The death of Maritz Inc. Chairman Bill Maritz in 2001 meant the loss of 40 years of experience at the very top of the company’s hierarchy. The tumult that followed as the 113-year-old family business struggled to deal with the loss of its patriarch, combined with the economic fallout from the Sept. 11 terrorist attacks, presented plenty of challenges for Steve Maritz, the new chairman and CEO.
“During his tenure here, the company had grown substantially into what it is,” Maritz says of his father’s legacy. “It is not unusual in families, much less businesses, that the death of the patriarch often triggers some consternation and squabbling amongst the next generation.”
With $1.45 billion in revenue in fiscal 2007 and more than 4,100 employees, Maritz Inc. is the largest source of integrated performance improvement, travel and market research services in the world.
Founded in 1894 by Edward Maritz as a fine jewelry manufacturing company, Maritz Inc. has evolved over the past century to a business that helps its clients find ways to understand, develop and motivate their employees. The company is now composed of seven divisions under the Maritz brand: Incentives, Interactions, Learning, Loyalty Marketing, Research, Rewards and Travel.
Steve Maritz took on the role of CEO in 1998, but his father continued to work actively as the company’s chairman until his death.
The challenge for Maritz was to ensure that as the company moved forward under his leadership, and hopefully continued to grow, that both its vision and culture would remain aligned.
“Vision is a funny thing,” Maritz says. “People tend to think that visions are arrived at mystically. I’m not sure that’s really true. ... I think it starts with a lot of listening. Listening to employees, listening to customers and listening to outsiders so that you can understand the history and why you are where you are. You can understand what your strengths are but also what your weaknesses are, so you can check out different hypotheses and potential approaches that might work.
“It’s something you have to pay consistent attention to. Just being aware of it and acting true to it. One of the keys to having a well-known strategy is that it allows you to say no to a good idea. There’s a ton of good ideas, but you really don’t want to do them all. Knowing what your strategy is helps you determine which of the good ideas you want to pursue.”
As he looked at where his company needed to be to continue growing, Maritz says he sought the input of employees at all levels of the organization.
“I shared the problem and that got everyone engaged in helping with the solutions,” Maritz says. “I was quite honest with all our folks about the challenges we faced. I was quite open to thoughts or ideas about how to fix them. You get a lot of thoughts and ideas that are in different directions. But as you work those through with people and you explore them, you start coming around to best approaches and best ideas, and you go after them aggressively.”
One of the key elements of any ongoing dialogue about change is to create a sense of common purpose among the groups with which you are talking. Taking this step helps ensure that the company’s vision is aligned with its culture and that everyone buys in to the plan and is working toward its fulfillment.
Maritz says he uses many forums to disseminate information and to gather input. Sometimes it’s as simple as a brown-bag lunch meeting. Other times, a town-hall meeting is more effective or maybe an online chat. Communication also takes place through the publication of an internal company magazine and a variety of small- and large-group meetings.
“I try to eat lunch in the cafeteria and talk to people and listen to people and see what they are up to,” Maritz says. “I try to spend a lot of time with customers and talk to them. Hopefully, through all that, we get on the same page.”
The company makes use of employee and customer surveys to gain feedback from both groups in an attempt to align the company around their needs, challenges and objectives.
When the feedback is returned with concerns about the direction that the company wants to go, it is important that they be heard and addressed.
“You can’t shoot the messenger,” Maritz says. “Nobody likes to hear bad news. But I like to hear the real news and the truth, whether it’s good or bad. There is nothing worse than bad news that festers into terrible news. The sooner you deal with those problems, the better able you are to deal with them effectively. The sooner they are dealt with, the smaller they are.
“You don’t want to be the emperor with no clothes. Every CEO needs haberdashers around who are willing to tell them when they are naked and help clothe them. You need a CEO who is willing to listen so when you tell them they are naked, they don’t say, ‘No, I’m not.’”
Maritz says he is also aware that while he is the CEO, his voice is not always the one that commands the most attention from employees.
“While people like to hear from the CEO, the most powerful communication to employees comes from the immediate supervisor,” Maritz says. “Their immediate supervisor, whoever that might be, is the one who they are in the most contact with, perhaps the one who has the most influence over their day-to-day life. What that immediate supervisor is or is not saying about the vision, the strategy, what’s required to get it done, what the plans are, is likely to carry the most weight with the people.”
Show you believe
The vision carries even more weight when the leaders who are conveying it demonstrate confidence in the plan.
“You’ve got to believe it,” Maritz says. “A lot of vision statements are so general and/or vacuous that they are meaningless. If that’s the truth of what the vision is, the first thing you have to do is work on the substance of it rather than the communication of it. If you’re comfortable with the substance of it, that it really is right and believable and the right thing to do, then communicating it should show up every day in your words and your actions.”
“(You need) a sense of common purpose and a sense of perspective about what the vision is or what the job to be done is,” Maritz says.
This means creating alignment between the vision and the organization’s communication and reward systems to get employees focused on a measurable form of performance and then rewarding them for achieving their goals.
“You line all those things up with your communication strategies and your overall objectives, and you try to tighten up the line of sight so that employees are working on things and being recognized for things over which they feel they have some control,” Maritz says. “Then people can get really engaged in your mission. Part of what we do for our customers and for ourselves is to translate business objectives into individual objectives, and then align reward systems and communication systems around that. So that when people are doing the right things right, the business wins and the people win.
“The negative cultures tend to be characterized by a lot of selfish behavior and parochialism. Oftentimes, it is people who think they are doing the right thing or they are doing the right thing for themselves or their own group, but they are sub-optimizing for the whole. It’s the same thing you see on a sports team: selfish players. Business is a team sport. Certainly, you need talent. But you need that sense of common purpose, and you need teamwork not blaming the other guy but helping the other guy.”
When incentives are introduced into the culture to encourage employees to follow the vision, a focus on the task at hand is often achieved that improves both employee performance and the performance of the company overall.
“Reward systems are very, very powerful motivators,” Maritz says. “It’s what capitalism is built upon.
“We use recognition to recognize a job well done or a series of jobs well done for an individual. An incentive or a reward is something that is promised. It’s, ‘Do this; get that. If we achieve X, we will get Y.’ And Y can be anything from a celebration to points or a big-screen TV or a trip to Hawaii, depending on who the person is and what the situation is. We use that mix of recognition for recognizing everyone from top performers to simply saying thank you for a job well done.”
The effort that Maritz Inc. put into its own vision and cultural alignment is something that it looks to do for its clients as well as through the division, Maritz Incentives. Company leaders who do not see the value of incentives should ask themselves if they are getting the highest level of performance out of their workers.
“I’ll bet most of those managers who say that have some form of incentive compensation themselves,” Maritz says. “I always find it remarkable that they think it’s good for them, but it’s not good for anyone else. If you’re getting all the performance you think you should get with that style of management, great. If you think you’re leaving some on the table, maybe you ought to try something different.”
Have fun along the way
When Maritz looks at his company today, he sees an organization that is more honest with itself.
“We’re more together,” Maritz says. “From a purely business standpoint, we’ve repositioned ourselves in some ways. We bought some businesses and sold some businesses to better position our portfolio for future growth.”
While it may not seem very technical, Maritz says the best companies almost always have one common attribute in their vision for success: They have fun in their work.
“Fun is an important part of our overall mix,” Maritz says. “In our vision of where we want to be, it’s to be the best in the business at everything we do. It’s to become our client’s most valuable ally and it’s to be fun to work with. The fun to work with, in my opinion, is very strong. It’s something I believe in. Fun to work with at its core is about performance. ... We should be able to enjoy each other’s company with a sense of good cheer and camaraderie and work like hell to get the job done and satisfy our customers. That is going to make work more fun for everybody.”
HOW TO REACH: Maritz Inc., (877) 462-7489 or www.maritz.com
By Matt McClellan
Kimberly Boyer’s employees own their own destiny. The knowledge that their input can actually change the direction of Adamson Advertising has helped create a culture of ownership at the 60-employee firm, which had 2006 billings of $60 million.
Boyer, president of Adamson, says she gives her employees the leeway to maneuver independently, and she attributes the firm’s success to that freedom.
Smart Business spoke with Boyer about how giving employees freedom allows them to be creative and to excel.
Q. How involved in the day-today operations should a leader be?
Most people who are promoted to a position like mine come from the trenches. When you become a leader, you have to slowly but surely let go of a few things.
Occasionally, when you’re doing changes, it varies. If you had a speedometer and one side of the speedometer is high involvement and the other side of the speedometer is low involvement, it will vary by the individual you’re working with. The goal would be to get everyone close to the middle.
As a leader, there’s no reason for me to be involved in every single detail. If that were the case, we would not grow. I can’t do everything, and I don’t have all the good ideas.
Occasionally, a leader has to be deeply involved just to show commitment. But you have to know when to get out of the way to let your people have the freedom.
It varies by team, the individual, and the goal would be to let people have enough freedom to move forward and not constrain them.
Q. How do you empower employees?
We empower them by asking them to set objectives for their teams. We’ve gone through an entire reorganization this year. We went through some small group meetings, and I laid out the objectives on where I wanted the company to go.
I asked the team leaders to discuss and decide the process how we would reorganize our company in order to meet the coming challenges. By doing it as a group, they owned it. By owning their own destiny, that empowers them.
If you’ve read the book ‘Good to Great,’ I totally agree with (Jim Collins) that you can’t motivate people; they have to be motivated from within. With that type of thinking, we create a culture where people can aspire to creativity.
Our mission is a freedom to be creative and excel. I don’t have to do a lot of it; they inspire each other.
If we can give people the freedom to work together and come up with the best ideas, that’s how we create a quality product. By evolving the culture into that environment, it will help us in the future.
Q. How do you create that culture?
We’ve doubled our training budget this year. When you expose your staff members to new ideas and give them new opportunities to learn, that inspires people.
Great ideas can come from everywhere. So, we’re now training everyone from accounting to receptionists. Sometimes when we have idea sessions, we involve people who aren’t in the roles we’re having ideas about because you never know where a good idea might come from.
The more they know about our business, the better. Training is a key for that.
Q. How do you achieve growth?
You pick and go after new business. And you have to pick the right things to go after things that you as a team have strength in, and that you can absorb within the company.
Sometimes you can get new business and not have to hire anyone. That’s easy.
When you have to add staff, that’s more challenging, but if you have a good sense of the type of people who fit well in your company, it’s easier to manage.
The individual is the key to achieving and managing business growth. If you hire the best employees, you’ll do it successfully.
Q. How do you attract the right employees?
We looked at the personality traits and characteristics of the individuals we all wanted on our teams. So we put those together in a list, and when we presented the plan to our staff members, we told them the characteristics a successful team member will have. The way to attract additional quality employees is by first creating a culture your own staff members love, then they will spread the word.
When we interview people, we have various team members interview them. If you don’t have people who love the company interviewing, then you won’t be able to attract great employees. So our goal is to keep the team members we have now motivated and happy in a culture they enjoy.
Then they, themselves, will attract great employees. We’ve hired excellent people, and they know excellent people.
HOW TO REACH: Adamson Advertising, (314) 727-9500 or www.adamsonadvertising.com
Born: Elgin, Ill.
Education: Bachelor of arts, DePauw University; master’s of business administration, Washington University, St. Louis
What is the greatest business challenge you have faced?
It’s an ongoing challenge. Finding the right people to share the work with and to share the profits. Finding the right people is the only limitation to the growth of any organization. Admit your mistakes. When you find someone who isn’t a good fit or can’t do what’s being asked, address that. That’s tough to be sure. But address it as quickly as you can and as professionally as you can.
What is the best business lesson you’ve ever learned?
Listen to your customers. They will tell you everything you need to know.
Whom do you admire most in business and why?
We worked for years with Peter Drucker. He referred to himself as an adjunct member of top management. How valuable it was for not only that individual but for the person they are responsible to, to have a clear understanding and agreement. What are their primary responsibilities and what are the outcomes of their work? The measures of their performance. How do you continue to help that person to grow and to make an even bigger contribution? He was all about respect for the individual. An awful lot of what I’ve talked about today in terms of our values and culture, it was a part of Edward Jones, but we have so crystallized and we understand it better because of the mentoring and coaching we received from working with Peter Drucker. I believe he has had a bigger impact on our firm than anyone else. And if you read his books today, they are absolutely as good as they were 30 and 40 and 50 years ago when they were written.
You’ve heard it all before social media is the wave of the future, and if you don’t get on board, your business will be left in the dust. It is true that in this day and age, a well-designed website is not enough. To be truly effective in marketing and promoting your business, you need social media. Whether you use Twitter, Facebook, LinkedIn or YouTube, a strong social media presence is vital to doing business in the new millennium.
But you can’t just jump into social media. Many considerations must be made, the first of which is the crafting of an effective social media policy.
The first step an employer needs to take before crafting a social media policy is to think about its particular business and what social media issues would be likely to come up in light of the business model or what the business does. Determine what issues are most important to control, and focus on those first.
“For example, if your business does a lot of research and development, the confidentiality of business information is something that must be covered,” says Charla Claypool, an associate with The Stolar Partnership LLP. “If you deal with children on a regular basis, your policy will want to address employees associating with, ‘friending’ or ‘following’ minors. You may want to consider customer privacy and publicity rights concerns, as well.”
Smart Business spoke with Claypool about social media, and what businesses should consider when crafting a social media policy.
What should employers consider when crafting a social media policy?
First, and most important, make sure that the policy complies with the law. As an employer, you have to keep yourself out of trouble for disciplining employees, and the best way to do that is to work with an attorney who has experience in both employment law and social media law. Look for an attorney with significant experience in promotions and/or advertising law, as he or she will also be able to address the legal issues related to business promotion via social media.
An experienced attorney will be able to spot any discrimination issues and will be well versed in any state laws that may come into play. For example, in Illinois, there is a law that does not allow employers to take adverse action against an employee based on information found on a social media site. The law makes it illegal for employers to discipline or discharge employees for use of lawful products off-premises during nonworking hours. So if an Illinois employer went to an employee’s Facebook page and saw a picture of that employee chugging a beer, the employer could not discipline the employee for this behavior, provided the employee is of legal drinking age. Currently, there is no law like this in Missouri, but many states are heading toward this type of legislation.
Another thing to consider when crafting a social media policy is to make sure the policy is consistent with all other office policies, particularly those that apply to computer usage.
What are pros and cons of using social media for business?
The biggest pro is that it’s a relatively inexpensive way to promote your business. Social media may give broader exposure to your business, even more so than hosting a company website. People aren’t going to find your business on the Internet unless they do a specific Google search about your business or what you do. But when you’re active in social media, people come to you, and all those people automatically find out about your business whenever you want them to. You can keep people informed about new products and services, you can offer customer support and you can tout awards and recognitions and all of this is targeted directly to your customers and clients.
The biggest drawback is that social media requires significant attention and monitoring. You have to be aware of that need and allocate the resources whether internally or externally necessary to keep your social media sites up and running. Social media sites have policies of their own (and those policies often change, especially when it comes to business pages), so you need to make sure you’re always operating in accordance with those policies. You don’t want your site to get shut down because you didn’t monitor and keep up with a policy change.
How can you minimize the risk posed by employees using social media?
Make sure you have a social media policy in place and that employees are adequately informed of and trained on that policy. Also, supervisors and human resources personnel must be trained on policy enforcement.
If you do monitor your employees’ social media, be very transparent about it make it a part of the policy and let employees know from day one that you will be monitoring them. Don’t ever monitor employees in deceptive ways. You cannot create a false persona online to gain access to your employees.
Are there any other social media considerations businesses should be aware of?
Be aware of Federal Trade Commission endorsement guidelines, which have been updated to address online promotion. If someone is promoting your product online and is receiving any type of compensation for it, or has a material connection to your company, certain disclosures must be made.
There was a case where a public relations agency was monitoring social media sites for comments about its clients’ products. The PR agency then posted positive comments and rebuffed negative comments about its clients’ products. The FTC said that was a violation of endorsement regulations because the PR agency didn’t disclose that it was essentially being compensated for its comments.
These guidelines may also come into play when employees promote or defend your company online. It is important to include as part of your social media policy a requirement that employees fully disclose their affiliation with your company when promoting or commenting on your company online.
CHARLA CLAYPOOL is an associate with The Stolar Partnership LLP and is a member of the firm’s Social Media Practice Group. Reach her at email@example.com.
“The first responsibility of a leader is to define reality. The last is to say, ‘Thank you.’” In between, the leader is a servant.” Max De Pree
As most of us know, reality is overrated. We wish for things the way they ought to be. And our biases, of course, often push us toward a reluctance to embrace reality.
Yet, in order to be great leaders, we must develop the discipline not to let our desires and ambitions cloud our perceptions of reality. Whether defining reality is, as De Pree suggests, the first responsibility of a leader or not, we know that it is a fundamental aspect of leadership. Describing the real world well creates within others the recognition that, as leaders, we are connected to the same planet on which others live. This provides the basis for others to trust us, which is essential if we want others to follow us into daily battle.
I would like to propose several key dimensions of reality that are important to define in order for our organizations to thrive.
Identify who matters most
We need to define which of our external stakeholders matter most to our success. We already know that every stakeholder group and stakeholder is important and needs attention and care. At the same time, some stakeholders, more than others, will define our moments of truth. Once we have identified that key stakeholder group, we need to find out how they choose our services and how they use our services.
How they choose our services refers to the decision-making process our customers/clients undertake in buying what we offer. This includes their perceptions of how we’re different than the competition. A common claim, for example, is that we’re different because of “our people.” Is this what customers tell us? Do other companies recruit our best employees?
Having chosen our services, we need to understand how customers use our services. What value do they perceive? How do our customers describe the difference we make in their lives? Is there a pattern to the answers they give?
Set the scene
We need to describe our current situation and the future state we’re striving for.
Painting an authentic picture of where we are now will remind people that we’re not wearing rose-colored glasses. Painting a vivid picture of where we’re going is essential in order for many of your employees to hang in there during the hard times.
Define expected behavior
We need to be clear about the behavior we’re looking for. As an organization, we can’t be all things to all people, be it employees or external stakeholders. If we want leaders with a tough, confrontational leadership style, we need to define our leadership model that way. You owe it to your people to define behavioral expectations. The reality of “how we do things around here” needs to be clear.
Know what really works
Finally, we need to be clear about what processes are really helping us achieve success for our customers. Are there things we do just because it’s the way we’ve done it forever? Do our processes deliver the value our customers expect? Are they grounded in the way in which we claim to be different? Are our strategies and initiatives consistent with the operating principles of our business and moving us in the right direction? If not, something needs to change.
Marcel Proust said, “All the mind’s activity is easy if it is not subjected to reality.” Leadership is hard work. But the hard work is worth it when you lead an organization that, because you are grounded in reality, can reach for the stars.
Andy Kanefield is the founder of Dialect Inc. and co-author of “Uncommon Sense: One CEO’s Tale of Getting in Sync.” Dialect helps organizations improve alignment and translation of organizational identity by discovering and using the unique strengths of the organization and its people. Kanefield can be reached at (314) 863-4400 or firstname.lastname@example.org.
It was Friday afternoon and Michael Kramer was ready to hit the beach. The president and CEO of Kellwood Co. was taking his family and heading to Southern California for a weekend of sun and sand.
It was then that a phone call turned the life of Kramer and his 1,200-employee apparel marketing company completely upside down.
“It was the fact that $140 million in bonds were becoming due,” Kramer says. “We had been negotiating with our bondholders to extend those bonds for another five years at a very attractive rate, a rate higher than they had been getting.”
The uncertain economy was making everyone in the financial sector nervous, and so the negotiations had suddenly been brought to a stop. The lenders wanted their money — all of it — and they wanted it now.
“There was no emotion to it,” Kramer says. “They did it at the very last minute, which precluded us from going out and finding alternative measures. So I faced a tough challenge: Do I threaten these guys and say, ‘OK, I’m just going to go bankrupt and you get pennies on the dollar.’ There’s risk with that if we call their bluff. The risk was to do that, in order to make it effective, I had to go public. When you go public saying you could potentially go bankrupt, there’s so much risk.
“Particularly in my industry, you’ve got manufacturers out there that are buying raw products and raw materials to manufacture my goods. If they get wind of the fact that there is a financial crisis on the horizon, they just might say, ‘Oh, I’m not making any more for them.’ It could be a compounding problem.”
Suddenly, the beach was the furthest thing from Kramer’s mind. He was facing the very real possibility that his business, which is a portfolio company of Sun Capital Partners Inc., might have to shut its doors.
“I was stunned,” Kramer says. “I just sat here, and I said, ‘How do I tell my staff? How do I tell my people?’ In the last 12 months, I had brought in a lot of old colleagues and people were excited and invigorated about what we were doing having no anticipation that this liquidity crisis would ever happen. Why would a bank turn us down? We were profitable. We could more than cover our debt costs. There was no problem. Why would they do this?”
Somewhere in the back of his mind, Kramer knew he had to act. But it was still too fresh to think about that just yet.
Lead with your heart
Kramer endured a couple of hours of being in a haze of shock and disbelief over what was happening.
“I wasn’t really concerned about me,” Kramer says. “It was more about everybody else, because of the economy. Particularly in St. Louis, there were a lot of layoffs and a lot of people looking for jobs. It was really, ‘How do I tell these guys?’ I’m going to let them down just as I was let down. That was just my first thought.”
But as reality began to set in, Kramer knew he couldn’t just curl up in a ball in his office and hope it would all go away. If he was going to get through this and help those employees keep their jobs, he was going to have to step up and be the leader they expected him to be.
Kramer gathered the eight people on his leadership team who he most strongly believed in and laid it all out there for them, complete with the emotions that had been building up inside.
“You don’t always have to be the stoic CEO,” Kramer says. “You have to be human. People want to see that you are just like them. Whether you’re talking to your leadership group or a wider range of employees, people know if you believe what you are saying. It wasn’t a matter of me saying, ‘Guys, here’s our plan and we can do it.’ They would know if I was just talking the talk.”
Kramer let his emotions come through in his words. But as tough as it was, he knew he had to move past those feelings and find a way to project some optimism that the company could get through this challenge. Kramer and his team also had to begin to formulate a plan of action to solve this problem.
“You are setting the tone,” Kramer says. “Of any time for me to not get into the doldrums, it was that time. Even though internally, I felt that way, it was important that I not be. You have no choice. What could I do? Sit and watch the Titanic go down? I was not going to do that.”
As he began to move past his raw emotions, he wanted to start thinking more logically about what he and his team could do to fix the problem.
“We wanted to put together a game plan, and the eight, I had huge confidence in them,” Kramer says. “Plus I had four attorneys and four financial consultants in terms of the bankruptcy side. So we had a team of basically 16 people to go at this.”
It was a good group of people that brought enough expertise to the table without being too unwieldy. The conversation turned to going public with what the company was facing.
The plan was to contact the Wall Street Journal, the St. Louis Post-Dispatch, Women’s Wear Daily and other media outlets and let them know what was going on with the company.
When the attorneys questioned one aspect of this plan to bring the situation out in the open, Kramer once again let loose with his emotions.
“They were very lethargic about it,” Kramer says. “I was like, ‘Listen, I’m fighting for a company here. You’re on your fifth bankruptcy case this month. This is just a normal day for you. This is not a normal day for me. This is not a normal day for my team. I’m fighting for the livelihood of [my] people. I’m fighting for a cause of what we’ve accomplished over the past 12 months in turning this company around. This is serious.’
“The attorney was like, ‘You know what, you’re right. Let’s try it.’ And in hindsight, that particular thing was one of the most important aspects of our approach.”
A little emotion and a little fire can be just what your team needs to summon the energy to fight through a crisis.
“We have to carry the flag,” Kramer says. “I’m not surprised by this, but I was so pleased to see my leadership team. They were like, ‘Where’s my armor and my sword? I’m ready to go.’
“You try to limit the moments of extreme passion for those moments that warrant it. It’s a touch-and-go thing. But effective leaders figure that out.”
This was clearly one of those moments.
Prepare for battle
Kramer and his leadership team felt like they had a good chance to win the PR battle by going public with what the lenders were doing to them. But he didn’t want his employees to read about this crisis for the first time in the paper.
“I wanted it to come from us,” Kramer says. “So we put together talking points and I had a town-hall meeting and basically communicated to my team in L.A., here in St. Louis and in New York.”
He tried to project optimism, but he didn’t make it too rosy.
“I didn’t give people a sense that we were invincible, because I didn’t think that was the right thing to do,” Kramer says. “Without getting into a lot of detail, we were very open and honest.”
In this kind of situation, it’s not about providing every last detail about what your company is facing. It’s about giving them a broad sense of what’s happening and what you’re doing about it.
“I’d stay at a very 30,000-foot level,” Kramer says. “I think too much information can be negative too. I wanted to tell people what’s the potential in front of us. I wanted to focus on the potential outcome that we believed had the highest success rate for us. I wasn’t lying, because after the meeting with the attorneys, we did have a high probability of getting through this thing.”
Once again, emotion plays a role. When you’re talking to your employees, they are looking to you to figure out how they should behave.
“If you don’t have passion and you get thrown a curveball like this, I think it would be really difficult,” Kramer says. “My advice would be if you have somebody on your leadership team that is more passionate and they have also been speaking from a leadership position where it’s not the first time the organization would have heard from them, I would put them in as the point person in terms of communication. People feeling that they are being communicated to warmly, honestly and from the heart is more important than who is doing it.”
Kramer says if you’re the type of leader who can’t bring a strong message to your people, it truly is a time to set your ego aside.
“If you’re not passionate and you’re not raring for a fight, in some cases, I just don’t know if you’re going to win,” Kramer says.
With his employees in the loop, Kramer wanted to get in touch with all his key customers, suppliers and manufacturers to let them know what was happening.
“Basically, I got on the phone with them and told them, ‘Hey, there is going to be some press that is going to come out,” Kramer says. “This is what we’re fighting for.’ It was the same process. It was just stating the facts and showing them your heart. More importantly, I just wanted them to hear from me.”
Kramer spoke to his peers, the CEOs of customers, while his COO talked to the manufacturers Kellwood works with.
“Most of these people, we had long-standing relationships with,” Kramer says. “Everybody goes through ups and downs. If you stand by people when they are going through a down, they are going to stand by you when you are going through a down. ”
Apply what you’ve learned
It didn’t take long for Kellwood’s PR barrage to show results. And just like that, it was over almost as quickly as it had begun.
“Within 24 hours, I got a call basically saying that they are back at the table,” Kramer says. “We got back to the table, extended the bonds and won.”
The experience caused a lot of stress for everyone, but it also built a great deal of camaraderie on the leadership team.
“Some of my people said to me after it was over and we had renegotiated the extension of the bonds and everything was fine, it was almost like when you come off this euphoria,” Kramer says. “You go back to normal. You’re on this high and your energy levels are on an all-time high and you’re operating on adrenaline.
“We were bonded. We work closer together. We’ve gone through crises together. We know we can count on each other during the crises. We know people’s strengths and weaknesses better than we ever have.”
The ultimate lesson, of course, is that no matter how bleak things look, you should have trust in yourself and the way you run your company.
“There were many times during that four days where we thought we could be forced to go into bankruptcy,” Kramer says. “We just kept fighting. If you believe in your gut in terms of the momentum of your company and what you’re doing and you are financially sound, you’ve got to believe that the intellectual argument will always win.”
So with the battle won, what was the first thing Kramer did to celebrate?
“Once we got through it all, we got on a plane and went to L.A. and sat on a beach,” Kramer says.
How to reach: Kellwood Co., (314) 576-3100 or www.kellwood.com
If you are sending your senior executives out into the parking lot to look for coins to help you meet this week’s payroll, your financial woes may be beyond repair. But for everyone else, there are a lot of ways that you could be working with your accounting firm to benefit your business.
The first step is to get beyond thinking of your accountant as someone who just helps you with taxes. Most accounting firms now offer a wide range of financial advisory services that, when properly utilized, can help you do anything from manage your cash flow better to meet the challenges of health care reform. But what might really grab your attention is that your firm can help you come out of the recession in sound financial condition, ready to take advantage of any opportunities that present themselves.
“Although the recession forced many companies to explore cost-saving and efficiency opportunities, in some instances, those companies may have simply deferred maintenance and now realize there are opportunities to invest and further elevate their operational efficiency and effectiveness,” says Steve Howe, Americas area managing partner, Ernst & Young. “They’ll be seeking resources that have proven experience in identifying and executing on these opportunities. Accounting firms will offer experiences and best practices to draw upon, having met similar challenges with other clients or market sectors.”
Even something as simple as getting all of your reporting done on time can mean the difference between success or failure. Why? Because your lenders want to know what’s going on.
“I think it puts them in the best possible light they can be in with their big creditors,” says Roger Hendren, Dallas office managing partner, McGladrey. “Along with that, an accounting firm can coach its clients to make sure they have the right financing in place in terms of length of debt agreement, the covenants that regulate the agreement so they’re positioned as well as they can be and they can have the right access to the credit they need so that when the recession goes away, they can take advantage of what should be a big upturn.”
When was the last time you took a look at your cost structure? Two years ago when the economy fell apart? It’s time to look at it again. A good firm can also help you create a more cost-efficient supply chain and identify costs that are not critical or essential to your core mission. And then there are also the tried-and-true tax opportunities accountants are known for. Maybe now would be a good time to reorganize your debt or capital structure to take advantage of either lower interest rates or sources of capital that would make things easier for you.
But the only way to find out what areas you can get help with is to share information with your accounting firm, and it should be interested in hearing what you have to say.
“The best way to advise the business is to understand the business,” says Randy Myeroff, president and CEO of Cleveland-based Cohen & Co. “You have to know what makes it tick; you have to know what the owners are trying to accomplish. You have to have some kind of base where people are trying to get to in order to be helpful. At the moment, it’s not a lot of rocket science. To get through a tough time, you really better have strong metrics and good internal information that’s giving you good feedback so you can understand the market and where it’s moving.
“Everyone’s got very short time frames in their minds. Everyone used to think about three-year plans and five-year plans. Now, to survive, a lot of businesses are thinking about three-week plans and five-week plans to monitor where backlog is, where labor percentages are, where the costs of commodity are moving. You’ve got to make sure they have really good information systems so they have great information and can react accordingly. It can’t just be about cutting costs and playing defensive strategies. You’ve got to understand your business, still take risks and be aggressive if you have opportunities to grow the business. You have to monitor and measure, because the tolerance for errors is a lot smaller than it used to be.”Moving forward
You might be happy sitting in the status quo, standing pat until it looks safe to come out again. But your competition is already on the move, so you better start talking to your accounting firm to find out what your options are for the future.
“Looking forward, based on the last 90 days, our business has really been ramping up, and I see it a lot more over the next 18 months and part of it is tax-related,” Hendren says. “There’s kind of a pent-up demand for acquisitions, which will require us to be more hands-on and active. At some point on the real estate side, they’ll venture back into new projects and developments that will require our assistance.”
CEOs are sensing the worst is over and are looking to make some strategic moves while prices are at historic lows.
“We’re hearing from many of our clients the desire to reposition their companies through varying merger and acquisition transactions,” Howe says. “This includes everything from carving out noncore businesses to growing through transactions. Many are looking for ways to leverage opportunities to expand their product lines and markets as well as their geographic reach. Accounting firms will play an essential role post-recession in helping clients evaluate, execute, implement and integrate these strategic alternatives, including identifying risks associated with the entrance into markets and processes to manage those risks.”
When you have a solid relationship with your accounting firm, it understands your business and you get a better idea of how it can help you with something other than your tax return. In fact, many firms have seen growth in areas that in years past, weren’t associated with accounting firms at all.
“Our experience has been that in some of our competency areas specifically strategy and operations, technology integration and human capital consulting our clients are using us more,” says Blaine Nelson, managing partner for North Texas, Arkansas and Oklahoma for Deloitte LLP. “In fact, those practices have been growing even during these tough economic times. In some areas of tax services mostly in the international, multistate or transfer pricing arenas we’re finding an increase in demand for our competencies, and many companies have been looking for more consulting around enterprise risk management, as well.”Finding a new partner
If you ask your current accounting partner about something other than taxes and his or her eyes glaze over or if he or she doesn’t bother to return your calls in a timely manner, it may be time to start a new relationship.
“You should change any time you think there’s a mismatch,” Myeroff says. “Even though there is overlap, firms are in business to do different things. There’s a market that doesn’t need an advocate but just needs us to get stuff done for them at an affordable price. There are larger firms that talk about being advocates and advisers, but if you dig deeper, there are people in those firms who are good, but the firm’s strategy or overall model might be based on something else.
“If you have a mismatch, understand that different firms do different things and you need to find the category or firm that will really suit your needs. If you’re not feeling like there’s engagement and advocacy, there’s never a bad time to switch, particularly in a difficult market.”
Just like you might always b e looking to find a better deal on office supplies, you need to be open to the idea of upgrading your accounting firm. But be careful about how you go about it.
“Since business itself is a dynamic activity and change is constant, companies should always be open to either improving or upgrading their relationships,” Nelson says. “Whether they’re considering upgrading, changing or improving the relationships they have either with a new accounting firm that can offer a greater depth and breadth of services or a new law firm, banker or insurance provider, companies should always be examining the benefits of increasing the variety of competencies that new providers can bring them. It’s also important to point out that being served by service providers who know a company well and know it in a nuanced way can provide a level and quality of service that a firm that doesn’t would have more difficulty offering.”
The other thing to take into consideration is the timing of any move you make.
“The real strong advice to anybody who is thinking about switching: Do it early in your year,” Hendren says. “You don’t want to wait until November or December, because you need to make sure the firm has enough time to get up to speed, get your work scheduled, understand your needs, and you don’t want to rush into all of that between Thanksgiving and Christmas. It needs to be done well in advance so that everyone’s comfortable and you can go through it in a real orderly transition.
“But I think because of the recession, accounting firms’ pricing is more competitive now than any time I’ve ever seen it in 32 years. Pricewise, now is the time to look around. But timing is the most important thing. I can’t overemphasize that enough. We’ve seen a lot of people change, and we’ve worked with a lot of people on changes, and we’re willing to do it on a hurry-up, but it works so much better in a more orderly fashion.”
Prices are low, and there are a lot of companies out there that want your business. But take your time, find the right match and follow the same principles you do with any other major investment.
Make sure all fee arrangements are clear and understood by both parties at the beginning of the relationship, and decide how much contact you are comfortable with. Do you prefer a formal quarterly meeting or informal contact several times a week? Work out the details in advance and don’t base your decision on price alone.
“I would caution companies to look out for the ‘too good to be true’ deal of low fees that is tempting short term but is not based on an in-depth knowledge of the company and its true risks and value drivers,” Howe says.
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 email@example.com.Terry Rodes is senior vice president/strategic account manager, Aon Risk Solutions. Reach him at (314) 854-0874 or firstname.lastname@example.org.
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.