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The 2011 insurance market seems fraught with both potential landmines and great opportunities. Al Tobin, managing principal at Aon Risk Solutions, says that although insurance companies did well in 2010, there are some factors that are making them cautious entering 2011.

“The more general your risk is, the more competition a company like us can bring to the table,” Tobin says. “More than ever, quality data is key to your renewal, whether it’s a property or excess casualty account.”

Smart Business spoke with Tobin and Jo Ellen Thelen, director, client services and brokerage, Aon Risk Solutions, about what to expect in 2011.

What does next year hold for the property, casualty and liability markets?

In 2011, noncatastrophic general property risks, general liability and excess casualty will be competitive. Most insurance companies don’t see a change in the marketplace coming from anywhere other than the catastrophic property side of the business. That means earthquake, terrorism event, or significant wind storm event.

The results from insurance companies are fairly decent for 2010 for two reasons. First, there were no catastrophic property risks in the U.S., outside of the oil disaster — no big hurricanes or earthquakes. The second is that there were a lot of reserve releases — the surplus an insurance company keeps to protect it from incurred but not reported (IBNR) losses.

Insurance companies are pretty conservative; they make sure they have funds set aside for unexpected losses, predominantly casualty-related losses. Last year, insurance companies came to the conclusion that things weren’t that bad on the casualty side, so they had too much money put aside. Their actuaries allowed them to release some of those reserves, which helped boost profits.

Many carriers have been releasing reserves over the last few quarters, which helped boost their profits for 2010. But they can only do that so many times, which is one reason they are saying that they cannot continue to see prices decrease in 2011.

When anyone makes money in any industry, it puts additional pressure on price. You can make the argument that price should continue to decrease in 2011 for most customers, but expect some serious carrier pushback because they believe their pricing has hit an all-time low.

What factors are affecting the market forecast?

As far as catastrophic property risks, the insurance companies review hurricane forecasts with great detail. If it is supposed to be an active hurricane season, insurance companies will become cautious. If it’s supposed to be an inactive hurricane season, they will be excited about potential profits. The forecasts are very active for 2011, which will concern them.

For catastrophic risks, there is one other potential change for 2011: new modeling. The insurance companies use a model called RMS, which changes every year. It is anticipated that the change in 2011’s model will drive insurance companies’ probabilities up.

The reason those model results are going to increase is because they will take into consideration storm damage from a hurricane that may penetrate the coastline. The damage hurricanes do to the coast is generally severe, but the damage that hurricanes can do with significant winds further inland wasn’t taken into consideration in the past.

How will insurance companies react?

On the board level, everyone will have the forecast. The boards will suggest the insurance companies be prudent in knowing the risks they underwrite and buying the right protective reinsurance program. This will just reinforce that.

The behavior it will drive is a conservative view for 2011 from a catastrophic risk perspective, specific to hurricanes. However, if the new RMS model increases an insurance company’s worst-case loss from a Category 3 storm from $1 billion to $1.2 billion, how will it respond? Will it write less business? Will it increase price?

I think the answer is that only the best risks will be written. If you don’t have really good data, you are going to pay more for your insurance in 2011.

What can companies do to make sure their data is more accurate?

You need to know your facilities’ secondary characteristics — year built, type of roof, number of stories, etc. If you have 20 properties in your portfolio, you probably know your top five really well. You may not know the middle ones as well.

In that case, I would highly recommend at least a single year program in which a fire engineer visits the facilities to provide the data so your modeling results are more accurate.

If you don’t provide the information, the computer model defaults to worst case. So by providing the information, you improve the results.

What steps should companies take to prepare for 2011?

Make sure you understand the global insurance marketplace. There are more choices than ever for customers, so getting good advice from your broker is critical.

Look for a broker or agent who uses peer group benchmarking. There are actually situations where your broker may recommend buying less limits. That’s a great thing for a customer to hear in this economy, ‘You’ve been buying too many limits; you should buy less and save some money.’

On the technical property, catastrophic, toughest risks in the world, we rely heavily on benchmarking and modeling to give advice to customers. So doing your homework can really pay off.

In these uncertain economic times, cost is very important. Still, don’t trade a couple bucks for inadequate limits. There is a lot of pressure on risk managers to make sure they are buying the most cost-effective product but without giving up coverages.

You should not give up coverage. You might save a few dollars, but it’s short-sighted.

Al Tobin is managing principal and national property leader with Aon Risk Solutions. Reach him at alfred.tobin@aon.com. Jo Ellen Thelen is director, client services and brokerage. Reach her at (314) 854-0710 or joellen.thelen@aon.com.

James Cowan kept hoping that he had hit rock bottom with the layoffs at American Railcar Industries Inc. But as he made a third round of cutbacks in two years, it was getting really hard to believe that his luck was about to turn around.

“Part of the reason we went through it three times was when we did our first assessment, we thought the business was going downhill,” says Cowan, the company’s president and CEO. “Then a couple months after that, you realize once you are going through the first cuts that the dire strait is going to be more dire.

“So now you’re a quarter later, maybe four months later, [and] we thought we were going to get this order or that order and none of them came through. So our backlog continues to go down. Then you make the second wave of cuts. The same process. You go two or three or four months and you realize you thought it was going to get bad and now it’s worse than bad.”

Cowan is certainly not alone in his business struggles, but the railcar industry has been hit particularly hard by the weakening of the economy over the past few years.

“The whole industry is at 15 percent capacity,” Cowan says. “I didn’t foresee that two years ago. I thought it might get to 30 percent. When you go from 85 to 90 percent capacity to 30 in a year and from 30 to 15 in another year, that’s pretty brutal.”

So what do you do when it appears as though the walls around you are crumbling before your eyes and the business you’re leading seems to be on the verge of extinction?

“The hardest thing is to downsize a business,” Cowan says. “You don’t want to cut out the muscle. You hate to tell anybody that they are not needed in the business. But as the business starts to shrink, you have to consolidate efforts and make do with fewer people. Obviously, there is a cost to that.”

While railcars, by the name of the business itself, are obviously a core for Cowan, he needed to look in other directions to make ends meet.

“We’re good with heavy fabrications,” Cowan says. “So you take a look and see if you can make some headway in other markets there. Margins can be embattled and very thin, so it always makes you wonder. You can ramp down a business, but you still have to see profitability in your future.”

At 1,335 employees and $423.4 million in revenue at the end of 2009, American Railcar was down substantially from its revenue of $808.8 million in 2008. It really becomes about survival and your ability to make the tough decisions to stay alive until business begins to pick up again.

Make the tough calls

When you’re in a situation when you know layoffs are going to be needed, you need to start asking everyone on your leadership team the same question over and over and over again.

“Does that activity add value for our customer?” Cowan says. “If it does not or if you’re not sure, you have to ask yourself, ‘Why are we doing it?’ The only thing we get paid for is providing a product or service to the customer. Do the activities we are discussing add value to our customer? We still hung in there with our innovation efforts and our customer solution efforts. We knew those either were going to add value to the customer or were about to add value. If it’s not adding value to the customer, consider it to be a wasted activity. It’s probably something you could survive without.”

At American Railcar, when the need for cuts was becoming clear, Cowan gathered his senior leadership team and met with them in the executive conference room.

“I showed them the top lines of the company and said, ‘Hey folks, here’s our build schedule going forward for six to 12 months,” Cowan says. “It was no surprise to any of them. They all knew it was gloomy and getting gloomier. We were kind of running ourselves out of business, and so, we had to slow down where we could.”

When you’re talking about the lives of your employees and their future with your business, you can’t afford to be anything but completely upfront about it.

“You have to set a goal,” Cowan says. “I told them, ‘Let’s see if we can do without 25 percent of our staff.’ And this isn’t all just people. You obviously have to take a look at other areas of the business where you can make some cutbacks that would be substantial. But people are a large cost, obviously.”

Once you’ve announced that cutbacks are going to be made, give your team members a chance to mull it over and think about what they can live without.

“Tell them in two or three days, let’s get back together,” Cowan says.

If you come back and you get the response that your leaders don’t feel like they can lose the number of people you believe they need to lose, you’re going to have problems.

“If that’s the case and your bottom line continues to deteriorate, you’re going to quickly get caught up with not having any customers, because you’re going to run yourself out of business,” Cowan says.

“I know a lot of people think business should be benevolent and be an employer first and a profit-maker second. But any business that is running red ink for a sustained number of months is heading quickly to going out of business. If that was still the case and you’re still drowning in red ink, you haven’t thought about what few customers you may have left.”

Fall back on your question about whether the activities in each department add value to the customer. Ask your team members who they can live without to keep the business going. Acknowledge that it’s a brutal decision to make, but it’s one that has to be made in order to keep the company in business.

“It all goes back to if you kept everybody and the business goes out of business, then we all lose our jobs,” Cowan says. “If the 2,500 can go to 1,500 and we can make it through the downturn, we can come out of it a stronger company. That’s certainly the goal you have in mind when you do start.”

If it’s your first round of cuts, you can certainly look at early retirement candidates and people who may be looking to leave of their own accord. You should also know who the people are that you truly can’t live without, who you’ll need to succeed when things do turn around.

“These are the veterans with tons of experience and tons of customer contact and tons of technical knowledge and brilliant accounting knowledge of how to finance and fine-tune a company,” Cowan says. “Those 50 to 100 folks, in any business, you better know who those top handfuls of folks are and be sure you protect them.

Be professional

Your reputation can hinge on how you handle the act of laying off people. So make sure you’re clear with your people about how you want it handled.

“Any time we’re talking about cutting staff, until we’re ready to announce what the plan is going to be, it’s only fair that they hear it from management first and not through the rumor mill,” Cowan says. “None of us would want to be let go at the coffee machine or from the janitor. That will really get everybody in a panic. You have to announce that. Say it at the beginning of the meeting and say it at the end of the meeting. ‘This is truly confidential. It has to remain such.’”

If you do have leaks in your company about important items like personnel moves, you need to address them seriously and immediately.

“This is a terminating offense,” Cowan says. “When I say it’s confidential and you’re in the room and the door is closed, then you have to understand my trust in you and you keeping your mouth shut. We don’t want panic in the company. If I didn’t know who it was, I wouldn’t have the least problem telling them, ‘When I do find out who you are, you won’t be working here. You won’t be on the layoff list. You’ll be on the termination list.’ If that’s the problem, you have to put a bold, nasty statement out there.”

As for the actual announcement itself from the company to the employee who is being let go, it should come from the direct supervisor.

“Anybody that reported to me that I had to let go, I talk to them directly,” Cowan says. “If you need help with an HR professional, we have those on staff. It needs to be delegated. It’s part of their responsibility. It’s fun promoting folks and giving raises. But there are also people you have to fire, and sometimes you have to do layoffs.”

Find reasons to believe

Survival has to be about more than just huddling up in a conference room to make cuts and then waiting for the economy to turn around. You need to make an effort to find opportunities for success and jump on them. You need to let your people know what these opportunities are, however limited they may be, and how to capitalize on them.

“You are the communicator in chief,” Cowan says. “You have to keep doing it. You have to talk about, ‘Yes, the times are tough.’ But you have to go out there and show them some rays of light, some hope that this too shall pass. The world isn’t coming to an end. Whatever cliché works for you. Here are the sparks.”

American Railcar looked into the more than 700 parts that make up a railcar.

“We only make a few hundred of them and we buy the rest,” Cowan says. “Where could we do more integration into our own internal supply? Where did it make sense to do that?

“Our innovation teams work on different components of the car that the customer is looking for improvement on,” Cowan says. “We’ve made all car types in the last 110 years. But with some, the market has been so depressed we haven’t made them or we’ve been out of them for a few decades. So we’ve gotten back into a few other car types. Those are areas where a team of folks have to get involved. The short answer is keep the people focused on growth and new exciting opportunities within the company.”

It’s not that you’re ignoring what happened and you certainly don’t want to discourage people who have questions and concerns from bringing those up with you.

“You can’t be afraid to talk about it,” Cowan says. “It’s the 800-pound gorilla in the room. You have to tell them, ‘It’s tough. We don’t like it. We wish it hadn’t happened.’ … Try to keep it as positive as you can.”

As Cowan looks to the future, being positive is beginning to get easier.

“I have $330 million of cash in the bank,” Cowan says. “We’re investing a small amount in India, and we’re going to build product that stays in India. It’s not going to come back here and displace American workers. We’ve also started to see some of the customers that normally only buy railcars every five to eight years realizing they had a great opportunity to buy at a fairly low price.

“We’ve had a lot of growth initiatives that our board has allowed us to pursue. We continue to look for other areas to excel and grow. We’ve broadened our product mix and our customer footprint from where we were two years ago. All of that is positive. It can make us a little more picky in terms of products we do produce. Hopefully, they’ll be at a strong margin for the company.”

How to reach: American Railcar Industries Inc., (636) 940-6000 or www.americanrailcar.com

Saturday, 30 April 2011 20:01

Delegate authority to become more effective

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Imagine for a moment that you are on a plane flying at 30,000 feet. As you cruise along, suddenly the door to the cockpit opens and the pilot walks back into the passenger compartment and starts getting drinks ready for the passengers and then leaves to deal with an unruly person in row 23. What would you think? First, you need to fly another airline. Second, why in the world is the pilot out dealing with things that are clearly the responsibilities of others?

There are two possibilities to this exaggerated example. Either the pilot isn’t very good and can’t focus on the task at hand or the people working with the pilot can’t get the job done on their own, so he has to come out and help. Either way, the plane doesn’t have anyone at the controls and the ramifications of that are very serious for everyone on board.

The answer is, probably no one, which also means your business is probably going nowhere fast, except maybe into a nosedive. The fact of the matter is, you can’t keep your business pointed in the right direction and navigate around hazards if you are distracted and forced to deal with issues that really belong to someone else. You have to have the right team to make your business ascendant.

Much like our mythical pilot described above, either the problem is you or the people who work for you. Either case requires you to take action. If the problem is you, then your management style needs to change. The only way you are going to be successful is if you start piloting your plane and leave the details to the people below you. At some point, you have to trust that they will get it done — maybe not the same way you would have done it — but done nonetheless.

If you talk to any successful CEO about what his or her average day looks like, it typically is all about strategic planning, meeting with investors, advisers or checking in with direct reports on key initiatives. Successful CEOs will not normally mention things like going on sales calls, troubleshooting a minor project or game planning about how to improve workflow within a department.

Why don’t they mention these types of activities? Because they aren’t doing them. If they were “down in the weeds,” dealing with details, who would be piloting the company from a strategic standpoint? The moment they started getting lost in the details is the moment the company would start to drift off course, because no one was there to steer it.

If the problem is your people, then that’s another issue. If you’re trying to pilot the plane but you have no choice but to go back and remind someone for the third time that you need some key piece of information or something else that should have long since been taken care of, then you may have a people problem. If you can’t trust the people below you to get the job done and they are doing poorly enough to where it’s a distraction to you, your only choice is to make a change.

That might mean training, it might mean moving someone to a different position better suited to his or her skills, or it might mean parting ways. But you can’t jeopardize the business by wading out into the weeds while the strategy goes on autopilot.

Being CEO is never easy. It’s up to you to decide whether the problem is the pilot or the crew, but one thing is for sure, you are never going to be able to pilot a plane if you are stuck in the weeds.

Thursday, 25 November 2010 19:00

The Kramer file

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Born: Hugoton, Kan.

Education: Bachelor of science degree in accounting, Kansas State University

What was your first job?

I worked on my parents’ farm and ranch at a very young age. My parents taught me the value of hard work as well as the value of the dollar early on. Even though my parents were upper middle class and fairly well to do, I wasn’t given anything. I had to earn almost everything.

In stark contrast to today’s parents, I had to fight all my own battles. Today, you see kids that have problems at school where parents go running down to the school to defend their child. It happens a lot. My parents never did that.

They would sit me down, and I would walk through the problem with them, and they would give me advice about what I needed to say to the teacher or the other child. But the battles were mine. I had to fight those battles myself. There was no entitlement of who I was born to. I had to earn everything that I got. I try to instill that in my children. It’s just more difficult today.

Whom do you admire most in business and why?

Steve Jobs. That man is a true visionary. The thing I love about Steve is his standards are never compromised. More importantly, and this is the difference between him and a lot of other leaders, he knows the areas where he’s an expert. He focuses on those.

Those areas that he’s not, he hires people and gets out of their way and empowers them. Wouldn’t you think somebody like him would get such a big head that they are an expert at everything? He’s not that way. He knows what his passion is and that’s what he goes after.

Thursday, 25 November 2010 19:00

3 Questions

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Gavin Geraci is the senior vice president and specialty group sales manager for PNC Business Banking. He has more than 18 years of experience in the financial services industry. PNC Bank’s business banking group provides cash flow options to accountants and other comprehensive solutions to make everyday business money management as efficient and effective as possible.

Q. What banking challenges do those in the accounting industry face that those in other industries might not?

Accounting firms are service-based businesses and hold fewer assets than more capital-intensive industries, such as manufacturing. Firms also have high fixed costs associated with salaries, rent/mortgage and utilities. Your bank must place more emphasis on other performance indicators, such as: cash flow, clientele, business tenure, character, personal wealth and the business development plan.

Another common challenge is a firm’s accounts receivable model. Most firms bill upon project completion. Depending on the customer, the accounts receivable process can extend between 45 days to 90 or more days. This results in a variable revenue stream, uneven cash flow and slow receivables.

Q. What should those in the accounting industry be doing from a banking perspective to ensure that they’re running their firm as efficiently as possible?

The banking industry has experienced significant technology advances over the past 10 years. The latest products help firms operate more efficiently than ever. Accept credit card and ACH transactions as an inexpensive and convenient way to accelerate receivables. Scan checks remotely to save time. Utilize software to help prevent check fraud. Ensure you have a sweep feature on your checking account to earn interest on idle balances. Take advantage of your bank’s online and information reporting tools.

Q. What are the most important factors an accountant should consider when recommending a bank to his or her clients?

Important factors to consider include: trust, responsiveness, customer service, consultative approach, scalability, financial soundness and industry-specific banking programs. Industry-specific banking programs are difficult to find but may be extremely beneficial to your clients. These programs often consist of specialized or highly trained bankers, in addition to discounted rates and fees.

Tuesday, 26 October 2010 20:00

The Simons file

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Born: Augusta, Ga.

Education: Juris doctorate, University of Georgia; C.R.B. fellowship, Belgian American Educational Foundation. While a C.R.B. Fellow, Simons obtained an LL.M. degree at Vrije Universiteit Brussel.

He completed his education as a Jervey Fellow from 1978 to 1980 at the Parker School of Foreign Law of Columbia University, during which time he was awarded an LL.M degree from Columbia and a Diplôme d’Etudes Approfondies from the Université de Paris I.

Simons on traveling internationally: While I was in graduate school, one of my professors was taking a group of undergraduate students from Colgate University to Yugoslavia. So it was my first opportunity to actually go abroad. The first country I went to was Yugoslavia.

I spent 10 weeks in Yugoslavia and another four weeks traveling around Europe. At a young age, that gave me a lot of perspective. I had an interest in international things before that, but it was the first time I was able to experience it, and I loved it, and I haven’t stopped traveling since.

Robert A. Reynolds Jr. faced a number of challenges in the wake of the Sept. 11 terrorist attacks. He had been president and CEO at Graybar Electric Co. Inc. for just more than a year and would soon add the title of chairman to his responsibilities.

Graybar certainly wasn’t the only business to be affected by Sept. 11 as the entire economy plummeted in its wake. But Reynolds had a number of other issues that were threatening the 6,900-employee company’s continued success.

“We spent a lot of money implementing a strategy that was not executed well,” Reynolds says. “We had systems that needed to be replaced. We had a souring economy made even worse by 9/11. The other thing we needed to look at as we went forward in the company was having the talent available, trained and ready to step in when needed.”

The most pressing concerns in the eyes of Reynolds were the large amount of debt Graybar had taken on and the aging systems that needed to be replaced.

“We needed to make a decision,” Reynolds says. “Do we go forward and put in a new system that we think would help us work on the balance sheet but, at the same time, would have an impact on the balance sheet because it was expensive?”

Reynolds wanted to work with his team to find a solution to the dilemma that was facing the electrical and communication products distributor. He wanted to develop a strategy that would upgrade the company’s operating systems without leaving the company in financial ruin.

“It was a little riskier,” Reynolds says. “But it was one we had to move forward on. We really didn’t have a choice.”

Get others involved

It’s up to you to put a strategy in motion and explain to your board how it will solve your company’s problems. But that doesn’t mean you can’t seek out help in putting the plan together.

As Reynolds began looking at how to solve Graybar’s problems, he quickly got his management team involved in the process.

“I can’t lock myself in my office and work real effectively,” Reynolds says. “I need to be out listening to people and talking to people and finding out what’s going on in the world. What’s going on in our industry? What’s going on with our competition? You try to pull all that together and figure out where the company needs to go to be better than what the others are doing.”

One of the first steps to any good strategy is research. A lot of research.

“You have to get other people involved in leading the effort,” Reynolds says, before thinking back to the first time he led the development of a business strategy.

“Everybody looked to me and said, ‘You’re the leader. You need to put this strategy together,’” Reynolds says. “You put the strategy together and then you’re all done and things start getting better and people say, ‘Well, we don’t have a strategy.’ I sat there and I said, ‘What do you mean we don’t have a strategy?’ Then you have to go back and rework it and say, ‘OK, what did I miss here?’

“What I learned is that for that strategy to be effective, it can’t be your strategy; it has to be everybody’s strategy. It has to be management’s strategy. Then it can’t be you taking that strategy out alone. It has to be management taking the strategy out with you. Everybody needs to have ownership of it. Everybody needs to buy in to it. Everybody has to communicate it as a team strategy, not as a Bob Reynolds’ strategy.”

Reynolds says he doesn’t follow a step-by-step process in developing a strategy. It’s simply a product of conversations he has with his management team.

“You’re waiting for that moment when it clicks and you say, ‘Aha, I got it. Let’s put it down. Let’s see if this rolls,’” Reynolds says. “You can’t sit there and try to force it.”

Talk to your people as you’re building the strategy. Don’t sit in your office and draw it up and then bring them the finished product.

“You’re getting buy-in as you go along,” Reynolds says. “You’re building it not just with your ideas. You’re building it with the ideas of others.”

One of the key conflicts at Graybar was figuring out how to improve the company’s operating systems without overwhelming a balance sheet that was already in bad shape.

“How are we going to improve the company while we’re growing the company?” Reynolds says. “How are we going to keep the balance sheet in good shape as we continue to do that?”

Reynolds led the meetings that were held to discuss these important issues. But he was never the first one to offer his opinion.

“When you contribute early, it shuts down everybody else,” Reynolds says. “As the leader, you want to be the last one to contribute. You want to be more a listener than a speaker. You can lead the meeting, but let everybody else provide their opinion. Once you provide your opinion, it shuts everything else down. They feel your mind is made up and you’re going forward. In essence, that’s not what you’re saying. You’re just trying to contribute like everybody else.”

Test the strategy

As the strategy begins to come together into a tangible form, you need your people even more. Reynolds prefers to take his management team and meet for a couple days to, as he says, take the strategy and “tear it apart.”

“Once you determine what that strategy is, you need to go out and test it,” Reynolds says. “I don’t like to say you sell it through because you don’t want to force it through. It has to be right. People have to believe in it or else it’s going to be very difficult for people to buy in. If they don’t buy in, it’s going to be very difficult to implement and execute.”

Be blunt and ask people if they think the strategy you are looking at makes sense.

“Can we make this work?” Reynolds says. “Will it work within our industry? Do we have the tools to make it happen? Do we have the people to make it happen? Do we have the finances to go forward doing it? You have to test every department. You have to take the strategy and see how every department fits into the strategy and then make sure it’s going to take the company in the right direction.”

By asking these questions and initiating these conversations, you’re demonstrating trust to your people that you believe their feedback is valuable to the process.

“We challenged each other regularly on this program,” Reynolds says. “You have to allow people to challenge you. You’re one individual, and one individual doesn’t have all the answers. You have to trust the people you have.”

If you’ve worked with your team from the beginning, you shouldn’t have a lot of divisiveness in the process. But it still occurs from time to time, and you need to hear it out.

“But if they’re not strong enough opinions or they’re not fact-based opinions where they can sway the group, I would expect them to get on board and not block the process,” Reynolds says. “Sometimes they do sway the group and we make changes.”

Reynolds recalled a situation with the logistics strategy that wasn’t working like it was expected to after it was implemented.

“If you’re not getting the results, you have to dig in and say, ‘Why aren’t we getting the results?’” Reynolds says. “Where is the flaw here? What isn’t happening? Why isn’t this going the right way? You need to be honest with yourself and ask questions and get input and see what their feelings are.”

If you don’t promote an air of openness, then concerns, such as those that arose with Graybar’s logistics strategy, will never come to light.

You can’t be afraid of confrontation and conflict in helping you get to a strategy that works for everybody.

“We always have challenges in there,” Reynolds says. “Some will feel that makes sense. Others won’t. So you sit there and you kind of battle through it until you come to a decision. Then you start implementing based on the decisions you made.”

There is another scenario that can occur with objections. While they may never be heard, the objections may instead fester with people who hold a grudge that they never had a chance to express how they felt.

“You need to communicate not only to those who are in charge of implementing the strategy, but to those who it’s going to impact,” Reynolds says. “They can fight it and never allow it to happen if they’re not included or at least have an understanding of where the company is going. You have to explain what you’re doing, why you’re doing it and here’s why it makes sense. Once they buy in and understand it, then they move forward with it.”

Be flexible

Even when he began releasing the strategy to the rest of Graybar’s employees, Reynolds says it wasn’t written in stone.

“We drew it up after we got all the details and presented it to everybody,” Reynolds says. “I took it out via field visits and teleconferences to the entire organization. We had posters made up. It takes a long time for people to realize you have a strategy and what a strategy is.”

You need to realize that while you’ve been spending long days and nights working on the strategy, it’s still new to many in your company.

“You think you have it, you go out and talk about it and people say, ‘I don’t know our strategy,’” Reynolds says. “You just have to keep reinforcing it. Listen to what people are saying and watch for verbal clues of whether they are buying in or not. Let them challenge you on what you say and why you’re saying it and what you do and why you’re doing it. Make it clear to them the role they play. The most important thing with a strategy is to let people speak.”

One of the challenges to getting feedback from regular employees is often a reluctance to speak up, something Reynolds readily acknowledges.

“If I walk into a meeting and say, ‘Does anybody have any questions?’ we’re going to have 15 minutes of mandatory silence before anybody starts opening up,” Reynolds says. “I don’t think it’s because I’m intimidating. It’s because the position is intimidating.”

Reynolds attempts to conquer that problem by giving employees cards on which they can write their questions anonymously.

“[On] those cards, it says, ‘This is your ticket to the meeting and everybody has to come with at least one question,’” Reynolds says. “That really opens up the communication because they don’t need to sign the card. They don’t even have to hand me the card. Nobody is put on the spot. It’s the group that has come together and the group that I’m speaking to, not individuals.”

Reynolds feels like his approach at fostering inclusion and collaboration has resulted in a more defined strategy for Graybar. In addition to being more definitive, the strategy developed after Sept. 11 was also kind to the company’s budget.

While some tough decisions had to be made in the way of employment and other costs, the $4.4 billion company was ultimately able to weather the storm.

“We’re in a much better financial position than we’ve been in for years,” Reynolds says. “We also have better systems in place, which have helped us.”

But even the most well-conceived strategy requires a little tweaking from time to time.

“It’s the same thing as any strategy you put in,” Reynolds says. “You need to go back and keep revisiting. You can’t put it in the drawer and pull it out at the end of the year and say, ‘Did we hit it?’ It’s not the plan and it’s not the results. It’s the execution.”

How to reach: Graybar Electric Co. Inc., (800) 472-9227 or www.graybar.com

Brown Smith Wallace LLC made decisions in 2009 that many companies probably can’t say they replicated. The accounting and business consulting firm didn’t have large layoffs, it didn’t cut back contributions to employee 401(k) plans, and it didn’t renege on employee raises.

That doesn’t mean the firm didn’t face a year filled with difficult choices. Many changes were made as the company worked to keep revenue steady at $26.4 million. Regardless of whether your company is facing good or bad times, there are essential elements of leadership you must maintain, says Harvey Wallace, co-founder and managing member. You must keep employees engaged and informed, perhaps even more so during financially tough times.

“You need to work a lot harder in down times than you do in good times to get the message out there,” he says.

Wallace stays connected with his 212 employees through multiple streams of communication and setting a context for how the firm is performing financially.

Smart Business spoke with Wallace about how to keep employees engaged.

Communicate to engage. It starts by being out front with employees and communicating what your vision is, letting them know what the expectations are. Our vision is to be recognized as the premier firm in our chosen market as demonstrated by the pride of those associated with us, our people and our clients. It’s setting expectations, communicating with people and continuing to work to move the organization forward.

No one wants to be with an organization that is either stagnant or moving backward, and so 2009 was one of those years where it was incumbent upon leaders that they keep that mood in place. Negativity is not something you can afford to share with your people.

Stay in front of employees. The word that we all like to talk about is communication, and it comes in many forms. At one of our firm meetings in late 2008, we, as most other companies, did realize there was a recession. It was either there or it was about to arrive. At our firm meeting, we addressed that head on, and our words were, ‘We choose not to participate.’ It gave the message to employees that we’re going to continue to keep heading in a positive direction and we understand that it may be difficult, but, as I said, we choose not to participate. That’s just an example. E-mail messages from me as managing partner, trying to update people on things that are going on, communicating any major changes in the organization.

It needs to be something that comes through not just the top management, but I think it needs to come through different levels of management. For example, in our firm, we have five different operating units and each of those operating units has a partner who is responsible for that practice. It certainly is coming from me as the managing member, but as we go down through the organization, it needs to come from direct supervisors of people in different practice areas so that they’re getting a consistent message that is communicated through technology, through e-mail, because that is how we all communicate these days, but [also] on a one-to-one basis so that the message is constant, it’s repeated and you avoid mixed messages.

It is important to make clear to the managers what our goals are and how we’re going to achieve it so that they are knowledgeable and can share that message with the people who report to them. That’s my job to make sure that our managers are informed and a part of the decision-making process and keeping everybody positive. I can’t repeat that enough. You have to continue to keep people positive because a culture that has been built over 30-something years in business can easily come tumbling down. We spent 37 years building our culture and building our firm, and we couldn’t — and no business should — allow one bad year to change the direction and the message.

Share financials. The annual report, as an example, we started doing that four or five years ago. It’s a summary of our performance during the year that’s just ending. We publish it in December; we send it to the homes of our employees so that it’s something they can share with their families.

It’s everything from financial statistics to information on major new clients, to practice areas, new individuals that come into the firm, we highlight people who have had significant anniversaries with the firm. The annual report is just that; it’s a state of the firm in the past year and, of course, ... how we’re doing compared to other years. I certainly think that’s one thing that is important to provide to our employees.

(A) firm meeting is ... the spoken version of the annual report. Our goal at that point is to provide a lot of the same information to employees.

Even in bad times, employees get comfort looking at our statistics, our revenue goal achievements, so that they can see that the organization is moving forward. It makes them feel a part of the organization. As I said, we want to share that with the families because there are 200 families who are a part of this organization, and we take seriously our responsibility to those 200 families. It brings them into the process, understanding who the firm is, what our values are, how we’re moving forward.

It is just so vital to everyone to understand the finances of their organization. Our information tends to be high level as opposed to every detailed line item, but certainly what I think employees, and every member of an organization, can certainly appreciate and understand is the revenue. Is the firm growing? Is the firm headed in the right direction?

Obviously, many public companies, all of their information is available, but I think more and more private companies are going to share information with their employees.

How to reach: Brown Smith Wallace LLC, (314) 983-1200 or www.bswllc.com

Selden Martin always has a plan. It’s an attribute that has served him well over the past couple of years as he has adapted to the global recession and the big changes at Merrill Lynch & Co. Inc.

It was Jan. 1, 2009, when the world learned that the well-known wealth management firm had been acquired by Bank of America Corp. With the economy already struggling, this was yet another reason to be scared. But Martin’s diligence about planning left him in a strong position to deal with the uncertainty that arose.

“One of the early lessons that evolved for me in leadership was to continue to adapt as a leader,” says Martin, managing director for the St. Louis Metro Complex of Merrill Lynch since 2005.

“I’ve always been a big believer that having a plan is important for any kind of business that you run. A lot of times, business owners are very entrepreneurial or very defined by the specific product or service that they produce. But they don’t have the experience or haven’t had the luxury of being in a position where they build an organization around it.”

In other words, it’s great if you grew up working on cars in the garage with your father and parlayed that knowledge into a chain of auto repair shops, but if you don’t know the mechanics of managing people and following a budget, your ability to fix a busted alternator may not be enough to keep your business going.

“Having a plan is important at any level, and then secondly, communicating that plan is paramount to getting the buy-in and getting the success of the employees in the organization,” Martin says. “That helps specifically all the way through the life cycle of the business.”

More than a year after the acquisition by Bank of America, both Martin and Merrill Lynch have adapted. The overall company registered $23.3 billion in 2009 revenue and Martin did his part to keep things moving with the nine offices and 200 financial advisers he oversees in St. Louis.

Here’s how Martin stays organized and stays in touch with his employees to make sure everyone understands what’s going on.

Know your purpose

It sounds simple enough, but do you know why you’re in business? Have you ever thought about it? If you haven’t, you need to start.

“You’ve got to have identification of a mission statement of what you’re about,” Martin says. “What’s the purpose of your enterprise? What are your goals and objectives for that? Once you identify that, you can decide the approach and strategy of how you want to operate the business, conduct the business and fill in the other parts that help you along the journey.”

You also need to secure resources to invest in your business and start breaking down your financial metrics.

“But all that is much more difficult if you don’t start with being grounded as to what your mission statement is and what you’re about and the broad-based goals and objectives,” Martin says. “If you properly address having a mission statement and having goals and objectives, you’re able to develop a comprehensive longer-term business plan. It’s very much part and parcel to the whole consultative approach we have for wealth management.”

The goal when helping clients with wealth management is determining what the clients want and mapping out a plan for how they can achieve that goal. It works the same way with a business in that you shouldn’t expect that you can do it all yourself.

“You have to have the right kind of mentors and advisers around you,” Martin says. “Advisers can be a board of advisers, they can be key client relationships, they can be key employees in the mix. It can be external partners that fulfill advice competency to your enterprise that you don’t necessarily warehouse within the business enterprise. … The advantage of working with mentors and boards of advisers is to draw upon their experiences in having similar paths of professional experience.”

The effort to be able to clearly state what you do and show what your business is all about and demonstrate planning will pay off in your ability to retain employees.

“The fact that you have it and the fact that you can stand up and communicate it to your employees as it relates to an overall plan for the business and the vision for the business puts you in a much better position to have employees who view your company as being something on an enduring and sustaining basis,” Martin says. “It all ties back. The existence of the plan puts you in a better position to articulate and communicate to your employees and to your clients what your company is about.

“Take a business where there’s X employees and it’s just a job and they show up and they punch in and punch out and it’s a place to collect a check,” Martin says. “They don’t feel like they are part of a bigger thing. They’re not locked into the mission of what they are fulfilling to the client and other possible goods that a company exists for.”

By attaching a purpose to your company and a clear reason for being in existence, you give your employees a foundation to stand upon.

“When companies define themselves much more broadly about an enduring purpose, the clients understand that and the employees are there as more of an avocation as opposed to a job,” Martin says.

Talk to your people

Planning can’t just consist of you issuing directives and strategies about how you want things to be done. You need to get feedback from your people on what they think about what’s going on.

“The first tip we all learn is that it’s a lot easier to get other people talking about themselves,” Martin says. “For a person that is a little bit more uncomfortable doing that, I think going in with a couple of good open-ended questions takes the pressure off. Go to an employee and say, ‘Tell me what’s going on in your life. How have you been? How’s work been going?’

“If you just shut up and listen, it takes a lot of that connectivity pressure and communication pressure off yourself. It puts you in a little bit better position when you are put on the response podium to communicate and deliver back to them. That holds true in the context of a business organization or a social setting.”

You also need to take some time to think about who you’re speaking to, in whatever setting you encounter them.

“Always try to think, ‘OK, who is my audience? What’s important to them today? What is it that they want to hear about?’” Martin says. “There are a lot of things that I think are important on my agenda that I want to get communicated, but if it’s coming off as me-centric or organization-centric, it’s not as relevant to the particular audience I’m talking to. I have to tweak it and figure out how I can accomplish the things that still need to be communicated, but do it in the setting of what’s important to the listening audience.”

Just as you plan for your company’s future and you plan when you have a problem, you need to plan when you’re going to speak to your employees.

“It’s always a helpful exercise to do your prep work about what it is you want to talk about,” Martin says. “Then back up and think, ‘OK, let’s think about the listener. What is it that they want to hear?’”

This is where your ability to stay true to yourself becomes vital. It’s a lot easier to speak with integrity and honesty when you’re talking about something you truly believe in and feel passionately about.

“You’ll come off as knowledgeable as opposed to you’re asked to speak on a topic you know nothing about and you have to go research it and it’s more likely you’ll have to operate off some kind of script because it’s not about something you’re inherently part of,” Martin says. “We try to authenticate the way we communicate. We try to use relative examples that the listening audience can relate to and put it into concepts they can relate to.”

If it seems like you’re having a problem getting employees to believe what you’re telling them when you speak to them in a group setting, maybe it’s because you don’t talk to them on a regular basis.

“You have a plan, you communicate it to your troops, you revisit that on a periodic basis,” Martin says. “That keeps you in the habit of doing it. If you never do it and then you wake up one day and say, ‘I’ve never sat up here as a business leader and communicated what we’re about,’ it’s going to be a pretty awkward presentation. Everybody is going to go, ‘Why is he doing this? We never do this.’ And you’ll be rusty at doing it. Like a lot of things, practice and frequency make you better at doing it.”

Take notes

Some people carry a micro-recorder with them or on their phone that they use to keep track of things, but for Martin, he just takes notes with a pen.

“I keep a little pocket sleeve on the inside part of my jacket and a pen,” he says. “The first thing I did this morning was I went down the hallway to meet with one of our top advisers who was out meeting with a significant corporate relationship yesterday. I wanted to know how the meeting went because I knew it was an important meeting.”

When Martin left the meeting, he jotted down a few notes that he deemed important.

“There was every potential it could be another hour before I got back to my office because I might get stopped along the hallway talking to other people,” Martin says. “I record things and I try to keep a daily log in a side drawer where I sit at my desk. I’ve tried to capture things in the course of a day. It could be thematic things that I’m starting to see systemic repetition of. It could be anecdotal pieces of information. It could be a good idea I want to share across the broader population of the employees. It could be a people issue that we need to address. Whatever it is, I keep a master list.”

No one questions the value of face-to-face communication, but it’s not as easy to keep a record of what’s being said when it’s not in an e-mail, text message or voice mail. So as your company gets larger, you need to find a way to keep track of what you hear so that you can process it and possibly incorporate it into your organization.

“Then at the end of each week or before I leave on Friday or even when I come in once on the weekend, it’s easy for me to get over and plan my week ahead,” he says. “By the time you’re running a $300 million or $400 million business with 300 or 400 employees, you’re going to have a lot more issues come up than something on a smaller scale. At some level, you can keep track of it in your head, but at some other point, you’ve got to move beyond that.”

How to reach: Merrill Lynch & Co Inc., (800) 637-7455 or http://www.totalmerrill.com/

Monday, 26 July 2010 20:00

Manufacturing remains in flux, but growing

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By the time financial markets around the globe started to tumble in October 2008, much of the manufacturing industry was already deep in a recession that had stretched across the better part of a decade. Millions of workers had been sent home, their labor and their experience no longer needed because of more efficient machines and the rise of globalization. Thousands of factories had been shuttered. Whole companies just disappeared. None of it was coming back. It was all gone for good.

Manufacturing was not, of course, the only industry hit hard prior to the start of the larger recession. Publishing and newspapers had been on the decline for years, and the domestic automotive industry, technically under the umbrella of general manufacturing, had been in a slide for a generation. But perhaps no industry was affected more since the turn of the millennium than manufacturing. About a quarter of a million manufacturing jobs were lost over the course of a decade, the large majority of them prior to 2008. As the recession spread from one industry to another, millions of workers were laid off from the collective work force, but manufacturers often still let go of the most employees.

The cycle was vicious, and it continued, month after month.

How is it possible, then, that less than two years after the economy turned, manufacturing is on the rise again? Manufacturing activity increased again in May, according to the Supply Management’s index, the 10th straight month of growth. And even though that growth has started to slow a bit, growth is still growth. Were the 2008 levels just so low that any growth is significant? Or is the sustained increase in manufacturing a sign for the rest of the economy? Nothing is certain, not yet, but all of the indicators do point up, however modest, rather than down.

“When we were going through this mess, we had to cut everything down to the bone to survive,” says Mark Birsinger, owner, M.A. Birsinger Co. LLC. “You had to survive in order to be there when the sun came out. And the sun is coming out and the sun is up. My opinion is, if you have made it this far and you’ve still got a good book of business and you’re not in financial straits, you’re going to make it.”

Prepare for more change

What was normal two years ago will almost certainly not be normal during the second half of 2010 or even during the first months of 2011. What was normal then, in fact, might never be normal again. However much it might be a cliché, change really is the new normal in manufacturing — and plenty of other industries, too.

Among those changes are the new gaps in the supply chains of some larger original equipment manufacturers, the result of smaller companies closing during the last couple of years, which might cause delays and problems in receiving supplies in a timely manner. A number of industry experts say the availability of credit will also likely change, with banks starting to somewhat relax their requirements for the first time in two years. But the biggest change might be the addition of manufacturing jobs.

“Manufacturing is now the only business sector that has been adding jobs for five months,” says Emily Stover DeRocco, president, The Manufacturing Institute. “Manufacturers have added 126,000 new jobs.

“But the focus is going to continue to be more on what we call mass customization, as opposed to mass commoditization. This reflects, again, the industry’s response to globalization, which is that U.S. manufacturers, in order to maintain their global leadership, have had to move to a higher quality and a higher value product.”

And that higher quality product will almost certainly lead to more changes in the way manufacturers and so many other companies plan and do business. It is the ripple effect across industries.

For example, if you have not already reassessed your vision and your plan for your company — especially in terms of negotiating for the best terms — that should move to the top of your priority list.

“You still have to get the best terms,” Birsinger says. “A lot of my clients are hesitant to go and tell that vendor or that supplier, ‘I need this. If you want to keep me as a customer, I need these terms and I need you to do this for me.’ So many small businesses think they do not represent enough of an order for their vendors to go and negotiate — tactfully but aggressively.

“Whether you’re ordering $1,000 or $50,000 worth of stuff, that order represents business for that company, and they are willing to do whatever they can do to not only keep you as a happy customer but, more important, keep you as a customer. A number of my clients think they don’t have the leverage to negotiate better terms.”

That can also help you better position yourself and your company for the continuing changes and the eventual uptick in the economy and the industry.

Keep the long term in perspective

Two years ago, few manufacturers — few companies at all, really — were prepared for the recession. But you can prepare for the ascension, however slow and modest it might be, by being smart during these coming months and years.

You might think about diversifying your product lines into other markets so you aren’t as dependent on single-source customers and, more generally, diversifying your portfolio. You might also research how to best tap in to loans, grants or tax credits that are available from various levels and departments of federal, state and local government to help increase business during challenging times. And you will likely want to consider your risks, especially over the long term.

“You’ve got to know what you do best,” Birsinger says. “You’ve got to know why you’re doing it. And you have to do it the best. I think that’s a question everyone needs to examine. Everything is different. Many of my manufacturers are not manufacturing exactly what they did in ’07 today because everything has kind of changed. You have to look at everything and re-evaluate it, and the best way to do that is a SWOT analysis. Everybody can brag about the successes and the opportunities, but truly the weaknesses and the threats are the value in that analysis.”

Technology and education, as would be expected, can also play a role in increasing your business. Several experts discussed how the advantage of companies that are owned and operated in the United States is the technology that is developed in the United States. Domestic manufacturers continue to be at the forefront when it comes to utilizing technology in their processes, a trend that will only continue. To ensure that the technology is operated correctly and efficiently, workers should be more educated than they were 40, 20, even 10 years ago, and with so many quality workers still unemployed, there is a deep talent pool from which to hire.

“Manufacturers need to hire and retain smarter workers,” DeRocco says. “As you have the intersection of technology and manufacturing in a much more complex global economy, the work force needs to become educated and skilled — what we call a 21st-century, high-performance work force.

“Most of our workers need a secondary education. A high school degree is no longer sufficient. Our reform will actually grade the competencies and skills that manufacturers now require of their employees into high school and community college programs of study. But it is important for manufacturers to also increase the skills of their current work force.”

How you handle all of that now might be the difference between a quicker return to profitability and increased production, and the far less appealing option of a long struggle back to respectability and some small sense of comfort in the market.

Most important, though, is to do everything with the long term — and that refers to years and decades, not just months and quarters — in mind.

Ask questions

As you prepare for the last months of 2010 and the first months of 2011, it will be important to keep any number of questions in mind. Write them down. Type them and print them out. Keep a copy on your desk. Distribute copies to your executive team, perhaps even all of your employees. Just keep them in mind. No matter how well you know your business and your industry, that list of questions will be as important now as it has ever been.

And just what questions should make the list? Well, a lot will depend on your industry, your goals and your financial standing at the moment, but there are some questions that all businesses need to be asking right now. And those are: What is happening in your industry? Is it expanding or contracting? Is your company expanding or contracting? Where do you see your company in 2015? In 2020? Is your company in the right market? Is it in the right position in the market? What are the strengths and expertise that your company has that could be adapted to another market or product line? Where can you turn to think through your situation? Will your company be able to receive a large enough line of credit during the next year? Will you be able to fund your growth? How sustainable are the current demands? And, the great unknown, how will global events affect your company?

“With the crisis in Europe, everybody’s kind of ultrasensitive to issues and to going out to a lending land, if you will,” Birsinger says. “Everybody’s on edge and everybody’s trying to understand the new economy for small business. All the rules have changed. Really, there aren’t a whole lot of rules right now. Everything has kind of changed, everybody wants it a different way, everybody needs it a different way and few are willing to keep inventories like they did before the recession.”

With all of that in mind, you will also need to consider whether your supply chain will be able to respond to the innovative approaches required for future growth and success, which means supply chain capabilities and locations become more important. The demographics of your work force are also important, especially with a generation of baby boomers still on the brink of retirement. And innovation is important, too. How will you move ideas from the collective mind of your company to the drawing board to the marketplace? Live in the present but remain focused on the future.

“Eyes on the future, but remember the volatility of this market,” DeRocco says. “There’s a constant threat to every business sector and there are some very large factors in play right now that will determine manufacturers’ cost structure for continued operations, so they’re keeping an eye on all of those — public policy, the global impacts around the world, certainly the European financial crisis.

“Every one of those issues has an impact and creates new challenges for manufacturers operating in that environment.”