human resources outsourcing, staffing and insurance for 400small and medium-sized Midwest companies. Reach him at (630) 286-7345 or email@example.com.
The new year is well under way, and many of us are still wondering, “What now?” Planning has taken on a whole new meaning in this unpredictable environment. How can investors prepare for what they can’t easily predict?
“A crisis can be a good opportunity to make strategic changes. But we have to remember that behind all the negative headlines are people, our friends and neighbors, who have had their lives, jobs, retirements and dreams for the future affected. Many people are having to make some very tough decisions,” says Bob Mathis, CEO of Peachtree Planning Corporation. “It’s important that, during times like these, people have an integrated view of their financial world and that they get control over their situation and make sure they’re continuing to make progress toward their goals.”
Smart Business learned more from Mathis about maintaining a level head — and a practical strategy — in a volatile market.
What are some of the big issues people are facing?
When you get into a market crisis, you get to see, sometimes pretty dramatically, what happens if you haven’t built a sound foundation in your financial plan. When people are faced with things they can’t control, such as losing jobs or having their investment accounts lose value, it’s made much worse when they don’t have adequate liquidity or savings. Every financial decision you make impacts not only one area, but also every other area of your finances as well. Coordination is key. No matter how dire the situation, there is always a path out. Most of us need someone to help us find that path.
Is it too late to set up a valid plan?
I think there’s always a way out. Whether you’re an individual or a business, you need to reassess your goals and objectives, take stock of where you are right now and what challenges you’re facing. This is a good time to meet with a competent planning professional who can help you analyze your situation and show you different alternatives. You’ll find that every decision you make can impact other areas. Sometimes you need someone to stand back and help you look at the whole picture to make the right step. Each financial decision is interrelated and what may look like the right move in one area may negatively impact other more important things and endanger your plan’s success.
Are there certain moves that investors should avoid?
There’s always the ‘plan d’jour,’ depending on what’s going on. For the most part, the things that made sense 25 years ago make sense today. We’ve always stressed protection and worst-case-scenario planning. Hopefully clients who have followed that advice are feeling confident that they can ride out the storm.
It seems in the past few months, many investors were saying, ‘Let’s just get to the election and see what happens when we get a new leader,’ and then, ‘Let’s see what happens when the new President is in.’ Sooner or later we all have to face facts and look at our current situations and decide on the right path to follow.
How will this economy affect future planning?
You always think the crisis that you’re in now is unlike anything else that’s ever happened in the past. Although we are in a different economic circumstance and probably a fairly deep recession, we’ve had recessions before. We’ve had wars, depressions, terrorist attacks and financial crises in the past. Everyone should understand that, going forward, we’ll see innovation, we’ll see growth, and we’ll see prosperity. The United States of America is not going out of business. I don’t know where the market is going to be six months from now, but five years from now, expect it to be much higher. Investors will have made solid profits and entrepreneurs will have started new companies. People will have jobs that haven’t even been invented yet.
In order to understand the effects of your financial decisions, streamline costs and plan for your future, you need an organized and integrated view of your financial decisions across your business and life. This will help you maximize protection, minimize costs and provide an impenetrable barrier to protect your business and personal assets.
What changes can be made right now?
Get organized. Get protected. Get focused. You have to know exactly where you stand and what challenges you face in order to develop a solid plan. You need to make sure all your protections are in order, that your life and your income are protected. You want to take a close look at cash flow — how do you reduce debt, increase savings — to put yourself in a position where you can come out of this stronger. Having an integrated view of your financial world gives you control over your progress in meeting your business and personal wealth building goals.
For high net worth individuals, this is a very good time to implement some estate planning strategies because of the decline in market values and assets. It’s a good time to make sure that your wills and estate documents are up to date. You may have had a strategy based on something that’s not valid anymore, so it’s a very good time to look at all of your tax and estate planning. Whether you are looking to grow, sell, retire or leave a lasting legacy, having a plan that ties it all together will make it simpler for you. Investors can learn more from us in the months to come about how to thrive in each of these scenarios — even in uncertain economic times.
BOB MATHIS is the CEO of Peachtree Planning Corporation. Reach him at (404) 260-1600 or Robert.Mathis@peachtreeplanning.com.
When assessing a company’s risks, many insurance brokers will just look at the existing policies, duplicate the policies and be on their way. In these scenarios, they’re doing the company a major disservice.
“It may be a cliche, but insurance is like a parachute; you only get one chance to see if it works,” says Rob Wilson, president of Corporate Risk Management Inc., a division of The Wilson Companies. “Businesses need periodic insurance checkups, no different than a regular physical, to catch something before it becomes a problem.”
Smart Business asked Wilson about how businesses can better assess their insurance coverage to make sure it truly reflects their insurable risks.
Is now a good time to review coverage?
Companies always want to evaluate that their policies insure their exposures. But given this economy, now is a time when you should look at how your exposures have changed. That could be on a variety of levels, from your workers’ comp coverage to what suppliers you’re working with and who your customers are. Instead of having three suppliers for the key part that goes into a widget, a company may have to rely on one supplier because it’s more economical or the other suppliers are in financial trouble. If that supplier has a catastrophe at his facility, where does the company get the material to make its finished product? You can insure that loss of income under contingent business income coverage.
Usually, we talk about clients being underinsured concerning physical assets. Today, they may be overinsured. It may be cheaper to rebuild a building than it was two or three years ago when we were in the middle of a building boom. That would cause you to consider reducing the amount of insurance on the building. You could also look at inventory. At one time, your widgets were in demand and you were insuring the inventory for $100,000. That inventory may have little value now, so you could reduce coverage or, better yet, just get rid of the widgets.
Another area to pay attention to is employment practices liability insurance (EPLI). Employees are much more litigious today than they were maybe 10 years ago, and layoffs in a tough economy could lead to more discrimination and wrongful termination suits.
Where should owners begin?
They should essentially begin by looking at their financial statements to see what assets they own and what their potential liabilities are, instead of just having someone duplicate policies, which is often the case. Looking at financial statements can uncover mistakes; for example, a company that has fiduciary liability for its pension plan that claims to be fully funded may, in fact, be only partially funded. This would be enough for an insurance company to deny any claim because of a false statement in a policy.
When looking at the value stated on the financial statements for real property, you have to ask what it’s going to cost to replace property if it’s damaged in a major catastrophe. There may be a huge difference between book value and replacement cost. A crucial element is how accurately these risks are reflected in your policies.
For example, we were just looking at a lumberyard whose policy said that their building had sprinklers when actually there were no sprinklers in the facility. If there were a fire — or even unrelated physical damage from, say, a windstorm — the insurance company would deny coverage because facts were misrepresented in the policy.
The last thing you look at are the existing insurance policies, in case there’s something you might have missed, but more likely to see what corrections need to be made. We had another client — an international company with Canadian and U.S. operations — with an umbrella policy that named the Canadian company but did not actually insure the Canadian operation. They were only getting coverage for that company name for the U.S. exposures. Their multiple locations in Canada were uninsured.
What should owners do to ensure they’re properly covered?
The insurance broker is commission-driven. But if you hire an independent consulting firm to evaluate coverage, it will conduct an objective review to see if you’re overinsured, underinsured, uninsured or have the wrong insurance. The party evaluating a company’s policies should start first with detailed questions about what they do, where they do it, how they do it and what their financial statements contain, all to uncover exposures that they otherwise wouldn’t be aware of. They need to do a physical tour of the facilities to see what’s there so the insurance person can understand the risks to which the business is exposed.
The process should also uncover price scenarios; we uncover numerous mistakes in class codes, incorrect premium charges or wrong rates in just about every area of an insurance program. Sometimes an evaluation results in a refund and other times it may cost a business a little more to do it right.
ROB WILSON is president of Corporate Risk Management Inc., a division of The Wilson Companies. CRM provides risk management consulting services throughout the United States. Reach him at (630) 286-7345 or firstname.lastname@example.org.
The turbulent financial markets are leaving business owners with some tough choices to make, one of which may include the need to reduce their work force.
Bob Holden, senior vice president with Employco Group, points out that employers have a responsibility to display compassion during the process to those let go while remaining decisive and optimistic for the remaining employees.
“How and what you communicate to your employees during a layoff is very important. You need to be honest and explain what’s going on in the company, in each department and how individuals may be affected. It may also be beneficial to clarify how outside factors are impacting the company during these tough economic times,” he says.
Smart Business learned more from Holden about how businesses can best navigate the process of layoffs.
How are layoffs different in this economic environment?
Oftentimes, reductions or layoffs are planned decisions made by the management team as a part of its strategic planning. What we’re finding in today’s environment is that many companies are forced to reduce their staff due to outside influences that can’t be controlled by the company itself. For example, if capital is not as available as it used to be via credit, it can affect a company’s ability to pay its accounts payables and, in turn, affect its vendors’ accounts receivables, which can further affect that company’s ability to make its payroll. It’s a cash flow issue since companies cannot rely on credit for capital at this current time.
Does this environment affect the decision of who stays and who goes?
In this particular case the kinds of things that confront the small business owner are economies of scale. You have to do an inventory of skill sets and job knowledge. Conduct a thorough assessment of how individuals perform on the team, determine where they excel and identify the persons who are cross-trained who can take on more responsibility. You’re trying to keep your highest performer while at the same time trying to keep your most multifaceted performer — the utility player. The utility player can be more valuable in this environment than an individual who is highly specialized in only one area. The utility player may already have some basic knowledge about the specialty — it may not be a lot, but enough to get by — and you can mix and match the kind of skill levels you require with the people you need to keep.
How should business owners approach these choices?
Develop a matrix and go through a position-by-position or a function-by-function needs analysis. If you decide on using a skill-based matrix and you narrow it down to two similar employees, then the next step is to take a hard look at their level of performance, skill and knowledge.
For example, can a credit manager now do the credit analyst work, or can one of the managers take over the duties of a credit manager? What is the difference in compensation? You may have multiple employees in the same position with comparable skill levels but they might not necessarily be the same type of performer. If you have a sound, accurate method in place for evaluating your employees, you’re in a better position to evaluate who truly are your best performers.
Lastly, in this day and age, depending on the size of your company, you also have to adhere to certain federal and state laws with respect to the various discriminatory issues, such as age, race, sex, etc. Be mindful of favoritism and learn how to balance all the different factors when looking at whom to let go.
How do you best manage the people remaining?
It’s never easy letting people go. Many times employees that get left behind are initially thankful and gratified that they were not let go. But there is a little bit of a guilt factor involved, as well as anger and resentment. And then there’s fear they may be chosen in the next round. After a set of layoffs, the management team needs to come together with the remaining employees to discuss the rationale behind the layoff, how the decisions were made and a plan for how the company is going to move forward. It’s a time to say: ‘Here’s where we see the company going, here’s how we’re going to affect change for the future and here’s what we need everybody to do to help us get there.’ If employees will be taking on extra work, communicate the new responsibilities, explain the possible longer work hours and be sensitive of how this may affect their personal lives. Make sure to address all questions and concerns from the remaining staff so everyone can get on the same page to move forward.
If you leave a cloud of suspicion and indecision where remaining employees are unsure of where the future leads, that could cause good people to look elsewhere or could create an unproductive work environment. Ultimately, you want to end up with your best, most knowledgeable and effective people in order to make it through the tough times.
Real estate companies and property owners have a vested interest in insuring against a long list of risks. In the current market, some owners can even face the prospect of not being able to get the insurance they need.
“You may have to use various strategies on the broker side in order to get the right coverage,” says Kevin Connelly, vice president of The Graham Company. “Someone that does-n’t handle this sort of risk frequently won’t have the experience or resources to get the right coverage when things get tough.”
Smart Business spoke to Connelly about some real estate insurance best practices for maintaining the proper coverage.
What are some common concerns for real estate owners?
A very common shortfall that we see in real estate programs is that a typical real estate owner’s policy similar to most commercial general liability policies is going to exclude things like, let’s say, mold. Some people might not really be worried about that exposure, but a real estate owner, particularly one that rents apartments, could have a serious exposure there. And if you have a standard general liability policy written the way that most real estate companies’ are, you have no coverage for that. In the insurance world, mold is usually considered a pollutant, so putting a pollution policy in place is a good way to fill that gap.
Other policies that might be overlooked are tenant discrimination type coverages or employment practices liability policies.
What about the structure of policies?
Typically, what you see with real estate companies is that they don’t have just one property. In these cases, there are a number of different ways property insurance can be written. One of the ways is with blanket limits, which essentially means that all of your properties are covered under one limit. You generally have this huge limit that will most likely satisfy any needs you may have in a loss. But a lot of times what we see with multiple properties is they’ll have one individual limit that applies to that location. And if that limit isn’t set properly and isn’t assessed closely, if something burned to the ground, you could end up with a limit that’s totally inadequate. Or you might have a policy that contains a coinsurance clause that becomes very punitive in the event of a partial loss.
Similarly, with business income coverage, if you have blanket limits over all your properties, you’re probably going to be more insulated against any miscalculation you might make in setting your limits. But if you have it on a per-location basis, there’s a greater possibility that you could have a shortfall in the amount of business income coverage needed.
How can real estate companies best manage losses?
Any insureds have to remember, whether they’re a real estate company or not, the thing that’s really going to be the biggest driver of their cost of insurance is how their historical losses look. What we see sometimes is that a real estate company will own many different properties, sometimes in different states. The problem with that is you may not have a risk management program where somebody pulls together what’s happening at all those locations and lets somebody at the headquarters in a corporate office know, for example, that the location out in Nebraska is really getting killed with losses and pulling the rest of the locations down. There’s not a lot of centralization of looking at losses, making sure contracts are standardized among the locations in the right way and making sure that the loss control that’s delivered to all the locations is delivered in some kind of orderly and organized manner. Because the ultimate goal is to reduce losses and manage risk in order to drive down the cost of risk.
What about companies that can’t get the insurance coverage they need?
Before Hurricane Katrina, things like wind coverage were fairly easy to get at whatever limits you wanted and the cost associated with it was somewhat nominal. After Katrina and the other hurricanes in Florida several years ago, the ability to get wind insurance in certain areas like Florida was really limited and very expensive. So instead of having an easy decision to make, you had to start thinking about different strategies to address what your real exposure was.
Let’s say you have a $100 million location in terms of your property values. When wind coverage gets really expensive or impossible to procure, you have to start looking at what your real exposure is. If your deductible is $1 million to begin with, and you estimate that your probable worst-case exposure is $5 million in damage above that, does it make sense to make a huge premium outlay for coverage above $5 million? Or perhaps the real concern is the amount above $5 million so you retain the risk below that level and buy insurance for a real catastrophic event. So what you need to assess is what coverage you really need on the high end, and then on the lower end, you need to assess what your real deductible levels should be. So you look at those things and you make sure you have the right amount of insurance, so that you don’t buy more than you need, and that you set your deductibles at a level that you can comfortably maintain and still be able to pay in the event of a loss.
KEVIN CONNELLY is vice president with The Graham Company. Reach him at (215) 701-5376 or email@example.com.
Construction companies face risks that other organizations never have to consider, which makes obtaining the right insurance coverage one of the most complicated parts of running their business. Insurance market conditions can change frequently, adding to the challenge of staying adequately protected.
Smart Business spoke to Marty Purcell, CPCU, vice president with The Graham Company, to clarify some of the more prevalent coverage issues that contractors face.
How is the insurance market for contractors right now?
We’re in a ‘soft’ insurance market, which is good news for buyers of insurance, including contractors. Rates are down and there’s a lot of competition among insurance companies. However, there are also some pitfalls associated with the ’soft’ market. Sometimes new insurance carriers that aren’t familiar with and don’t typically write insurance for contractors start bidding for construction business. These same insurance carriers may decide to cancel or non-renew coverages they have written for contractors as soon as the market changes if they are not committed to maintaining a construction portfolio.
Regardless of the market, contractors need to make sure they are insured with the right insurance carrier that is in it for the long term. This means they understand construction and can provide broad coverage, competitive pricing as well as effective claims handling and loss control services.
What are some of the key coverage issues the industry is currently facing?
The construction industry is dealing with significant changes to additional insured and contractual liability coverage as well as exclusions for wrap-up programs and residential work.
When the market is ‘soft,’ sometimes construction companies may be tempted to look for immediate cost savings when purchasing insurance and might overlook potential coverage issues. No matter how much money you save in insurance premiums, it can cost a lot more money in the long run if you’re faced with uninsured losses or poor loss experience if the coverage is not structured correctly or claims handling is sloppy.
How often should contractors evaluate their insurance programs?
The program structure should be re-evaluated every year, but we usually recommend marketing the program extensively roughly every third year. Depending on market conditions, it might make sense to consider changing the amount of risk being assumed, such as increasing or decreasing deductibles. We usually caution against full-scale marketing every year, however, since insurance companies can become frustrated if they are continuously asked to provide a quote but they don’t write the business. A little bit of loyalty can go a long way.
Are some forms of coverage more challenging than others?
Wrap-ups or owner-controlled insurance programs are commonplace, and many contractors are getting involved with them on larger projects. The key consideration when working on wrap-ups is whether the insurance coverage provided to the contractor is sound. Oftentimes it is difficult for contractors to obtain accurate and complete information about the coverage being provided for them so that they can ensure that the combination of the wrap-up and their own insurance program provides adequate protection. We spend a significant amount of time reviewing these wrap-up programs for our construction clients. It’s almost like a jigsaw puzzle where all the pieces need to fit together in order for the contractor to be properly protected.
Another challenging issue for contractors is builders’ risk coverage. On a specific project, the builders’ risk may be provided by the owner of the project or the general contractor on behalf of all contractors working on the project. If this is the case, then it is important to make sure that the contract language and the builders’ risk coverage are written properly to insure adequate protection for the contractor on the project.
What else can contractors do to protect themselves?
Maintaining a strong risk management program with good safety and claims management policies and procedures in place, regardless of the market conditions, is always critical. With larger contractors, in many cases the contractor will be assuming a portion of its own risk in the form of a deductible on its insurance. If the contractor has large deductibles and poor losses, claims payments can quickly become the biggest component of the overall insurance program cost. Consequently, contractors need a strong safety program not one just sitting on the shelf, but one that is understood and implemented by all of their employees. Safety programs can help to eliminate many of the claims that might otherwise occur. On the flip side, when there are claims that do occur, having a good claims management program in place, including a broker that can assist you in managing the entire risk management process, helps to reduce the cost of claims and save money.
MARTY PURCELL, CPCU, is vice president with The Graham Company. Reach him at (215) 701-5202 or firstname.lastname@example.org.