DRS Sustainment Systems Inc.
Born: St. Louis
Education: St. Louis College of Pharmacy, bachelor of science in pharmacy; Southern Illinois University, MBA
What was your very first job?
I’m a registered pharmacist. I made the decision in high school, and the idea was that I wanted to go into a profession that helps people, but then also one that had a program I graduated from and could be licensed in.
To me, medicine was a natural. I certainly enjoyed math and chemistry, and I did very well there. I actually worked a number of opportunities while in school. I worked in retail pharmacy, a hospital pharmacy, and I worked in a lab.
Ironically I worked as an office boy for this company at 17 years of age through college. When I graduated, I was offered an opportunity to stay with this business or pursue my pharmacy career and I elected to pursue this business and work part-time as a pharmacist.
What is the best business advice you ever received?
Find a job that you like and never work a day in your life.
Whom do you admire most in business and why?
I look at our current chairman, Mark Newman, as one of the best businessmen for having taken a family business and grown it into a $3 billion company and having sold it to be part of a $22 billion company (DRS was sold to an Italian company, Finmeccanica S.p.A., in 2008.) Having watched for a very limited time from my vantage point, Mark is probably one of the best I’ve seen.
Until you learn to delegate, your company’s growth will be limited, says Shri Thanedar.
“A common misconception is I can do it better than someone else can and I can do it quicker than somebody else can,” Thanedar says. “It may be so, but when you do somebody else’s job, there’s nobody there to do your job.”
It’s a lesson that the CEO and chairman of Chemir Analytical Services Inc. learned firsthand. For years, he relied on his own determination and independence. Growing up poor in India, Thanedar arrived in the U.S. to get his doctorate in chemistry with only $20 in his pocket. In 1990, he bought Chemir for $75,000, running it with two employees. Since then, the pharmaceutical company has grown to 400 employees and posted 2008 revenue of $60 million.
He says that to grow your business, you have to share all aspects of your business with employees, show them that their opinions count and allow them to make decisions.
Smart Business spoke with Thanedar about how to empower employees to make decisions that will help your business succeed.
Share the business background. A lot of times, especially private companies don’t have to disclose their sales and their profitability. We make it a point to let all of our employees — not just the top management, not just the key employees — we let every employee know about our profitability and know about our sales so there are no secrets.
They don’t need to come to me and ask questions because I have this special knowledge or information that they don’t have. One of the first things I do is let them know what I know.
We look at our business as a game, and if you don’t know the rules of the game, it’s very difficult to play. Same way, if you don’t know what the score is, then you don’t know if you’re winning or losing.
We make sure that we educate our employees. We make sure that they all understand how the business is doing, what makes the business successful, why our clients come to us, what our current sales are, what our sales are in the last three months, how many price quotes we have given out to potential clients, what percentage of those price quotes get accepted, when they don’t accept a price quote why do they not buy from us.
All the information I have gets communicated.
Let employees know that their opinions count. Recently, we had a meeting of our team leaders of the company. I said, ‘Imagine today is Jan. 25, 2012. Also, imagine I was gone for three years. I was kidnapped, I was gone, and I just got released from my captors, so I don’t know anything about your company. Now tell me, what did you do, what sales were? How did you come here?’
I took them in the future and got them thinking. They said, ‘Oh, we achieved all of our goals. We were at $120 million in sales.’
I said, ‘Tell me how you did it.’
We had a two-hour brain-storming session, and I wrote it down, everything that they said. It became very obvious for everyone this is really what we need to do.
It’s part of delegating; it’s part of letting people know that their opinion counts. The job isn’t just putting them in a pigeonhole and saying, ‘This is all you do.’ Get them to think like an owner; give them responsibilities.
It’s very tempting to jump in and do it yourself. The key thing here is, give those responsibilities away, give the authority away and communicate that you’re going to accept their decision.
It’s a very open culture. It’s a culture where information is shared. It really doesn’t matter where the idea came from.
Teach employees to make their own decisions. It is very, very important that you let people make mistakes. They have to feel that if they fail, if they make a mistake, that I will understand and I will accept.
I tell them that unless two or three times out of 10 times if they try something and they don’t fail, then they’re not trying hard enough.
It’s trusting people and giving them the authority. Not just giving them the responsibility, but giving them the authority to make decisions to think (things) through.
Often, if they come to me and say, ‘What do you want me to do about this?’ business owners love to be in that situation. It makes them feel good that people come to you and then they have all the answers. It is so much better if we don’t really try to do that because then people stop thinking and they just want to rely on you.
If I approve something or say, ‘This is how it should be done,’ then they’re off the hook because then I become responsible for the success of that idea or that approach. Usually when someone comes to me with a problem, I ask them, if they were in my shoes, what would they do? Almost always they come up with really a good solution to the problem. Once they tell me that, I say, ‘Well, I agree with you … go implement it if you’ve got a good idea.’
(If it’s not a good idea), I keep asking them. ‘How else can we solve it? I don’t really know what exactly can be done here; give me some parts.’ So I work with them until they come up with a position.
How to reach: Chemir Analytical Services Inc., (314) 291-6620 or www.chemir.com
Robert Reeg knew a lot was riding on the success of this project. The sheer numbers at stake were enough to make even the most calm and cool leader break into a sweat.
MasterCard Worldwide handles more than 25 billion payment card transactions annually and is responsible for the transfer of more than $1 trillion between financial institutions each year. All Reeg had to do was lead the rewrite of the core transaction processing platforms that the 5,000-employee company uses to make all that happen. Oh, and by the way, this wouldn’t be the first shot at making this work.
“MasterCard had initiated programs in the past, three of them, to get to that new platform,” says Reeg, president of MasterCard Worldwide’s Global Technology and Operations headquarters in St. Louis.
“For various reasons, all three of those previous attempts were shut down. You naturally had a lot of skeptics in place to say why would this attempt be any different? The leadership challenge was making sure you had the right people involved at the right time and establishing champions to make sure this effort succeeded.”
Reeg says the Golden Rule is a great place to start when embarking on any kind of change.
“It just gets down to everybody responds to respect and integrity,” Reeg says. “As long as you are treating people the way you would expect to be treated and you’re being honest and open with people and welcoming ideas from all avenues, I think people respond to that.
The effort took five years and cost $160 million. But by encouraging collaboration and working through mistakes, Reeg was able to lead the delivery of the system on schedule and on budget. It gives MasterCard one of the leading payment processing platforms in the industry.
Here are some key strategies to keep in mind when taking on a major change initiative.
Set the tone
Entrepreneurial spirit is often hailed as the key to getting a small business off the ground when a man and an idea come together to provide something the world wants like a car or a computer. But you also need that spirit in established companies to help work through major changes.
“You have to give your people in key leadership positions enough leeway that they can go out and try some things that don’t take some kind of blessing from the top all the time,” Reeg says. “These are the big projects, the big investments that we’re going to make.”
Going into MasterCard’s data processing platform project, the prevailing thought was that the system, which makes sure transaction data gets to the right place, would be built on a client server architecture.
“As we went forward with this, one of the people raised the concern that we’re talking about a huge number-crunching application and wouldn’t we be better off doing that on a mainframe and treating the mainframe as just a huge client server to transition the data,” Reeg says. “That was obviously a huge change from the architecture plan. But in hindsight, it gave us a much more robust and cost-effective clearing system.”
You have to give your in-house entrepreneurs a chance to show you new ways of thinking about a problem, but you also have to be methodical in how you sort through them.
“Once you get things like this going, you do get a lot of ideas to throw on the wall to see what sticks,” Reeg says. “You have to have some kind of process in place that can help keep you focused so you’re not trying to do 5,000 things part way where you could be doing 50 things really well.”
But if you don’t first create a culture where ideas can be freely expressed, you won’t have those things to choose from.
“You give each of those proposals a chance to make their case,” Reeg says. “It really comes down to which of the efforts look to have the best short-term and long-term potential.”
One of the best ways to encourage creativity is often to get teams together with people who haven’t previously dealt with the topic at hand.
“When you put someone on a team that hasn’t been directly involved with a particular opportunity you’re looking at, it gives them an ability to put a different perspective on the table than if you’re continuing to use the same people that have been involved with it on a day-to-day basis,” Reeg says. “You want people involved in looking at opportunities who have a deep knowledge of the area impacted, but you don’t want to be so overly focused on that as the only solution that you lose sight of what someone from the outside can tell you. It’s a matter of making sure you have both sets of views on a team.”
The key to making it work effectively is to have a purpose that everyone understands and through which employees’ thoughts and ideas can be channeled. The purpose behind the MasterCard project was to “make every transaction more valuable.”
“What are they doing in their individual development plan that will make them more successful in making every transaction more valuable?” Reeg says. “It goes back to, in our case, trying to help everybody be rallied around that one objective and how does the work they do day-on-day support that.”
Take advantage of failure
Any sports fan can recall the phrases used when his or her team loses the big game: ‘Losing builds character,’ ‘They gave it their best shot,’ and, ‘We’ll get ’em next time.’
But the fact is that in business, losing or failing is often a step that must be taken to move ahead and find success, especially when implementing change.
“Whenever I’m talking or looking for a new position or interviewing, I like to find out what their biggest failure was,” Reeg says. “If someone doesn’t succeed in delivering something, but they were trying to do something that was really out of the box, I understand that.
“What I think you want to find out is, did they learn from that and are they able to now parlay that into other situations where they can really drive change and understand what can cause change to fail? That experience in having something not go right is really valuable.”
As Reeg launched his effort to develop a new transaction-processing platform at MasterCard, he was keenly aware of the past failures. If this project was going to work, his people needed to know what had not worked in the past.
“It’s establishing right upfront a tenet that every issue is thrown out on the table, no matter how painful,” Reeg says. “You can’t have an activity the magnitude and size of this effort and not assume there aren’t going to be problems along the way. You have to have a good problem resolution process built into the framework. You have to make it OK for people to raise issues.”
Your approach to the discussion of past mistakes and how to learn from them is crucial. Talk about mistakes you personally have made and how you responded to them.
“When I can talk about things that didn’t go right that I was leading, it makes it much easier for a project leader to talk to me about something that’s not going right for them now,” Reeg says. “You have to humanize that and bring it from a personal standpoint.”
It’s the idea of remembering what happened, but always continuing to push forward that will get you through and help you when the inevitable new mistakes are made.
“The first thing we always try to get focused on is, ‘Let’s get the problem fixed,’” Reeg says. “Then, assuming it had enough importance, we always do a lessons learned afterward. It’s not a lessons learned to find out who is guilty. It’s a lessons learned to say, ‘Here’s a process we put in place to make sure we never have to go through this again.’ Keep people focused on fixing the problem first, lessons learned second and what do we put in place to make sure it doesn’t happen again.”
Find your champions
It can be a delicate balance to find the right number of people for a team that is embarking on a major change initiative.
“If you make the numbers too small, then it impacts the buy-in that you have,” Reeg says. “If you make the numbers too large, it complicates decision-making and gets into group analysis paralysis that can permeate something that’s complex.”
The best approach is to have one person established as a champion for each of the key components of your project.
“That person is going to draw on the expertise, knowledge and assistance from a wide variety of sources throughout the company,” Reeg says. “For success, you need to ensure they have the necessary support and bandwidth. If that’s not in place, their success is in jeopardy, as is your own.”
In other words, if you put somebody in charge of something, let that person do his or her job and lead it.
Look for people who have demonstrated in the past an ability to dissect a situation into manageable pieces and put it back together as a solution.
“This person went out and did something completely different and worked with the business to help start domestic processing in a country where we never had it before,” Reeg says. “That’s something that helps give MasterCard a foothold.”
Be approachable and be out interacting with your people to get firsthand insight as to who has what it takes to be a leader.
“You’re not going to be able to unearth potential leaders without interacting with them,” Reeg says. “I maintain a regular schedule of what we call skip-level meetings that allow me to get to know some of the more junior people. We also rotate individuals from front-line customer-facing roles back into the product development groups and vice versa. It works as a fertilizer for the organization and the individual.”
When you get to the point of selecting a champion who will lead some aspect of the change, you need to have a clear idea of what you want the project to accomplish.
“The change plan needs to be as specific as possible, with the goals made very clear and measurable,” Reeg says. “You need to paint the picture for people so they can envision what things will look like in the new, changed environment. Then, that plan needs to be broken down into specific tactical components that you can match up with the leaders to advocate and advance those mini-plans.”
It’s that detail that can help these champions succeed.
“For me, when I can see firsthand how the change is impacting someone or some process, I have a lot better appreciation for what’s trying to be accomplished,” Reeg says.
The bottom line is that making change happen is not easy.
“No one should be surprised about how hard it is to make a significant change,” Reeg says. “But if you leverage the right people and give them a process and capability to get stuff done, that will drive change through the organization. When people see it working for someone else and good things come of that, it really does start to be a trickle-down effect and get embedded into the DNA of that organization.”
How to reach: MasterCard Worldwide Global Technology and Operations, (636) 722-6100 or www.mastercard.com
The Family and Medical Leave Act(FMLA) is going through somechanges, and business owners willneed to pay particular attention in 2009to make sure they stay compliant.
As always, the FMLA requires that covered employers grant eligible employeesup to 12 work weeks of unpaid job-protected leave during a 12-month period for the birth and care of a newbornor adopted child; to care for an immediate family member (spouse, child or parent) with a serious health condition; orwhen the employee has a serious healthcondition.
“The final rule that updates the FMLAregulations went into effect on January16, 2009,” says Jill Luft, an officer in theLabor & Employment Practice Group atGreensfelder, Hemker & Gale, P.C. “Theregulations include new military familyleave entitlements, as well as revisionsdesigned to clarify the requirements thatthe FMLA imposes on both employeesand employers.”
Smart Business spoke with Luft aboutthe new FMLA changes and howemployers can stay on top of them.
What kinds of changes have been made tothe FMLA?
To be eligible, an employee must haveworked for a covered employer for atleast 12 months, must have worked atleast 1,250 hours over the previous 12-month period, and must work at a location where at least 50 employees areemployed by the employer within 75miles. The new regulations establishthat the 12 months of employment donot need to be 12 consecutive months.Generally, any period of employmentprior to a continuous break in service ofseven years need not be counted whendetermining whether an employee iseligible.
The new regulations also clarify thedefinition of ‘serious health condition’and set parameters for when visits to ahealth care provider by the employeemust occur. The new regulations alsorequire an employee who takes intermittent FMLA leave to schedule medical treatments so as not to unduly disruptthe employer’s operation.
And, the new regulations allow anemployer to contact the employee’shealth care provider directly for the purposes of clarifying and authenticatingthe medical certification. While theemployee is not required to permit thiscommunication, if the employee deniesthe employer permission and does nototherwise clarify an unclear certification, the regulations now say thatthe employer can deny the FMLA leavealtogether.
The regulations also allow an employerto deny a perfect attendance award to anemployee who took a FMLA leave, solong as the employer treats employeestaking non-FMLA leave the same way.
The new regulations also clarify thattime spent by an employee working lightduty does not count against the employee’s FMLA entitlement. So an employee’sright to have his job restored is actuallyheld in abeyance while the employeeperforms light duty or until the end ofthe 12-month period that the employeruses to calculate FMLA leave, whicheveroccurs first.
What are the new rules concerning militaryfamily leave entitlements?
The new regulations provide additionalleave rights to eligible employees withfamily members serving in the military.This is actually part of the larger militaryspending bill called the National DefenseAuthorization Act of 2008, and there aretwo new types of leave. MilitaryCaregiver Leave provides 26 weeks ofleave in a 12-month period to an eligibleemployee to care for a family member inthe armed forces with a serious injury orillness that occurred in the line of dutywhile on active duty.
Qualified Exigency Leave provides 12weeks of leave to an eligible employeewhose family member is on active dutyin the National Guard or Reserve or hasbeen notified of an impending call ororder to duty. The leave is for a ‘qualifiedexigency,’ and there is a non-exhaustivelaundry list of examples of qualified exigencies in the new regulations. Theyinclude short-notice deployment, military events and related activities, child-care and school activities, making financial and legal arrangements, counseling,rest and recuperation, post-deploymentactivities and additional activities agreedto by the employer and the employee.
What happens if employers do not complywith the new FMLA regulations?
If an employer does not comply withthe FMLA, an employee can file a complaint with the Department of Labor orfile a lawsuit in state or federal court.Normally, if the lawsuit is filed in statecourt, the employer will remove the caseto federal court. If an employer is foundto have violated an employee’s FMLArights, then the employee is entitled torecover actual damages, interest, equitable relief, attorneys’ fees and costs.
If the violation is found to have beenwillful, the employee is also entitled toliquidated damages in an amount equalto the actual damages.
JILL LUFT is an officer in the Labor & Employment Practice Group and member of the Board of Directors of Greensfelder, Hemker &Gale, P.C. Reach her at (314) 516-2653 or firstname.lastname@example.org.
When the times get tough for Russ Burns, he flashes back to a time when he was a pilot in the U.S. Air Force and faced much more dire circumstances than anything he’ll likely ever face as the president at Clayco.
“I was flying over the water, way away from land, and we had smoke in the cockpit,” Burns says.
“I distinctly remember that panic that hits. You just think, ‘Oh my goodness, what good is going to come from this?’ We had a country off to the side of us, the only place we could really get to at that moment that was totally hostile to us. So we couldn’t go there. You have this moment and you say, ‘OK, I’m either going to panic or I’m going to do what I’ve been trained to do and I’m going to get out of this.”
Burns chose the latter, fell back on his training and managed to get the plane to safe territory. The experience serves as a constant reminder to him not to panic when trouble arises but rather to always be thinking about his next move.
“Even when business is good, that’s the way I look at it,” Burns says. “I don’t sit around and say, ‘The economy is much worse today, and that requires me to be more afraid.’ I’m genuinely coming in every day and trying to make this company better than it was the day before. … I’m certainly aware of what’s going on, but I’m not going to focus on the smoke. I’m going to focus on how to get the smoke out and how to get to where I’m headed.”
Burns took over as Clayco’s president on an interim basis in August 2007, removing the “interim” title in January 2008. He says it would have been easy to get carried away preparing for the job, particularly in light of a slowing economy that was gaining speed in its descent.
“You feel the pressure,” Burns says, before reiterating his advice for pressure situations. “Just relax. It’s when you do that, that you produce your best results anyway. Then you’re believable. Then you’re in the business producing results and people say, ‘I believe that guy. He’s credible, and he knows what he is doing.’”
Burns’ goal has been to convey his confidence in Clayco to his employees and to keep them focused on the customer and not the economy. Here are some of the things Burns did at Clayco in his first full year to make that happen and help the 500-employee construction firm hit $770 million in 2008 revenue.Talk about solutions
In any organization, the biggest threat to success is uncertainty.
“Uncertainty creates insecurity and fear, and that drains people,” Burns says. “It’s really a cancer beyond the unsettledness of it. It’s a cancer in the sense that employees are distracted from giving you the excellence and delivering the excellence that they are accustomed to doing.”
Clayco has developed a very strong financial base with geographic and product diversity that insulates it from being too dependent on any single market, customer or type of work. But Burns says the economy’s performance at the end of 2008 and the beginning of 2009 has everyone concerned.
You need to talk about the concerns that employees have about how the tough times will affect their job and the company as a whole. But you can’t dwell on it.
“We are sitting down with people in small groups and talking to people one on one,” Burns says. “We are basically creating venues where people can talk about things and get answers. But then it’s saying, ‘OK, here. Now we’ve talked about it. We can come back and talk about it again, but between here and there, let’s go and deliver excellence because that’s how we best deal with this market.’”
You make the dialogue effective by being genuine and by staying away from clichés.
“We don’t sit there and say, ‘Well, I don’t know, but we’re just going to work through it,’” Burns says. “We talk very specifically about staying on task. We talk very specifically about new initiatives that we’re doing to make us better that relate to how we design projects, how we manage projects and computer software and hardware to be able to facilitate that in a way that we’ll be leading the industry.
“We’re investing the time because we believe now is the time to do it. When they see that happening, they say, ‘Look, we’re not sitting here just trying to survive. We’re pressing forward to gain market share.’ That’s encouraging to people. People want to be part of that sort of thing. It’s getting it out there, but it’s also saying, ‘Now guys, what are we going to do to get out of this and to lead ourselves through this?’”Lead with your heart
In challenging times, it’s more important than ever to build relationships with your employees. They need to be able to come to you with concerns and know you well enough to have faith in your leadership ability.
Burns says it’s key to stay on task and keep focusing on the customer, but you need to show your employees that you care about them, as well, and that can start with a simple conversation.
“There is something cathartic about being able to just talk like a human being to each other,” Burns says. “You talk about your kids. You talk about where you are from. … If, as the leader, I’m candid with them and open with them consistently, it makes them feel that it’s safe to be open and candid with me. If it’s treated right, you can foster that process. There’s nothing that makes the bad things go away. It’s just (the bad things) are put in their place and it allows us to stay on task, which is really key in these times.”
If you’re just trying to show your employees that you care about them, you’ll probably fail. That caring and compassion has to be genuine and come from your heart in order for them to buy in to it and believe you have their best interests in mind.
“Everyone says they care and everyone says they love their employees, but I have to challenge myself and ask, ‘Do I really care about my employees?’” Burns says. “It’s a very real thing to say. ‘Do I care for these people?’ People know you, and they know when you are just saying it. When they know you do care, it shatters pretense and it shatters barriers. You have to work at it, and you have to make yourself available.”
As you get out and about in your workplace and talk to people, they’ll start to talk to each other and let their peers know that you are approachable. But again, Burns says it needs to be part of who you are and not a strategy in your day planner.
“Part of my gut tells me if you have to think about it too much, you’re probably not doing it right,” Burns says. “If I’m a credible leader, then being out there and being able to do things and being a substantive leader, it should almost be a self-fulfilling prophecy. That reassurance is going to take place. … I don’t sit and say, ‘OK, today, I want to do things to ease people’s minds so I’m going to do this, this and this. And then I’m going to do my everyday activities.’ I think they are mutually inclusive.”
You need to be cognizant that you’re always sending a message, whether you are giving a speech or just walking back to your office.
“If you’re out doing your day-to-day and you’re not mindful that people are watching you every moment, you’re not thinking about your position,” Burns says. “How is he answering this? What does he think about that? You’re impacting those things while you’re doing your regular work.”
The connection between you and your people is not something that you can go out and look for, in most cases.
“If you go out looking for it, you are never going to find it,” Burns says. “Those things just seem to happen. There are some days when you realize, ‘Wow, this is working.’ There are some days when you think, ‘My stars, could I be any further from where I need to be?’ But that is the nature of leadership. I’ve never found it when I was looking for it.”
The reality is that leadership presence is something that takes time to establish.
“People look at track record,” Burns says. “The way to develop that is honesty. It’s integrity. It’s leading with open ears and then when you make a mistake, being very open and honest about it but not getting dragged down in the dirt and not getting so focused on the mistake that you forget your job is to lead. You really get right back up, you dust yourself off and you keep going. People respect that, especially when you then get success after that. Then over time, the trend is there.”Stay focused on the customer
At the end of the day, getting your employees to open up and being visible to them in the workplace does no good if the focus of your business and the focus of the majority of your conversations are not on the customer.
In a tough economy, focusing on the customer should be the root of everything that you do.
“There’s plenty of companies that have wonderfully happy employees that aren’t making money and aren’t delivering results,” Burns says. “There’s no future in that, no matter how happy they are. That business model fails. Everything has got to be about delivering excellence. Everything has got to be about delivering a deliverable that’s better than the market and that the client is ecstatic about receiving. That’s where you keep your eye. If you get your eye too caught up in just the environment, you’ll miss it.”
You need to get your employees engaged in your business, and you need to build trust in order for them to buy in to your leadership and give their best for the company. You need to work through their concerns, particularly in a tough economy.
But if the end goal of your efforts isn’t to provide the best service to the customer, it won’t work.
“If every conversation has something to do with clients and deliverables, something good is going to come of it,” Burns says. “If you’re not talking about a client or a deliverable, you have to ask yourself, ‘Why are we talking about this?’”
If you want to maintain a focus on the customer, then get out there and talk about it. But talk about it with an attitude of collaboration.
“You as the leader need to plug into your core group, not bring your core group to plug into you,” Burns says. “You go out there and you plug into them and make sure you understand and make sure they understand. Then you leave and let them do their job. … I think sometimes we do a bad thing when we draw them in and pull them up and put them on display. That’s not what made them good. What made them good was what they were doing out there producing those results.
“Leadership is living out a credible witness to what it is you want your life to be about. People are either going to follow you or they’re not. To try to institute something that says, ‘OK, this is how you do it,’ I’m just not a big believer in that.”
Burns believes it is that focus that will make the difference for Clayco.
“We believe those who stay on task and deliver the excellence that we’ve been delivering for the past 23 years, we will gain market share,” Burns says. “If we train that on a market that’s really not as focused as it should be, we can gain market share.”
How to reach: Clayco, www.claycorp.com or (314) 429-5100
The current economy has brought many changes to business, particularly regarding financing. The multiples of cash flow that most banks are lending has decreased significantly, anywhere from one to 1.5 multiples, and many banks have stopped cash flow lending. Banks are also more cautious when lending to businesses.
“What were the standards 12 months ago are no longer in place because so many banks are looking to deleverage,” says Barry Worth, CPA/ABV, CVA, CM&AA, member and head of mergers and acquisitions and turnaround consulting at Brown Smith Wallace LLC. “Bank lending policies have changed significantly to where they will lend much less money at today’s levels than they did 12 and 15 months ago.”
Smart Business spoke with Worth about how different areas of financial analysis and structuring can help you improve your financial position.
What financial analysis and structuring measures should be used during these times?
In all types of transactions, a debt and capital structure evaluation, along with a working capital review, are key to structuring debt and equity. These analyses require planning and forecasting on the front end. Working capital is one of the major lifelines of the business — it’s operating capital. You can’t get through a 12-month period or a growth period without having adequate working capital.
So, you should definitely conduct a study of the working capital needs of the business. You should look at planned inventory returns, how long the receivable collection period is, and what the normal payment period would be for accounts payable. These all have a bearing on cash flow, which affects how much working capital is required on a periodic basis.
How can businesses plan and forecast in these areas?
You really need estimates of revenues and expenses, looking out over a three- to five-year period, to prepare budgets. People who have a good handle on their business generally have a feel for what their growth percentages will be and how they’re going to achieve those. What they can never fully know are what the market conditions will be.
For instance, some businesses go through cycles. But, whatever the situation, the important thing is that a company prepares forecasts. They need to roll those forecasts forward based upon current conditions as they change, so they’re prepared to either recapitalize the business — put in additional equity — or determine that they’re going to have greater borrowing needs — increase the debt. If either of these options aren’t available to you because banks believe you’re over-leveraged, you can pursue either additional investors or mezzanine lenders, which provide funds that are always subordinated to senior debt.
Can you still effect a merger or acquisition?
Sure. A number of companies with strong balance sheets are looking to acquire strategic assets. Whether you are seeking acquisitions or considering selling, a strong financial position will help you.
From a financial perspective, most deals will be successful or unsuccessful based upon the structuring of the debt and equity. There’s always a balance you have to strike. Banks will lend primarily based upon collateral, so some deals may not go through because the banks have cut back on how much they will lend on a transaction.
Look at how you’re going to structure the total needs of the business, between how much debt you’re going to be able to get from the banks and how much equity you can raise, either from yourself or yourself plus investors. If there is a gap, you can go to the mezzanine players, where the funds can be interest bearing and/or interest bearing plus some convertible securities.
What options does a troubled company have?
Troubled companies have had significant losses, and banks demand a lot more from them, including ‘find another bank.’ A lot of companies that are hurting now are going to have to get capital infusions of additional equity. There’s always reluctance on the part of the company owner or owners to take in additional investors because it cuts down on their percentage of ownership. But, in most of these cases, the owners won’t have a choice, it’s a matter of survival. Generally, the debt restructuring or refinancing will require additional equity. These owners will have to show some improvement or a plan on how they’re going to improve the business before they can get additional capital or refinancing. We’ll be seeing a lot of these transactions in the next couple of years.
What are the benefits of a financial analysis and structuring initiative?
The critical value comes from understanding your business and establishing strategic positions and directions that you might not necessarily have thought of if you didn’t plan. The practical value is that you’ll be better able to convince a banker or investor to provide you with the funds to achieve your plan.
BARRY WORTH, CPA/ABV, CVA, CM&AA, is a member and head of mergers and acquisitions and turnaround consulting at Brown Smith Wallace LLC. Reach him at (314) 983-1202 or email@example.com.
Companies are tightening their belts, trimming the fat and squeezing operations. Businesses are engaging in cost analysis at all levels, putting their budgets under the microscope as they determine what resources must be redistributed or reinforced to weather the economic storm.
“These times are tough, but companies that review their cost structure and revenue sources will come out of the downturn in a much stronger position,” says Bill Willbrand, member, tax and accounting, Brown Smith Wallace LLC.
“It’s a time of concern, but also of great opportunity,” says Ted Flom, member and co-leader of the risk services practice at Brown Smith Wallace LLC.
A careful review of costs includes evaluating key areas of the business such as customers, margins, contracts and leases, health insurance and travel. Willbrand suggests a “clean piece of paper” approach to budgeting to determine a company’s real value stream and isolate waste that can be cut from the organization.
Smart Business spoke with Flom and Willbrand, who shared cost control and reduction strategies that companies should implement today.
How can a customer analysis shed light on cost inefficiencies?
A careful review of customers can unearth opportunities to improve profitability and mitigate risk. Evaluate direct and indirect customers of your products and services — including your customers’ clients. Their financial health can affect your business. For instance, if you do not directly serve the building industry, but you supply a product to a company that sells into the housing market, you can expect its financial stresses to trickle down to your organization. Also, examine your customer base and identify those that are unprofitable or those with low margins. You may decide to renegotiate pricing with these clients, or you may be able to use this information as leverage to demand other concessions such as quicker payment terms. Lastly, look for clients who are notoriously behind in payments. These clients are treating your business like a bank. The longer receivables string out, the less likely you are to collect on them.
How can companies find opportunities to cut costs by evaluating profit margins on products and services?
In this economy, companies should evaluate profit margins on products and services to identify those that are selling for low margins or at a loss. Consider the labor and raw materials invested in producing these products and services along with other costs, such as warehousing and packaging. If you can focus your efforts on products and services that sell at margins that support your business, you will be able to improve the company’s overall profitability.
What cost savings can be realized through analyzing contracts and leases and renegotiating where possible?
Companies need to get a handle on their most significant vendor relationships, which often include leases. Review contracts with your most significant vendors and be sure you are receiving all promised discounts or rebates. Read the fine print and hold vendors to these agreements. You may be receiving charges that are not consistent with the terms of the agreement. For leases, common area maintenance (CAM) expenses are often a source of inappropriate charges. If you feel your contracts or leases might present opportunities, consider conducting an audit.
As you review vendors’ contracts, you may recognize opportunities to reduce the number of vendors and realize economies of scale by giving more business to a single vendor. Also, revisit contracts with existing vendors and ask about renegotiating pricing and other key terms. Today, vendors really want to keep your business, and they may be willing to offer discounts and incentives or adjust payment terms. Don’t be afraid to shop around. Being smart about your contracts is one way companies can quickly and easily impact the bottom line.
What can be done to reduce health costs?
Businesses are having a difficult time managing health insurance costs, which continue to increase. Review plan design and the premium you ask employees to pay. Health insurance is a valued benefit, so you should help employees understand how much premiums actually cost. Companies today are asking employees to take on more of these costs. You should also check into lower cost plans, such as health savings accounts bundled with high-deductible health plans. Finally, if your company is self-insured, enlist a third party to audit the plan administrator to identify cost savings, such as participants enrolled in the plan who are not eligible and claims that are not being handled properly.
How can companies trim travel expenses without hurting client relationships or new business development?
Companies are finding opportunities to reduce travel costs by tightening their policies, renegotiating arrangements with travel partners and by enabling employees to utilize technology. Tighten your travel policies to make employees be more prudent with their travel expenses. In this economic climate, there are also opportunities to negotiate better deals with air carriers, hotels and car companies. In addition, some companies are asking employees to reduce the number of trips they take and to make greater use of existing technologies such as conference calling and Internet-based application sharing tools like WebEx.
TED FLOM is a member and co-leader of the risk services practice at Brown Smith Wallace LLC. Reach him at (314) 983-1294 or firstname.lastname@example.org. BILL WILLBRAND is a tax and accounting member of Brown Smith Wallace LLC. Reach him at (636) 754-0200 or email@example.com.
Aili Jokela is the senior vice president, senior partner and general manager of Fleishman-Hillard, and the co-chair of the company’s Sustainability Practice Group. Fleishman-Hillard, an international public relations firm, initiated the Sustainability Practice Group to address sustainability needs, such as green product and service marketing to corporate climate response. Her technical expertise is in the areas of strategic energy management and energy efficiency.
How can investing in sustainability improve a company’s bottom line?
Sustainability helps a company’s social marketing and industrial energy efficiency while promoting corporate responsibility. The percentage of the benefit will vary in different industries, but there are big benefits to be had. Sustainability allows businesses to streamline costs more efficiently while taking waste out of the consumer stream and creating a better P&L statement for the company. Companies educating themselves on sustainable practices today will be able to anticipate potential regulation and ultimately have a better seat at the table. Sustainable companies will also develop a leadership position and be part of shaping their outcomes.
What will it take for businesses to increase interest in being more sustainable?
Regulation and incentives speed up the process, but otherwise it takes time to get everyone on board. A good example of this is the automobile industry. When safety regulation discussions started gaining momentum, the industry fought it, but then they adapted to the new standard. Now, car manufacturers use their vehicles’ safety features as a marketing angle.
Why should companies still investigate and invest in sustainability now that the economy is in a downswing?
The world’s current economic and environmental situation demands that companies operate sustainably. Companies need to know they can put sustainability methods into place and not break the bank. In the future, it will continue to cost companies more not operating efficiently. Even though money may be tight, sustainable practices help companies retain their market share and diversify themselves from competitors in tough times. Companies that are educating themselves on the matter are positioning themselves effectively for when the economy starts to grow again. Having less money than you’re accustomed to makes you become smart about things quickly and that’s what’s happening now.
There are two schools of thought on distribution center trends. On one hand, those favoring more small distribution centers argue that a number of facilities spread across the country are the ideal model. Those favoring fewer large distribution centers believe that one million square feet and above is the best strategy to pursue.
Lindsey Stieve, CCIM, an associate at Colliers Turley Martin Tucker, stands firmly in the corner of fewer, larger distribution centers pointing out that million-square-foot facilities are becoming the norm.
“There are three factors driving the shift from many smaller distribution centers to several larger ones across the country: economies of scale, full truck-load shipments and the ability to reduce inventory levels,” says Stieve.
Smart Business spoke with Stieve about the advantages of large distribution centers, what mistakes to avoid when looking for optimal industrial space and how to go about selecting a quality broker.
How can a large distribution center reduce operating costs through economies of scale?
A large distribution center reduces operating costs significantly. Instead of spreading your labor and equipment costs over 200,000 square feet, you are spreading your costs over a million square feet. These are fixed costs for labor, warehouse management systems, fork trucks and general distribution center equipment. As square footage increases, cost per unit decreases. Third party logistic firms that we have dealt with in our market believe maximum operational economies are achieved at one million square feet.
How can utilizing large warehouses help reduce inventory?
Let’s use a large consumer products company as an example. By keeping all of its lines of product (shampoo, laundry detergent, deodorant, etc.) in one facility, it can maximize full truckload shipments, which greatly reduces transportation costs.
Inventory is capital. By reducing inventory a company reduces its capital costs. By housing full product lines under one roof, a company effectively and efficiently reduces inventory. Efficiency is achieved by having all product lines in one building and full trucks can be on the road within hours. If the inventory is spread across the country the truck must wait for the orders to come together from the various locations before it can reach the customer.
Also, it is important to note that large retailers — the Wal-Marts, the Costcos — will not accept LTL (less than truckload) shipments from large companies. They want all of their products on one truck at one time. LTL shipments increase transportation costs and paperwork.
How can transportation costs be minimized?
By utilizing full-truckload shipments versus LTL shipments, companies can reduce transportation costs. In addition to driving down transportation costs, using full truckloads saves time and products are delivered directly to the end user. On the other hand, partial-truckload shipments often sit in the LTL facility for extended periods of time waiting for a full order to come together. Not only is time a factor but also the more times a product is handled the greater chance of damage.
What are the biggest mistakes companies make when looking for industrial space, and how can these mistakes be avoided?
As corporations have become increasingly sophisticated, mistakes have been minimized. In today’s market, large companies have a strategic plan in place prior to enlisting the services of a broker or searching for property.
Companies looking for a suitable location for a distribution center should make sure there is a decent labor pool. Once you are there you can’t create labor from surrounding areas if there is not a large enough population to pull from. Also, it is important to evaluate taxes and other costs associated with a location.
How should a company go about selecting a quality broker to help secure optimal industrial space?
The broker should be an industrial real estate expert who specializes in the logistics industry. In the interview process, a broker should be able to fluently discuss operational and real estate issues. You are hiring a broker for his or her expertise. If the broker can’t provide you with the necessary tools to secure an industrial space that meets your supply chain needs, the person is not doing his or her job. A good broker is an expert just as a company is an expert in its industry.
Additionally, it is important that a broker communicates and works well with the company’s team.
LINDSEY STIEVE, CCIM, is an associate at Colliers Turley Martin Tucker. Reach her at (314) 236-5459 or firstname.lastname@example.org.Lindsey Stieve, CCIM
Associate, Colliers Turley Martin Tucker