In his latest Smart Connection video, "How to accept constructive feedback," Takash tackles the other side of the coin. Most of us haven’t been taught the guidelines for feedback and even if we have, emotion and ego can still be an impediment to growth.
So, when people provide you feedback, here are Takash's suggestions:
1. Try not to take it personally
2. Thank people for the feedback
3. Clarify what you don’t understand
4. Provide your perspective on what you’re heard
Joe Takash is the president of Victory Consulting, a Chicago-based executive and organizational development firm. He advises clients on leadership strategies and has helped executives prepare for $3 billion worth of sales presentations. He is a keynote speaker for executive retreats, sales meetings and management conferences and has appeared in numerous media outlets. Learn more at www.victoryconsulting.com.
Women-owned businesses are three-and-a-half times less likely to reach $1 million in annual revenue as businesses owned by men, according to an independent impact study released by Ernst & Young LLP, a professional services company.
The reason? Most women just don’t think big enough.
Here are five key points Ernst & Young recommends for scaling small companies into large ones:
- Think big and be bold
- Build a public profile
- Work on the business, rather than in it
- Establish key advisory networks
- Evaluate financing for expansion
To learn more, join us for “The POWER of Perseverance,” the 10th annual Perspectives: Women Who Excel Conference, presented by Anthem and sponsored by Smart Business, Cleveland Clinic and Colortone Staging & Rentals.
The April 13 event will feature a panel discussion with a dynamic group of leading women executives who will share their insights on what it takes to redefine and reinvigorate your leadership style in order to move a business forward.
Join us to discuss methods for promoting success for women-owned businesses in our region.
If your company is selling through distribution, it's well aware of the common challenges and issues that distributors will pose, such as continual price pressures, not comprehending nor selling the value of your company's products (or services) and demand for lucrative volume discount programs to name a few.
As a result, it can be a daunting effort to keep your price discounting in check, while trying to persuade distributors to sell the value of your product. In order to more effectively handle these types of challenges, there are several factors that should be taken in to consideration, such as distributors' performance, behaviors, and alternative pricing techniques.
When pricing through distribution, you know that one needs to price accordingly to motivate distributors to sell your products or services. However, one also needs to keep in mind whether you're adhering to your company's objective. Is it to increase market-share? Profitability? Whatever your company's objective is, in your pricing to distributors, you want to allow them some room to make a profit. Therefore, selling through distribution requires looking at a host of typical pricing factors. But one area that should be included and given close attention to in your analysis is a distributors' performance. For example, when evaluating this, you should carefully review:
- The product mix that your distributors are selling.
- The distributor’s incentive programs. They may be too rich and disproportionately reward more low-value vs. high-value product sales.
The overall relationship your company and its distributor have with each other is key. This can be a challenge depending on the distributor itself. Some will use "street-bully" or devious tactics to get what they want. It's not uncommon that some distributors will be difficult to work with. Are they concerned about, or do they understand, the value of your product? Some will make unreasonable demands, such as asking for continual deep discounts or allowances. Working with distributors is a team-effort for the pricing group and the sales force, which is usually at the forefront of these encounters. To work effectively with distributors, you also need to understand not only their challenges and issues, but also the behaviors they may exhibit to obtain the best pricing. They may impose unreasonable timetables. For example, a distributor might claim "I need a price now!" threatening to take the business elsewhere.
They may demand lower prices or claim your company's pricing practices lack flexibility, just to name a few antics. To more effectively handle these common types of behaviors you should determine:
- What is fact or fiction. Get to know your distributors well. Make an effort to better understand the distributor’s challenges, issues and concerns.
- Is your distributor is loyal and a true ally or a hindrance to your business? Is the distributor generating significant and profitable sales revenue for your company or not?
Though the onus is primarily on the sales force to develop and maintain a good working relationship with distributors, it's also important that the pricing group is able to implement strategic pricing tactics through distribution. We know distributors usually do not pay list price. However, it's important to control price discounting to distributors, as the pricing waterfall chart below shows.
The chart illustrates (concepts developed by McKinsey & Co.) how the difference between list price and "pocket-price" can result in a significant reduction to bottom-line profit. It's important to understand this concept in order to help manage these discounts effectively.
Educating the sales force about the pricing waterfall concept is an important factor in helping them more effectively manage the discounts they may offer a distributor. It can also encourage more thoughtful judgment as to how the sales force's decisions will affect the company's profitability. However, a few ways a company can attempt to minimize these revenue leakages are as follows:
- Leverage your company's advantage. Is it the incumbent supplier? Try to capitalize on that by selling or reminding distributors of your company's excellent customer service and/or inventory supply. Offer additional value-added services, such as priority scheduling and delivery, but do it at a premium.
- Discount on incremental sales volume only. Entertain earned discounts not negotiated.
- Obtain something in return for price concessions. Reward a change in distributor behavior, i.e., offer discounts for using EDI or telephone service support, thereby reducing or eliminating on-site sales visits. Or, modified payment terms. Has the distributor asked for continual price reductions? If so, consider adjusting their lengthy payment terms.
These are some pricing tactics and strategies one can implement when pricing through distribution. Distributors are in business to make a profit just as your firm is. However, it doesn't mean you have to give your product away at ridiculous prices. In working with distributors, developing an effective relationship is important, as is any successful relationship. Your pricing team should take the time to truly understand your distribution channels. Have them join your company's sales force on account calls to understand the distributor's challenges, issues and concerns. Ensure that your sales team has a good understanding of your products and pricing tactics and remember:
- Control your discounting
- Obtain something in return for price concessions.
- Leverage your company's advantage.
- Evaluate distributors performance.
Peter Maniscalco is a contract senior pricing consultant for the Strategic Pricing Management Group, an international pricing management consulting firm. He is based in the greater Philadelphia area. His specialty is B2B and B2C product and services pricing for multi-industries. He can be reached at firstname.lastname@example.org or (484) 947-6450, as well as on LinkedIn.
Transfer pricing refers to the pricing of goods, services or intangibles within a multinational organization, particularly in regard to cross-border transactions.
The vast majority of global trade occurs between related-party entities. As global trade increases, companies are confronted more and more with complex issues associated with intercompany pricing. This is compounded because many countries have specific transfer pricing legislation, and the tax authorities within those countries aggressively pursue transfer pricing adjustments. It is no wonder transfer pricing is often listed as the single most important international tax issue facing multinational companies.
Smart Business sat down with Will James and David Whitmer of BKD, LLP, to discuss transfer pricing and the following is their country-by-country breakdown.
Australia: Transfer Pricing Rule Changes Proposed
The Australian government has announced intent to reform its transfer pricing regime due to worries its regulations, issued in 1982, are outdated, leading to an eroding tax base and a less attractive business climate for investors. As part of the process, the Australian government issued a Consultation Paper on November 1, 2011, outlining potential changes in attempt to solicit comments. Comments on the Consultation Paper closed on November 30, 2011. The main point of the Consultation Paper was an attempt to modify Division 13 (Australia’s transfer pricing legislation) to better reflect the arm’s-length principle and line up more closely with the 2010 revised Organisation for Economic Cooperation and Development’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).
The Consultation Paper suggests taxpayers are obliged to conduct intercompany business in an arm’s-length manner and maintain contemporaneous documentation; the paper also considers a statute of limitation for tax audits and adjustment periods. The Consultation Paper seeks to move away from looking at specific transfer prices, instead focusing on transaction outcomes. The Australian government also considered that there is some disconnection between its tax treaties and transfer pricing legislation and may apply clarifications retroactive to July 2004. Finally, the paper recognizes the differences between Australia’s approach of profit attribution to branches and the OECD’s “functionally separate enterprise” approach.
Canada: GE Capital Canada – Crown’s Appeal Dismissed
On December 15, 2010, Canada’s Federal Court of Appeal (FCA) dismissed the Crown’s appeal of the Tax Court of Canada (TCC) 2009 judgment in favor of the taxpayer, General Electric Capital Canada, Inc. (GECC). This concludes a landmark case regarding the treatment of intercompany financial guarantees. The Canada Revenue Agency (CRA) had disallowed GECC’s deductions of guarantee fees on the grounds that the explicit financial guarantee provided by General Electric U.S. (GEUS) did not provide a benefit to GECC. The CRA argued GEUS would have provided financial support to GECC with or without the explicit guarantee, asserting financial guarantees are implicit by nature.
Ultimately, the TCC determined and the FCA confirmed GEUS’ explicit guarantee did provide an incremental benefit to GECC and that the guarantee fee charged did not exceed an arm’s-length price. The TCC’s 2009 judgment relied on the “yield approach” (also commonly called the “interest-saved approach”) to determine the total benefit of the intercompany guarantee, i.e., the yield spread. The yield spread was calculated by comparing the actual cost of GECC’s third-party financing with an explicit guarantee to its estimated cost of financing without the explicit guarantee. This required a credit rating assessment of GECC to estimate GECC’s cost of finance without the explicit guarantee. The TCC determined and FCA confirmed implicit support would be considered by a third party when pricing an arm’s-length guarantee fee. As such, in applying the yield approach, the TCC estimated GECC’s cost of third-party finance without the explicit guarantee based on GECC’s credit rating inclusive of implicit support, rather than on a standalone basis.
With the GECC case serving as a precedent, analysis of intercompany guarantee fees should incorporate the concept of implicit support. Under this concept, the borrower’s credit rating would lie between its credit rating on a standalone basis and that of its parent. The yield approach provides an acceptable method to determine the benefit provided by the parent’s guarantee to its subsidiary, but it does not calculate the market price of intercompany guarantees. As the GECC case stopped short of determining an arm’s-length guarantee fee, the TCC and FCA have not yet suggested the preferred approaches to determine arm’s-length guarantee fees.
Estonia: Rule Revisions Require Documentation from More Multinationals
Estonia’s formal transfer pricing legislation (Article 53), which relies heavily upon the OECD Guidelines, has been effective as of January 1, 2007. Prior to the adoption of Article 53, the Estonian Tax and Customs Board (ETCB) rarely challenged Estonian taxpayers on transfer pricing matters. However, as the ETCB has built its transfer pricing expertise in recent years, it also increased its enforcement of transfer pricing regulations. According to KPMG’s Estonian entity, the number of transfer pricing audits conducted by the ETCB was expected to have doubled in 2010 compared to 2008 and 2009.
On January 1, 2011, new amendments to Estonia’s transfer pricing regulations took effect. The most significant change was the broadening of the previously limited definition of what constitutes related parties with respect to transaction participants in a business contract. Under the new amendment, entities now are to be considered related parties through common business interest or “dominant influence” of one of the partners over others. Presumably, with a broader definition of related parties, a greater number of Estonian business entities will be required to abide by the Estonian transfer pricing legislation, which includes certain documentation requirements.
Furthermore, the new amendments more clearly define the terms “transfer price” and “market price.” The term transfer price is now defined as the value of a transaction between related parties, while the term market price has been defined as the value of a business contract between unrelated parties.
France: Release of Guidance on 2010 Documentation Requirements
During January 2011, the French Tax Authorities (FTA) issued the final administrative guidelines regarding transfer pricing (Instruction 4 A-10-10). They are an interpretation of articles L13 AA and L13 AB of the French Tax Procedure Code (FTPC), which went into effect for tax years beginning on or after January 1, 2010. The revised rules apply to entities meeting any of the following requirements:
- Gross annual revenues or gross assets equal to or exceeding €400 million (approximately $520 million)
- The entity directly or indirectly owns at least 50 percent of companies meeting the €400 million criteria
- More than 50 percent of the entity’s capital or voting rights are owned, directly or indirectly, by French or foreign entities meeting the €400 million criteria
- The entity benefits from the regime of worldwide tax consolidation in France
- The entity is in a consolidated tax group in France when at least one company of the group meets any of the above criteria
The new guidelines rely on the OECD Guidelines to define the arm’s-length standard and methods to prepare transfer pricing documentation. The French transfer pricing guidelines state transfer pricing documentation must be prepared contemporaneously and must be provided within 30 days of a written request by the FTA during an audit. French transfer pricing documentation can be prepared in any language, but the FTA may require translation into French. The FTA’s final administrative guidelines on transfer pricing allows for penalties of up to 5 percent of the transfer pricing adjustment for each audited year, with minimum penalty of €10,000. Companies with French affiliates need to evaluate French transfer pricing documentation needs annually.
Italy: Government Issues Revisions to the Relatively New Transfer Pricing Regime
On September 29, 2010, the Italian Revenue Agency (IRA) established a new transfer pricing documentation regime under Regulation 2010/137654, which provides penalty protection for taxpayers that have prepared and maintained sufficient documentation. In addition, the IRA introduced new transfer pricing guidelines under Circular No. 58/E on December 15, 2010. Circular No. 58/E updates Italy’s original guidelines, introduced in 1980, and provides further explanation of the documentation requirements under Regulation 2010/137654.
Regulation 2010/137654 specifies who is required to prepare transfer pricing documentation and what information is required to achieve penalty protection. Italian taxpayers meeting these documentation requirements may avoid administrative penalties of 100 percent to 200 percent of unpaid tax resulting from an IRA-imposed income adjustment. Italian entities that are holding or subholding companies are required to prepare a master file containing documents pertaining to the taxpayer’s worldwide group. In addition, a country-specific file is required that must provide items such as a description of the local entity’s business, industry and intercompany transactions, as well as provide a detailed discussion regarding the selection of transfer pricing method and comparability analysis related to the relevant intercompany transactions. Circular No. 58 implies cooperation with the IRA and good faith efforts to prepare documentation will be factored into decisions whether to impose transfer pricing penalties.
Under Circular No. 58/E, the transfer pricing rules have been revised to be consistent with the revised transfer pricing guidelines issued by the OECD on July 22, 2010. The original Italian guidelines exalted traditional methods above income-based methods. The updated Italian guidelines, in certain circumstances, eliminate this hierarchy and allow selection of the most appropriate method given the transaction circumstances.
Korea: Better Alignment of Customs & Transfer Pricing Rules
Multinational corporations with subsidiaries in Korea and Korean companies purchasing goods from foreign related parties often face difficulties due to differences between Korea’s transfer pricing rules under income tax law and customs valuation rules under customs law. For example, if during a transfer pricing audit, a Korean importer is determined to have underreported income due to an overstated transfer price, it is often difficult for the importer to receive a refund on the applicable customs duties. In contrast, if the transfer price paid by the importer is subsequently raised due to a transfer pricing audit, the Korean Customs Service (KCS) often charges the importer the additional customs duties as well as any related penalties.
To better align Korea’s tax and customs laws and increase cooperation between the Korean National Tax Service (NTS) and KCS, a task force was organized by the Korean Ministry of Strategy and Finance (MOSF) in early 2011. On September 7, the MOSF announced proposals based on the task force’s instructions that would amend the Law for Coordination of International Tax Affairs (LCITA) and the Customs Act. The amendment is expected to take effect January 1, 2012.
The most significant change in the proposal is the provision of correlative adjustments between transfer pricing and customs value for import transactions. If the NTS or KCS makes an adjustment on a related-party import transaction and the taxpayer files a refund request to the other authority, the other authority must make a correlative adjustment if it views the adjusted price as appropriate. If the KCS or NTS views the price adjustment made by the other authority as inappropriate, the two authorities must come to a compromise.
Other major amendments included in the proposal include:
- Opportunity to present taxpayer’s opinion in determining customs value
- Improvement on profit and general expense ratio under Method 4 of customs valuation
- Exemption from penalties in relation to Advance Customs Valuation Arrangement
- Establishment of a Customs Ruling Examination Committee
- Establishment of a duty amendment system
The proposal represents a positive development in the Korean transfer pricing environment, as it reduces the possibility of a taxpayer being unfairly assessed additional customs or taxes in the event of an adjustment by either authority.
Luxembourg: Circular Issued on Advance Rulings for Finance Companies
A circular (Circular L.I.R. No. 164/2) affecting multinational enterprises with financing arrangements involving a Luxembourg entity was issued by the Luxembourg tax authorities on January 28, 2011. Luxembourg, like the Netherlands, has been a preferred jurisdiction for intercompany financing arrangements, and many multinationals have obtained informal rulings covering their intercompany financing arrangements.
The new requirements were a result of pressure from the European Union to harmonize the pricing approach for financing companies. The circular specifies companies wishing to obtain advance clearance on their intercompany financing arrangements must meet more stringent requirements in order to qualify. The rules necessitate the Luxembourg company must have significant substance in Luxembourg and must bear real economic risks related to its financing activities. The substance requirement necessitates: the Luxembourg company’s board of directors be comprised of Luxembourg residents—or nonresidents with a professional activity in Luxembourg—who have decision-making ability; the key management decisions should be made in Luxembourg; the entity must not be considered a tax resident of another country; and the entity must have a Luxembourg bank account or a bank account with a Luxembourg bank with a foreign branch. A ruling, which is valid for five years, only will be granted if the above conditions are met and an OECD-compliant transfer pricing study, which includes a functional analysis, is prepared.
Malaysia: New Intercompany Disclosure Form Launched in Malaysia
In July 2011, the Inland Revenue Board’s (IRB) Multinational Tax Department (MTD) introduced Form MNE [1/2011] in an effort to increase transfer pricing compliance by multinational companies under section 140A of Malaysia’s Income Tax Act, 1967. While this form does not establish formal transfer pricing rules, it is regarded as a step toward prescribed transfer pricing regulation in Malaysia.
Form MNE [1/2011] is divided into four sections: General Information, Related Party Transactions, Intercompany Financing and Other Information. The General Information section requests information related to the taxpayer’s legal entity structure and details regarding the taxpayer’s dealings with related parties. The Related Party Transactions section asks for information regarding intercompany transaction volumes in relation to tangible goods, intangible assets, services, interest and guarantee fees. The Intercompany Financing section requests disclosure and details of the financing arrangements between foreign related parties and information about whether this financial assistance is interest bearing or interest free. The Other Information section requests a functional characterization of the Malaysian entity and an indication of whether the company has prepared contemporaneous transfer pricing documentation for the current year; outdated transfer pricing documentation would need to be updated for a positive response to the latter request.
Company data from Form MNE [1/2011] will enable the MTD to target companies engaging in significant related-party transactions, consistently reporting losses or poor profits and lacking transfer pricing documentation for audit. The IRB has advised taxpayers to maintain current documentation or pursue advance pricing agreements to avoid uncertainty and potential costs related to transfer pricing audits.
People’s Republic of China: Assault Continues on Multinational Companies
China’s transfer pricing laws took effect January 1, 2008. There usually is a lag between the enactment of the new transfer pricing rules and vigorous enforcement. However, the State Administration of Taxation (SAT) has been aggressively auditing the transfer pricing arrangements for inbound multinational enterprises as part of a concerted enforcement effort.
In a recent turn of events, the SAT has started to compile information from its audits into a database. According to the Deputy Chief of SAT’s Anti-Avoidance Division, more than 1,000 audit cases will be added to the database. The information will be used as ‘secret comparables’ during the course of transfer pricing audits where publicly available data is not available or is not sufficient. The use of secret comparables is permissible in China. Taxpayers are at a distinct disadvantage when secret comparables are used as the basis of the tax authority’s position, as taxpayers have no ability to review the information to determine if it is on par.
According to an SAT official, a number of taxpayers are producing inadequate transfer pricing documentation. The SAT is working on a template to enable local tax inspectors to assess the transfer pricing documentation. Circular No. (2010) 323, issued in July 2010, requires local tax authorities to review and grade at least 10 percent of documentation.
Qatar: Transfer Pricing Principles Introduced
The introduction of self-assessment tax regime in Qatar also included some transfer pricing provisions. Companies registered in the Qatar Financial Center (QFC) must pay a flat corporate income tax of 10 percent. Companies operating in the QFC are largely in the banking, asset management, insurance and reinsurance sectors.
The new rules provide a definition of what constitutes related parties, i.e., control, introduce the arm’s-length principle and provide a process for advance rulings and relief from double taxation. The new rules enable tax authorities to adjust non-arm’s-length intercompany transactions for companies located in the QFC and outside of the QFC using arm’s-length principles. The new rules, retroactive to January 1, 2010, do not require taxpayers to maintain transfer pricing documentation.
Russia: New Rules Require Increased Transfer Pricing Documentation
With the introduction of Federal Law No. 227-FZ by the Russian Ministry of Finance in July 2011, Russia’s transfer pricing rules have been amended to include additional technical detail and increased consistency with OECD Guidelines.
Some of the noteworthy changes to the Russian transfer pricing regulations include:
- The introduction of the arm’s-length principle as the standard for analyzing intercompany transactions
- Augmentation of the number of accepted transfer pricing methodologies
- A reduction in the list of transaction types subject to Russian transfer pricing regulations
- An expanded definition of the term “related parties,” including an increase in the direct or indirect ownership threshold from 20 percent to 25 percent
- Elimination of the safe harbor that previously allowed controlled prices to deviate by up to 20 percent from current arm’s-length market prices
- An expanded list of approved sources from which data may be obtained for purposes of determining an arm’s-length transfer price
Also outlined in the 2012 regulations is the transfer pricing documentation requirements. Taxpayers will be required to prepare transfer documentation for related-party transactions in which the total income received by the taxpayer from all controlled transactions with the same related party exceeds RUB 100 million (USD $3.6 million) in 2012 and RUB 80 million (USD $2.9 million) in 2013. After 2013, documentation will be required for all related-party transactions.
The 2012 regulations also include details about penalties for Russian taxpayers who underpay taxes due to the use of non-arm’s-length transfer prices. However, the penalties will not go into effect until 2014. Between 2014 and 2016, a penalty of 20 percent of the additional tax payable may be imposed on noncompliant taxpayers. Beginning in 2017 and moving forward, the penalty will be increased to 40 percent of the additional tax payable.
Turkey: Documentation Requirements Increased
In November 2010, the Turkish Tax Authority (TTA) published guidelines that further clarify transfer pricing subjects covered in Article 13 of the Turkish Corporate Income Tax Law.
In 2007, the TTA published the General Communiqué Regarding Disguised Income Distribution via Transfer Pricing, which provided details and clarification of Turkey’s formal transfer pricing rules located in Article 13 of the Turkish Corporate Income Tax Law. The November 2010 publication by the TTA contained guidelines further clarifying subjects covered in the transfer pricing communiqué and outlining Turkey’s transfer pricing documentation requirements in greater detail.
The TTA’s guidelines maintain Turkish taxpayers should prepare transfer pricing documentation on an annual basis, covering all intercompany transactions regardless of materiality. The 2010 guidelines place further emphasis on the TTA’s preference for the use of internal comparables to determine an arm’s-length transfer price. However, for situations requiring third-party comparable searches, the TTA has indicated it may further investigate taxpayers with transfer pricing report draft dates substantially differs from the documented performance date of any comparable searches.
The guidelines also provide a sample transfer pricing report outlining what information should be included in each section of a complete transfer pricing report. To avoid future conflicts with taxpayers, the TTA has indicated it would like taxpayers to strictly follow the format of the provided sample transfer report when assembling their own documentation.
United Kingdom: OECD Guideline Revisions Formally Adopted into Law
Her Majesty’s Revenue and Customs (HMRC) has issued a briefing about proposed revisions of its transfer pricing rules found in Schedule 28AA to the Income and Corporation Taxes Act 1988 (for accounting periods ending on or after July 1, 1999). As the OECD Guidelines were modified and finalized in July 2010, the HMRC wants to synchronize its transfer pricing rules with the 2010 revised OECD Guidelines. This should help mitigate double taxation risk for businesses with cross-border activities.
HMRC also is examining its stance on taxation of high-technology intangible property (IP) and its link to research and development. In particular, it has the idea of creating a Patent Box tax regime to locate high-technology jobs and IP in the U.K. In 2011, the HMRC consulted with corporations and other stakeholders for input on this idea.
United States: Recent IRS Transfer Pricing Developments
The IRS has continued efforts to enhance its international tax capabilities, with specific efforts to bolster its transfer pricing enforcement capability. The IRS intends to more effectively identify, examine and resolve transfer pricing cases through the recent reorganization of the Large & Mid-Sized Business (LMSB) division, the hiring of additional technical transfer pricing personnel and the addition of a transfer pricing director. With the expected increase in transfer pricing-focused audits, taxpayers increasingly will benefit from sensible transfer pricing documentation to justify their intercompany pricing.
In October 2010, the IRS reorganized the LMSB division into the Large Business & International (LB&I) division, signifying renewed attempts to integrate and coordinate international tax compliance efforts. The IRS’ international subdivision will add nearly 900 employees, including examiners, transfer pricing economists and technical staff, to the 600 employees in place at the end of 2010. New Transfer Pricing Director Samuel Maruca has been tasked with developing and managing the international subdivision’s transfer pricing strategy, training initiatives and operating policies, as well as the soon-to-be combined Advance Pricing Agreement (APA) and Competent Authority programs. To better coordinate the efforts of the transfer pricing national office and the field, the LB&I division intends to create a transfer pricing advisory group organized geographically, comprising 40 to 60 personnel.
According to Michael Danilack, the IRS Deputy Commissioner (International), there will be an enhanced focus on intercompany transactions of foreign-controlled U.S. corporations and U.S. branches of foreign corporations. With Japan reducing its statutory tax rate, the U.S. will soon have the highest statutory tax rate in the world, and the IRS will be dedicating resources to challenge intercompany transactions that avoid U.S. tax by inappropriately shifting income back to the taxpayer’s home country.
In 2010, Vietnam issued new transfer pricing guidelines outlined in Circular 66 (2010) to replace Circular 117 (2005), as a part of an initiative to enforce Vietnam’s transfer pricing regulations. Circular 66 introduced several changes that strengthened the country’s transfer pricing requirements. During 2011, the Vietnamese General Department of Taxation (VGDT) issued a report citing significant gains in tax revenues due to the release of the 2010 transfer pricing rules and increased audits resulting in transfer pricing assessments. The VGDT also announced it will conduct further audits of the 2008 to 2010 tax years; companies with losses or low profits automatically will be audited.
As part of the compliance initiative, the VGDT also issued surveys asking taxpayers to provide certain company data for 2006–2010, including financial indicators, transaction descriptions and transaction volumes. In addition, the VGDT inquired about the location of these related parties, transfer pricing methods adopted in connection with the surveyed transactions and each company’s compliance procedures implemented after the introduction of Circular 66.
To learn more about transfer pricing solutions or to discuss your company’s current transfer pricing positions, please contact Will James (email@example.com), David Whitmer (firstname.lastname@example.org) or your BKD advisor.
Article reprinted with permission from BKD, LLP, bkd.com. All rights reserved.
As a working mother of two, Jo Kirchner identified with the growth goals of the founders of Primrose Schools — shifting their half-day preschools to full-day child care facilities that offered high-quality preschool.
“They were really seeing a shift with professional working women who needed to go back to work and were looking for quality care,” Kirchner says.
She joined the organization in 1988 as a consultant to assist with the shift. Now, serving as president and CEO, she continues to modify the school’s model to grow the Acworth, Ga.-based company, which now encompasses 235 schools in 17 markets.
Smart Business sat down with Kirchner at the 2011 Ernst & Young Strategic Growth Forum to discuss how Primrose Schools continues to innovate its model using feedback for curriculum improvements.
Q: How do you engage your constituents to identify their needs?
In the beginning, it was a lot of consumer research — research studies that we were doing or outsourced research companies that would do surveys for us. But today, social media has enabled us to engage with them directly. Not necessarily the children, but with the staffs, with the parents, with the franchise owners and the people in the communities that we serve. We’re able, through social media, to connect to them beautifully. They’ll tell us exactly what they want.
Q: How do you gather and filter feedback to find the best ideas?
Our franchise owners are very savvy with social media. They have a tendency to funnel those innovative ideas up that they’re getting in their local markets, because the franchise owners (and) the parents have relationships. … So either via social media or via direct, the parents are giving them ideas and best practices or recommendations.
An innovative idea that comes from the field, we’ll test it in our school and we’ll test it in the field. Then we roll it out. … The best way to make an idea really stick and be imbedded in the organization is to engage the franchise owners in developing it, and then launch it in a consistent way where you’ve worked out all the bugs.
For example: music. We knew there was a weakness in the music program that we had because we were getting feedback from parents via social media and because when we were assessing the skill sets of the children they were weak in the music area. So we went back and found a partner out in the marketplace that had a fabulous music program … and embedded it into our curriculum.
Q: How do you assess students to evaluate the curriculum?
We pre-assess and post-assess the children in the four- and five-year-old programs so we can see through this assessment research how well the children are progressing. And if there’s an area that they’re not getting what they need, we’re then that next year working on embedding it in the curriculum and rolling it out.
We are the only for profit education company in America that’s delivering exactly the same curriculum in every school, every week, every day, every year. And so if we know it’s not a teacher, it’s not the room and it’s not the child, then it’s the curriculum (that’s the problem) if we see something consistently across the country.
Q: What role does technology play in innovating curriculum?
For instance, we’re Skyping in the four-year-old classrooms with children in China. We’re bringing iPads into our after-school program to begin to work with children with the iPads, really using technology as much as we can.
Q: Where do you see the future of Primrose Schools?
I had an opportunity to visit Dubai to accredit the American International School. And while our plan is to double the size of the company here in the United States in the next five to six years, it became really apparent to me at the American International School that I visited that there was a great opportunity for preschools in other countries.
We’re getting people contacting us because obviously education is a driving force for the future work force, and all the research says that brain development in the first five years has a significant impact on a child’s learning and life skills. So early childhood education is really becoming well-recognized as a very vital component, yet most countries don’t have a proven model for that. So what’s next for us is to start researching international and beginning to look at how we’ll deliver in an international market.
For over 50 years Colliers International has provided real estate solutions to many of Houston’s leading corporations, institutions, and small businesses.
Leading companies such as 3M, Crown Castle, Talisman, Christus Health, Fidelity and The Coca-Cola Company rely on them for strategic guidance and creative solutions. That’s why Colliers International is ranked the second most-recognized commercial real estate brand in the world by the Lipsey Company.
Smart Business spoke with J. Patrick Duffy, ICSC, MCR, the president of the Houston office of Colliers International and chairman of the Colliers retail services group, about how the company overcomes obstacles and employs innovation to be on the leading edge.
Give us an example of a business challenge your organization faced, as well as how you overcame it.
The commercial real estate market saw a significant drop in business after the capital market meltdown in 08. While A drop in volume was predictable, the length (time before recovery) and depth of the decline were very difficult to predict. We knew that we needed to tighten our belts and get ready for a few years of substantially decreased revenue. At the same time we saw the downturn as an opportunity to improve our efficiency and potentially grow our market share while our publicly traded competitors, who had more short term earnings pressure, were forced to make more drastic cuts. We made the decision to cut any luxuries from our operations but maintain the core support services that our clients and brokers required to achieve the best results possible despite the current market conditions. Our partners agreed that short term losses, while not preferred, were acceptable if required to maintain our services at a high level and to keep the skilled people with the organization.
We had cash reserves and no debt going into the downturn which made this decision possible and when we made the decision to acquire a friendly competitor and obtain a new office location in Sugar Land, our partners opted to add additional capital rather than use capital reserves for the expansion.
The result of this action was that we kept our brokers and clients happy, managed to break even while we grew the firm in a depressed market environment and grow our market share. We implemented weekly training and streamlined many of our processes during the downturn and are enjoying the fruits of those efforts now that the market has recovered.
In what ways are you an innovative leader, and how does your organization employ innovation to be on the leading edge?
Colliers has a robust international platform and is investing globally in training and information technology which gives us a real edge over most of our competitors. I was given the opportunity to be a trainer for Colliers University classes and have leveraged that additional training to bring the best practices of our global platform to Houston in weekly one hour training sessions. We are taking the best ideas from around the world and where appropriate, applying them here at home in Houston.
We have embraced social media and technology but a great deal of our “innovation” is just acknowledging that there is always a better way to do everything, looking for examples and embracing positive change.
What is the greatest lesson you’ve learned and how have you applied it?
Making sure that there is alignment within the organization as to who we are, where we are going and why is critical. We have a running two year plan that every person has a copy of and has had the opportunity to comment on. Having clear vision and a plan to make it happen energizes most people and makes work more fun. We try to keep it light but focused.
How does your organization make a significant impact on the community and regional economy?
We help companies acquire and dispose of the real estate that supports their business. That may be a single asset or a portfolio of properties. We assist existing companies expand or relocate to improve their profitability and prosper. We guide companies that are considering the Houston market understand the dynamics of this area and make good decisions about where to locate and how to control their occupancy costs for long term success.
We also take an active role in the community through work with charitable and community organizations. As an example, we hold a golf tournament every year to raise funds for a selected charity (new one each year). This year we are helping “Kids’ Meals” purchase and distribute over 20,000 meals to Houston pre-school aged children, living in poverty who are in need of food.
How have you added “value” to the products and services you provide to customers and clients?
Real estate is one of the largest expense (and asset) line items for any company after their payroll costs. By bringing our experience in locating the right real estate for their particular business and negotiating the best terms for the control of that real estate, lease or purchase, we can have a significant impact on the profitability and growth of a company.
In many cases we help our clients with creative solutions for disposing of assets that they no longer need or in the case of investment properties are ready for conversion to the next asset or cash. Our professionals average over 18 years of experience and work collaboratively to make sure that we bring the best ideas and implementation to whatever commercial real estate problem our clients may have.
What is your philosophy on going “above and beyond” for customer service?
There is nothing better than getting a “wow” out of a client. Put simply, that is our goal. Our mission statement is that we will “deliver a superior commercial real estate experience with an absolute dedication to exceeding our clients’ expectations.” That mission statement is framed and on everyone’s desk. We try to live it.
J. Patrick Duffy, ICSC, MCR, is the president of the Houston office of Colliers International and chairman of the Colliers retail services group. Reach him at (713) 830-2112 or Patrick.Duffy@colliers.com.
Don’t take this the wrong way, but Lars Bjork has found his share of headaches as he’s dealt with his company’s rapid growth over the past few years.
It’s a great problem to have, right? As an untold number of American businesses have struggled just to tread water, and numerous large, well-known companies have undergone very public bankruptcy proceedings, Qlik Technologies Inc. has been heading in the other direction. The business software solutions company, which brands itself as QlikTech, has sprouted from $44 million in 2006 revenue to $226 million in revenue and 1,000 employees in 2010.
But fast growth still puts great stress on a business. For Bjork, QlikTech’s CEO, the question of growth has largely become a question of finding and retaining the best people.
“We employ a lot of people, we hire a lot of people, and the challenge is, how do you continue to sustain a certain rate of that, because we want to continue to grow the business,” Bjork says. “The growth numbers for us over the past few years have been substantially higher than the average company. So, how do you keep the quality high for the hires you make, but still bring on a lot of people? Within that, how do you onboard them, and get them ingrained with our culture and values that we hold to be so important within QlikTech? That’s the challenge: How do you find people at this growth pace, and how do you get them on board in a way that they can thrive in this type of environment?”
At QlikTech, hiring isn’t just an issue for the human resources department. Every leader in the company, including Bjork, has taken an active role in ensuring they attract the right type of people for the growing business and can retain them. It requires not just an eye for talent, but a well-defined culture and an understanding of how all the puzzle pieces need to fit in order for the employees and the business to remain successful.
If your stated hiring mission is to find employees who fit your culture, you’re saying a lot more than you might realize. Even if you have distilled your core values down to a few bullet points that can easily fit on a lunchroom poster, you won’t find a single type of person that will easily fill the mold you have created.
Some people aspire to be managers. They want to climb the organizational ladder and become less specialized as they gain more experience. Some people want to drill down in their area of specialization and carve a niche for themselves. You have to find a place for both in your company, because your company won’t be able to function if it doesn’t have a balance of aspiring leaders and aspiring specialists.
“We think that people who are going to be attracted to a company like ours will want to continue to develop professionally, they’ll want to work within a team and have a social element to their work,” Bjork says. “Some of them want to continue to grow in their specific role as the company continues to develop. Some have higher aspirations to ascend to the managerial level. What we try to do is avoid a common mistake that a lot of businesses make, which is to simply take the best expert in a given area and make them the leader. As an example, you might take the best doctor and make him the head of the clinic. But your best doctor might not be your best leader.”
Bjork and his leadership team strive to achieve that balance by putting job candidates through a rigorous series of interviews, in which a candidate’s personality is assessed from different perspectives.
“It’s not only a direct manager doing the interviews,” Bjork says. “It could be the manager’s manager, or a person in a peer position. It could be a member of HR or another senior person. It does make it a bit of a tedious process, because if you want to hold standards high, you tend to be picky, and you’ll probably have to look at more people.”
Ultimately, Bjork is trying to get past a candidate’s interview façade and uncover the real personality traits. Whether the person is interviewing for a managerial role, a sales role or any other position, Bjork simply wants his team to be able to make an honest assessment.
“I want to see how people present themselves even more than I care about what they say,” he says. “It’s also about what they don’t say and what they don’t ask. It’s about finding out their interest level in the company and what we do. Is there interest very limited, are they mainly concerned with getting their foot in the door and getting a job?
“That’s why I ask the question, ‘What do you want to be when you grow up?’ It’s not meant to offend anyone, it’s more about getting to the point of deciding what you would do if you could choose. If everything was laid out in front of you, what would you do? It doesn’t mean that you have to aspire to be a high-ranking manager. You can be fine in your role, and developing your expertise in that area. But you still want to develop that skill set, and you can articulate that in way that holds up.”
No matter which way a job candidate leans – toward a career in management or a career in their field – the different kinds of personalities and skill sets that can thrive in a high-growth company need to have one common trait: the desire to grow along with the company. No matter how that trait manifests itself in a given employee, Bjork says it is essential.
“You’re looking for very driven people, people who want to accomplish something,” he says. “They get things done, they want to be given a lot of responsibility, and they aren’t afraid to be held accountable for it. When we hire someone, we point out what we would like the company to do, then you figure out explicitly how to do it. That is why we hired you.”
Strengthen the bond
QlikTech is now headquartered in Radnor, Pa., but the company was founded in Lund, Sweden in 1993. With operations that serve customers in more than 100 countries, QlikTech decided to use the company’s birthplace as a central location to indoctrinate new employees in the culture and values. Once a job candidate has passed the interview process and accepted a job offer, QlikTech sends the new employee to Sweden for a week of training.
“We still have a lot of our company’s heritage in Sweden, and our R&D is there,” says Bjork, a native of Stockholm. “So we send all employees there for an introduction week, where we go through our culture, our values and teach some of the key processes. It’s a very interactive week, where you have to work with other nationalities as well. It has happened where we have pulled people out of their employment because they couldn’t make it through the week. It doesn’t happen often, but we have done it in the past.”
The training week in Sweden is a test as much as it is a primer. The interview process can reveal a great deal about prospective employees’ personality and character traits, but the training week tests their ability to stay motivated to succeed in the QlikTech environment.
It’s the gap that every company has to bridge when onboarding new talent: taking the hire from concept to practice. In order to feel motivated, new employees have to feel the energy and passion that their coworkers and managers have for the company. Particularly in a growth-oriented environment, as conditions are changing at a rapid pace, employees need to feel a sense of motivation around moving forward and working toward what’s next for the company.
As with many things in a business, it all starts with the example set at the top.
“You have to walk the talk, you can’t talk the talk,” Bjork says. “There is nothing you can put on posters on the wall. You have to live a culture by showing it through actions. It’s like with kids, it’s not what you tell them to do, it’s what you show them to do. Otherwise, the message becomes very empty and shallow.”
Be a motivator
Once new QlikTech employees come back from their training week in Sweden, their sense of motivation determines how far they will ascend professionally, and how far they will help move the company. At some point, the questions asked during the interview process, the lessons taught in training and the example set by management has to result in something tangible in the employee’s performance, otherwise you might have to call the hire itself into question.
“I’m trying to embrace the fact that motivated people will do more than people who are not motivated,” Bjork says. “They have to feel to a very great extent that their piece of the puzzle adds up to something that becomes very successful, both for them and the company. It’s especially true for younger people. Many young people have grown up in an environment where financial stability is something that they have taken for granted, so money is not the No. 1 motivator for them at work. For my generation, and especially my parents’ generation, that was a much bigger motivator. For younger workers, it comes down to ‘I want to be involved, I want to make an impact, I want to learn more.’ That is how you’re training them, and that is what drives their motivation.”
Once you have set the example, and believe you have motivated your growing work force to a satisfactory level, that isn’t the time to let up with your communication. As the leader, you are in the spotlight at all times. You need to recognize that motivating your employees is an ongoing process of taking the raw-material talents and skills that your employees bring to the table each day and converting them into the momentum that powers your company for future growth.
“A culture is defined by how people interpret the organization when they walk in,” Bjork says. “People need to see an open environment, a flat organization, a place where it is easy to approach anyone. People here know they can walk into my office, my door is open almost all the time, and you can simply be yourself. I don’t need to point out to anyone that I’m the CEO. They know I am CEO, so I just want to be myself when I interact with everyone. That is where the example starts, and it’s true for any senior manager. Recognize people, give them praise, talk with them about what is going on in the business. Don’t sit in the ivory tower. Continually motivate your people and promote the idea that you are working as a team.”
How to reach: Qlik Technologies Inc., (888) 828-9768 or www.qlikview.com
The Bjork file
Born: Stockholm, Sweden
Education: Business administration degree from Lund University, Sweden
What is the best business lesson you have learned?
Trust your people, because they can work miracles for you.
What traits or skills are essential for a business leader?
You need to be comfortable with hiring people who are better than yourself, in the sense that they are experts in their field, and you are willing to be a good listener. You need to be comfortable with not allowing yourself to just have a bunch of yea-sayers around you.
What is your definition of success?
It is the ability to meet or exceed expectations, whether that expectation is from an employee, a customer or a shareholder.
Kay Napier freely admits that she felt a little lost in early 2010.
After years as a successful vice president with Procter & Gamble and McDonald’s, she had taken over as CEO of Arbonne International LLC in August 2009. But she couldn’t admire the view from the summit for too long. About a month later, it became apparent that Arbonne was headed for a crisis.
“The company had grown very rapidly and hadn’t built the infrastructure that they needed to be successful, either at the current volume rate or to get set for future growth,” Napier says. “There was a lot of volume sold that didn’t get to the end consumers’ hands. There was a lot of positive momentum in the business, but not the follow-up that needs to happen from a training standpoint. So in that setting, what goes up must come down.”
The company, which sells health and beauty products to consumers through more than 30,000 independent consultants, was suffering from poor business practices that had created a large amount of debt. In September 2009, the company’s board made the decision to file for Chapter 11 bankruptcy, in order to restructure the debt to equity and allow the company’s lenders to become the owners of the business. The company officially declared bankruptcy in January 2010.
Napier had never gone through a bankruptcy before, so almost as quickly as she settled into the CEO’s role, she was undergoing a baptism by fire, dropped directly into the middle of an organizational turnaround.
“I was very concerned, as were the potential new owners, that we would have a lot of defections, particularly in the field because these people are independent contractors who can go work for another company very easily,” Napier says. “Any time people here the ‘B’ word, you’re going to be concerned about defections.”
Napier had to get nearly 1,000 internal employees, as well as tens of thousands of consultants, to see past the bankruptcy proceeding and look toward a new future with Arbonne. The new CEO had to instill confidence in a company that she was still learning about herself.
Read and react
In some ways, Napier is glad she was still a rookie CEO when news of the bankruptcy first emerged. She didn’t have a chance to overthink things. Much like a first responder in a disaster situation, she had to rely on her training and instincts. And her training and instincts told her to start informing everyone in the organization, employees and consultants alike.
The first item she needed to make clear was that the company was not in jeopardy of going under. Everyone was still going to have a job, both now and in the future.
“In this case, there was no liquidation,” Napier says. “Everyone got paid, it was business as usual largely. But you can say that, and your people will come back and say ‘Sure, just wait until next month when you cut our paychecks or whatever.’ I had to trust that our new owners and potential owners were telling me the truth regarding that, because that’s what I was communicating to our troops.”
To help simplify communication and ensure that Arbonne’s corporate leadership was broadcasting a consistent message to everyone in the company, Napier and her leadership team produced a series of videos that laid out, in a straightforward manner, what the bankruptcy meant for the company.
“They were done in an interview style,” Napier says. “I told everyone in the video that I had to learn about this, too. I told them what this really will be is a strengthening of the balance sheet, because for us to continue with the level of debt we had would have been a very challenging business situation. We also wanted to outline that everyone would get paid, and that this would ultimately be a good thing for the organization, not a bad thing.”
Your messages in a time of crisis should be realistic, but whenever possible, optimistic. Employees normally only see surface evidence of what is happening within the company, and if the surface evidence looks like bad news, they’ll start envisioning worst-case scenarios — unless you intervene with the truth.
“Communicating in these situations is like producing a good ad,” Napier says. “Someone has to see it six times before it really sinks in. If you assume saying it one time is enough, you’re wrong. You have to reassure your people twice as much as you think you need to. In my case, I was just coming in, so they didn’t know me from a hole in the ground. They had to trust that I was telling them the truth, and that was the case for both the employees and the consultants.”
Napier says communicating during the bankruptcy wasn’t a complicated process. It was a matter of doing simple things repeatedly.
“You know your subject, which is an old Dale Carnegie principle, and you know your heart,” she says. “I think that is some of the best training for any communicator. I was definitely living and breathing my subject, and I maintained a positive attitude because I wanted to be positive about this situation. I knew this had the potential to turn into a great situation for us over the long term.”
Get others involved
In addition to a jump right into crisis communication, Napier also had to jump into prioritization. She was already working on a number of new initiatives when bankruptcy proceedings began, and she had to determine how to best lead the company on a day-to-day basis in addition to piloting the company through the bankruptcy. It took the involvement of Napier’s leadership team, which at the time was a combination of holdovers from before.
“There wasn’t a lot of balance right away,” Napier says. “I’d be lying if I said there was balance. I had to perform some delegation of responsibilities, but at the same time, there were gaps with what I had in terms of resources, so I couldn’t delegate everything. For example, I didn’t have a head of marketing until we emerged from bankruptcy, so in addition to the CEO hat, I had to wear the marketing hat, as well as the bankruptcy hat. I think we did well collectively with the bankruptcy, and I think I did reasonably well as a CEO overall. On marketing, I think I deserve a C-plus. There were things that happened with marketing that, if I had more time to devote to it, we would have done a better job. But I could only work so many hours in a day.”
When Napier did delegate, it was more out of necessity than by design. But by trusting her team to take on responsibilities and help her lead, she began to develop a sense of familiarity with them, and they began to understand her leadership style and trust her decision-making skills.
“For any leader in a situation like this, I would tell them that whatever you do is going to be magnified,” Napier says. “If you’re not positive, no one is going to be. Even if you are a realistic executive, and you might be realistic about your bottom line and financials, you have to be a cheerleader when leading your management team and the people in the field. Because if you don’t believe in what is going on, they’ll never believe.”
Napier kept coming back to the old saying about making lemonade when life gives you lemons, and began preaching that to her leadership team. She asked her team to follow her example by remaining positive and finding whatever positives might exist within the crisis.
“The first thing you’re going to do when considering joining a company is decide whether there is a future in terms of business growth,” she says. “When I looked at this company, I knew there were financial issues, but I believed in the fundamentals of the business. That is what allowed me to come in and be positive about the future. You can make lemonade out of lemons in most situations, and people are going to keep looking to you to do that. So you need to maintain a positive attitude even when you just want to scream and run out the door. If you stay positive, others will respond, and you will start to feed off of each other.”
Over the course of the first months on the job, Napier’s focus on getting others upbeat and involved started to pay dividends.
“When I announced to the national vice presidents that we were filing for bankruptcy, one of our consultants told me that she was excited that we were going for bankruptcy,” Napier says. “I still kind of kid her about it, because it summed up the attitude that we’re going to turn this into a great thing for us, and we have. We have great new owners who are in it for the long term; they don’t force me to do anything that isn’t right for the business in the long term and they challenge me in a very good way. It’s all in the power of how you approach it, how you get others to approach it, and continually trying to make lemonade from the lemons you were given.”
Prepare for the future
Arbonne emerged from bankruptcy in 37 days and rebounded to post $353 million in revenue during 2010.
“I think it’s still the world record for the fastest Chapter 11 emergence in history,” Napier says.
To make sure the circumstances that led to Arbonne’s bankruptcy never appear again, Napier and her team have begun to reform how the company does business. In particular, Arbonne has revamped its training regimen for independent consultants.
“Before the bankruptcy, there was a lot of product being sold by people who were not ready to enter the business,” Napier says. “It wasn’t a majority of the growth, maybe 20 percent, but no matter what business you’re in, if you recruit somebody to do a job, but don’t teach them how to do a job on an ongoing basis, you’re going to be a flash in the pan. We had a lot of that, people being recruited with no follow-up.”
Napier and her team have produced a video aimed at giving prospective consultants a detailed overview of Arbonne, its business concept and what is expected of consultants from a business standpoint. Arbonne’s leadership team has also solicited input from the field on the training topics most in need of emphasis.
“There were not as many company-generated training devices as there should have been,” Napier says. “The problem is that when you leave anyone alone – be it employees, consultants, your kids, anyone — if you don’t give them a structure, they’re going to create their own stuff. So you want to get everyone involved in that creative process. Our consultants are much better at creating these training vehicles in collaboration with us than we would have been by ourselves.”
Napier has learned a lot of what she now knows as a CEO on the fly. Now that she has a chance to step back and look at Arbonne since the bankruptcy, she says she is glad that her first few years on the job didn’t just follow the script. In the long run, the need to react to a crisis is essential for any CEO.
“It’s kind of like your mother teaches you: Get in there, and do what you have to do,” Napier says. “I had never been through anything like that before, and I think my career background prepared me to walk into a situation that I knew nothing about and do the best I could. You have to know what the goal is and coalesce around that goal.”
How to reach: Arbonne International LLC, (949) 770-2610 or www.arbonne.com
The Napier file
Education: Double major in studio fine arts painting and economics from Georgetown University
First job: My first real job outside the house was at a pharmacy in Montgomery, Ohio, when I was 16.
What is the best business lesson you’ve learned?
When you’re dealing with something difficult – be it a bad boss, a bad experience or just a challenging experience – you can use that to emerge as a better leader, better manager and better person. I am a huge believer in persistence. If it doesn’t kill you, it’s going to make you stronger.
What is your definition of success?
In general, success is reaching your goals, and feeling like you have accomplished something. If you’ve set your goals as a person or a company, and you achieve some of those goals, you start to feel a sense of self-worth and satisfaction. Outside of business, success also comes from learning about life, self-development and helping your family achieve their goals.
Mike Duggan always found it offensive that hospitals profit more when a patient’s health problems are more severe.
“It’s really true: Hospitals make more money the sicker you are,” says the president and CEO of the Detroit Medical Center. “If we recycle the same sick people through hospitals over and over, the doctors and hospitals make more money from that. The fact is, the worse off patients are, the better the doctors and hospitals are, which never made any sense to me.”
Last May, Duggan and his leadership team at DMC decided to do something about it by applying to become one of 32 medical systems nationwide that will participate in the Medicare-operated Pioneer Accountable Care Organization Model program. DMC was officially named a program participant in December. As part of the program, DMC will receive money from the federal government based on its preventative-care track record moving forward.
“It started off as a moral question, and most of the DMC physicians agreed with it,” Duggan says. “Doctors went into this business to keep people well, and the idea that you succeeded more if you keep patients well appealed to a lot of doctors, it appealed to us, but you are going to find that most hospitals in the country didn’t apply for the Pioneer ACO, and really are resisting that direction.”
One possible reason for resistance is the fundamental changes required at the operational level. The ACO model requires a high level of coordination between doctors and hospitals to ensure that patients receive adequate preventative care and are maintaining follow-up doctor appointments after a hospital discharge. For doctors used to running their own practices, Duggan says they can experience some culture shock when placed in an environment where they and hospital administrators have to hold each other mutually accountable for a patient’s care.
That is the challenge that Duggan has faced, and will continue to face throughout the year. With 14,000 direct employees, and more than 1,000 physicians positioned as 50 percent stakeholders through DMC’s physician hospital organization, Duggan has to keep 15,000 people focused on a new approach to health care by emphasizing the reasons for change, and keeping everyone plugged into the organization’s progress.
Give them the paintbrush
When outlining any rationale for change, you have to spell out the reasons behind the change if you want to get buy-in throughout your organization. In DMC’s case, however, Duggan tried to put the change in the hands of his doctors and employees as much as possible. He outlined the resources at DMC’s disposal, the business model, and how the resources and model, if properly implemented and utilized, would make the ACO model a success. From there, he wanted the 1,000 stakeholder doctors to put two and two together, and come to the conclusion that this was the right way for DMC to operate.
Duggan wanted the stakeholder physicians to see that DMC had a highly integrated electronic medical records platform, a doctor-driven operational structure and a constructive relationship between doctors and administrative staff.
“We were the first system in Michigan to become 100 percent electronic, and that system is now being rolled out to the doctors’ offices,” Duggan says. “That means we’ll have someone in a central control capacity that will be able to see that Mrs. Jones was discharged on Dec. 7, she has a follow-up appointment with her doctor on Dec. 11, and then we can see if she showed up to her appointment. If she didn’t, we’ll be on the phone asking if she needs a ride or needs a nurse to come to her house.”
The real-time electronic updates have fostered a positive working relationship that is essential when implementing a system that requires coordinated movement from many different parts within an organization. Ultimately, no matter how you accomplish it, in order to develop the strong working relationships that can help smooth a large transition, the right hand has to know what left is doing. If there is a sense of disconnect, communication has broken down and problems can arise in your plan’s implementation.
“The great thing about this is I have been providing administrative support, but this has been a doctor-driven process,” Duggan says. “The doctors are driving the medical side, and we have been working together seamlessly. If you talk to doctors at a lot of other hospitals, there is a contentious relationship with them and the hospitals. When you have people that want to be a part of a big change like this, you have to keep them close and connected. I think we’ve been effective in doing that.”
Another factor working in favor of Duggan’s plan is the fact that doctors have, in a very real sense, bought into DMC’s future. In December 2010, the health system became a physician hospital organization. The 1,000 doctors that paid $1,000 to join the organization represent nearly half of DMC’s 2,500 affiliated physicians. By literally buying in to DMC’s future, the doctors who joined the PHO have become advocates to their peers for the switchover to an ACO-based operating model.
With that level of engagement, Duggan has had a great deal of help in aligning the organization.
“I don’t spend a lot of time with skeptics,” he says. “I just say, ‘Here is the reason why I think it makes sense to sign up; if you don’t want to sign up this year, you could sign up a year from now after you see how it all works. It’s your own choice.’ But so many doctors have gone and persuaded their colleagues that this is the right thing to do. And it’s because we’ve taken that approach. The key is to be totally honest and direct, and don’t twist anybody’s arm. If you believe this is the direction to go, it’s going to be a lot of fun. If you don’t believe in this direction, nobody is going to criticize you, and you can reevaluate a year from now.”
Build on the momentum
When you’re trying to build support for a large-scale organizational change, it’s nice to have people take up the cause and advocate to their peers, even if you don’t ask for the help. But as the leader, you often can’t just wait for that support to sprout on its own. You have to cultivate it. And the way you cultivate it is by searching for the dreamers and the complainers in your company.
The dreamers are the people who still have a sense of idealism about their work. They still want to change the company, the industry and the world for the better. The complainers might seem like a destructive force on the surface, calling your decisions into question, but Duggan sees something else.
“The person who is always calling you, complaining that you aren’t doing enough, that is normally where I start looking for my change agents,” he says. “The person who doesn’t care enough to call up with a company probably isn’t your guy. But I’ve always relied heavily on the people who care enough to call up. I engage those people, because while some complainers are just complainers, a lot of complainers are problem solvers who just want a shot to make things better. Your most vocal critics are often your best change agents when you’re trying to promote a change like this.”
Duggan points to one of the other administrators at DMC, who has been a highly antagonistic critic ever since Duggan was hired as CEO. Duggan has repeatedly sought his critical colleague out for service on panels, knowing that he’ll bring a different perspective to the table. When you’re trying to facilitate a major change, it might seem counterintuitive to give a voice to your harshest critics. But bringing them to the discussion can accomplish two things — it can bring a fresh outlook to the proceedings, and it can win over not just the critical person alone, but also like-minded skeptics who see you accepting a differing viewpoint.
Duggan got his dreamers on board during a trip to a seminar in Minnesota last June.
“We had a couple of private doctors who have had a drive their entire life to change the way medicine is practiced,” Duggan says. “When the feds had the seminar in Minnesota, I got those doctors to go along with me. After three days, they were very excited, and we came back to Detroit with that attitude. I’m picking people who are leaders and change agents by their nature. If you engage them and allow them to take an active role in the direction you’re headed, you don’t have to do anything. They’ll just take over and embrace what’s happening.”
Duggan placed his dreamers and complainers in influential positions, leveraged their passion to improve, and allowed their attitude to become contagious to the rest of the DMC organization. Once the doctors bought in, administrators and staff members followed the example and started to believe in Duggan’s plan.
“I think once the hospital staff and administrators heard the doctors talking with more enthusiasm, we started to see more interest in our meetings,” he says. “Now, I think you’ll find the leadership at all of our hospitals deeply involved in the planning. But it’s like any new idea. It takes awhile to catch on.”
Any major change is going to challenge your ability as a communicator. Even after the initial rollout of your plan, you’ll need to keep your message in front of your people, and continually give them opportunities to offer their opinions and ask questions.
Like many leaders of large organizations, Duggan has created numerous touch points between himself, doctors and hospital staffers, in an effort to ensure that their engagement level doesn’t wane as the ACO model moves from a novel concept to an everyday way of life. Duggan says communication is still a work in progress.
“If the doctors have one criticism, it’s that we have not communicated frequently enough,” he says. “There is a whole series of steps involved, and we’ve been putting more rigor around it. I wanted a monthly newsletter, but it didn’t go out every month. We were busy, so we stopped and said ‘You know what? This is going to be a priority from now on. This is going out every month.’ I think we’ve improved, but there are a lot of grind-it-out details that you have to keep executing on. There hasn’t been any magic to it.”
To an extent, the challenges Duggan faces are not unlike a franchisor. The leader of a franchise-concept company might have more control over the customer experience, but Duggan still has to get independently owned businesses under the same corporate umbrella to adhere to a uniform set of standards and practices, as DMC forges ahead into uncharted waters in the U.S. medical field. So far, Duggan believes the results have been good, but it will be an ongoing process for quite awhile.
“That’s what is going to be fascinating about all of this,” Duggan says. “The doctors have agreed to the standards and protocol, they’ve agreed to be on electronic records and be measured, and now we watching all these different businesses find a way to implement new standards in a way that works for their practice. It’s going to be fascinating to watch.”
How to reach: Detroit Medical Center, (888) 362-2500 or www.dmc.org
The Duggan file
Education: B.A. and juris doctor, University of Michigan
What is the best business lesson you’ve learned?
I don’t tolerate feuds among the management team. That is a guiding principle in business, for everyone to see the team as unified. You can’t drive change with people bickering with one another. You can disagree, but you can’t allow people to hold grudges.
What traits or skills are essential for a leader?
Honesty. Really, beyond that, anything else is secondary.
What is your definition of success?
Essentially, it is succeeding in making the world a better place than how you found it.
According to Joe Takash, the president of Victory Consulting, most people don't get or give enough feedback. In his latest Smart Connection video, "Four tips for giving feedback," Takash demonstrates four tips to giving good, constructive feedback:
1. Frame it
2. Share it
3. Back it
4. Then listen
Joe Takash is the president of Victory Consulting, a Chicago-based executive and organizational development firm. He advises clients on leadership strategies and has helped executives prepare for $3 billion worth of sales presentations. He is a keynote speaker for executive retreats, sales meetings and management conferences and has appeared in numerous media outlets. Learn more at www.victoryconsulting.com.