Clare DeCapua

Sunday, 25 November 2007 19:00

Inside coverage

Business owners are well aware of how expensive defending themselves in a lawsuit can be, and that the proper insurance can lessen the burden. What they may not know is that more than half of all corporate claims are brought by employees, making Employment Practices Liability Insurance (EPLI) a specialized form of coverage that’s worth investigating.

Alfonso Galvez, commercial insurance broker with Westland Insurance Brokers, points out that EPLI is often an afterthought for employers.

“Generally, people are so busy building their business, they lose sight,” says Galvez, a 20-year veteran of commercial insurance. “People are concerned about maybe the theft of a computer or a fire that might happen in their facility. But one of the most common claims that can occur would be an employee-related claim.”

Smart Business spoke to Galvez about the role EPLI plays in protecting a company’s assets in the event that it’s the target of a work-related lawsuit.

What is EPLI and what kinds of claims does it cover?

It’s specialized insurance coverage that protects employers against claims in work-related lawsuits. It includes wrongful termination, harassment and discrimination based on age, race and gender.

There’s also an option to purchase third-party discrimination and harassment insurance. For instance, in a retail store a patron may feel like he or she is being discriminated against because of race. Or it could be a situation where you have a manufacturing company and perhaps a vendor pays a visit and the receptionist harasses that individual. These are examples of third-party claims as opposed to claims that take place within the work force of a particular company.

Other employment-related suits that may be brought against an employer and are included in this type of policy are breach of an employment contract, negligent evaluation, wrongful discipline and mismanagement of employee benefit plans.

Who should consider EPLI?

I believe that every company should have this coverage in force. Companies that are most vulnerable are generally small- to mid-size companies. They may not have either the necessary capital to defend themselves against an employment-related suit or other resources, such as a human resources manager who is current with rapidly changing employment policies.

What kinds of expenses does EPLI cover?

Among the costs that are covered in an EPLI policy are such things as judgments that are handed down in court. It also includes coverage for general expenses to discover what the alleged claim is or what occurred. Also included are legal expenses, which — particularly in California — can rise rapidly.

How does a company assess its risk for employee-related claims?

It’s determined by the type of company it is, how many employees it has, and if it’s had any past claims history. It also depends on whether or not the company has instituted any kind of employment policies and procedures. It’s really important that the company have an actual employee handbook and policy manual to help reduce the likelihood of a claim.

Does employment law affect EPLI?

Yes, it really does. One of the challenges that most companies have is trying to stay current with all the changes in state and federal employment-related laws. That’s why it’s especially important to have this kind of coverage because it adds another layer of protection in the event something changes of which a company is not aware.

What else can EPLI coverage provide a company?

One of the newest features of many Employment Practices Liability policies is that insurance companies include free legal hotline assistance. A number of insurance companies provide a set period of prescribed time to call a designated law firm to ask questions about either employment law or a situation that has arisen within your company.

You can also get what is referred to as loss-control services. This provides assistance with the information you can include in your employee handbook and policy manual. For instance, you would include information related to zero tolerance in the workplace and state in the handbook how you would handle a report of an alleged harassment or discrimination incident.

Some policies also provide you the option of choosing your own counsel and therefore having more control over the defense and settlement of your claim.

ALFONSO GALVEZ is a commercial insurance broker with Westland Insurance Brokers. Reach him at (949) 862-3323 or agalvez@westlandib.com.

Friday, 26 October 2007 20:00

Character counts

Starting out, every business owner has high expectations of the kinds of people they want to surround themselves with: hard workers with integrity and character who can get the job done. The day-today operations of a business can draw an owner’s focus away from these ideals, but they’re still attainable if you’re willing to put in the effort to bring in the best.

Bill Graham, CEO of The Graham Company, believes business owners can’t afford to cut corners when bringing in both employees and customers. While it might cost more upfront, being selective pays off in the long run with greater longevity with customers and employees, happier employees and an excellent reputation.

“It’s very difficult to find both clients and employees that are good businesspeople,” he says. “If they want to be successful, salespeople — or producers in the insurance business — need to go after the very best customers, the cream of the crop.”

Smart Business asked Graham about what to look for in business associates, which includes customers, employees, suppliers and vendors.

You talk about working with good business-people. What would you say constitutes a good businessperson, and how do you handle clients who don’t fit this standard?

To me, a good businessperson looks at cost, but also looks at the value they are getting for a certain price. For example, one company might sell you something for $15 while its competitor sells a similar product for $7.50. The $15 product returns $45 to $60 every year for each $15 you spend, while the $7.50 product returns nothing. A bad businessperson would pick the $7.50 product every time. It costs half as much, so he convinces himself that it must be a good deal. A good businessperson takes the time to understand the differences between the two products and goes for the $15 product. Even though it cost him more initially, he knows he’ll get his money back quickly.

It’s never a good sign if someone says, ‘We can cut a few corners on this,’ or ‘We’ll meet bid specs.’ What you should be looking for is somebody who always wants to exceed expectations. If after two or three years, a client isn’t what we thought they were, we suggest that they might want to talk to another broker. It’s not very often that this happens, but it does happen occasionally. We go through a screening process before we develop a business relationship with customers. It involves inspections and a series of interviews about the way they do things in their business. A lot can come out of that. If people cut corners on maintenance, safety, or things like that, it affects more than just insurance. It’s a pretty clear indication of their life philosophy.

We’ve made recommendations and people have ignored them and then someone is seriously injured, and their attitude is, ‘Well, we can’t win ’em all.’ We don’t want to do business with people like that.

How do you find and retain the best quality employees?

I think you have to know what you’re looking for. When we’re trying to hire people, we look for almost the same things we’d look for in a good customer — integrity and good character are critical.

You have to start by hiring good people that are smart and street smart — people that are proud of their reputation and know how to get the job done. What we do is go through an interview process initially where people are interviewed by anywhere from 10 to 15 people at our company that do different jobs. It’s a long process. And if we really feel that this is someone with the right characteristics, then we send the person for a full day of testing with a clinical psychologist for IQ tests and personality inventories. We’re looking for certain characteristics in a producer, other characteristics in an account manager and different characteristics in a claim consultant.

If candidates do well, they interview with me and then with a panel. A series of questions includes how, in their previous job, they would respond to certain situations so we can determine if they have the tenacity, the stick-to-itiveness and the problem-solving abilities that will make them successful. Usually, behavior repeats itself. So if they give up in certain situations at their last job, they’ll probably do the same thing with us.

How does this pay off for a business?

You wouldn’t want to hire people that aren’t high quality or don’t have a lot of character.

When you have a great group of quality people that do a consistently good job and continuously excel, it develops a reputation that makes it a lot easier to develop relationships with other good people. Birds of a feather flock together: a referral from a bad egg will probably get you another bad egg — a referral from a quality person is probably going to lead to another quality person.

BILL GRAHAM is CEO of The Graham Company. Reach him at (215) 567-6300 or wagiv@grahamco.com.

Monday, 25 June 2007 20:00

Variable work force

When faced with mergers and acquisitions, new systems, process changes or a project that might be outside of a management team’s expertise, a professional service firm can often provide the specific skill set your company needs to proceed with clarity.

“I see companies going forth with a lot of that work and trying to do it in-house with their existing staff, and then using professional service firms or consulting firms strategically when they need certain experience or knowledge that’s maybe not in their existing organization,” says Martin J. Dorfner Jr., managing director of Resources Global Professionals.

Smart Business asked Dorfner about the ways in which a variable work force can meet a company’s needs.

When might a company consider bringing in someone from a professional service firm?

Professional service firms are typically engaged when companies are going through a great deal of change and also when companies want to get some external influence or project management.

There are different approaches from the various professional service firms. The traditional consulting model is used when companies want to push project ownership, risk and control out of the organization. Our service delivery model is to work from the inside out, integrating our team with a client’s project team, thus enabling client management to retain control and ownership of a project.

Some typical areas to consider using a professional service firm can be for acquisitions, divestitures, bankruptcy, compliance (Sarbanes-Oxley, HIPPA); new accounting, financial reporting, human resources or supply chain applications; and loss of key people in an organization caused by a leave of absence or traditional promotions or job changes.

What benefits can a company derive from a variable work force?

Companies are always trying to manage head count or FTEs (full-time equivalents), and using professional service firms can help. So as companies grow or downsize, they are constantly evaluating how many people are really needed in every department or business to sustain the current business state and then manage growth. Strategically using professional service firms can allow you greater flexibility in accessing specialized skills and experience, handling projects and increased workloads, and transition of key positions.

As companies invest in growth through acquisitions or implement new systems leading to process automation, one of the big areas of focus and efficiency is the reduction of head count or FTEs. This is one of the big metrics that companies have to report on and that publicly traded companies are watched on. Maintaining or dropping that number plays very well for those companies with investors and the capital markets.

What are some of the perceived downfalls of a variable work force?

One of the big worries when any kind of outside professional service firm or consulting firm is brought in is that the knowledge leaves when they disengage from the project. Once someone from a professional service firm works in a company’s environment, helping put in their new system, helping integrate an acquisition, or backfilling a key management or executive position, he or she gains a great deal of knowledge about the company. Training then becomes important and typically occurs in the middle or the end of the project when one of two things is going to happen:

  1. When people come off a project back to their role, we’ll spend time with them to make sure that any changes to the role — new systems or processes, for example — are clearly communicated and they’re up to speed before we walk out the door.

  2. And if it’s a situation where we’re filling a void for an open position — interim controller or CFO or other high-level person — we’ll make sure that he or she is acclimated to the business and the day-today responsibilities in order to function more seamlessly when we leave.

What are the cost implications?

As companies go through the big projects of mergers and acquisitions or new systems, one of the big ROI pieces of the calculation is head-count reduction. So if they can, companies will push hard for efficiencies through process automation or eliminating duplicative efforts.

When you think about the cost of traditional employees versus using experienced professionals from a professional service firm, it’s not as simple as comparing salary costs of $90,000 to hire this person. There are also the benefits cost associated with that — which could be anywhere from 25 percent to 40 percent of the salary — and training costs. You also need to evaluate whether your organization needs this experience/skill on staff for the foreseeable future or if it’s a short-term requirement. It may make sense to evaluate all costs — training, salary, incentive, benefit and, possibly, severance — before deciding on a traditional employee or utilizing experienced professionals from a firm.

MARTIN J. DORFNER JR. is managing director at Resources Global Professionals in Pittsburgh. Reach him at (412) 263-3303 or mdorfner@resources-us.com.

Wednesday, 25 April 2007 20:00

Inside coverage

Business owners are well aware of how expensive defending themselves in a lawsuit can be, and that the proper insurance can lessen the burden. What they may not know is that more than half of all corporate claims are brought by employees, making Employment Practices Liability Insurance (EPLI) a specialized form of coverage that’s worth investigating.

Alfonso Galvez, commercial insurance broker with Westland Insurance Brokers, points out that EPLI is often an afterthought for employers.

“Generally, people are so busy building their business, they lose sight,” says Galvez, a 20-year veteran of commercial insurance. “People are concerned about maybe the theft of a computer or a fire that might happen in their facility. But one of the most common claims that can occur would be an employee-related claim.”

Smart Business spoke to Galvez about the role EPLI plays in protecting a company’s assets in the event that it’s the target of a work-related lawsuit.

What is EPLI and what kinds of claims does it cover?

It’s specialized insurance coverage that protects employers against claims in work-related lawsuits. It includes wrongful termination, harassment and discrimination based on age, race and gender.

There’s also an option to purchase third-party discrimination and harassment insurance. For instance, in a retail store a patron may feel like he or she is being discriminated against because of race. Or it could be a situation where you have a manufacturing company and perhaps a vendor pays a visit and the receptionist harasses that individual. These are examples of third-party claims as opposed to claims that take place within the work force of a particular company.

Other employment-related suits that may be brought against an employer and are included in this type of policy would be breach of an employment contract, negligent evaluation, wrongful discipline and mismanagement of employee benefit plans.

Who should consider EPLI?

I believe that every company should have this coverage in force. Companies that are most vulnerable are generally small to mid-size companies. They may not have either the necessary capital to defend themselves against an employment-related suit or other resources, such as a human resources manager who is current with rapidly changing employment policies.

What kinds of expenses does EPLI cover?

Among the costs that are covered in an EPLI policy are such things as judgments that are handed down in court. It also includes coverage for general expenses to discover what the alleged claim is or what occurred. Also included are legal expenses, which — particularly in California — can rise rapidly.

How does a company assess its risk for employee-related claims?

It’s determined by the type of company it is, how many employees it has, and if it’s had any past claims history. It also depends on whether or not the company has instituted any kind of employment policies and procedures. It’s really important that the company have an actual employee handbook and policy manual to help reduce the likelihood of a claim.

Does employment law affect EPLI?

Yes, it really does. One of the challenges that most companies have is trying to stay current with all the changes in state and federal employment-related laws. That’s why it’s especially important to have this kind of coverage because it adds another layer of protection in the event something changes that a company is not aware of.

What else can EPLI coverage provide a company?

One of the newest features of many Employment Practices Liability polices is that insurance companies include free legal hotline assistance. A number of insurance companies provide a set period of prescribed time to call a designated law firm to ask questions about either employment law or a situation that has arisen within your company.

You can also get what is referred to as loss-control services. This provides assistance with the information you can include in your employee handbook and policy manual. For instance, you would include information related to zero tolerance in the workplace and state in the handbook how you would handle a report of an alleged harassment or discrimination incident.

Some policies also provide you the option of choosing your own counsel and therefore having more control over the defense and settlement of your claim.

ALFONSO GALVEZ is a commercial insurance broker with Westland Insurance Brokers. Reach him at (949) 862-3323 or agalvez@westlandib.com.

If your accountant is not serving as a partner who can advise you on broader issues, it may be time to look for a firm with a more robust set of capabilities to address your changing needs.

“At the end of the day, what return or value do you desire for the money you spend for accounting, tax and consulting services?” says Stephen Christian, managing director at Kreischer Miller. “The business world is much more complicated today — ever more complex federal, state and local tax laws, increasing international operations, and compliance with international accounting standards and enhanced business risks. Your accountant can serve as your counselor on these and other issues. Or your accountant can just ‘keep score’ by simply assisting with your company’s financial statements and tax returns. It’s your choice.”

Smart Business spoke with Christian about how to select the best accounting firm for your needs and how to make the most of that relationship.

How do accounting firms differ?

Accounting firms basically fall into three categories. There are large, international firms that are compliance oriented, process driven and tend to work best with large Fortune 1000 corporations. At the other end of the spectrum are smaller, local accounting firms that generally are more tax focused and may be resource challenged given their size.

The third group of firms sits somewhere in the middle and provides the skill set and resources of national firms and the entrepreneurial feel of smaller firms.

All three types of firms serve their clients well, but each offers a unique customer focus.

How does a business owner decide which type of firm a company needs?

Before embarking on the process of finding a best-fit solution, management needs to determine what it values in a relationship with an accountant and identify the company’s specific needs and expectations — cost, service, tax advice, international capabilities, regular business counsel?

The requirements of management of a large, publicly held company are one thing, but the needs of a $100 million privately held distribution company may be quite different. Will the relationship be more compliance oriented, possibly driving you to a low-cost provider, or more consultative in nature, directing your search to different, more value-added skills?

How can partnering with the right firm create value?

Partnering with the right accounting firm should provide a greater opportunity to grow and prosper. The firm should have a deep knowledge of your industry and business, and spend time with you discussing various business and tax strategies, opportunities for performance improvement, compensation and benefit issues, and risk mitigation.

It will not necessarily have all the answers, but it is going to be able to have a dialog with you regarding relevant issues and who you should talk to in order to get more information.

By creating a strong relationship with your accounting firm, you will get an outside, independent perspective. It will be beneficial to receive input from someone with significant experience serving other businesses, who will bring to you the ideas that are working for similar companies and try to prevent you from making mistakes that others have made.

What resources can business owners use to ensure they select the right firm for their needs?

Lenders are a great resource, as well as attorneys and other professionals and trade associations. For example, if you are a contractor and you participate in the Construction Financial Management Association, ask fellow members about their experiences with accounting firms.

Once management begins the selection process, they should focus on four main things: industry and technical expertise; the passion and enthusiasm to serve you; the chemistry between your team and the accounting firm’s team; and the expected amount of partner and manager involvement with your account.

The accounting profession is about leverage of people, but maximum value is derived from spending time with the firm’s senior members.

What would you say to business owners who are reluctant to leave their current firm to find a better fit?

Often, a company’s needs change, requiring consideration of a change in accounting firms to better meet the organization’s objectives. The current service provider may have been on the scene for many years and established a strong personal relationship with management. The needs of the company, however, should trump the long-standing, personal relationship.

Management should determine in an unemotional way whether or not the current firm is the best fit for the company and proceed accordingly.

In situations where perhaps management is reluctant to terminate a longstanding relationship, there may be a piece of the services that can remain with the current firm while bringing in a new provider to better accomplish the balance of the work.

If the right firms are engaged and have only the company’s best interests in mind, they will easily work together in serving the client.

Stephen Christian is the managing director at Kreischer Miller. Reach him at (215) 441-4600 or schristian@kmco.com.

Companies often choose markets to enter based on an opportunity that presents itself. They might get an e-mail from a potential customer saying they’d like to buy their product and sell it in another country. While there’s nothing wrong with those opportunities, the question is: Are they the right opportunities in which to invest?

“It’s important to have a strategy in which you’ve studied markets that have the most potential and determined where you want to focus your efforts and, more importantly, your time and money,” says S. Martijn Steger, chair of the International Business?and Mediation practices?at Kegler, Brown, Hill & Ritter. “If you’re more focused you’ll be more likely to create a profitable operation, and less likely to overextend yourself.”

Smart Business learned more from Steger about how to spend your time and money wisely on a venture in an international market.

How can businesses identify opportunities in other markets and establish a presence?

When a client calls and says, ‘I met this great person at a trade show and she wants to distribute our products in all of Asia. Draft up an agreement for us,’ I would say, ‘I can do that. How does that fit your international strategy?’ Because that might be a great opportunity, and it might not. It depends on whether you can really devote the necessary resources to make that a successful venture.

If all you’re doing is making occasional sales in a market, and if that’s consistent with your strategy, then you probably don’t need a whole lot of firsthand knowledge of the market. You do have to be able to trust whomever you’re selling to that they’ll find the right customers, and that they’ll pay you when they buy products. If you’re not getting payment in advance or a letter of credit to secure the payment, then you have an accounts receivable risk in that country.

On the other hand, if you want to do a joint venture, buy an existing company or form your own company, you have an elevated need to have someone you know and trust in that market who can give you local knowledge and guidance. Also, having your project leader spend significant time in the country sends the strong signal to your partner that you’re committed. It’s critical not to take the human element out of business. Without that commitment, you have a higher risk that something goes wrong and you won’t know about it until it’s too late to fix it.

What are the pitfalls to look out for when entering another market?

Many companies assume that their intellectual property protection here will carry over to another country. As a general rule, you need to seek registration in that country, whether it’s a trademark or a patent. Also, you need to have the right agreements in place with whomever you’re working with to make sure that they’re also obligated to protect your trade secrets. And if you’re going to have employees in another country, make sure their employment agreements specify that anything they develop belongs to the company. Otherwise, in many countries, an employee developing intellectual property on the job has a claim to it.

Legal regimes in both developing and developed countries can be quite different from ours. For example, in most U.S. states, we have the concept of employment at will. We can fire employees for any reason, unless it’s discriminatory. That’s not true in many countries, where employees are entitled to severance at the time of the termination of contract. So reducing your work force in markets where the business hasn’t been as successful as you’d anticipated can be a very expensive proposition.

The tax laws can also be very different. One of the first things to analyze is what your tax exposure is going to be for the type of operation that you’ll have in that country.

What other challenges might businesses encounter?

If you’re going to strategically develop markets, your investments will be greater than for a comparable-sized domestic market. Travel takes longer and is more expensive; plus you’ve got to spend more time training in-country people.

As we draft contract provisions to capture the terms of the deal, normally we’re looking for balance so that both you and your in-country partner believe that it will be mutually beneficial. The value that they’re getting may not be completely equal because their investment may be smaller than yours, but it ought to be commensurate to their investment. Otherwise, resentment will grow, they might want to try to cut corners in order to compensate themselves in other ways and it will undermine a successful relationship.

What other advice can you provide to businesses establishing international operations?

Despite the ease of electronic communications with other countries, the timeline will be slower because of travel time and time zone differences. You will also face cultural differences. The work style may be slower than it is here. If you haven’t invested the time in that market and you’re asking for a major commitment from them early on, they could drag their feet because they haven’t yet been shown the respect that they expect before making their own investment.

When you establish your budgets and your expectations about how long things will take, those kinds of cultural disparities can make a difference. That will impact the time at which you can expect to start seeing profits from your work, and that then needs to be factored into realistic timelines.

S. Martijn Steger?is chair of the International Business?and Mediation practices?at Kegler, Brown, Hill & Ritter.?Reach him at msteger@keglerbrown.com?or (614) 462-5495.

Tuesday, 26 January 2010 19:00

Business analytics

Achieving strategic objectives in any organization is highly dependent upon defining and monitoring critical measures of business performance: marketing results, pipeline and backlog trends, costs and employment trends.

“By defining the key performance indicators that relate to critical elements of the corporate strategy, management teams can ensure the timely identification of issues impacting the achievement of objectives as well as the timely development and execution of contingency plans needed to meet those objectives,” says James M. Pippis, a director in the Audit & Accounting Group at Kreischer Miller.

Smart Business spoke with Pippis about how companies can use business analytics to achieve strategic objectives.

Why are analytics important to a business?

The days when executives could make decisions based solely on instinct are gone — today’s business environment is simply too complex, dynamic and competitive. The data contained in traditional financial statements is often stale by the time it is disseminated or omits nonfinancial metrics that might help paint a clearer picture of causes and effects.

The identification and monitoring of key performance indicators can help management teams gain access to the real-time data necessary for rapid responses. When properly constructed, the resulting information not only mitigates risk, it can also provide companies with a competitive advantage. For example, there are many companies that have achieved substantial increases in revenue and profits by rapidly refining marketing efforts based on the results of real-time monitoring of customer response rate metrics.

How can companies implement effective analytical techniques?

The first step is the development of a business plan or strategy. Next, key performance indicators associated with critical objectives must be identified. If these metrics are not evident, analysis of third-party industry research or consultation with outside advisers can help companies select meaningful measures of business performance.

After identifying these metrics, it is important to determine whether the current infrastructure facilitates timely and accurate reporting of these measures and, if not, implement processes to address this problem. Finally, management teams must determine which decision-makers within an organization will get the data and create formal reporting mechanisms to make sure the information gets to the right people at the right time.

Which metrics can help a company drive increases in profitability?

Unfortunately, the solution is not one size fits all, because every industry has a set of unique measures that represent key lagging or leading indicators. For example, service organizations often find measures of employee utilization, project profitability or revenue per employee to be highly correlated with overall profitability.

By tracking any one of these statistics, management teams can identify excess capacity and shift resources to other customer assignments in order to maximize profitability.

In the retail and distribution industry, monitoring trends in average order value can provide management teams with timely feedback indicating whether changes in marketing programs have been effective in generating increases in transaction values. If not, management teams can make rapid changes to marketing initiatives, maximizing the return on marketing spending.

In a manufacturing environment, monitoring warranty cost by product can help to identify quality deficiencies that could undermine profitability as well as jeopardize longstanding customer relationships — which could have a significant impact on the company’s ability to achieve its long-term objectives. Early identification and investigation of the root causes of the trend might lead to the identification of defects in raw materials from a particular supplier, deficiencies in the maintenance of its plant and manufacturing equipment, or training issues with the company’s labor force, all of which might be able to be remediated at a cost far less than the current warranty costs being incurred.

What are some common pitfalls associated with business analytics?

The most obvious issue is the selection of the wrong metrics, but thorough research or consultation with strategic advisers can help mitigate this risk. Additionally, identifying and monitoring too many metrics can sometimes result in analysis paralysis. It is important to try to ensure that managers focus on a handful of key metrics and then use additional supporting data to try to clarify problematic trends reflected in these key metrics.

Next, ensuring the accuracy of the data is absolutely critical. Nothing is more frustrating than feeling like you are making progress based on interim information, only to find out that actual performance was dramatically different than your expectations.

Finally, it is important to make sure that you link reward programs, such as incentive plans, with performance targets, and communicate progress frequently. Most employees can have a direct impact on key performance indicators and resulting business performance, but if reward programs are not linked to these metrics, the probability of achievement of defined objectives will fall.

By developing a sound strategy, implementing an effective information system and monitoring performance on a routine basis, companies can maximize the probability of achieving strategic objectives. Additionally, management teams can achieve meaningful improvements in the measure that matters most — shareholder returns.

James M. Pippis is a director in the Audit & Accounting Group at Kreischer Miller. Reach him at jpippis@kmco.com or (215) 441-4600.

Saturday, 26 December 2009 19:00

Dare to compare

When faced with the media storm of news surrounding the economy, many corporate leaders assume that a drop in sales and other business trends is the norm. However, if companies are not conducting historical trend analysis and industry benchmarking, they may not have all of the relevant facts necessary to prepare meaningful forecasts or measure performance against other businesses within their industry.

“Many businesses are falling into a similar thought pattern, assuming all businesses are experiencing the same troubles — and thereby, the same results. They assume this is the norm based on current market conditions,” says Robert Olszewski, CPA, director in the Audit and Accounting Group with Kreischer Miller. “As we move through these volatile times, companies should be benchmarking against their industry group and performing a critical assessment of the historical trends of their own business. Historical trends tell the story of where you have been, where you currently are and assists in forecasting for where you would like to be.”

Smart Business spoke with Olszewski about using both historical trend analysis of your business and benchmarking within your industry to aid in strategic decisions and help you stay ahead of the curve.

Why should companies use historical trend analysis and industry benchmarking?

Over the past year, businesses have routinely asked how everyone else is faring through the economic turmoil. Their questions can be quantitatively addressed using historical trend analysis and industry benchmarking.

Historical trend analysis provides the financial story of a business in recent years and assists in monitoring the impact of key decisions. Benchmarking is the process of comparing business performance metrics against other businesses operating within a similar industry, provides a snapshot of the performance of your business and aids in assessing yourself against the competition.

Benchmarking within a specific industry often tells a unique story. For example, over the past year, a business maintained consistent sales but the gross profit percentage eroded. The management team thought they were operating above average based on what they had routinely witnessed on the news. To their surprise, the industry benchmarking indicated that, on average, sales within their industry were up 5 percent and the gross profit percentage had remained relatively consistent.

Business leaders often find a great deal of value in historical trend analysis and industry benchmarking. Both processes provide an opportunity to step back, compare and subsequently monitor.

How can companies use historical trend analysis and industry benchmarking?

Businesses can utilize both processes to monitor performance, develop plans, adapt to change in a timely fashion and identify potential business risks. We operate in a fast-paced environment and both historical trend analysis and industry benchmarking provide management and those charged with corporate governance an overview of how the business is performing as a whole. Key business decisions are made on a regular basis inclusive of process improvement, staffing requirements and technology upgrades. Trend analysis and benchmarking provide the opportunity to measure the impact of those decisions that were rendered.

Historical financial trends provide a perspective on what the company may have looked like in terms of cost structure and staffing needs at certain revenue levels. This data provides the opportunity to go back to a period when the company was at certain revenue levels, quantify the number of full-time equivalents and make adjustments based on today’s numbers. Companies may also use industry benchmarking to evaluate labor costs, unemployment trends, average costs per full-time equivalent, or full-time equivalents compared to revenue.

What are some keys to making this process successful and useful?

Disaggregation of information can often be a useful tool within trend analysis. For example, reviewing gross profit percentage or inventory turnover within a specific product line may provide results that vary from the overall company. And, it can provide insight on where the company needs to focus its time and effort. For example, disaggregation of information allowed one company to identify that a significant amount of resources and efforts were being devoted to e-commerce, which accounted for 3 percent of total revenue. Upon obtaining this information, the owners and management redirected the focus of the company toward the product line that accounted for 45 percent of total revenue.

Industry benchmarking and historical trend analysis must also take into account key financial assets and liabilities. Balance sheet analysis can potentially mitigate the inadvertent assumption of business risks. For example, one of the largest assumptions of risk within a company is credit risk. By computing the average days outstanding and turnover ratios on accounts receivable, a business may uncover certain risks that were not previously identified in relation to customer credit. It is imperative to understand why specific fluctuations may have occurred in the early stages of the process.

Who should be involved in the process of analyzing and benchmarking?

A majority of accounting personnel have the ability to provide the historical financial data based on information obtained from the general ledger accounting system. Analysis of the data requires dedicated time and business acumen to understand the results in order to provide an action plan for the future. However, taking the time to comprehend and respond to the results is the critical component of this process. Companies may rely on their accounting firm or an outside consultant to assist in understanding the results achieved if internal staffing is not able to provide meaningful feedback.

Robert Olszewski, CPA, is a director in the Audit and Accounting Group at Kreischer Miller. Reach him at (215) 441-4600 or rolszewski@kmco.com.

Friday, 25 September 2009 20:00

Ease the burden

During November 2008, the Securities and Exchange Commission (SEC) announced a road map for implementing International Financial Reporting Standards (IFRS) for public companies in the U.S. The SEC has proposed a timetable that targets implementation of IFRS effective for the 2014 reporting period.

“People think there is plenty of time before 2014, but they’ll have to prepare for the transition far in advance,” says John Helmuth, a director in the audit and accounting group at Kreischer Miller.

“Since filings of public companies contain three years of financial information, consistency of reporting would require implementation of IFRS for 2012 and 2013,” adds Helmuth. “To fully implement new processes for 2012, companies likely would need to have changes in place by the end of 2011.”

Smart Business spoke with Helmuth about what public companies can do to begin preparing to meet the new IFRS requirements.

Why is the U.S. moving toward IFRS reporting standards?

The goal is to move toward a single set of high-quality, globally accepted accounting standards. The growth of the international equity markets and worldwide momentum of international accounting standards are driving the conversion to IFRS for U.S. companies. Many believe this will improve comparability of financial information of U.S. companies with that of non-U.S. companies. The acceptance and popularity of IFRS has increased significantly in recent years, resulting in the movement toward IFRS becoming the common set of accounting standards globally.

During July 2009, the International Accounting Standards Board addressed the implementation of IFRS for small and medium-sized entities that are not publicly held and that publish general-purpose financial statements for external users. The movement toward IFRS will most likely impact all U.S. companies.

What differences will companies encounter?

There are a number of significant differences between IFRS and U.S. Generally Accepted Accounting Principles (US GAAP). The overall financial statement presentation is expected to be significantly different, where the proposed layout of the balance sheet and income statement is based on a company’s operating, investing and financing activities.

The rules for revenue recognition represent another major difference. Generally speaking, the accounting standards are more principle-based under IFRS. For example, software companies and construction companies have different and specific revenue recognition policies that they need to follow under U.S. GAAP. The IFRS policies are more broadly based and likely will result in changes to how revenue is recognized.

Some other areas of significant changes include the accounting for inventories, capital assets, income taxes, goodwill impairment and leases.

How will the changes affect training?

Training preparers and users of financial statements represents one of the most daunting challenges. Accounting departments will have to familiarize themselves with a new set of rules to contend with the accounting and financial reporting changes. Operations personnel will have to learn the new rules, as internal and external data will now be presented in a different format. IT departments will also be impacted, as modifications may need to be made to the financial reporting systems. In addition, management personnel will have to educate the users of their financial statements, including investors, board members, lenders, suppliers and customers. The conversion to IFRS is a companywide process that will require the complete support of the senior management team. Beyond industry, there will also be significant changes in universities and college textbooks, and the CPA exam will undergo a major update.

What are the cost implications?

The costs of IFRS adoption for U.S. companies could be significant and will vary based on the size of the company. Larger SEC filers will incur more costs, while privately owned companies will likely have fewer costs. The primary costs of implementation include internal training of current employees, hiring of experienced accounting personnel or outside consultants, additional external audit costs, revamping the accounting systems, and revising internal controls over financial reporting. Some believe these costs may outweigh the benefits of conforming to a global set of standards.

How can companies lessen the impact on their resources?

Public U.S. companies should begin planning for IFRS conversion now. Because of the magnitude of the effort, assigning an experienced project manager is essential. Management should evaluate the company’s organizational structure and accounting department to develop an implementation plan and training process for all the staff involved. In addition, companies need to complete an overall assessment of the required modifications to their internal and external financial reporting systems.

Companies should also communicate the potential changes that may occur as a result of IFRS with outside parties. For example, they may have debt agreements with specific covenants and requirements to meet certain financial reporting ratios, which are most likely based on U.S. GAAP. Because of the changes in reporting and potential differences in accounting treatment, such as revenue recognition, companies may need to make significant modifications to debt agreements or other contracts.

A strategic implementation plan, budget and project timeline are crucial in order to avoid costly and problematic conversion issues as you transition to IFRS.

Wednesday, 26 August 2009 20:00

Meeting budget constraints

Businesses are all under the gun to reduce spending on IT and simultaneously preserve head counts. What they need are options: for meeting budget constraints as well as keeping the people on staff who know their complex IT environment best. Ultimately, this economy will rebound, and businesses will want to have that head count available to them for the important projects.

Most companies have worked with an original equipment manufacturer and may not be aware of the cost savings that can be derived from integrating an independent service organization into the process.

“Basically, what they’re going to get from an ISO is the same level of service that they pay for now with an OEM,” says Ed Kenty, president and CEO of Park Place International. “So whether their equipment is Sun, Hewlett-Packard, IBM or EMC — the Tier 1 platforms — companies can save up to 50 percent immediately on their existing maintenance contracts. That’s millions of dollars in some cases.”

Smart Business spoke to Kenty about how businesses can reduce IT costs and keep their own valuable employees in the process.

What challenges are businesses facing regarding their IT budgets?

Particularly now, in a downturned economy that we’re all faced with, they’re making very radical cuts to their IT budgets. IT managers and directors and CIOs are faced with decisions about how to best use those resources. So they’ve got to do one of two things: They’ve either got to let people go, which none of them likes to do, or find the savings elsewhere.

The challenge is to preserve the IT staff. If I’m the CIO, I want to get my budget relief elsewhere than from letting people go. Keeping those people gives me continuity into the user community. The people on my team understand my environment better than anyone.

How does working with an ISO affect a company’s IT budget?

An ISO offers companies the opportunity to save money on their hardware support contracts, which allows them to hit their budget goals without having to downsize their staff.

An ISO’s price points are much more competitive than the OEM’s, because its overhead is low. So right off the bat that is going to save them anywhere from 40 to 55 percent off the OEM list. That frees up a lot of spending. When you’ve got a $3 or $4 million hardware maintenance budget, you may be able to get more than $2 million of that back to reallocate and preserve jobs.

Secondly, because ISOs don’t sell hardware, they can allow businesses to continue to run on their existing assets. In some cases, the OEM no longer even supports some of that older architecture. An ISO will support it until a company wants to move it out, with no pressure to replace it and roll it into a new lease or buy new hardware with a three-year warranty. They can really get a lot more life out of their assets.

What is the impact on the business?

There’s mission critical data running through these companies’ data centers, and the people who have been working on it for years are very complementary to their service solutions provider. So companies want the best of both worlds — they want the same level of service that they’re typically getting from the OEM or better, but they also want to hold onto their staff.

An ISO can come in and augment their staff with engineers and a maintenance value proposition. In other words, it can allow them to keep their resources, which makes them more comfortable. The last thing they want to do is use contract resources to support the user community; an ISO partners with them in a nonthreatening way to keep their resources intact and work closely with them to continue the maintenance of their hardware.

In what other ways can an ISO save companies money and time?

An ISO doesn’t necessarily have to be as rigid as an OEM. Billing cycles could be annually, quarterly or monthly. The service-level agreements may vary by platform, focusing on the really mission-critical hardware that’s running the mission-critical applications.

Businesses may want to have 7x24x4 hour support on some applications, with less critical applications running on additional hardware on a next-business-day or a 8x5 level of support. An ISO can give them different options within their environment that makes the most sense for them, versus providing only high-end service across everything in their environment even though they probably don’t need it.

The more vendors you have in your IT environment, the more time you spend managing them. So if you can consolidate a handful or a dozen or 20 vendors into one single point of contact, that gives you a lot of your cycles back to be able to work on other projects and the things that are more important to the business and the user community.

A company may have multiple contractors, multiple OEMs with multiple invoices supporting its entire environment. An ISO can save resources, time and efficiency in the billing departments, because it’s a single point of contact. And that streamlines everything for them from IT management right down through billing.