Growth through Mergers and Acquisitions

Companies seek growth through mergers and acquisitions to satisfy one or more of the following – adding a related product or service; expanding geographic reach; purchasing assets, i.e. real estate, patent, brand; and/or, acquiring clients.  There is also the promise of cost reductions through consolidation of back-office and front-office services.  The justification for two companies coming together to either expand or further strengthen a competitive position is logical and easy to support from a financial perspective.  More than likely if an increase in shareholder value can be demonstrated, based on a proforma, the entities will proceed.

Very soon after a decision to merge or acquire is made, a press release is issued which identifies the combination benefits.  “We look forward to working with Cerberus to maintain and grow GMAC’s traditional strong performance and contribution to the GM family,” said GM Chairman and Chief Executive Officer Rick Wagoner.  “This agreement is another important milestone in the turnaround of General Motors. It creates a stronger GMAC while preserving the mutually beneficial relationship between GM and GMAC. At the same time, it provides significant liquidity to support our North American turnaround plan, finance future GM growth initiatives, strengthen our balance sheet and fund other corporate priorities.” (Ally Financial Inc.  Press Release: 2006)

But regardless of how good the merger or acquisition looks on paper, there is a large body of research that shows that mergers and acquisitions add no value, for a majority of the transactions.  In my career I have been exposed to seven entity combinations.  In two instances, the entity I was associated with was acquired; in three situations we were the acquirer; in one situation my entity assumed a majority interest in another entity; and finally one situation where a majority interest was taken in the entity where I was associated (quote above).

The successful execution of this type of growth initiative rests on the details of how the process is managed.  If you choose to acquire or agree to be acquired, consider the following three topics –

Business Integration

Systems – Integration of systems must be addressed upfront to ensure clients of each heritage entity can communicate with the new entity, in a seamless fashion, securely.  This initiative is extremely important during this period where cybercrime and hacking are ubiquitous.  Allowing systems from legacy companies to communicate via workarounds is not a secure approach.

Policy & Procedures – While these guidelines may have common features from company to company, they are custom to each organization.  More than likely your P&P does not match the P&P of the entity that you are acquiring.  You will find that one set is more restrictive than the other.  The question you will have to deal with – “Which policies should be the policies of the new organization?”

Costs – A primary reason to merge or acquire is the perception that cost efficiency can be obtained either from economies of scale, usage of excess capacity, co-location, supplier discounts…

The integration topic has a direct link to time, i.e. how fast you can integrate to secure systems, ensure consistent policies and procedures and cut costs.  Moving too quickly can cause needless disruption to the business; while moving too slowly just delays the benefit of the acquisition.

Employees

Attrition – The combination of two entities immediately creates redundancy.  Employee loss will be high. Some of this loss will be welcomed, but other will not.  You may find that you prefer Manager #1 over Manager #2, but Manager #1 resigns.  Regardless of the amount of analysis and preparation, management has the least control over the individual preferences and decisions of employees.  This point is apparent when you consider the following citation – “Yahoo has naturally lost some of its acquired talent. At least 16, or roughly one-fifth, of the more than 70 startup founders and startup CEOs who joined Yahoo through an acquisition during Ms. Mayer’s tenure have left the company.”  “Yahoo’s Other Challenge: Retaining Acquired Talent.”  Wall Street Journal Online.  Wall Street Journal, 1 May 2015.

Reporting – In my first merger experience, my company was acquired by a company of equal size but stronger economically. A colleague at the time explained to me that when two companies come together, the acquiring company assumes the management responsibility of all roles.  In essence, I would fall under that manager and be performing the role of the person that reported to me.  Every individual in the company that was acquired must be ready to do the job of their direct report.  This explanation was true for all combinations.  At times I had the higher role, as I was with the acquiring entity; while in other situations the reverse was true.

Clients

Attrition – Client loss will be high, more commonly from those clients that were associated with the brand that no longer exists.  This set of clients, do not feel they have any relationship with the new entity.  Consider short-term pricing discounts to persuade clients to consider keeping their business with the new entity.

Sales Management – If you sell a product or service in a geography and you acquire an entity in the same market, you will need to wrestle with the question of who owns the customer, i.e. territory management.  This situation occurs commonly when clients represent national accounts.

Sales Compensation – Similar to Policies and Procedures – While these compensation structures may have common features from company to company, they are custom to each organization.  More than likely your compensation plan does not match the compensation plan of the entity that you are acquiring.  You will find that one set is richer than the other.  The question you will have to deal with – “Which compensation structure should be the structure of the new organization?”

In summary, when an entity wishes to add a product or service or expand geographic reach or purchase assets or purchase clients, the acquisitions approach is considered preferable by many, as it is faster.   Just remember that the economics of the new entity will not be the economics of the addition of each heritage company.  A merger or acquisition takes careful planning to be effective.  There will be upfront costs required for integration and client incentives.  It will require flawless execution to come anywhere close to the proforma goals established at the outset.  There are too many unknowns, internally and externally, to be positive of the outcome.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Business Disruption Survival Techniques

Establishing a twelve month budget/business planand a business continuity plan are still the best ways to prepare a business for the most probable known threats. But what can you do for unanticipated shocks that negatively affect your ability to achieve your profit goals? When companies are faced with unanticipated situations, that threaten their business, and they realize these disruptions are not short-term issues, they may need to employ “business disruption survival techniques.”

Examples of situations that few saw coming include – The sudden drop in the per barrel price of oil, i.e. NYMEX closing price $99.75 (6/30/2014) vs. $52.78 (02/13/2015), negatively impacting oil and gas companies, and the businesses that support them. Union disagreements and work stoppages at US ports along the West Coast, negatively impacting the inventory of many businesses that sell imported goods. This situation is believed to be resolved, after nine months. The climb in the value of the dollar against most currencies, resulting in exports becoming more expensive, while imports become cheaper.

In reacting to these shocks, businesses implement three main types of cuts, for the sake of temporary relief, i.e. expense personnel, expense non-personnel and investments. If not done correctly, these approaches may do more long-term harm, than good. Activities are as follows –

Slash budgets (Personnel Expenses) – As personnel expenses are the largest cost associated with every business, targeting this expense is usually the first move. This tactic includes implementing hiring freezes and job eliminations.

Additional approaches include salary freezes; bonus reductions; and reducing or eliminating the company investment in the employee, i.e. usually related to education subsidies. More often than not these approaches will leave you with a large exodus from among the high performing dis-satisfied employees that can move to your competitors.

A popular technique which I believe is a big mistake is to provide a stay bonus to a select few. The message relayed with this last strategy, “If you did not receive a bonus, you are not considered critical to the organization.”

Slash budgets (Non-Personnel Expenses) – In the short-run, fixed expenses cannot be slashed, i.e. rent, insurance… The target of this tactic is usually variable expenses, i.e. marketing. But during this time of a disruption, marketing is very important to bring in new sources of revenues.

Delay Investments (Revenues) – To preserve cash during tough times, companies may place a hold on investments until the difficulties pass. But why would you wish to delay the opportunity for revenues, associated with a new product or service?

To avoid the slash and burn mentality, establish an environment of constant review and analysis. Do not wait until you are forced to make a large correction. Make small adjustments to your business, continually along the way. Suggested areas to monitor include –

Review Client Arrangements – Obtaining a customer that becomes unprofitable is a common situation. It only becomes an error of management if you do not constantly review the situation to understand the returns.

Review Products or Services – Periodically every business should review its product lines and services, to understand the profitability generated. The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities.

Review Accounts Receivables – If you extend credit to your customers, which is required for almost all businesses, a certain amount of bad debt will result. At a certain point, you will need to ask for what you are owed. Resolving this bad debt efficiently and quickly, while not disrupting the possibility of future business from the customer takes tact and experience.

Understand Variable Expenses – Review your needs – Contracts represent your needs at a point in time, i.e. when they were executed. It makes sense that a contract will include items you no longer need – understand needs; understand pricing alternatives; seek opportunities to bundle; and avoid the warranty trap with new technology.

Consider Business Management Practices – The solution to counter an underperforming small or medium-sized business is a redesign. Interestingly, the method to redesign a business is the implementation of standard business management “best practices.”

Continue to Review Investment Opportunities – A company should only allocate cash to the most profitable uses, with the highest return on investment, which will provide potential distributable benefits to its investors, within the shortest amount of time.

Survival will be based on your ability to shift quickly, but strategically.

You can never plan for external disruptions, but you can prepare. Do the analysis today.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Who Owns the Customer, i.e. the Company or the Sales Agent?

This question was less important when the job market was in decline.  But as the economy recovers, business owners and senior managers will be faced with this question, more and more.

Depending on who you ask, there are two popular, but contradicting opinions.  If you ask the owner/CEO of the entity – “The customer belongs to the company.  They come to us because of our quality products/services.  The Sales Agent has been properly compensated for procuring the customer on our behalf.”

However, If you ask the Sales Agent – “The customer belongs to me.  They were sourced by my efforts and we have a relationship.  They transact business with the entity because of me.”

In fact, it is not uncommon for a Sales Agent to maintain a separate and personal file of their interaction with the client/customer.  When they leave your entity and seek employment from your competitor, they may say, “I produced $XXX in revenues for my last company, and I can do the same for you.  I maintain a book of business that will more than likely follow me, if I move to your company.”

There is a legal answer to this question, which I was reminded of, when I left an entity after fourteen years, even though not in a Sales capacity.  Not more than 30 days after my departure from one entity to a competitor, I received a letter from the President of my former employer.  Excerpts of the note are as follows -“In view of your departure from XYZ, this letter is to remind you of your obligations to XYZ, and under the law, both during and after your employment with XYZ…it is your obligation to handle XYZ trade secrets, confidential or proprietary information to which you had access during your employment at XYZ, whether in your memory or in writing, or in any other form, with the strictest confidence and in a manner consistent with XYZ’s policy, both during and subsequent to your employment…you may not misappropriate or use for the benefit of anyone other than XYZ any confidential or proprietary information relating to XYZ’s business.”

So what can you do?

As a first step, make sure your compensation agreements and employee agreements include language that clearly states the client belongs to the company and the legal obligation of the employee.  This agreement should be reviewed and approved by a qualified Labor Attorney.

But even after this measure, you may find that the client leaves you and follows the Sales Agent.  This situation may occur not because of what the Sales Agent did, but more because of what you did not do.  The companies that lock in the client and foster brand loyalty have developed a communication link with the client.  If you do not reach out and establish this link to your brand, the only connection the client has to the company is the Sales Agent.  More than likely, if the Sales Agent leaves, so will the client.

Popular approaches companies use to reach out to the client and maintain contact include offering post purchase support or discounts on future purchases or advertising related products/services.

At every possible opportunity your entity should advertise the brand and state the value proposition.   Regardless of the product/service, every business runs the risk that what they offer becomes a commodity in clients’ minds, i.e. belief that every competitor offers identical product/service.  If all products/services are the same, why not just work with the individual Sales Agent, wherever they go?

But your value proposition is your differentiator.  Customers/clients will seek you out and be less sensitive to price if they understand the benefit of working with you vs. other vendors.  How do you differentiate yourself from the pack?

It is a valuable exercise to identify and document what makes you different.  The results of this activity should become the basis of all marketing materials, i.e. your value proposition.

An example of a value proposition that I have used includes the following commitments.  XYZ Entity –

  • Offers superior product or service;
  • Makes an effort to understand your specific needs and has many ways of doing things so you can find the one that meets your needs;
  • Takes responsibility to get things done;
  • Is knowledgeable about the product/service you seek;
  • Tells you what you need to know in the way you understand;
  • Offers a complete array of the product/service you seek, to make your life easier.

The only way to maintain a client is to develop a relationship between the client and the company, through consistent messaging that differentiates yourself from the pack of competitors.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Company Lifecycle

The classic lifecycle is used to describe the phases that most products go through, i.e. Introduction, Growth, Maturity, Decline. Products move from one phase to the next phase in succession. The most successful products move slowly through each phase.

Similar to a product that has a lifecycle, companies have a lifecycle.  The company lifecycle includes Introduction, Growth, Redesign, Maturity, and Merger & Acquisition. The goal of any business is to completely avoid the decline phase. During the decline phase it is not uncommon for a successful business to be acquired by a larger entity. But companies do not move from one phase to the next phase in sequence. The most successful companies will constantly shift back and forth between the growth to redesign to the maturity phase.

For a company, the phases are as follows –

Introductory Phase

This period is characterized by a heavy marketing focus. The company consumes cash to establish and build a brand. It is possible to lose the profit focus and instead be driven by revenues and customer acquisition counts. Pricing is set to promote client purchase. Within the business itself, staffing is low. Multiple tasks are being performed by a few individuals. These individuals may be required to manage different aspects of the business, which are not representative of their primary skill set. It is in this phase where a large number of start-up entities perish.

Growth Phase

A victim of its own success, a company grows production and distribution rapidly. The company reacts to the sudden increase in business and creates processes that are inefficient; contracts are signed quickly, increasing the potential for error; employee overhead rises through increased overtime or additional headcount; and cash outlays jump to manage the increased business.

Redesign Phase

In this phase the focus turns to stream-lining processes and cost containment. Interestingly, the method to redesign a business is the implementation of standard business management “best practices.”

  • Focus on Cash Flow. Poor cash flow management will impact a business by constraining its ability to fill orders timely if inputs and/or inventory purchases are delayed; replacing outdated equipment; and, implementing process improvement which historically has upfront costs, prior to the savings.
  • Review product lines and services, to understand the profitability generated. The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities.
  • Review customer/client relationships, to understand the relationship value. Obtaining a customer that becomes unprofitable is a common situation. It only becomes an error of management if you do not review the economics of each client periodically, or ignore the results after the review. If you discover that a client is unprofitable, try to correct the situation or walk away from the client.
  • Review and Improve Production/Service Processes. Process improvement is undertaken for a multitude of reasons which include – improve customer satisfaction, improve employee satisfaction, eliminate/contain non-value added costs. A non-value added cost is an expense that is incurred, but does not add to the value or perceived value of your product or service. Simply stated, it is a cost your customers will not want to pay. Instead you will assume the cost out of your profits. Company owners should attempt to protect their profit margins by eliminating or containing non-value added costs.
  • Review and Improve Back-Office Processes. Several back-office tasks should be consistently managed closely. While more than likely these areas represent straight expense, all are critical to the successful management of any business.
  1. Accounting Management tasks include – Processing accurate state and federal filings; producing timely monthly financial statements; managing cash flow, i.e. receivables and payables; and responding to senior managers’ ad hoc questions.
  2. Financial Management – Providing critical financial and operational information to partners, with actionable recommendations on both strategy and operations, will allow your business to maximize profits: developing budgets/plans and analyzing financial variances to plan; installing a system of activity-based financial analysis; and managing vendor relationships to control expenses.
  3. Risk Management – A solid risk management program will reduce the probability of business disruptions, i.e. ensuring maintenance of appropriate internal controls and financial procedures; implementing financial and accounting “Best Practices;” and establishing metric(s) for each risk with corresponding tolerance range(s); and implementing a process of the timely distribution of critical success measures via a scorecard.
  4. Strategy Development – Analyzing business initiatives to determine expected cash flow, i.e. opening/closing offices, asset acquisition, new service launches; projecting impact of relationship pricing over time; and implementing processes that may open up new sources of business, i.e. sustainability, business continuity, engaging past customers.

Maturity Phase

In situations where offerings are similar, differentiation must be established at the company level. Why would consumers buy from me vs. my competitors, if I offer similar products? In this situation the company must adjust the value it delivers to customers, i.e. its value proposition. The answer to the question – you should buy from me because my product/service is superior and my knowledge, experience and customer service expertise will provide you with enhanced benefits.

As mentioned previously, the most successful companies will constantly shift back and forth between the growth to redesign to the maturity phase.

What phase is your company in?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Diversification or Divestment – Opposite ends of the same Strategy

When an entrepreneur starts a business, there is usually one product/service in mind.  They are focused on marketing and distribution.  As they grow, they begin to think about diversifying the business mix.  But whether your business sells Real Estate, Insurance or widgets, the primary reasons for diversification are to reduce risk, stabilize cash flow, and preserve a competitive advantage.  Through diversification, you can

-Ensure sales during seasons when the demand for your primary product is low.  In this situation, a firm should sell a related product that is active during business lulls, i.e. firm sells heating systems, as well as air cooling systems;

-Satisfy customer demands for related products.  One mistake in business is to refer your client to a competitor, to satisfy a need which you cannot fill.  More than likely, once they go, they will never come back.  One stop shopping for customers is always preferable over visiting multiple vendors;

-Assume control of a supply or distribution chain, i.e. Amazon begins Sunday deliveries, to increase customer satisfaction;

-Stay competitive by exploring growth opportunities, i.e. develop new markets and/or attract new customers; and,

-Balance a business which has long periods between sales with a quick sales cycle, i.e. automotive sales which may occur every five years, offering auto service which occurs every six months.

From a purely finance perspective, when investing capital to achieve growth, only commit capital to those projects that meet your profit expectations, return on investment requirements and results in a positive free cash flow position.

Profit – Funds available after total expenses are deducted from total revenues.  The basis from which taxes are calculated.  Pre-tax profits can be calculated monthly, quarterly, annually.  This value is ideal to plan annually.

-Return on Investments (ROI) – Ratio of Income generated over dollars invested in a process or product financed, to stimulate the growth of the company.  ROI is usually tracked for three to five years.  This statistic should be used to ensure that financial resources are being allocated to growth opportunities with the highest returns.

-Free Cash Flow (FCF) – Funds available after paying expenses, adjusted for non-cash items, minus capital expenditures to maintain the firm’s current productive capacity, i.e. the amount available for distributions or future growth prospects. FCF is an annual measure.

A company that incorporates a diversification strategy should be prepared to also at times consider a divestment approach.  Periodically every business should review its product lines and services, to understand the profitability generated.  The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities.  Through this exercise, you will quickly identify problems in products and service fulfillment.

When you discover a line or business that is not performing as planned, there will be three questions that need to be asked – Is the business inefficient, but can be optimized?  Is the business being managed by the correct person?  Is the activity important to the overall strategy of your business?

If this line or business is not critical to your strategy, it may be time to divest.

It is not uncommon to read the press and see an article about a company divesting of a subsidiary.  The next day, there is another press article that the same company is acquiring an entity.  There are multiple reasons why a business may divest itself of a product line or subsidiary – the business does not meet expectations of profits, return on investment, or free cash flow targets.  These success targets may have been missed due to faulty production assumptions in the planning of the new line or subsidiary; or external factors may make the business no longer profitable.  Common external factors include unexpected regulation or taxes that make the business more expensive than previously planned; or a new competitor enters the market with a lower cost of doing business.

But the greatest reason for divesting an unsuccessful line or business is to free capital, so it may be allocated to more profitable activities.

When was the last time your business mix was reviewed?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Why are so many companies announcing a Turnaround?

So far in 2014, turnarounds have been discussed domestically at Radio Shack, Yahoo, Best Buy, Lowe’s and JCPenney, to name a few.  Internationally, word of turnarounds have been reported at Sony, HTC, Carrefour…   So what has caused this trend?

Simply stated, when business is good, it is very easy to overlook inefficiency and waste.  But the macroeconomic weakness that is affecting the US is resulting in sales declines; while at the same time costs continue to rise. As a result, profits decline.  A business may find itself in need of turnaround assistance based on unforeseen external factors, i.e. a natural disaster, competition, new regulation, new taxation assessed federally or at the local level.  While internally, rapid unplanned growth can be very disruptive, if the focus turned away from profitability.  This growth may have been attributed to organic growth or a merger or acquisition.

The most detailed and transparent turnaround discussed is the turnaround at Hewlett Packard –

Meg Whitman joined HP as the President and Chief Executive Officer in September 2011.  After a year of assessing the HP situation, Ms. Whitman announced a Turnaround.  At a Security Analyst Meeting (10/03/2012), Ms. Whitman attributed the need for a turnaround to several factors, including a change in the IT industry; constant change in executive leadership of the company; decentralized marketing; integration of acquired companies; misalignment of compensation and accountability; lack of metrics and scorecards to manage the business; lack of a cost containment focus; product gaps; and ineffective sales management.  The turnaround which began in 2012 is expected to take hold by 2016.

The solution to counter this situation is a redesign, i.e. a focus on stream-lining processes and cost containment.  Interestingly, the method to redesign a business is the implementation of standard business management “best practices.”  But to fully implement a turnaround, innovation and growth will be required.  Customers’ needs must be placed at the center of your decision making and a focus on business development will be required.

Start by assessing and understanding the amount of change required and develop approaches that will minimize the potential for disruption.

Superior management and flawless execution will be required.  Each member of the management team should understand their responsibility and be committed to work together as a team to redesign to turnaround the underperforming business.  A commitment to financial discipline and a returns based capital allocation strategy is required.

Going forward, managing the business should be accomplished from a data based perspective.  Any decision regarding the use of funds and or the changing of strategies needs to be quantified.  Opinions should be the basis for investigation, but data should be the reason for actions.  An executive needs to be able to read financial and production numbers; as well as understand the significance of combining the data sets to grow.  If you do not understand the drivers of revenues and expenses, or the significance of production data, any decision will be a best guess on how to proceed.

If you understand the current situation with respect to the market, competitors, customers and employees, you will be better able to develop detailed strategies that allow you to minimize weakness, maximize opportunities, and mitigate threats.

Managing cash flow is critical.  The optimal approach is to employ conservative and sound financial and accounting policies; maintain a strong working capital position; and implement accurate and responsible reporting that looks at variances to established plans.

In a turnaround situation, a “best practice” is to document and review policies and procedures; to stream-line and remove inefficiencies; discontinue manual tasks through automation; and, enhance security through segregation of duties.  The outcome will naturally be cost savings.  Circumventing established policies and procedures exposes the firm to errors, unnecessary risks and costs associated with wasted time.

If you are in a business turnaround situation, it is very easy to think the proper decision is to slash the marketing budget to cut expenses.  But, it is during these tough times that marketing and sales are the most important.  As expenses keep increasing, revenues at the very least must keep pace, or profits suffer.  Annually, new customers must be sourced.

The role of your marketing department is to collaborate on strategic campaigns and point of sale initiatives; while fostering a consistent and standard sales approach across all corporate communications and marketing efforts.

The redesign steps are as follows –

  • Communicate the need to redesign to senior managers and the board of directors, to gain concurrence;
  • Select a respected executive with the authority to cross department lines to lead the project.  This individual will be the champion of the project and facilitate the integration of change;
  • Perform a key assessment of the organization to prioritize the trouble spots;
  • Set strategy and establish a cash flow plan for the next 12 months, based on the current situation;
  • Communicate the strategy companywide, as well as the intentions to redesign companywide processes, to gain employee understanding and involvement in the process;
  • Optimize support functions; and,
  • Emphasize business development to grow.

Communicate with the Board of Directors, throughout the process.

The speed at which the process can be completed will be based on the amount of redesign required and the commitment of your management and staff to make required changes.

 

In 2014, Regis published Redesign to Turnaround Underperforming Small and Medium-Sized Businesses.  To read chapter one of the manuscript, click Here.  Recommendations so far have been positive.  To order your copy, click

Redesign to Turnaround Underperforming Small and Medium-Sized Businesses

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

“Framework for Improving Critical Infrastructure Cybersecurity”

Cybersecurity evolved from training staff not to accept spam mail that may include a virus that will disrupt systems; to not accepting spam that may include malware that will be used to steal client information.

Target Stores announced on its website 12.19.2013 that it experienced “…unauthorized access to Target payment card data. The unauthorized access may impact guests who made credit or debit card purchases in our U.S. stores from Nov. 27 to Dec. 15, 2013.”

Neiman Marcus announced on its website 02.21.2014 that it experienced “…malicious software (malware) was clandestinely installed on our system and that it attempted to collect or “scrape” payment card data from July 16, 2013 to October 30, 2013.”

Michaels Stores, Inc. announced on its website 01.25.2014 that it “recently learned of possible fraudulent activity on some U.S. payment cards that had been used at Michaels, suggesting that the Company may have experienced a data security attack.”

Cyber threats are very real and growing.  According to the Symantec Internet Security Threat Report (ISTR) 2013, “Last year’s data made it clear that any business, no matter its size, was a potential target for attackers. This was not a fluke. In 2012, 50 percent of all targeted attacks were aimed at businesses with fewer than 2,500 employees. In fact, the largest growth area for targeted attacks in 2012 was businesses with fewer than 250 employees; 31 percent of all attacks targeted them.”

It makes sense that cyber threats will migrate to smaller companies that most likely do not have security protocols as extensive as the Fortune 100 companies that spend millions on security.

But, on February 12th 2013, President Obama signed an Executive Order, “Improving Critical Infrastructure Cyber security.”  Under the order, government agencies were expected to draft standards and share information regarding unclassified cyber threats.  In theory, the government and private industry would collaborate on this critical priority and develop voluntary standards, i.e. “best practices.”

On February 12, 2014, The National Institutes of Standards and Technology released a “Framework for Improving Critical Infrastructure Cybersecurity”.  This document is considered a start (version 1.0); and is expected to evolve over time as new risks present themselves.  A main point in the document is that cybersecurity should now be considered a standard part of any Risk Management framework, i.e. no longer kept separate.

While the document is extensive, as it was designed to safeguard critical industries in the United States, i.e. banking, financial, healthcare; the approach is generic enough where it can be adopted for use by any organization.

The framework is a non-regulatory, voluntary set of industry standards and best practices.  A brief synopsis of the framework is as follows –

Framework Core: An approach to analyze cyber risk which tracks activities based on an incident management approach –

Functions Categories Subcategories Informative References
Identify – organizational understanding of risks
Protect – safeguards against incidences
Detect – ways to identify a cybersecurity event
Respond – actions to be taken once detected
Recover – restoration activities

 

Framework Implementation Tiers: Four levels which describe how the organization views the cyber risk and the processes in place to address them.

Tier Risk Management Process Integrated Risk Management Process External Participation
Tier 1 Partial Ad hoc  processes No organization risk awareness; and no organization wide approach none
Tier 2 Risk Informed Approved by management; but not established organization wide Organization awareness; but no organization wide approach none
Tier 3 Repeatable Approved by management; and policy established organization wide Organization awareness; and organization wide approach Collaborates with external organizations
Tier 4 Adaptive Established processes based on lessons learned and predictive indicators Organization wide approach that uses risk-informed policies Openly shares information with external partners to improve cybersecurity for all

 

Framework Profile: Current state of cybersecurity vs. the desired state of cybersecurity.

The Framework can be used to either establish a cybersecurity program or improve a current cybersecurity program.  Steps are as follows –

1) Prioritize and scope – Cybersecurity direction based on your organization’s business, mission and strategy.  This action can be accomplished through interviewing senior managers.  This step is required not only to uncover concerns you may not be aware of, but to also develop buy-in.  The end result of this process will be more control and internal policies, which may cause frustration, i.e. restricted access to data, segregation of duties, system change management.  Early buy-in is highly recommended.

2) Orient – Review of cybersecurity in relation to related systems and regulatory requirements.

3) Create a Current Profile – Based on the Framework Core.

4) Conduct a Risk Assessment – Assessment of the operational environment in relation to the likelihood of an event and potential impact.  Included in this step would be to look at system access internally and how remote employees access your system externally.  The second part of this task is to understand what employees need to access vs. what they should not need to access.  Private client information should not be readily accessible to all employees of the firm.

5) Create a Target Profile – Desired cybersecurity outcomes.

6) Determine, Analyze and Prioritize Gaps – Comparison current state of cybersecurity vs. the desired state of cybersecurity; and what it will require to move to the desired state.  The ability to implement all changes quickly will be constrained by time and money.  As such, your first priority should be items that if are not done will expose you to financial loss, regulatory action, brand damage, and/or client loss.

7) Implement Action Plan – Determination of activities to implement based on previous steps.  There will be unforeseen consequences to your cyber risk mitigation strategies.  It is recommended to test the effects, prior to widespread implementation, to avoid business disruptions.

So what is the liability for doing nothing?  According to the Federal Trade Commission the liability is great – “Further, a company engages in unfair acts or practices if its data security practices cause or are likely to cause substantial injury to consumers that is neither reasonably avoidable by consumers nor outweighed by countervailing benefits to consumers or to competition.  The Commission has settled more than 20 cases alleging that a company’s failure to reasonably safeguard consumer data was an unfair practice.”  (Prepared Statement of the Federal Trade Commission on Protecting Personal Consumer Information from Cyber Attacks and Data Breaches before the Committee on Commerce, Science and Transportation, Washington DC March 26, 2014)

But how much do you spend?  Based on a recent survey by BAE Systems Applied Intelligence of senior IT officials showed that 15% of the IT budget today was allocated t0 security.  It is better to prepare for a threat that may never touch your firm, than be in a reactive mode when a situation occurs.

To read the full report click –Framework for Improving Critical Infrastructure Cybersecurity

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Should TeleCommuting be a part of your company’s plan?

“Census data indicate that the rate of telecommuting has plateaued at about 17 percent of the U.S. workforce, with the average telecommuter working from home about one day per week.” (US News, Telecommuting Can Boost Productivity and Job Performance, 03.15.2013).

The benefits of telecommuting have been extensively documented. For the employer, the benefits include increased productivity, reduced absenteeism, decreased attrition, reduced brick and mortar expense, and a labor pool that is not geographically constrained. For the employee, they can avoid a morning commute and help with work-life balancing.

But according to research performed by the Bureau of Labor Statistics and published in the Monthly Labor Review – 2012, data showed that providing the option to log-in remotely for employees, served primarily to help expand the workday, more so than replace the company office with the home office.

So why is the frequency of telecommuting not growing?

The truth is that there are some positions/tasks that can be completed 100% offsite; while there are other positions that can’t be.  Aetna boasts that 47% of its 35,000 US workforce works from home.  Historically sales positions have worked off-site.  While positions that require interaction with colleagues within the organization do not lend themselves to tele-commuting.

This past February, Marissa Mayer (CEO), reversed a Yahoo policy.  Working from home was no longer an option for Yahoo employees. Instead, employees would be required to work from a Yahoo location. The reason for the policy change was to facilitate “communication and collaboration.”

Once you identify the roles that can work remotely —

In addition to the technology which is business specific, ensure you establish policies at the company level that all employees are required to follow.  Ensure these policies are fully documented and include provisions regarding equipment responsibility, data security and client privacy.  The way employees that telecommute are managed should be established early on to avoid the employee feeling excluded and disconnected from the company.

But caution is warranted —

Recent claims have been made in court by plaintiffs that asserted that tele-commuting was justified for an organization to offer reasonable accommodations as required by the Americans with Disabilities Act, i.e. Bixby v. JPMorgan Chase; Core v. Champaign County Board of County Commissioners; and EEOC v. Ford Motor Co.

As such, do not leave the decision to allow a tele-commuting arrangement to be established at the local manager level.  This approach will result in different managers having different policies and may create a liability for the company.  Establish one policy and ensure that all follow it.  Seek the input of an employment attorney.

Where is your company in this process?

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

2013 Year End Tax Strategy

With four months remaining in the year, a sound approach would be to review expiring business tax provisions and plan accordingly.  Are there tax benefits today that you would like to take advantage of before the opportunity passes?

According to the Joint Committee on Taxation, List of Expiring Federal Tax Provision 2013-2023 (01.11.2013), there are 55 provisions that will expire, of which 24 would be categorized as business provisions.  While many of these provisions have been extended previously; it is unlikely they will be extended again, based on the current tax policy environment.

Are there activities that you are considering implementing in 2014 that if you moved to 2013 would allow you to take advantage of tax benefits?  Some of the more general provisions include –

15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (secs. 168(e)(3)(E)(iv), (v),(ix), 168(e)(7)(A)(i) and (e)(8)) – In 2014, the straight-line recovery period will revert back to 39-years.

Increase in expensing to $500,000/$2,000,000 and expansion of definition of section 179 property (secs. 179(b)(1) and (2) and 179(f)) – In 2014, deduction and qualifying property limits will be $25,000 and $200,000, respectively.  Additionally, off-the shelf computer software qualifies for Section 179 expensing in 2013, but not in 2014.

Tax credit for research and experimentation expenses (sec. 41(h)(1)(B))

To understand what expiring provisions will impact your specific situation, it is recommended that you consult with your tax advisor.

To review the full listing of expring provisions, please see – https://www.jct.gov/publications.html?func=startdown&id=4499

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Big Data for Pricing Optimization

If you study Marketing, you learn that pricing is part of the “marketing mix.”  The firm combines price, product, place and promotion in the hope of finding the appropriate relationship to appeal to the target market.  The degree at which these variables are manipulated is based on available data, i.e. geographic assumptions and customer qualities within the geography.  If your product has features that are different from what is currently offered in the market, it may be possible to garner a higher price, if consumers can distinguish the feature differences.

But in situations where offerings are similar, differentiation must be established at the company level. Why would consumers buy from me vs. my competitors, if I offer similar products? In this situation the company must adjust the value it delivers to customers, i.e. its value proposition.  The answer to the question – you should buy from me because of my knowledge, experience and customer service expertise.  It may be possible to garner a higher price, if consumers can distinguish the value difference.

It only makes sense that if you improve the quality of the data used to make decisions regarding the marketing mix components and the value offered, the firm will benefit financially.  Through the use of large data sets that consider consumer preferences and actions “Big Data” analytics may help you achieve this goal.

As reported in Game changers: Five opportunities for US growth and renewal a McKinsey Global Institute study (July 2013), “Amazon has taken cross-selling to a new level with sophisticated predictive algorithms that prompt customers with recommendations for related products, services, bundled promotions, and even dynamic pricing; its recommendation engine reportedly drives 30 percent of sales.  But most retailers are still in the earliest stages of implementing these technologies and have achieved best-in-class performance only in narrow functions, such as merchandising or promotions.” (page 75)

Big Data analytics are typically used for the following –

-improve internal processes;

-improve products or services;

-develop new products or services; and,

-enhance targeted offerings.

Implementing a “Big Data” approach requires hardware, software and highly technical quantitative analysts that have the specific knowledge to glean results from large data sets.  If you were looking to investigate the potential benefits that you may receive from a Big Data analytics program, it would make sense to outsource a test.  If the test is successful and you believe that an internal resource should be developed, you will be in a better position to develop that function internally.

There are a few companies today that offer “Big Data” services – Accenture, Deloitte, Oracle, PROS Pricing, SAP, Vendavo, Vistaar, and Zillant.

Does your company use “Big Data?  How?

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Is it time to Plan for Growth?

A sample of recent survey results published, showed that finance professionals will be looking in the near future, to stimulate company growth, after years of focusing on cost containment, reducing debt and risk management.

– “79 percent said they would, in part, reinvest in their businesses and/or fund acquisitions using their cash holdings.”  (Accenture 2013 CFO Survey)

– “80 percent of CFOs plan to spend liquid cash on hand on investment in operations and growth initiatives, further emphasizing the importance of operations to many companies’ overall business strategies, as well as the CFO’s involvement in the execution of those plans.”  (Korn/Ferry 2013 CFO Pulse Survey)

-“ CFOs say their top uses of cash will be investments in organic and inorganic growth – well ahead of alternatives like funding operational improvement efforts and holding cash as a risk hedge.”  (Deloitte 2Q13 CFO Signals ™ What North America’s top finance executives are thinking – and doing)

Statistics support the notion that since the “Great Recession,” capital expenditures have not yet recovered.  According to the US Census Bureau’s Annual Capital Expenditures Survey, from 2008 to 2009, capital expenditures declined 20.63%.  For the following two years, increases have been minimal, 1.38% from 2009 to 2010 and 10.84% from 2010 to 2011.  While this survey is not all inclusive, it serves as a good proxy of activity for all companies and may point to pent up demand by businesses to invest in profit generation activities.

From a purely finance perspective, when investing capital to achieve growth, only commit capital to those projects that exceed the firm’s cost of capital.  But the piece that is very difficult to quantify is related to the disruption generated that accompanies a change to the organization.

Broadly, growth comes from increasing the current products and services offered.  The difference comes in to play in how that goal is achieved and executed –

-Expansion of current capacity (least disruptive), to drive down the cost of production and increase sales capacity.  In this situation, current policies and procedures and risk mitigation measures, need not change.  Profit growth is essentially related to driving down expenses through productivity increases.  The effects of changes in this area may be realized within twelve months.

-Expansion of a related product or service (minimally disruptive), that compliments your current offering.  This approach may require the addition of headcount that are experts in the new product or service.  Current policies and procedures and risk mitigation measures, may need to be enhanced.  This approach may lead to incremental profitability increases.  The effects of changes in this area may be realized within twenty-four to thirty-six months.

-Merger/Acquisition (most disruptive) associated with the integration of the current organization with the acquired organization.  This approach may lead to a sharp increase in profits, if done correctly.  In addition to increasing capacity, this approach will serve to remove/eliminate a competitor.  The effects of changes in this area may be realized within sixty months.

Prior to the implementation, perform a rigorous review and analysis – set a plan, manage the investment approach, validate assumptions, and modify if necessary.  Timing required and profitability gained will be directly related to the ability to Execute on the established plan to achieve the projected financial results.

Every business should constantly consider options to grow or risk losing market share to a competitor that has invested in growth.

How will your organization grow in the next 24 months?

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Are Defined Benefit Pension Plans becoming too much of a cash drain?

It is not uncommon to read about very large companies taking non-cash charges associated with their defined benefit plans – UPS $3 billion, Boeing $3.1 billion, Ford $5 billion…

A defined benefit pension program is a retirement plan funded by the employer, which promises a monthly benefit to the employee upon retirement. Contribution amounts are based on a benefit formula which takes into account employee income, age and years of service.   Simply stated, employers set aside an amount today that is expected to grow over years, to be able to satisfy a future commitment.  If you have ever discounted cash flows, you know that low interest rates will slow the projected  growth of the dollars set aside.

It is these low rates that are a primary cause of a trend in under-funded pension liabilities.   “Defined benefit pension assets for S&P 500 Index companies increased by $113 billion, from $1.11 trillion to $1.22 trillion, while liabilities increased $174 billion, from $1.39 trillion to $1.56 trillion. The median corporate funded ratio is 76.9%, which represents a modest decline from 77.7% last year.” (94% of Pension Plans Underfunded: Wilshire, by John Sullivan, AdvisorOne 04.11.2013)

While the goal should be to have a funded ratio of 100%, rating agencies use this statistic as a factor in judging the soundness of programs. The scale is as follows – Strong Funded Ratio >= 90%; Above Average > 80% but < 90%; Below Average > 60% but < 80%; and Weak <= 60%.

Based on this rating scale, on average, defined benefit pension assets for S&P 500 Index companies are below average.

In response, companies are setting aside large sums of money to fund programs, rather than invest or issue dividends to shareholders. “Between 2009 and 2012, companies in the Russell 3000-stock index have added $1 trillion in assets to their pension plans through investment returns and contributions, but their overall deficit still increased to an estimated $441 billion from $392 billion over that period, according to data from J.P. Morgan Asset Management.” (WSJ, Why the Corporate Pension Gap Is Soaring, 02.26.2013)

However, “Pension sponsors can’t sustain having to make large contributions year after year to finance their pension plans; they have to depend also on favorable investment markets and reasonable interest rates to contribute toward funding.” (Pension & Investments, The cost of low rates, 02.20.2012)

A protracted low rate environment will continue to make this pension plan structure a drag on corporate balance sheets for some time.  The likely impact will be a further decline in the usage of this pension plan structure.  According to the U.S. Department of Labor, the number of defined benefit plans fell 55% from 103,346 plans in 1975  to 46,543 plans in 2010.

Results are similar within the public sector –

According to Morningstar (The State of State Pension Plans A Deep Dive Into Shortfalls and Surpluses) using the rating scale revealed that in 2011,  70% of state pension funds were below average or weak: 7 programs were  strong with Wisconsin the strongest. 8 programs above average, 23 programs below average; and 12 programs weak with Illinois the weakest.

The only way to counteract this trend is to enter an environment with sustained, higher rates.

What are your thoughts?

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

“Unless you trust the sender, don’t click the link”

On February 12th 2013, President Obama signed an Executive Order, “Improving Critical Infrastructure Cyber security.”  Under the order, government agencies are expected to draft standards and share information regarding unclassified cyber threats.  In theory, the government and private industry will collaborate on this critical priority and develop voluntary standards, i.e. “Best Practices.”

So what is the incentive for private industry to share?  Historically companies have no desire to share information regarding breaches unless they are required.  If a company is successful at avoiding a threat, they have a competitive advantage over their competitors who may not be as prepared.  However, if the company is unsuccessful at avoiding a breach, disclosure risks damage to their brand when customers lose trust in them.

But cyber threats are very real and growing.  According to the Symantec Internet Security Threat Report (ISTR) 2013, “Last year’s data made it clear that any business, no matter its size, was a potential target for attackers. This was not a fluke. In 2012, 50 percent of all targeted attacks were aimed at businesses with fewer than 2,500 employees. In fact, the largest growth area for targeted attacks in 2012 was businesses with fewer than 250 employees; 31 percent of all attacks targeted them.”

It makes sense that cyber threats will migrate to smaller companies that most likely do not have security protocols as extensive as the Fortune 100 companies that spend millions on security.

So what can a small business do to protect itself and mitigate cyber risk?

Understand the current security expectations of management and key stakeholders of your firm.  This step is required not only to uncover concerns you may not be aware of, but to also develop buy-in.  The end result of this process will be more control and internal policies, which may cause frustration, i.e. restricted access to data, segregation of duties, system change management.  Early buy-in is highly recommended.

Analyze the firm’s current situation to identify security gaps.  The first part of this activity looks at system access internally and how remote employees access your system externally.  The second part of this task is to understand what employees need to access vs. what they should not need to access.  Private client information should not be readily accessible to all employees of the firm.

Develop strategies to close the gaps and prioritize the work required.  After the first two activities, you will quickly develop a list of process and policy changes that should be implemented.  The ability to implement all changes quickly will be constrained by time and money.  As such, your first priority should be items that if are not done will expose you to financial loss, regulatory action, brand damage, and/or client loss.

Test the effectiveness of your strategies.  There will be unforeseen consequences to your cyber risk mitigation strategies.  It is recommended to test the effects, prior to widespread implementation, to avoid business disruptions.

Educate staff on their cyber security responsibilities.  This activity introduces the policies and procedures to your staff; while underscoring the importance of any changes they will need to adopt.

Continually test the effectiveness of your strategies; and modify them as risks change.

It is better to prepare for a threat that may never touch your firm, than be in a reactive mode when a situation occurs.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

What do you do with a whistleblower that is not satisfied?

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Whistleblower program within the Securities and Exchange Commission was launched August 2011. Since that time, 3,335 complaints were received, from which four rewards have been granted, i.e. one Aug 21, 2012 and three June 12, 2013.

But the SEC is not the only program – In March 1867 the Treasury began a form of a Whistleblower Tax program.  The IRS program was modified in December 2006 as a result of the Tax Relief and Health Care Act. From 2006 through 2012, 40,110 cases were received, with 1,077 awards paid.

What is of concern is that even though people are reporting issues to the respective regulatory bodies, the conversion from claim to outcome is very low, i.e. 0.1% for SEC and 3% for IRS.  The low SEC rate is most likely attributed to the newness of the program.  So when the SEC program reaches the seven year mark of the IRS program under review, will the claim rate reach 3%?

Now as more and more companies launch whistleblower programs internally they should tread lightly and consider how they will address issues raised.  If a process is established to address a legal or ethical issue raised by an employee, and the process fails, dis-satisfaction will be created. As such, creating an internal program where companies can identify issues and resolve them, prior to them becoming public brand blemishes, may backfire.  When a company does not act on information provided, the whistleblower may become unhappy and seek resolution outside the organization in a public forum.

“Markopolos began contacting the SEC at the beginning of the decade to warn that Madoff was a fraud. He sent detailed memos, listing dozens of red flags, laying out a road map of instructions for SEC investigators to follow, even listing contacts and phone numbers of Wall Street experts whom he said would confirm his findings. But, Markopolos’ whistle-blowing effort got nowhere.” (Madoff whistleblower blasts SEC by By Allan Chernoff, Sr. Correspondent, CNN 02.04.2009 CNN Money)

“Interviews with university officials, former players and members of the board, as well as reviews of internal documents and legal records, show that when the most senior Rutgers officials were confronted with explicit details about Mr. Rice’s behavior toward his players and his staff, they ignored them or issued relatively light penalties.” (Rutgers Officials Long Knew of Coach’s Actions by Steve Eder 04.16.2013 New York Times)

The SEC and Rutgers will be attempting to repair their respective images for some time.

While not every report of unethical or illegal activity will be valid, every claim should be treated the same way, until the results of a qualified investigation are finalized.  When training employees on the existence of a program, where they may freely lodge complaints without fear of retaliation, let them know that there is an established process that will be followed to investigate each and every claim.

Prior to embarking on establishing an internal Whistleblower Program, engage a Labor Attorney.  Understand the Federal Laws, as well as the laws within the states you operate.  Note – the Department of Labor has their own Whistleblower program.

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

CFOs … Beyond Bean Counters

Re-Post of a blog written by Cindy Kraft, first posted on www.CFO-Coach.com.

The American Banker addressed the evolving role of Chief Financial Officers in banking.

The CFO’s responsibilities have broadened since the financial crisis, becoming more challenging and requiring executives to have an understanding of areas beyond accounting.

The Finance Chief’s role has been evolving and expanding for years, and not just within banking, but across every industry.

So what does make a Chief Financial Officer marketable today, regardless of industry?

Thought Leadership

Marketable CFOs have the proven ability to envision a direction and/or initiative, execute that vision, and deliver a positive impact for the organization. Sitting at the executive table is different than being a leader who sits at the table and strategically contributes to the executive team.

Operational Knowledge & Impacts

Head knowledge without proof of ability to use it … is just head knowledge. A marketable CFO will have CAR+SI (Challenge – Action – Bottom-line Result + Strategic Impact) stories that illustrate his depth of understanding of dollars and operations – and – operations and profitability.

Operational CFOs with proven track records of positive impact are in high demand, and will remain so. They also make great CEO candidates.

Soft Skills

As the CFO, your finance skills are a given … and your marketing documents should reflect that fact with stories of solving real problems and delivering a tangible impact. However, today that is not enough.

The evolution of CFO from bean counter to strategic leader means soft skills matter. If no one is following you, you’re not leading; and without great communication and negotiation skills, you probably can’t be an effective leader.

Marketable CFOs are strategic, operational leaders, not numbers nerds.

Targeted Audience

Not everyone needs you, nor will your message resonate with everyone. But a Subject Matter Expert can help a well-defined market, will understand who that market is, and target his message to that audience.

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Value of Shareholder Concerns to the CFO

“CFOs have become key contacts for the investment community, auditors, and ratings agencies, and are the day-to-day access to shareholders that directors do not have.”  (Bloomberg BusinessWeek, 9/22/2009) Boards and the Expanding Role of the CFO, by Karen D. Quint and T. Christopher Butler.

Regardless of the size of your company, there is a value in understanding the general issues and perceptions of the shareholder community.  You may find that your investors have beliefs and concerns that align closely with the general beliefs and concerns of all shareholders.  This assumption will be especially true if you have or are looking to secure a sophisticated investor for your business.

The Annual Meeting season is off and running and the trends that were observed in 2011 and 2012 are expected to continue in the 2013 season. 

So how is 2013 shaping up?

According to Proxy Monitor (www.proxymonitor.org/), a review of shareholder proposals for 170 companies, whose annual meetings are scheduled from 01.09.2013 through 05.23.2013, show three primary concerns:

  • Corporate Governance (74 proposals) – This category includes such items related to the legal structure of the organization, i.e. voting rules, separation of Chairman and CEO, special meetings, written consent, proxy access…   Current Events – (Wall Street Journal,  2/20/2013) Investors Seek to Split J.P. Morgan Top Posts, by Dan Fitzpatrick
  • Executive Compensation (202) – This category includes items such as say-on-pay, equity compensation rules, golden parachutes…
  • Social Policy (78) – Includes items which include animal rights, employment rights, sustainability…

Who is sponsoring these shareholder proposals?

According to Ernst & Young LLP “Proxy season 2013 Preview “, individual investors account for 27% of the proposals; socially responsible investors 21%; public funds 20%; labor funds 16%; faith based funds 10%; and Other 6%.

What is not included in this review are the proposals that do not make it to the annual meeting, either because there is no substantial support or the issue is resolved/negotiated, prior to reaching the annual meeting.

How does your organization compare?

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The New Cash Management Approach – Pay Slower

Could you continue unscathed, if your customers stopped paying you for two to three months and instead paid within 60 and 100 days? On April 16, 2013 an article was published in the Wall Street Journal, “P&G, Big Companies Pinch Suppliers on Payments.” The WSJ article discussed a trend among large companies to push payments out.

If you do not have any large clients, you may not be immune to this trend.  If you provide materials to suppliers of large clients, these clients will attempt to delay payments to you, i.e. attempting to push the payment issue down-stream.

The immediate impact to your business will be the evaporation of your free cash flow.  Your ability to develop new products, make acquisitions, pay dividends, reduce debt, and hire will be greatly reduced.

So what can you do?

I recommend you anticipate the issue.  The following tactics are simply “best practices.”  If you are not affected by this trend, none of these tips will harm you.

– Increase required down payments/retainers. A non-paying customer may be worse than no customer at all, if you incur costs to obtain the business or advance funds to complete the business.

– Tie sales compensation in some form to payments received, i.e. commissions tiering and/or quarterly bonuses.  This tactic will ensure your Sales force is providing quality customers that pay on-time and they stay engaged in the collection process.

– Document and distribute payment terms that provide discounts for early payments; but late fees if payments exceed established timing.

– Stay engaged.  If you are owed, ask for payments.

Doing nothing is ill-advised, as the message relayed to your customers will be, “its ok to pay me late.”

However, if you implement the above recommendations without success, you may need to consider the following two options to address an expected cash crunch –

– Establish a short-term borrowing facility – Short-term financing based on your credit worthiness through a bank.  This option will have a cost which you may not be able to pass to your customer, i.e. negatively impacting your margins; or,

– Consider factoring – Receive an advance against accounts receivables from an asset based lender called a factor.  This option may be required if you don’t quite qualify for a traditional loan.   This option will have a cost which you may not be able to pass to your customer, i.e. negatively impacting your margins.

It will be interesting to see how the credit agencies handle these situations, as a lack of timely payments should impact the credit quality of the delinquent payers, i.e. D&B, S&P, Moody’s…

It will also be interesting to see investors’ perceptions of this change.  There are several financial ratios calculated by investors and analysts that use Current Liabilities as the denominator.  It makes sense that if payments are put-off, Current Liabilities will increase which will impact – Working Capital (Total Current Assets – Total Current Liabilities); Current Ratio (Total Current Assets / Total Current Liabilities); and Quick Ratio (Cash + Accounts Receivable) / Total Current Liabilities).

What are you seeing?

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Is Your Company maximizing Social Media?

Social media is a communications outlet that cannot be overlooked.  While current clients can be reached today via print, TV and through more traditional methods; future clients, individuals that were born after 2000, can be best reached via a social media platform.

If you are not engaged in the Social Media, following are some tips on how to get started —

Identify your strategy.  A strategy I have used before is as follows – “Build a relationship between your company and your consumers.   Reinforce your brand and your positioning.  Engage consumers or potential consumers to gain feedback on your products or services, i.e., positive testimonials, and willingness to recommend statements.”

Set-up a company page on a couple of social networks that reach your target customer.  Invite current/past users and potential customers to join your community.  Interact with the community on-line through product development suggestions, beta testing, targeted marketing campaigns.  Be true to your brand.  If your clients expect traditional content, now is not the time to become satirical.

Actively Market.  Respond to clients/customers.  It is terrible when a client makes an effort and comments, and their efforts do not receive any feedback.  If there is no response, they will never comment again, and may develop a negative impression of you.

Continue to post fresh material.  Successful usage of social media requires an effort.  It is not an afterthought.

Differentiate messaging across social media sites.  For example, you may wish to discuss seasonal promotions, special events or discounts on Twitter; but product information on Facebook.

However, in my experience, there are two primary reasons why some companies may wish to shy away from this communication medium –

Negative Comments – If you provide individuals an opportunity to interact with your company via social media, be prepared to read bad comments; as well as good comments.  Keep in mind that messaging on the internet is “forever” at the current time.  These negative comments will never go away.  But, in my opinion, any information that helps you understand what your clients are thinking adds value.  Just be prepared.

Legal Significance – Often times, social media is discussed as just a different type of advertising, similar to print and TV spots.  There does seem to be one very big difference.  Any company communication, prior to the use of print or TV, is vetted through legal departments to ensure there are no statements that could be considered by reasonable people as misleading.  It may not make much sense economically to constantly run 170+ words by your legal department.

But regardless of the two caveats discussed, I believe the benefits of engaging in social media outweigh the risks.  Just be thoughtful and true to your brand and strategy.

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Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The CFO Analyst

The CFO office should function as a source of process improvement ideas; as well as business development recommendations.  It is in this location where production data meets financial data.  It is expected that your CFO will perform the necessary analysis to understand why actual results differ from Plan results.  But the analytical process does not stop there.

By comparing actual results between you and your competitors (benchmarking) or comparing activities within different regions of a company, you should be able to identify variations in revenues and expenses.  There may be perfectly good reasons for the disparities, but the questions must be asked.  More often than not, differences will be explainable.  But if not, you may have found a process that needs improvement to save the company real dollars.

This analytical discipline is also needed when considering new products and services, or expanding the distribution of current products and services.  The initial concept review is performed by the CFO – analysis, modeling, and planning.  Once approval is provided by the CEO, the CFO will pull in the affected departments, to implement the plan, i.e. HR, IT, Compliance, Legal, Sales…

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Value Embedded in Tele-Commuting

As communication technology advances and tools become more pervasive, the traditional office blurs, i.e. geography and time zone.  Organizations are more-and-more giving up traditional brick and mortar, in exchange for the online office.  High speed internet is now available in many places.  Business can be conducted at home or at the local coffee establishment.  The term telecommuting includes all remote working and work from home arrangements.

The trend is growing —

“In a recent Accountemps survey, one-third (33 percent) of chief financial officers (CFOs) interviewed said remote work arrangements, such as telecommuting and working from satellite offices, have increased at their companies in the last three years.” (PR Newswire 09.14.2011)

“TechCast, a virtual think tank based at George Washington University, forecasts that 30% of the employees in industrialized nations will telework  2–3 days a week by the year 2019. What’s more, they estimate the market for related products and services at $400 billion a year.”  (TeleworkResearchNetwork.com / Kate Lister / May 2010)

Benefits to these arrangements include –

  • Benefits to Employer – “Half-time home-based work among those with compatible jobs could save employers over $10,000 per employee per year—the result of increased productivity, reduced facility costs, lowered absenteeism, and reduced turnover. The cumulative benefit to U.S. companies would exceed $400 billion a year.”  (TeleworkResearchNetwork.com / Kate Lister / May 2010)
  • Benefits to Employee – “Overall, researchers have found that virtual workers are slightly more satisfied than their in-office counterparts. In general, virtual work leads to higher satisfaction, lower absenteeism and higher retention. Additionally, because the majority of virtual assignments result from the employees’ expressed desire, organizations usually observe little to no decrease in production or performance. On the contrary, productivity often increases (Erskine, 2009; Mulki, Bardhi, Lassk & Nanavaty-Dahl, 2009).”  (Cornell University study Remote Work: An Examination of Current Trends and Emerging Issues Spring 2011)
  • Benefits to Society – Online Office arrangements provide the opportunity for those with disabilities to more efficiently participate in and/or transition into the workforce, i.e. an online arrangement may allow individuals on maternity leave to transition back to the work force more easily.

Benefits to date have been experienced by employers and employees, using a combination of various technology tools.  Top 10 technologies that companies provide to support remote workers include – Laptop 62%, Virtual Private Network (VPN) 40%, Instant Messaging 29%, Outlook Web App (OWA) 28%, On-line Meeting 27%, SmartPhone Mobile Computing 25%, Desktop 21%, Remote Desktop 18%, Collaboration/On-line Workspace 17%, Video Conference 17%. (Microsoft 2010 US Remote Working Research Summary National Survey Findings).

However, as you would expect with changes in business methods, come unforeseen issues, i.e. innovation creates disruption –

  • Issue 1 – Employee Exclusion – “Employees in virtual environments may develop perceptions of exclusion or isolation due to their need to rely on technology to communicate with others; common forms of communication technology (e.g., email) do not provide a high level of information richness and can inhibit social exchange (Marshall, Michaels, & Mulki, 2007).” (Cornell University study Remote Work: An Examination of Current Trends and Emerging Issues Spring 2011)
  • Issue 2 – Remote Responsiveness – “Some remote employees struggle when attempting to coordinate their work with their managers and other employees or when attempting to receive timely feedback.”  (Cornell University study Remote Work: An Examination of Current Trends and Emerging Issues Spring 2011)

More and more companies are figuring out the proper way to reap these benefits, while addressing the issues.

Where is your company in this process?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Should your CFO be a CPA?

It only makes sense for my first blog post to be an issue that is controversial.

The correct answer to the question…not necessarily.

A CFO is a well-rounded management executive, whose primary role is “advisor” to the CEO, regarding strategy and direction of the company. He/she is a finance expert that must interact with internal groups (HR, IT, Accounting, Sales) and represent the company with external groups (banks, investors, reporting agencies, auditors).

I am in no way dismissing the knowledge and experience gained in public accounting, by a CPA. However, a CPA would be a Subject Matter Expert in only one area that requires attention from a CFO.

While the CFO need not be a CPA; he/she must certainly be able to understand the issues and ramifications of decisions. He/she needs a strong understanding of GAAP; and be skilled in financial statements, the general ledger, and the day-to-day technical skills.

Experience is the primary requirement for a company’s top Finance post. A CFO with hands-on experience and exposure to different situations and complex challenges enables them to quickly analyze and assess any situation.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.