There are so many stereotypes about attorneys. Some of them are true, of course, but most of them are not.
Some attorneys are, for instance, sharp dressers, every bit the models for the top designers that you might expect, with perfect hair and a packed brain to match, but not all attorneys look like they belong on the cast of some courtroom drama that moves through its story arc each week in 44 minutes flat.
Some attorneys are fast and slick and out to make a quick dollar or a quick couple of thousand dollars but not many.
And, yes, some attorneys are blindingly intelligent and able to rattle off laws, statutes, regulations and court cases long since decided as if it was their job because, well, it is.
Your attorney is not a heart surgeon, a rocket scientist or a neurophysicist. They might as well be, though, to handle the level of work and degree of difficulty required during the last couple of years. After all, you have probably rarely called your attorney for something casual during these strapped economic times. Calls always seem to be reserved for something expensive and stressful that has to be handled correctly.
“Managing the tough times is always harder,” says Vincent J. Garozzo, principal, Greensfelder, Hemker & Gale PC. “I think businesses are trying to use their legal counsel in a more efficient way. They don’t want the simple problems to have to go to the business lawyer for resolution. They think they’re able to handle those themselves.
“What you’re seeing is that, when a business owner calls us, the problem has either escalated to the point where it’s in need of damage control or it’s so mind-numbingly complex that the business owner doesn’t know where to start.”
You might be in the midst of one of those swelling problems at the moment. A majority of attorneys say this is an opportune time to think, then think again, about your business strategy and to examine the economic landscape, because there are opportunities available right now, even in slower industries, that will not be available for long. If you can afford to, this is the time to move. And if you have a good attorney on your team of advisers no stereotypes here you already have about as good an ally as possible to help steer you forward.Remember the past
The last couple of years have provided you with a new set of challenges. Perhaps you needed to lay off a percentage of your employees, close a branch of your business or just do more every day with an already overworked, if not smaller, staff. Odds are your attorney was with you during many of those moments because even if you didn’t work more with your attorney in order to save legal fees, you probably called and talked more often.
That is, at least, what many attorneys are saying.
“Our relationships have been more related to general corporate counseling, specific to litigation needs, and in the areas of general business and litigation, it has probably experienced a bit of an uptick just because there have been things that needed to be addressed,” says Austin L. Hirsch, partner, Reed Smith. “We are viewed as a business adviser as opposed to someone who is providing a task, and these are the times when that really counts, these are the times when it really shows whether you have a relationship.”
The amount of work and communication required of some attorneys will also likely increase through the rest of 2010 and during the early months of 2011.
“I think a lot of companies are really focused on cleaning their own house in anticipation that when market conditions improve, they’re going to be in a better position either to profit or potentially sell themselves through a liquidity event,” Garozzo says. “So they’re doing what I call an internal audit looking at all their contracts, their personnel files, their financial statements because that makes the business more valuable.”
And that makes for more work for attorneys. Until then, the existing bump in bankruptcy, commercial litigation and corporate reorganization sure signs of an economy that has seen better days, months and years will likely continue.
And valuations are still historically low though not as far in the cellar as they were during much of 2009 which means now is still a good time to examine and consider estate and succession planning. What will your business do after you’re out of the top spot? Who will own the business? Who will be in charge? And were you able to take advantage of a down market to pass it along at a better rate?
There are plenty of other things you should consider with your attorney before the economy starts to bump up a little more.Look ahead and plan
Did you manage to obtain any sort of credit during the last two years? If so, congratulations. That is quite an accomplishment. If not, no worries, because not many other companies did either. That said, some good news for the coming year is that credit is expected to be more available in 2011 than it has been in several years.
More credit is just one of the major points of interest for attorneys during the next six to 12 months. Because of those increased lines of credit, much of the next year will likely include a focus on mergers and acquisitions. Some attorneys say that M&A activity increased during the first half of 2010 before slowing some during the last four months, but no matter your city or region and St. Louis is expected to be no different M&A activity will likely be prevalent by the time the calendar turns.
“In the last couple of years, there has been less merger and acquisition activity on both sides, for buyers and sellers, particularly in the upper middle market,” Hirsch says. “But certainly, if the economy does pull itself out and we’re starting to see some of our more successful clients step out because they’ve been more profitable during this time more businesses will start to think strategically about opportunities in the marketplace.
“If that trend continues, there will be more M&A activity in the course of the next year.”
Alternative fee structures and arrangements or at least discussions about them are also expected to increase in 2011. Some firms have provided them for years as an option, others have added them only during the last couple of years as clients asked for them, but there does seem to be a split between clients who are more open to alternative fee structures and those who hold tight to the hourly rate.
Even if you have no interest in alternative fee structures and will renew your proverbial subscription to the hourly rate, at least starting a conversation with your attorney or legal team about some other option might not be a bad idea, especially with the economy and cash flow still in flux.
“We hear and see in the news a lot about how clients want to get away from the billable hours and move to alternative fee structures,” Garozzo says. “But when I sit down with a client and try to discuss an alternative fee structure, 95 percent of the time, we wind up back at the billable hour. My astute business clients like the billable hour rate for business law services. I have not had one come up to me and say, ‘Would you consider an alternative fee structure?’ Now, in litigation, that’s happening every day.”Ensure your value
How can you be certain that you will receive as much value as possible from your partnership with your attorney? Communication, of course the seemingly simple center of every conversation and great relationship remains the top priority. If you do not talk regul arly with your attorney or if you rarely, if ever, ask questions or send recent documents and forms, you need to communicate more.
Most attorneys say they like to talk with clients at least once per month, just a casual meeting for breakfast, lunch or coffee to sit down and talk about you and your company, especially if they work with you more as an adviser than as an auditor though every relationship is different.
“I like to use the term ‘staying sticky’ with your clients,” Hirsch says. “I think it is something in which you try to continue to meet with the clients regularly to go over strategy. Now, you have to tailor your relationship. It’s hard to say that every client relationship is the same, but clearly, there are benefits that we can provide by going out to lunch, by going out to a client’s place of business, by sending articles of interest that will stir and stimulate thinking about different tactics or approaches for their business or their customers.”
If you are not pleased with the quality or the nature of the relationship you have with your attorney, for any number of reasons, the time to consider a move might be now. Rates are historically low, and this is perhaps the best buyer’s market of any of our lifetimes.
“If you don’t have qualified corporate counsel and you’ll know if you have it by dealing with them you need to change out of that right away,” Garozzo says. “If you’re working with lawyers now who are narrow in scope and who can’t advise on what I call multidiscipline issue tax, accounting, corporate you probably need to move on in any economy, because your dollars are too precious.”
You might want to consider a change if you have just outgrown your firm and need a firm with a larger regional, national or international footprint.
You might also consider asking your attorney about any changes in rules and regulations for 2011 and beyond. Asking whether the firm offers any corporate education that you and your employees might be able to put to use would also be a good idea. And asking for a review of your corporate structure, especially for possible inefficiencies, would not be a bad use of time or money. What are your employees earning? What are your executives earning? What else are you paying for? And is it really worth the cost?
“A good business lawyer will work with his client to keep him ahead of the curve, knowing that the economy changes on supply and demand and that how a business reacts to that will affect the bottom line,” Garozzo says. “And staying ahead of the curve is the goal.”
Because in a world and an industry filled with so much change during the last couple of years, something needs to stay the same.
Perhaps someone forgot to tell Thad Simons that this wasn’t a permanent gig. As interim CEO of Novus International Inc., he was just supposed to keep the seat warm until a full-time leader could be found.
“No one expected me to take the job seriously,” says Simons, who would eventually become president and permanent CEO. “As interim, you’re not supposed to do anything. You’re supposed to just keep the company going.”
But Simons wanted to do more than that. He had been with Novus for more than a decade as general counsel and helped the company establish its own identity after separating from Monsanto Co. in 1991.
“The reason our product is provided is to make up the nutritional balance for good growth and health,” Simons says of his company, which provides nutrition for people, pets and livestock. “Our growth in the whole industry was following the phenomenal growth of the poultry industry worldwide.”
He watched the company grow throughout the economic boom of the 1990s and then fall as the economy struggled and ultimately gave away in the 2000s most of what it had gained.
“What had been very strong demand growth collapsed,” Simons says. “We went down to where we were barely making any money. Your shareholders are unhappy and the staff is unhappy because there are no bonuses and something has to change.”
Simons had a few ideas about how to get business moving again. He had some thoughts on the development of new products and services. He felt like he could make a positive difference for the business.
But these feelings clashed with the opinions of other leaders in the company who wanted to ride out the storm with a strategy that was less risky and more proven.
“One way of looking at it would have been to say, ‘We should hunker down and focus on the core and focus on what we’re strong in,’” Simons says. “There were certainly many people telling me, ‘This is what we should do. We should get rid of R&D and technical support and really look at ourselves as being a strong commodity supplier.’”
Maybe it would have been safer to do it that way at the company of more than 750 employees.
But Simons felt the potential reward of going all out to support his research and development team outweighed the risk of not always getting it right and experiencing a few failures along the way.
He just needed to get some people around him who felt the same way.
Start building your team
Simons launched his plan by getting people who he had worked with placed into two key positions in the company. These positions were the head of sales and marketing and the head of research and development. They were key departments because they have a lot to say about how the company interacts with customers.
“What I had to do was assemble a team around me that shared the same vision for the growth of the company,” Simons says. “The team I put around me were people who had been coming up in other areas but shared that same vision for growth.”
Simons understood why there was some skepticism about his plan at this stage. Both he and his new head of sales and marketing had experienced failure at Novus in their early days with the company. In the case of Simons, the circumstances were eerily similar.
“I was head of business development,” Simons says. “The technologies that I tried to bring to the company failed, because there was a huge resistance in the company to taking new products forward.”
His new head of sales faced similar skepticism because of past results.
“He was responsible for one of our little startup companies, which was in a software business line related to livestock nutrition,” says Simons. “That was also a failure. So my selection of him to be head of marketing and sales was not obvious to most people at the time. They thought it was quite high risk.”
Simons was confident that both he and his colleague had learned from their mistakes. Simons had clearly done pretty well for himself, as he was now the company’s CEO. He felt his colleague was the right guy to have working with him to spread his vision of going all out for the customer.
Who better to have at your side when you’re facing a group of skeptics than someone who knows what you’re going through and believes in what you’re trying to do?
“What was important to me was to have R&D and marketing be very closely aligned in terms of their goals,” Simons says. “I’ve seen that R&D can be isolated from what the customer needs and what the marketing needs are. It was very important we get a structure in place and people in place who understood that R&D is really serving the customer.”
Simons needed people who shared his excitement for generating new business.
“If you don’t have support at that level, you’re not going to be able to push it down in the organization,” Simons says. “It was much the same thing in operations and how to make sure operations were focused on satisfying a customer need.”
Let’s put it this way: If you have a beautiful engine sitting in your garage that purrs like a kitten but doesn’t have anything to power, it’s not going to do you much good. Simons wanted to focus on where his engine could take him rather than how efficiently it ran.
“Efficiency is very important, but in the end, efficiency isn’t going to cause a customer to buy,” Simons says. “It was more important to be a reliable supplier and a responsive supplier. Efficiency was just one of those factors. So it was making sure I had the right team in place to grow the company.”
Simons wanted to build a culture in which the company was always looking for new opportunities to generate revenue and expand its reach in the field of nutrition products.
“I wanted us to build upon what I thought was a strong technical base that we had in the organization and to leverage that to provide more value to our customers and to provide it to more customers,” Simons says.
Engage your team
Simons wanted to help Novus in the present, but he also wanted the company to be more prepared for the next economic downturn. He needed to build a way of doing business that promoted diversity and was constantly cranking out new ideas and new products.
“I knew the cycle would turn again, and I wanted us to be ready,” Simons says. “I wanted us to avoid being caught in this down cycle the next time it came. I knew that would require having other products that were going into other parts of the livestock industry. That would actually deepen our business with our customers.”
Simons’ task now was to sell his team on the idea. He had surrounded himself with supporters, but he still needed to get them fully bought in to his idea of pushing research and development if this was to work throughout the company.
“This needed to be their plan,” Simons says. “It wasn’t just done in one day. It was done over the course of sharing ideas back and forth. But eventually we all came together in one room and then we broke into small groups and took on different components. HR led a workshop talking about the people side. Communication and marketing took the reputation side. People from sales took on the growth side and product leadership took on the profitability side. They all came back together into the big group and came back with some ideas.”
Let each department get together and just throw
ideas on the table to get the discussion going. Your job is to keep it focused on the ultimate goal, which in the case of Novus was to find better ways to serve customers.
“Try to cut through some of those things and build a consensus around what’s most important,” Simons says. “When there are still too many things to do and priorities have to be set, it comes down to the CEO to do the final allocation of the resources.”
But short of you needing to step in and do that, you’re trying to promote a culture of participation. It will help you work through most doubts that people may have.
“People can deal with a lot of uncertainty if they are aware of what they can do to affect it,” Simons says. “So what we’ve tried to do is make them aware. If we’re going through a very good time, we don’t want them to lose sight of the challenges that could come up in the future.”
Simons thought that a company that always had an eye on the future would be more prepared and more in touch with its customers.
“People will feel empowered and they will be working on the right things, because they’ll understand what is really important and what’s not really important,” Simons says.
Simons knew he had to provide some backbone to his push for innovation.
“It’s nice to have lofty goals, but if there is nobody working on it, you’re going to be disappointed at the end of the year,” Simons says.
Key accountability documents, or KADs, help make sure that doesn’t happen.
“We say around here, ‘Is it on somebody’s KAD?’” Simons says. “We all know if it’s not on somebody’s goal document, it’s not going to get done. That’s one of the ways we check internally with each other. Who has the accountability for getting this done?”
The trick is to come up with metrics for the different things you want to do so that you can have that accountability and know if you are making progress.
“The organization starts by saying, ‘These things are important,’” Simons says. “These are the things we’re going to measure ourselves against and, therefore, measure you and measure the organization against. We expect you and your area to have your own project. It has to be one that meets the Novus guidelines.”
Simons doesn’t mandate the numbers and tell his people what he expects them to achieve in each area.
“We have an expectation that each one of the regions will have local initiatives,” Simons says. “We don’t know what the needs or opportunities are as well as they do. We report in our journal report on what they are doing. That recognition causes people to do more of those good things. If you don’t recognize it, they don’t know it was a good thing to do.”
It didn’t take long for the board at Novus to realize that Simons was doing many good things and that it could remove “interim” from his title. The company’s president and CEO was promoting more outreach to customers, and that outreach has expanded around the world and played a part in the company reaching $949 million in 2009 revenue.
“We wanted to better understand what the local conditions for the poultry industry were in Mozambique,” Simons says. “We had no presence in Mozambique.”
So the company set goals for establishing relationships in countries such as Mozambique. It brought a scientist from Mozambique to St. Louis so that the company could learn from her and she could learn from Novus.
“The money we spent bringing her here and having her as a fellow and carrying the cost of her housing is really small compared to the benefit we will have by avoiding mistakes and by going into a market and actually bringing value to the customers there,” Simons says.
It’s the type of work and effort that Simons envisioned for Novus back when he was just the interim CEO. By diving into new opportunities, Simons is confident that Novus is more prepared for the drastic swings that can hit the economy.
“We’ve greatly diversified our product range so we now are not only present in the poultry industry, but we are present across all livestock,” Simons says. “You need to always be open to learning something new and be open to different opportunities.”
How to reach: Novus International Inc., (888) 906-6887 or www.novusint.com
Consumer spending, the lifeblood of the retail industry, is depressed in today’s business climate. Job growth is anemic, and revenue projections are difficult, at best.
As a result, many retailers are seeking to control cost and increase revenue, and one way to achieve those goals is by creating a captive insurance company, says Len Churnetski, regional practice leader of Aon Risk Services’ retail division.
“Historically, companies purchased insurance and paid a premium,” Churnetski says. “Many insurance buyers have asked, ‘Was that a cost-efficient use of our capital? Should we have kept that risk for our own account?’ Instead of putting it on their books as an ongoing business expense, a company could have a formal captive insurance program underwrite that risk that it decided to keep for its own account.”
Smart Business spoke with Churnetski and Terry Rodes, senior vice president/strategic account manager, about how captive insurance companies can help retailers, as well as those in other industries, control costs.
What is a captive insurance company?
There are two types of captive insurance companies. The first one is a single-parent captive insurance company. This is a closely held insurance company that is owned by a single entity whose insurance business is primarily supplied and controlled by its owner. It exists primarily to underwrite the risk of its parent and its affiliated companies. That single-parent captive may or may not elect to underwrite the risks of its customers, suppliers, employees and/or unrelated entities.
The other type is a group captive insurance company, which is organized on the basis of multi-ownership or multi-insured in the captive, all different entities. They might have a similar risk, for example, they might be a homogenous group of companies, perhaps all in the same field, and they want to pool their risk together in the form of a captive insurance company to underwrite that particular risk within their group.
Why would a retailer want to form a captive insurance company?
Major retailers know they are going to have a lot of workers’ compensation claims, property claims and customer slip and falls on their premises. They realize that is a part of their cost and to a certain degree they should retain some of that risk for their own account and just pay those losses. In many cases, retailers keep some of that risk for their own account in the form of a deductible or self insurance, but they all purchase some type of insurance above that to protect them from catastrophic losses. A captive insurance company can be an excellent mechanism for keeping some of that risk below what is deemed catastrophic.
How can retailers determine if this is the right decision for them?
The biggest way is through the feasibility process. There is a soft insurance market right now, which means prices are depressed for the risk. Prices have been decreasing for the last five or six years, but as we’ve seen in the past, a hard market will arrive in the near future. Through the feasibility process, we look at the potential domicile (official residence) of a captive insurance company, the potential lines of business that may be written by this captive company, the amount of capital and surplus that would be required, and the local taxation and reporting requirements of the places you may consider.
Next, we look back at what has happened to you in the past. See how you used corporate capital to purchase insurance to hedge your risk. Do an as-if study: If you had a Captive Insurance Company (CIC) in place to write those risks — the ones you did keep for your own account or the ones you might have transferred to the professional insurance marketplace — see if it would have been a cost- and tax-efficient way to fund those risks in the past. Then you will have a track record. You can say ‘Here’s what our results would have been if we had a captive insurance company.’ That’s the best test to see if it would benefit your organization. Then you can project that track record into the future.
What are some pitfalls to avoid when creating a captive insurance company?
Make certain you have everybody on board in your own organization who would potentially be weighing in on the decision process. Make them part of the due diligence team. That way, once you begin the process, you don’t find someone in your own organization obstructing forward progress because they weren’t involved in the decision process. The due diligence team can involve tax, finance and legal experts within your own organization. Get everyone on board to look at the issues with a team approach.
When analyzing this, it’s helpful to choose a partner who has the depth of experience to answer your questions such as, ‘What are the best domiciles for my company’s particular needs?’ and ‘Who has expertise on the captive creation side and experience putting some of these programs together for other retailers?’
What’s the next step?
Once you go through the feasibility process, you devise a plan of operations for the captive insurance company, depending on which domicile you determine to be the optimal choice. Then you select a staff to manage and administer the captive, including outside accountants and attorneys. In the domiciles that have enabling legislation for CICs, there has developed quite a large cottage industry of the professionals needed to manage these companies. Running a company can be done on a very cost-efficient basis. Once you’ve selected the people to help you manage the company, you obtain a license to operate in that domicile and make the necessary capital contributions required of the insurance company. Then, you may enter into a reinsurance agreement, in which your captive insurance company purchases insurance to protect itself.
Len Churnetski is regional practice leader, retail division, for Aon Risk Solutions. Reach him at (212) 441-1401 or firstname.lastname@example.org.Terry Rodes is senior vice president/strategic account manager, Aon Risk Solutions. Reach him at (314) 854-0874 or email@example.com.
The 2010 Aon Retail Symposium is scheduled for Oct. 19-21 in Chicago. The agenda will consist of a dynamic mix of clients, insurers and Aon presenters collaborating in breakout sessions, and retailer-only self-moderated discussion forums. For more information on this topic and the 2010 Aon Retail Symposium, please contact Len Churnetski at (212) 441-1401.
It is often said that the purpose of business interruption coverage is to do for the insured’s company what the business would have continued to do had no loss occurred. But Mike Hoffman, assistant vice president at Aon Risk Services Central Inc., says it is equally important to understand what the coverage is not intended to do.
“A business interruption contract is not a cure-all for an ailing business or industry,” says Hoffman.
Smart Business spoke with Hoffman about how business interruption coverage can help your business navigate a crisis.
How can a company navigate a business interruption loss?
There are four areas in a business interruption situation that must be addressed to effectively evaluate the exposure on any given loss. These are: 1) determination of the period of suspension; 2) the concept, definition and understanding of the term ‘actual loss sustained’; 3) the determination of the company’s projected business for the period of suspension; and 4) the establishment of those expenses that do not necessarily continue during a total or partial suspension of operations.
The human element should not be overlooked amid the more technical aspects of the determination of a business interruption loss. A major contributing factor to an improper and unsatisfactory loss adjustment is the failure by the parties involved to communicate effectively. It is important to open the lines of communication immediately following a loss to provide a quick and reasonable understanding of what is needed by all parties.
What is due diligence and dispatch?
The first issue to overcome in the loss analysis is the proper determination of the period of interruption. Involved parties should agree upon what is needed to complete repairs to damaged or destroyed buildings and equipment, and then arrange for the timely replacement of necessary raw materials, work in process, or other supplies essential to the resumption of operations.
Often, a business will want to make improvements during the repair process. The effects of replacing with dissimilar materials or type of construction or the intent to rebuild on a grander scale should be addressed as soon as possible after the plans are known. When plans are known early in the settlement process, an agreement can be reached between the business and insurance company as to what the time element loss would be without these changes, so future disputes over delays arising from the changes can be avoided.
How is the actual loss sustained determined?
While the term ‘actual cash value’ may be among the most misunderstood of insurance contract phrases, the term ‘actual loss sustained’ is equally misunderstood by parties involved in business interruption claims. Actual loss sustained may range from ‘no loss at all’ to ‘record’ production or sales and margins of profit on these sales. Somewhere in between is the perception of what is fair and reasonable to the parties evaluating the loss.
Many insurance companies interpret actual loss sustained to mean that, regardless of whether a company has sustained a loss in production, it must demonstrate, beyond any reasonable doubt, that the loss in production resulted in a loss of sales. Factors to consider when trying to determine whether a business has sustained a loss of sales include the length of the suspension period, the amount of inventory available to meet sales commitments, the mix of the inventory on hand, the timing of the sale and the ability to deliver all of an order on time.
In the end, it is incumbent upon the insurance company to restore the business to the same condition that existed at the time of loss.
How can a business demonstrate its loss?
Among the more common ways are the uses of production records, sales records, inventory data, order backlog reports and customer order documents. One of the most troublesome business interruption calculations is the necessity of demonstrating what the business would have done had no loss occurred.
This is a subjective judgment and extremes must be avoided; what a business could do is not necessarily what it would have done.
What constitutes necessary continuing expenses?
When discussing those expenses that do not necessarily continue during the interruption of the business, it is important to recognize the degree of disallowance depends very closely upon the question of whether the impacted operation is down completely, or whether it is maintaining partial production through the use of other equipment or a substitute facility. Even in the case of a substitute facility, it is necessary to make the distinction as to which of those expenses can be truly avoided and which are necessary to the ongoing operation of the business.
In the case where ordinary payroll is excluded from the insurance contract, it may still be appropriate for the insurance company to indemnify the impacted business for payroll costs associated with making up lost production. In some cases, it is not a payment of the ordinary payroll itself but rather a recognition of an expense incurred to reduce the loss.
The simplest way to measure continuing and noncontinuing expenses is to study the history of the business prior to the loss. One should determine the degree of variability of the expenses and attempt to recognize which of those would or should discontinue under the circumstances surrounding the loss.
The timing and location of the loss, as well as related contractual agreements, all have considerable bearing on whether expenses can be avoided following the occurrence. In short, the determination of continuing versus noncontinuing expenses is a matter of practicality and judgment among all involved parties.
The situation following a loss may be safely navigated by keeping in mind that open and ongoing communication is essential to effective business interruption claims negotiations. Everything else is secondary.
Mike Hoffman is assistant vice president at Aon Risk Services Central Inc. Reach him at (314) 854-0726 or firstname.lastname@example.org.
Risk management was once regarded as an insurance purchasing function for the risk manager, or even for local plant managers, with no connection to the company’s broader operational or financial priorities.
But with the economic downturn, more CEOs and CFOs are re-evaluating their purchasing habits for all facets of the operations, including insurance premiums. Further, with the number of natural disasters in the past few years, protecting the company’s assets and revenue stream has been front of mind for CEOs and CFOs, and risk management has become a key part of the overall financial and operational strategy, says Rebecca Newman, Director of Aon Mergers & Acquisitions, a part of Aon Risk Services.
“All too often, we run into companies not taking this approach and leaving room for improvement, both in terms of coverage and premium savings,” says Newman. “By purchasing insurance on a consolidated basis, broader coverage terms can be negotiated and often, premium savings can be achieved. But most important, this consolidated approach to purchasing insurance forces the company to develop a risk management philosophy after thoughtfully considering its appetite for risk.”
Smart Business spoke with Newman about how to develop a corporate risk management program and the benefits that come with it.
At what point should a company take a risk management approach?
Most large companies follow this strategy already. We most often see a decentralized approach to risk management when companies have grown substantially — either organically or by acquisition — and lose track of insurance along the way, or in very lean organizations, where CFOs are hesitant to include another item on their long list of responsibilities. Every company should be evaluating its risks from the top, identifying all the noninsurable and insurable risks. Many mid-sized and small companies purchase insurance based on statutory, lender or contractual requirements, and fail to think beyond the mandates until they suffer a loss. It is these companies that have the most to gain from this approach.
What lines of coverage can be consolidated?
All lines of coverage, including workers’ compensation, automobile, general liability and property can be consolidated. Repeatedly, we have seen companies purchasing different policies for each location, state or subsidiary, but when the risk profile is aggregated across the entire corporation, premium savings up to 40 percent can be achieved. Consolidating the exposure information (i.e. payroll, sales, autos and property values) usually gains negotiating leverage in the insurance marketplace.
Besides premium savings, what are some other benefits of consolidation?
Specific to property insurance, depending on the spread of risk, the coverage terms can be enhanced substantially regarding certain sublimits, blanket versus scheduled coverage, flood/earthquake catastrophe limits and coinsurance penalties. For those that may not have suffered a property loss yet, this may not seem important, but it can make a significant difference in the amount the insurance company pays for a loss, or even if it pays at all.
Administrative efficiency is another benefit to centralizing insurance procurement, as having a single renewal date and one point person handling the renewal saves time.
The ability to easily track and manage your company’s total cost of risk (TCOR includes premiums, claims and expenses) is another benefit. TCOR is most often converted to a percentage of an operating value, such as revenue, allowing you to normalize the data for benchmarking year to year, and can also be used to benchmark business units. Claims safety and loss control best practices can be implemented throughout the company to reduce losses.
How does risk management work if a company has operations outside the United States?
Today, many companies have a global reach in terms of sales, operations or supply chains. Hence, the need is enhanced for corporate wide oversight of insurance and an insurance broker with global capabilities.
Some countries require that local policies be issued within their own jurisdiction, and a global broker will understand these laws. By understanding the full scope of exposures worldwide, you can cover them on a single global insurance program, with local policies where required. An umbrella policy can then provide coverage excess of the global program, creating true worldwide coverage.
Companies commonly allow their country manager to purchase insurance from a local agent in the name of the local subsidiary, with no link to the main operating entity or U.S. holding company. This leaves a major gap in coverage should the foreign subsidiary be sued in the U.S., or the U.S. operating entity be faced with a suit filed in that country.
What is the impact if a company plans to grow through acquisitions or be sold?
Both strategies create even more reason to create a platform risk management program. On the sell side, delivering a consolidated program for all company operations will create an easy-to-understand package for the buyer to evaluate. In addition, the premium savings achieved may increase EBITDA, the metric often used in determining the purchase price.
On the buy side, having a corporate wide program lends itself nicely to realizing synergies immediately upon closing the transaction. This ensures that the newly acquired assets are insured following the corporate risk management philosophy and creates a prime opportunity for a new risk management philosophy to be adopted.
As a company realigns resources, a corporate wide risk management platform can be an effective way to protect the balance sheet and create value across the entire entity.
Rebecca Newman is director of Aon Mergers & Acquisitions, a part of Aon Risk Services. Reach her at (314) 854-0766 or Rebecca.Newman@aon.com.
As director of the Center for Professional Development at
Webster University, Larry Mabrey has helped develop and implement the
university’s Leadership Continuum Certification, which takes a new approach to
leadership training and development. Mabrey previously worked as the external
communications administrator for Webster’s School of Business and Technology.
Q. What should companies train employees in as the economy
In an improving economy, customer service is an area that can
impact a business probably the most dramatically. As your business picks up,
you have the opportunity to capture new customers by providing top-notch
service. Hand in hand with that is communication, both internal and external.
Establishing strong internal and external guidelines for communication can help
effectively manage whatever growth you have because everybody is aware of
what’s going on.
Q. How can companies determine what training employees need?
They have to do an analysis of their own organization, doing
something as simple as a SWOT (strengths, weaknesses, opportunities, threats)
analysis on your company. If you step back objectively, you can get a snapshot
of where the opportunities are. Then you look at your people and say, ‘Do we
have the people who can take advantage of those opportunities or do we need to
give them some specific training to get them ready for that?’ Also, what are
your threats? If you see technological challenges coming ahead, then get people
trained in the technology areas that can specifically address those.
Q. What are some cost-effective ways to train employees?
Through the center, we have round tables that we do. Those of
course are free. Most regions have a local business paper, a local university
or college that provides these kinds of events, seminars that may be free or at
The idea of bringing a training company into your organization
and training an entire team may be of greater value to you than shipping your
whole team off to a weeklong conference or two- or three-day seminar. Having
someone come into your work can save you money and can be customized for you.
There are a variety of online training programs out there.
Continuous controls monitoring (CCM) has been on the radar for many companies for the last 20 years, but only recently have organizations really pushed toward meeting this goal. In a broad sense, CCM is a systemic way of verifying transactions and reducing operational, compliance and financial risks. And a key goal is to catch control failures quickly, before they cause too much damage. “If you detect errors as quickly as possible, you’ll have less revenue loss and exposure to risk,” says Janet Beckmann, CPA, data analysis practice leader at Brown Smith Wallace LLC. The impetus for initiating CCM depends on the company but usually is prompted for one of three reasons: because the company experienced loss or fraud and wants to make sure it never happens again; time-intensive processes need to be automated so the company can work more efficiently; or a proactive company has security concerns in a certain area of the business, such as payroll or accounts payable. “Companies first need to determine their key objective,” says Beckmann. “From there, a system can be put in place to help maintain optimum control and identify problems so they can be solved before causing revenue damage.” Smart Business spoke with Beckmann about the value of CCM and what organizations should consider when planning a system. What is continuous controls monitoring, and how does it work for a business? Over time, CCM has become somewhat of a generic term that means a system that verifies transactions. But, in its true sense, CCM is a system that runs live, identifies problems as they arise and alerts people immediately. For example, if a CCM system is in place and someone inputs vendor invoices, the system will signal potential duplicate payments before checks go out the door. However, CCM also means having ongoing processes that help a company better control its environment. For instance, a company may only want to run the system once each quarter or twice annually, depending on the risk assessment and the company’s goals. Regardless of what type of system is put in place, CCM protects a business from fraud and revenue leakage while enhancing the overall control environment. What are the benefits of a continuous controls monitoring system? Ultimately, CCM serves as a highly effective risk assessment tool that allows companies to track key performance indicators and quickly respond to change, rather than waiting until end-of-year financial statements to catch errors or revenue leakage. A system can reduce the risks associated with operations, compliance and finances, and can help stop revenue leakage such as overpayments, duplicate checks and other administrative errors. Also, it can facilitate fraud protection by enhancing the control environment. When employees recognize that a system is in place to watch all transactions and collect data, this raises awareness and tends to improve overall operations. Everyone is more careful because the company is committed to improving controls. Finally, CCM can improve efficiency in an organization by automating time-consuming processes. For instance, one person may spend three out of four weeks in a month working on a single reconciliation. If that process is automated through a CCM system, the employee is freed up to focus on other areas of the business. Where can a company derive the most value from a continuous controls monitoring system? That depends on the company’s objectives. If a company fears that revenue is not growing as it should, a CCM system will help track trends by time, location, product and employee to identify where expectations are not being met. Doing a trend analysis to get this information can be quite difficult, so this is where a CCM system can be very helpful. Companies that work with large quantities of data — millions of transactions, for example — may need to monitor the business in a global sense, as opposed to watching over each business unit; there is no limit on the size or quantity of data that a CCM system can handle. Also, companies with disparate systems that are not effectively linked are at a higher risk for control failure unless a CCM system is put in place. No matter what the goals of the company are, once red flags and patterns that indicate suspicious transactions are identified, the problems can be solved. What is necessary for a continuous controls monitoring system to be effective? The system must be flexible to suit a company’s needs. An off-the-shelf system can’t be truly efficient for every business. It’s worthwhile to invest in a customized system that aligns with your company’s objectives. Also, the system must be simple — the more user-friendly, the better. To take full advantage of the system, a business must have follow-up and reporting policies in place; for example, a system may be set up to produce reports that managers review. Finally, a company must determine how the system and data will be managed. Will it be outsourced, or overseen by someone in-house? It’s a good idea to consult with a professional while going through the risk identification process to pinpoint areas where a system will be most effective. Janet Beckmann, CPA, is the data analysis practice leader at Brown Smith Wallace LLC. Reach her at (314) 983-1254 or email@example.com.
When Matthew E. Rubel joined Payless ShoeSource a little more than half a decade ago, the discount retail shoe store suffered from an image problem. Store associates considered it to be little more than a cheap place to buy shoes, at least according to company literature. More important, customers thought the same thing. But today, Payless has a new logo, a new store design, a studio in New York and partnerships with respected names in the fashion and shoe industries.
It is now also part of a larger company, Collective Brands Inc., which has gathered Payless with five iconic shoe brands Airwalk, Keds, Saucony, Sperry Top-Sider and Stride Rite in large thanks to Rubel and his entrepreneurial vision.
After less than two years on the job as chairman, president and CEO of Payless, Rubel and the company acquired The Stride Rite Corp. and Collective Licensing International in 2007. That brought in other brands and led to a significant change and a diverse hybrid business model.
Since the acquisition, Rubel has sparked an evolution in nearly every brand under the company umbrella. Payless, of course, received its major makeover. But Sperry, a mainstay in the industry for 75 years, expanded its women’s business and opened its first retail stores. Keds, familiar for almost a century, launched Keds Collective, which allows the minds of artists and musicians to run wild on the blank canvas of the classic sneaker. And Saucony expanded its strategy to reach a broader range of runners, expand its line to include apparel and sign a number of elite runners. Industry accolades have poured in all the while.
Rubel did not wait for the proverbial other shoe to drop on a tired company. No, he made his own luck, and now he is setting the pace.
How to reach: Collective Brands Inc., (785) 233-5171 or www.collectivebrands.com
Russ Hornsby has wanted to make toys since as far back as he can remember, and when you see him leading a business that does just that, you assume that he is living out his lifelong dream.
In many ways, Cepia LLC is the fulfillment of a childhood dream, but the journey he took to achieve it was as challenging as it was rewarding. He faced laughter and skepticism as people questioned the power of imagination and Hornsby’s determination to make his dreams comes true.
But he overcame the doubters and launched Trendmasters Inc., building it into one of the largest privately held toy companies in North America. He then sold that business and launched a new venture, Cepia LLC.
At first, Cepia focused on medical compliance, lawn and garden products, and industrial sprayers. But Hornsby’s heart never left the making of toys, and in 2008 and 2009, he spun off those businesses to focus solely on toys.
Hornsby, the company’s CEO, has never backed down from a challenge or given into those who doubt his ability to succeed. He overcame the tough competition of larger corporations and convinced retailers that he was making a great product.
He reached out directly to consumers and let them vote on a product that he had invested his own money in because he knew the product was a winner. And the success of his product, Zhu Zhu Pets, proved him right.
But it’s not just Hornsby that drives the momentum at Cepia. He encourages the same imagination in his people that he has and supports their ideas and creativity in developing new products. And by maintaining his place as a small business, Cepia remains agile to quickly adapt to the competition and consistently stay near the top of the toy industry.
How to reach: Cepia LLC, (314) 725-4900 or www.cepiallc.com
When L. Thomas Duvall was working as a CPA after college, he represented a small truck transportation company during an IRS audit, and in 1996, he purchased that company and left public accounting to run the business.
To make matters worse, the day before Duvall took possession of the company, he learned that the remaining employees were starting their own company. He was soon left with nothing but a cabinet, computer files and a few drivers.
In over his head, he contacted a childhood friend who was a manager at a truck stop. His friend agreed to move back to Kansas to help him out, so the two went to work as TruckMovers.com
They called on drivers, met with customers, learned the basics of the business and were quickly operating successfully. Within a few months, a few past employees returned, and the business flourished. In 2000, Duvall and his team were awarded a contract with Freightliner Market Development Corp., but they were only one of 15 vendors selected, so they were determined to differentiate the company.
At this point, most customers didn’t use e-mail, much less the Internet. Freightliner used fax and paper to coordinate its truck deliveries, and he thought if TruckMovers could develop a system to make Freightliner’s job easier, it would differentiate the company. In 2002, TruckMovers officially rolled out, and soon after, Freightliner selected the company for use as its tracking system, and by 2006, TruckMovers was the exclusive contract holder with Freightliner. That system opened many doors for Duvall and led to other exclusive contracts. Since then, Duvall continued to invest heavily in technology and process improvement, and TruckMovers continues to grow to this day.
How to reach: TruckMovers.com, (816) 861-5444 or www.truckmovers.com