Financial Planning

By Jeanne Lee

October 1, 2008

These days, small business clients are suffering in two ways. ...[They're] worrying about shrinking revenues and finding enough operating capital to survive this tough economic climate.

At the same time, business owners feel the pain in their personal retirement accounts. ...

Reach Out
... A slow economy is a perfect time to cement relationships or even to pick up new business.

...Small business clients often need an objective voice to help take the emotion out of financial decisions. "Even the good managers get mired in minutiae and freeze up-even panic," says Andy J. Matysik, managing partner at L.M. Punch & Associates in Minneapolis.

...Financial advisors should guide business owners to review employee retirement plans with an eye toward cutting administrative costs and possibly reducing or temporarily eliminating contributions for employees. A small firm with a 401(k) plan that costs $2,000 a year to administer may be better off switching to Simple IRAs with no administrative costs, especially when the company is no longer able to contribute matching funds. ...

Many experts expect tax rates to go up with the next presidential administration. If a business owner's income is less than $100,000 this year, planners might want to bring up the idea of converting retirement assets to a Roth, so that he or she can pay taxes on those assets while in a lower tax bracket. "The business owner can amend the retirement plan to allow in-service, non-hardship withdrawals, then roll it into a Roth," says Pam Dumonceau, president of Consistent Values, a planning firm in Aurora, Colo.

Cut Costs
... Many business owners are unaware that changing employee health insurance plans to a high-deductible health plan that is compatible with health savings accounts (HSAs) could reduce their premium expenses by 30% to 50%.

"There are not a lot of ways to cut health insurance costs, but if you've got a small employer who is pretty well out of options and has to cut expenses to get over the hump, he or she should look into these high-deductible health plans," says Leon Rousso of Leon Russo CFP & Associates in Ventura, Calif. "For a 15-person group, the savings could be $30,000 or $40,000 a year—which might mean saving one employee."

Ordinarily, Rousso says, he would advise that half of the cost savings be shared with employees in the form of contributions to their health savings accounts—accounts that allow individuals to put aside money for qualified healthcare expenses on a tax-free basis. It's a move that's good for morale. However, if a business is struggling to stay afloat, all of the money saved can be used to pay the bills. ...

Rethink Expenses
Advisors should also encourage business owners to take some extra time in a slower business environment to take a hard look at their expenses, experts say. ...

Vincent Schiavi, president of Schiavi and Dattani in Wilmington, Del., believes that "small business owners need to get their accountants involved and really look at budgeting." An accountant in the industry can tell you if your ratios—like days in accounts receivable, revenue per employee, gross profit margin—are in line. This information can help business owners make decisions such as whether or not to discontinue a product line.

Find Cash
Business owners facing a cash crunch may be looking at their personal retirement accounts as a source of cash, though taxes and heavy penalties for early withdrawal make this a poor choice for funding. Advisors can help clients brainstorm creative solutions to short-term cash crunches.

If they need money to get the business over a hump, check whether there is some cash value in a life insurance policy as this might be a cheap source of funds. See if there are any business assets that they can collateralize.

If there is a line of credit, see if the business owner can apply to the bank for a lower rate. "Interest rates are down, and lines of credit are variable rate, so they can probably renegotiate," Dumonceau says.

Succession Planning
In many ways, an economic slowdown is the ideal time to initiate discussions about succession planning. Business owners are often so preoccupied with day-to-day operations that exit-planning issues are left on the back burner. But financial advisors should alert owners who plan to pass their businesses on to family members that they can use this opportunity to take advantage of lowered values. ...

It's common for business owners to be trapped in unwanted assets that would trigger a tax headache if sold. Examples include low-basis stocks or bonds outside of retirement plans, equipment, machinery or real estate. ...

"A lot of these small businesses are S-corporations, where the tax consequences just flow through to the individual owner," Matysik notes. Now is a good time to sell, he says, since asset prices are suppressed. Also, tax rates are not likely to go any lower. "We are telling clients to realize gains in this or next calendar year, so they can take advantage," Matysik says.

Talent Raids
Once the economy turns around, human capital will again be at a premium. Financial advisors should encourage small business clients to position themselves for the next business cycle by snatching valuable talent on the cheap, if they can afford to. ...

Explore Acquisitions
For a business owner client whose company is in an expansion mode—even if growth is at a more modest level—this may be a good time to explore acquisitions. If a competitor is struggling, your client may be able to buy that competitor out at a very reasonable price. ...

Along the same lines, with commercial real estate values muted, this is a great time for business owners who are anticipating an expansion in the near future to consider purchasing warehouses or even acquiring additional office space. ...

Yet drastic times call for drastic measures. And when drastic times pass, small business clients who have come through the storm intact with your assistance will want to bring you more business.
Jeanne Lee is a business, personal finance and healthcare writer living in New York. Her work has appeared in Fortune and Money.

Use a gimmick to attract attention--and customers--to your business

MyBusiness October/November 2008

by Geoff Williams

In 2005, the beverage maker Snapple attempted to create the world’s largest ice pop made of its own product. The frozen bar--hoisted above Times Square in New York City--measured 25 feet tall and weighed 17.5 tons. But it melted much faster than expected, prompting panicked tourists to run as a sticky, sugary mess of strawberry-kiwi flavored fluid flooded the streets. That probably wasn’t the intended outcome, but at least it got people’s attention.

In this sluggish economy, concocting a gimmick for your business can mean the difference between no sales and new sales. Even better, gimmicks (unless you want to try to top Snapple’s efforts) don’t have to cost a lot of money to implement--which means if they don’t work, there’s no harm done. Here are three tips for creating the right gimmick for your small business:

1. Show customers that you feel their pain.
Many businesses have given out discounts to customers in the form of free gas cards, an idea that revolves around a gripe that everyone shares. But Cole Durbin, the owner of Padre’s Modern Mexican (www.padresmexican.com), a restaurant in Phoenix, actually came up with a unique way to show the public he understands his clientele’s problems beyond the pump.

During "Recession Happy Hour," Durbin offers a free drink to anyone who brings in a foreclosure notice. Inexpen-sive and clever--and the media noticed. CNN did a story on his business, and, well, we’re mentioning it, aren’t we?

2. Steal from the greats.
Provided you aren’t taking intellectual property--like another company’s logo--there’s nothing wrong with borrowing ideas that have worked for others and using them for your own marketing devices. But if you’re going to do that, advises Subscriber-Mail’s Jordan Ayan, borrow from the best. A huge fan of the late George Carlin, Ayan, who is founder and CEO of the e-mail marketing firm, wrote a white paper called "The Seven Dirty Words You Can’t Say in Subject Lines; Plus 100 Others You Shouldn’t Use Either." It turned out to be the most frequently downloaded article from his Web site, www.subscribermail.com.

3. Think personal, not professional.
Amy Maurer, who owns a media consultancy business in Washington, D.C., has an inexpensive marketing gimmick that she uses with her present and potential clients. She bakes cookies and hand-delivers them, insisting that it’s helped her triple her business clientele. "I think it immediately tells potential clients that I am different," Maurer says.

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NFIB.com
For more tips on making your business stand out from the competition, check out the "Sales and Marketing" section of www.NFIB.com/toolsandtips.

Buyout bosses manage companies that outperform their publicly traded peers on key measures of growth. And they don't do it just by cutting costs.

CFO Magazine

Kate O'Sullivan - CFO Magazine

September 1, 2008

The public's perception of private-equity firms is all wrong — at least according to a new study from Ernst & Young.

Often viewed as hard-hearted financial engineers who pile up profits by slashing expenses, P-E kingpins are criticized for their lack of transparency [and] their much-debated tax status. But a new report offers support for the ... case that P-E bosses ... are not only shrewd investors but also talented managers.

The study examined last year's top-100 private-equity exits in North America, Europe, and Asia, using publicly available information and self-reported data gathered in interviews with private-equity investors. ... P-E firms helped their portfolio companies achieve an average enterprise value growth rate that was double that of their publicly held peer companies.

Private-equity-backed businesses outperform public companies in productivity gains, in employment growth, and in business expansion, measured both in terms of enterprise value — the company's market value plus net debt — and earnings before interest, taxes, depreciation, and amortization, according to John O'Neill, Americas director of private equity at Ernst & Young. "We found that probably only a third of that growth is from cost-cutting," he says. "More than 50 percent is organic growth, and the rest is acquisition-related."

By making quick decisions free from the scrutiny of public shareholders, installing and motivating the best managers and workers, and sticking rigorously to their business plans, P-E firms "are selling better businesses than they bought," says O'Neill.

The study found that even when private-equity investors take the "secondary buyout" route — selling a portfolio business to another private-equity player — the new owner manages to unlock further value. So why did the first firm sell it? "Once they find a buyer at the right price, they're going to sell the company," says John Vester, a principal in E&Y's transaction advisory services group. "They don't fall in love with the deal."

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How visual tools and techniques help managers lead with the whole brain.

strategy+business Autumn 2008

by Tom Ehrenfeld

Illustration by Opto, image © Photodisc/Alamy

Visual management has be­come an essential discipline for managers today. The practice involves communicating with images, organizing and directing work through vi­sual controls, and creating clear graphic depictions of complex ideas — for example, to enable workers to see how their work fits into a value stream flowing directly to customers.

...Several recent books add new ideas to the existing literature about visual management as both a tool and a broader form of managerial thought. ...

A Question of Meaning
... [Consultant] Dan Roam’s ... book, The Back of the Napkin: Solving Problems and Selling Ideas with Pictures...has more to do with generating insights, framing problems, and selling ideas than with visual thinking per se. ...

“One of the reasons that pictures are such a great way to solve problems is that many problems are hard to see clearly, and a picture can help us see aspects of the problem that might otherwise be invisible,” Roam writes. “Visual thinking helps by giving us a way to see problems not as an endless variety of things that go wrong, but as a small set of interconnected visual challenges, each one of which can be pictured more clearly on its own.”

...Ultimately, Roam doesn’t convince us that his methodology is the best tool for the job. That said, his approach can help managers facing a complex problem discover the most important elements to act on. ...

A Mission of Elegance
...Edward Tufte, the best-known figure in information design, ... was anointed as “the Leonardo da Vinci of data” by the New York Times. ...

Tufte ... argues that graphic excellence can be boiled down to a handful of essential principles that enable anyone to use charts, graphs, and the like to make sense of data to communicate a powerful message with clarity and elegance...

In his book The Visual Display of Quantitative Information ..., [his] “principles of graphical excellence” are compelling in themselves; for example:

• Graphical excellence is that which gives to the viewer the greatest number of ideas in he shortest time with the least ink in the smallest space.

• Graphical excellence is nearly always multivariate.

• And graphical excellence requires telling the truth about the data.

... One of his vilest enemies is PowerPoint, which he cites as an evil, authoritarian form of communication that elevates format over content, prevents rich data analysis, and essentially turns every presentation into a sales pitch. ... Tufte shows how blind obedience to this format produced, in the case of NASA engineers studying data on the space shuttle Columbia, a failure to read the looming danger sug­gested by the data. (The shuttle disintegrated in flight in 2003, killing seven crew members.)

...The centerpiece of Tufte’s books is his reverential decon­struction of a map by famed illustrator Charles Minard that depicts the movement and dissipation of troops in Napoleon’s Russian Campaign of 1812. ... (See Exhibit 1.) Tufte passionately ex­plains how Minard compiled the best data and incorporated numerous graphic tech­niques, each one precisely chosen, to convey a compelling and complex message with clarity and elegance. ...

 

Wisdom from Comics
...Scott McCloud’s Understanding Comics: The Invisible Art ... is really about learning to see, read, and fully realize the dynamics of words coupled with pictures.

...McCloud explores many of the technical aspects of visual storytelling. He shows ... how visual storytelling can create meaning in ways no other storytelling method can and thus evoke a powerful response from the reader. ...

Revenge of the Right-brained
...[Today's] changing ways of managing call for something different — an approach that relies more on skills tied to visual management. ...Daniel H. Pink’s A Whole New Mind: Why Right-Brainers Will Rule the Future...argues that ... [to] thrive in the new economy, individuals and managers must think with both the left and right sides of the brain, Pink says. “We are moving from an economy and a society built on the logical, linear, computer-like capabilities of the Information Age to an economy and a society built on the inventive, empathic, big-picture ca­pabilities of what’s rising in its place, the Conceptual Age,” he writes.

... Honing one’s vision can also start with developing a keen eye for how things get done and how they can be improved. This ap­proach is embodied in the Toyota production system, codified and known as lean management. In this system, based on the principles of eliminating waste and engaging em­ployees by aligning all actions with the understanding of how one’s work creates customer value, visual tools have enormous leverage. ...

... [The] Lean Enterprise Institute ... published a ... workbook titled Learning to See. This resource was designed on a simple premise: that Toyota built part of its success through the organizational practice of mapping the streams through which information and materials travel from first steps to customer value. The authors, lean expert Mike Rother and Toyota veteran John Shook, knew from experience that people could monitor the flow of goods and the health of processes by creating maps comparing the ideal state with current practices. By analyzing the gap between these two conditions, individuals working together could greatly im­prove the processes, and see where and how their work fit with others. ...

...The Elegant Solution: Toyota’s Formula for Mastering Innovation, in which author Matthew E. May ... shares a basic principle of the Toyota system, which is to begin all problem solving by in­tensely observing the work itself. ... May shows how lean managers “think in pictures” by sharing their findings in a clean, visual, and commonly understood format that prompts everyone to understand and act on the problem together.

Visual Tools
... Gwendolyn D. Galsworth’s Visual Workplace, Visual Thinking: Creating Enterprise Excellence through the Technologies of the Visual Workplace ...shows how visual tools support a more powerful, effective, and aware workplace. All work can be broken down into the technical standards of what one works on and the procedural standards of how one integrates this work into a value stream, Galsworth explains. ...

A visual workplace is distinguished by cues that indicate when materials are running low or by understandable categories for commonly used materials. It displays times for pickups and dropoffs, boards with critical metrics for project success. These devices guide work and transform culture by uncovering and sharing critical information that would otherwise be hoarded by managers, protected by workers, and simply lost in the grind of getting the next project out the door. As individuals find visual ways to share their standards of getting things done, “the workplace speaks, able at last to tell us where things are, what needs to be done, by when (or for how long), by whom (or by which machine or tool), in what quantity, and how,” she writes. And this principle applies as much to white-collar office work as it does to manufacturing.

... “The vi­sual workplace is about making the truth hold still long enough for us to see it, assess it, make a sound decision, and then take timely action,” she argues. Again, these are not abstract ideals, but operational practices; she speaks of specific tools such as visual displays, production boards, and other commonly understood cues for shared action.

... “In its fullness, an implementation of the visual workplace will change everything. Everything. In its fullness, it represents the creation of an entirely new set of competencies for people, process, and leadership.

“To tell by looking. To tell everything by looking. To put an end to motion by liberating in­formation that has long been imprisoned in the binders, reports, books, computer files, and data systems of the company — and in the hearts and minds of the workforce — and in the process to liberate the human will.”

Reprint No. 08310

Author Profile:

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Tom Ehrenfeld is a freelance writer based in Cambridge, Mass. Formerly a writer and editor with Harvard Business Review and Inc. magazine, he is the author of The Startup Garden: How Growing a Business Grows You (McGraw-Hill, 2001).

Growthink blogs

Written by Dave Lavinsky on Wednesday, September 10, 2008

...[Here's] a technique that will allow you to gain insightful market research and learn best practices REALLY QUICKLY.
And for no cost, thanks to Google.
...[Let's] say I want to get into the lacrosse business, selling equipment through stores and/or online.
...I went to Google's new keyword search volume tool here: https://adwords.google.com/select/KeywordToolExternal
I typed in "lacrosse" and Google then shows me all the related keywords and how many times people searched on them last month. It immediately showed me the following:
Keywords_________ Approx Monthly Search Volume
lacrosse.......................... 2,740,000
lacrosse equipment........ 110,000
women's lacrosse........... 74,000
girls lacrosse.................. 60,500
high school lacrosse...... 49,500
lacrosse sticks................ 49,500
lacrosse wisconsin......... 49,500
lacrosse camp................ 40,500
From this, I see that lacrosse is a pretty popular sport; in fact, when I download Google's list of the top 150 lacrosse-related searches, I see that the sport gets 4.9 million searches per month.
To put this in perspective, and to see if the market is growing or expanding, I go to Google Trends at http://www.google.com/trends and type in "lacrosse."
... Also, from the Google Trends graph, I quickly saw that lacrosse is a seasonal sport with peaks and valleys in search volume.
My next area of research is to determine the level of competition for selling lacrosse equipment. For this, I simply type in terms like "lacrosse," "lacrosse equipment," and "high school lacrosse." I find that general terms like "lacrosse" and "high school lacrosse" have very little competition (based on the few Sponsored Links I see on the top and to the left of the search results), thus providing a significant opportunity if I can figure out products and/or services to fulfill the needs of those who search these terms.
For the term "lacrosse equipment," which is a term that shows more buying intent (i.e., someone who searches this term has more intent to purchase a product than someone who simply searches "lacrosse"), I see several more competitors. Finally, when I search the term "lacrosse sticks," I see even more ads, since someone who types in this phrase has even more buying intent.
The next tool I use is Google's Traffic Estimator, located at https://adwords.google.com/select/TrafficEstimatorSandbox, which shows both the estimated clicks per day I would receive if I advertised on the term, but more importantly, the average estimated price that I would pay each time someone clicked on my ad.
...[It] gives me an estimate of how much my competitors are spending each time someone clicks on their ads.
For "lacrosse sticks," Google estimates that the top 3 advertisers pay between $0.99 and $1.26 per click.
The final stage of my research is to return to Google.com, do a search on "lacrosse sticks," and conduct competitive research. I click on the ads of the companies advertising on the keyword, and figure out how they are generating more than $1.26 per click.
I assess things like:
1. How their web pages are organized
2. Whether they are trying to generate profits from merely a one-time sale or whether they have long-term revenue generation systems (e.g., a paid membership club)
3. Whether they have a newsletter or other mechanisms to collect the email addresses of their prospects so they can market to them on an ongoing basis, etc.
This process provides me with significant competitive intelligence on current practices in the industry.
...

US News and World Report

Even sole proprietors without employees can get in on 401(k)'s to plan retirement

By Matthew Bandyk

Posted August 15, 2008

... Small-business owners are so focused on developing their businesses that some do not realize that those assets can grow at a much faster rate for their retirement under the right plan. ...

... But there are some unique benefits to 401(k)'s. ... Today, a business owner under 50 with a 401(k) can invest up to ... $15,500 ($20,500 if over 50) coming from his or her own income, and then up to 25 percent of the business's profits under the "profit sharing" provision. ... [The] total amount cannot exceed $46,000 (or $51,000 if you're over 50)... That $46,000 "can drop you a tax bracket," says Stuart Robertson, general manager of [ING DIRECT's ShareBuilder401k, which designs 401(k) plans for small businesses]. "That is a great tax shelter for these folks."

...[What] do you need to know before you get your own plan started?

Know the difference if you have any employees. ... Having employees also means the proprietor must pay a higher administrative burden for the plan. That's because 401(k)'s are regulated so that they can't be "top-heavy"—the benefits of the plan cannot be too weighted in favor of the company's top brass.

Carefully consider the array of investment options. ... Some offer a "closed" menu of funds or other investments for you to put your money. Not only does that limit your options, but sometimes the mutual fund is paying the third party for the favored treatment. That means as a shareholder in that fund, you're footing that bill, which means less money for retirement. Look for brokers who are "open" and do not have such restrictions on what funds are available.

Make sure a third party is experienced. If you're using a someone else to set up your 401(k), make sure they know what they're doing. ...

Understand the Roth account. ... The difference between the regular 401(k) and the Roth account is that the traditional account holds money that ... comes from your pre-tax income, and is taxed only when the money is distributed upon retirement. The Roth account is tax-free—the money comes from your after-tax income, and is not taxed again. The fact that tax rates are historically quite low today has made the Roth account much more attractive, because the expectation is that taxes will be higher in the future, says Richard Meigs, [president of 401khelpcenter.com]. ... "If you think taxes are going to increase, or if you think you're going to be in a higher tax bracket, I would put some in your Roth and some in your traditional, as a hedge," explains Robertson.

Ask yourself how much control you want. ... "There are lots of financial institutions that will let you set up [a 401(k)], but you have to invest in just the vanilla options—mutual funds, stocks, bonds," says [Eric Wikstrom of Integrated Wealth Strategies LLC]. "In my opinion, they don't offer true self-direction." Some people choose to pursue a "self-directed" 401(k), which lets you invest your money in almost anything you choose, such as real estate. ...

CFOs are preparing for a prolonged downturn.

CFO Magazine - July/August 2008 Issue

Kate O'Sullivan - CFO Magazine

July 15, 2008

... "I'm not optimistic, but I think things may be improving, if only because we've bottomed out," says Jeff Burchill, CFO of FM Global, a commercial-property insurer.  ...

Seventy-one percent of finance executives say the U.S. economy will not begin to recover until 2009 or later, and 30 percent say they don't expect a rebound until at least the second half of next year. ...

Like many finance executives, Burchill ... believes high energy prices, a weak dollar, and inflation will continue....

... 60 percent of survey respondents now say they are taking steps to address higher fuel prices, including reducing business travel, improving the energy efficiency of their facilities, and adopting more-efficient shipping processes.

...FM Global ... is launching a Website through which employees can arrange carpools, and will now provide shuttle service from downtown Providence so that workers can use public transportation.

Some CFOs are passing along the increasing cost of fuel and other commodities to customers (see "To Raise or Not to Raise?"), saying they expect to raise prices an average of 4 percent over the next year. Wages will grow by just 3 percent, while domestic hiring will flatten. ...

Slightly more than a third of finance chiefs say their companies have been directly affected by the credit crunch... Among lower-rated firms, however, that number soars to 82 percent. ...

Don Elsey, CFO at Emergent BioSolutions, a Maryland-based manufacturer of vaccines, says ... banks are now seeking equity as part of their financing packages. "We're very reluctant to go down that path," he adds.

All in all, CFOs are treading a path that has an unmistakable downward slope. The question that remains is whether the steps they are taking to reverse direction will have the desired effect or result in a continued slide.

Kate O'Sullivan is a senior writer at CFO.

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To find out how CFOs regard soaring costs, the credit crisis, and their future prospects, click here.

A program that targets cost-effective opportunities in energy productivity could halve the growth in energy demand, cut emissions of greenhouse gases, and generate attractive returns.

Diana Farrell and Jaana K. Remes

The McKinsey Quarterly

July 2008

One hundred and seventy billion dollars a year invested in efforts to boost energy efficiency from now until 2020 could halve the projected growth in global energy demand. ...[These] investments could also deliver up to half of the emission abatement required to cap the long-term concentration of atmospheric greenhouse gases at ... the level experts suggest will be needed to prevent the global mean temperature from rising by more than two degrees centigrade.

The key to achieving these results will be carefully targeting cost-effective opportunities to boost energy productivity... In previously published work, the McKinsey Global Institute (MGI) ... [has] described the possibilities for improving the efficiency of lighting, cooling, and heating systems, and of other technologies like vehicles and factory machinery.¹ Concerted action could reduce global energy consumption in 2020 by 135 quadrillion British thermal units (QBTU) a year, the equivalent of roughly 64 million barrels of petroleum a day.

We arrived at the figure of $170 billion by estimating the market price of all the large and small investments needed to realize the energy productivity opportunities identified in our previous work.² The average internal rate of return (IRR) of these investments would be 17 percent, and each of them would generate an IRR of at least 10 percent.³ The total annual energy savings would come to roughly $900 billion by 2020.⁴ All of the investments, representing just 0.4 percent of current global GDP a year, involve existing technologies—and none require compromising the consumer’s comfort or convenience.

Nevertheless, real obstacles stand in the way of these investments and the energy savings they could generate. One is a set of market and policy imperfections. ... [Consumers] don’t have enough information about energy-efficient options, fuel subsidies discourage efficient energy use, and landlords and tenants alike resist energy-efficient investments they believe would mostly benefit the other party. A second challenge is that two-thirds of the investment opportunity lies in developing countries ...

The public and private sectors can do much to overcome these obstacles and facilitate the necessary investments, however. Policy priorities include setting energy efficiency standards for appliances and equipment, as well as removing subsidies and tax breaks for energy consumption. Businesses can raise their efficiency standards and innovate to overcome the information and agency barriers that keep both them and consumers from making economically and environmentally sound choices. In this way, the leaders will capture the significant financial benefits of efficiency and perhaps even create entirely new markets.

 

How to invest $170 billion a year

The energy productivity investment opportunity varies dramatically by sector and region. Industrial sectors ... could ... deploy just under half of the $170 billion a year, residential sectors about a quarter. The commercial and transportation sectors would absorb the remaining investment... About two-thirds of the $170 billion would go to developing economies, where the cost of abating a unit of energy demand is about 35 percent lower than it is in the developed world, because these economies are growing rapidly, consume energy in a relatively inefficient way, and have large supplies of cheap labor.⁵

 

The industrial sector

By 2020, $83 billion a year ... would allow the world’s industrial sectors to abate ... 40 percent of the world’s energy productivity opportunity. ...

In emerging markets ... economics of raising energy productivity are particularly attractive. In China ... the capital required to abate each QBTU of industrial energy in 2020 would be on average 33 percent less than it is in the United States. ...

Significant numbers of energy productivity opportunities in industrial sectors around the world have an IRR of around 10 percent and are therefore sensitive to hurdle rates... Doubling the hurdle rate, to 20 percent, reduces the industrial sector’s energy productivity opportunity by 14 percent ... and the cumulative capital requirements by 27 percent ...

 

The residential sector

Almost 80 percent of the residential sector’s $40 billion a year of investments would be devoted to just one opportunity: installing more efficient heating and cooling systems in new and existing homes. Yet these improvements would capture only 37 percent of the abatement opportunity ...

The remaining 63 percent of the residential sector’s abatement potential will require little more than 20 percent of the sector’s ... capital. ... [Expanding] the use of compact fluorescent lightbulbs (CFLs) and light-emitting diodes (LEDs) ... will account for only about 4 percent of the sector’s capital requirements but for 26 percent of the opportunity to abate residential energy demand in 2020.

Another low-capital opportunity ... lies in boosting the efficiency of appliances. The capital cost to end users could be close to zero. ... The remaining investment and abatement potential will be captured through more efficient water heating and some smaller opportunities.

China and the United States represent more than 40 percent of the global energy-abatement opportunity in the residential sector...

 

The commercial sector

In the commercial sector—which includes hospitals, hotels, offices, restaurants, retail buildings, and schools—the opportunity is much smaller than it is in the industrial and residential sectors. Investing ... 13 percent of the total ... would generate energy savings of ... 10 percent of the energy productivity opportunity ...

For lighting, the huge difference is due primarily to the fact that lighting in the commercial sector is already more efficient and therefore requires upgrades more expensive than CFLs. Replacing halogen lamps with LEDs cuts demand by 50 percent ... but the incremental cost of LEDs is much higher than that of CFLs. ...

 

The transportation sector

Fully one-third ... of the transportation sector’s energy-saving opportunity requires no additional capital. These gains would come from removing fuel subsidies in oil-exporting regions such as the Middle East and Venezuela, thereby reducing their overconsumption of transportation fuel.

The remaining two-thirds of the sector’s total opportunity—...10 percent of the savings potential across all sectors—is relatively capital intensive. Opportunities to reduce the weight and size of vehicles by redesigning them and substituting new materials, for example, can be expensive. (Lightweight materials such as aluminum and high-performance composites cost significantly more than iron and steel do.) ...

Three priorities for action

I

n many cases, the energy-investment opportunities we have described are not being seized. ...The main reason is ... fuel subsidies that directly discourage productive energy use, a lack of information for consumers about the energy efficiencies available to them, and the misaligned balance of incentives among builders, landlords, and tenants.⁶ There are no easy ways around these obstacles, but policy makers and business leaders can make significant progress by focusing on three priorities. Although a few leaders have already begun to act, many more will be needed.

Set energy efficiency standards for appliances and equipment--The investment requirements are relatively modest in appliances, lighting, equipment, and the like. Efficiency standards can play a critical role in coordinating the transition ... from less efficient products to more efficient ones ... by generating large unit cost reductions.⁷ ...

Some governments have chosen to base standards on specific technologies (as Australia has done by mandating the use of CFLs). A more effective approach is to set overall performance standards that can be reached in a variety of ways. South Korea, for example, has a one-watt standby power requirement,⁸ ...

Meanwhile, private-sector companies can create voluntary industry standards for energy efficiency. ...

Finance energy efficiency upgrades in new buildings and in remodels--Incorporating energy efficiency features in new houses and other structures is much cheaper than retrofitting them later on... Likewise, if households or companies tear down walls when they have buildings remodeled, it pays to install more insulation.

Yet capital constraints prevent many households from seizing these opportunities. ... In most private commercial buildings, the main challenge is to overcome agency issues between landlords and tenants and rapid turnover of commercial businesses that lead to very high discount rates.

For all these reasons, the public and private sectors should help provide capital to finance upfront investments in energy-efficient construction. Some private- and public-sector players already offer energy efficiency loans: Citigroup and Bank of America, for instance, have announced $50 billion and $18 billion funds, respectively, for green investments, including preferential loans for energy-efficient homes.⁹ ...

There is much room for further innovation...

Public–private partnerships often expand the investment pie and tap into specialized expertise effectively. Under the Clinton Climate Initiative, for example, the US federal government has teamed up with building-control companies and financial institutions to increase the energy efficiency of urban structures through retrofitting. Some $5 billion of loans from five major financial institutions are available to facilitate economically practical efficiency solutions.

International financial institutions and development agencies, as well as nongovernmental organizations (NGOs), play a critical role in expanding financial support for energy efficiency in rapidly growing developing regions. ... The Renewable Energy and Energy Efficiency Partnership (REEEP)—a global public–private undertaking backed by more than 200 governments, businesses, development banks, and NGOs—specializes in the innovative financing of energy efficiency investments. ...

Raise corporate standards for energy efficiency--Why does so much of the potential energy productivity opportunity in the industrial and commercial sectors remain untapped? One important reason is that many companies around the globe continue to be government owned ... or enjoy high levels of regulatory protection that shields them from competition ... Improving performance is hard work for managers. Without market pressure to do so, many companies just will not take advantage of all the available opportunities to boost their energy productivity.

Institutional investors and other shareholders can help create incentives to pursue fragmented energy productivity opportunities.... Developing energy efficiency metrics and generating information is a critical piece of the puzzle. ...¹⁰

... Private-equity firms ... (and utilities as well) are ... tapping into the large combined-heat-and-power opportunity in industrial companies; capturing heat to generate electricity on-site can increase the efficiency of power generation to 80 percent, from 40.

 

The role of energy intermediaries

Despite the favorable economics of energy productivity investments ... some opportunities will probably remain on the table as a result of information gaps, high discount rates for energy investments, and uncertainty about future savings, as well as the disinclination of landlords to make investments that benefit their tenants and vice versa. A range of intermediaries, such as utilities and energy service companies (ESCOs), will therefore have opportunities to finance, enable, and profit from energy efficiency investments.

... Traditionally, the revenues of utilities have been tied to the volume of electricity delivered, encouraging growth in electricity consumption rather than energy efficiency. Instead, regulators can reward utilities for promoting energy efficiency and reducing energy consumption among their customers. ...

With the right incentives, utilities’ demand-side-management (DSM) programs could have a large impact on household energy consumption. For example, advanced metering, which allows utilities to communicate more effectively with customers about the precise cost of their current usage patterns, would help them keep down peak-period energy consumption. ... 

Energy service companies combine the engineering expertise needed ... with financial services that help municipalities, universities, schools, and hospitals ... to bridge the gap between current financial resources and future energy savings. They make money by providing funds for upfront investments in energy savings in exchange for a share of the cash flows these savings generate. ...

... The Washington, DC, financial-services firm Hannon Armstrong ... has teamed up with Pepco Energy Services in a $500 million project to raise the energy efficiency of private and government buildings in the US capital. Pepco will conduct an energy audit of buildings; retrofit them with higher-efficiency lighting, heating, and cooling systems; and guarantee energy savings that Hannon Armstrong will use to finance the project, which has a payback period of five to ten years.

... Subtle changes in the way users receive information and learn about their choices—say, by offering energy efficient solutions by default, with the option to opt out—can change their behavior. These choices have direct pecuniary implications and can encourage consumers to take advantage of the savings available to them.¹¹

The economic case for energy productivity investments has never been stronger. One hundred and seventy billion dollars a year in capital is a sum well within reach, and the prize—halving the growth in energy demand while earning attractive returns—is significant.

 

About the Authors

Diana Farrell is director of the McKinsey Global Institute, and Jaana Remes is a consultant in McKinsey’s San Francisco office.

Notes

¹For more on this earlier research, see Diana Farrell, Scott S. Nyquist, and Matthew C. Rogers, “Making the most of the world’s energy resources,” mckinseyquarterly.com, February 2007.

²The $170 billion in annual investments would be aimed at all the end-use sectors (industrial, residential, commercial, and transportation), which together represent about 85 percent of the global energy productivity opportunity. Because of the end-use focus, we excluded from our capital analysis the investments required to boost the efficiency of generating and refining energy—the remaining 15 percent of the energy productivity opportunity that MGI identified. For more details on the capital analysis, see The case for investing in energy productivity, available free of charge on www.mckinsey.com/mgi.

³All internal rate of return (IRR) calculations assume that oil costs $50 a barrel—far less than today’s prices, which would generate higher returns.

⁴At the same time, making these investments would avoid having to invest in generating capacity and other forms of energy infrastructure that would otherwise be necessary to keep pace with accelerating demand. The International Energy Agency (IEA) estimates that, on average, $1 spent on more efficient electrical equipment, appliances, and buildings avoids more than $2 of investment in electricity supply (World Energy Outlook 2006, International Energy Agency, 2006).

⁵Lower labor costs reduce capital requirements both directly (for example, through labor-intensive factory construction or equipment installation) and indirectly (through the lower cost of locally produced inputs, such as commodity materials and equipment in the industrial sector, as well as local buildings).

⁶For a more detailed description of the market failures in different energy-consuming segments, see “Policies to capture the energy productivity opportunity,” in Curbing Global Energy Demand Growth,The Energy Productivity Opportunity, available free of charge on www.mckinsey.com/mgi.

⁷By contrast, standards for buildings have less favorable economics. The economies of scale are lower for efficient housing shells than for appliances and equipment, and the capital constraints in financing them are higher. For these reasons, the rate of compliance with standards for buildings is much lower than it is for appliances, particularly in the more credit-constrained developing economies.

⁸Standby electricity use is the energy consumed by electrical appliances when they are turned off, or not in use.

⁹These allow households that buy energy-efficient homes to qualify for higher mortgages by adding future utility bill savings to their qualifying incomes and to pay for any efficiency improvements over the lifetime of the mortgage. To compensate consumers for the time and cost of third-party certification, the two banks now take $1,000 off closing costs.

¹⁰For details of the London Accord collaboration among investment banks, research houses, academics, and NGOs, see www.london-accord.co.uk.

¹¹ See the examples in Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness, New Haven and London: Yale University Press, 2008.

We welcome your comments on this article.

 Top companies regard climate change as an opportunity to get closer to suppliers—effectively reducing both costs and carbon in their supply chains.

The McKinsey Quarterly

Chris Brickman and Drew Ungerman

July 2008

Global executives increasingly identify the environment, ... as a top concern. ... A McKinsey survey of more than 2,000 global executives¹ finds that while nearly half of respondents say that climate change is a somewhat or very important issue to consider in purchasing and supply chain management, fewer than one-quarter report their companies always or frequently take climate change into consideration in these areas. ...

... Our analysis suggests that for consumer goods makers, high-tech players, and other manufacturers, between 40 and 60 percent of a company’s carbon footprint resides upstream in its supply chain... For retailers, the figure can be 80 percent. Therefore, any significant carbon-abatement activities will require collaboration with supply chain partners... [We] find that many of the opportunities to reduce emissions carry no net life-cycle costs—the upfront investment more than pays for itself through lower energy or material usage. Others ... will require tradeoffs between emissions and profitability, in areas such as logistics and product design (including product specification and functionality). Forward-looking companies are using such discussions as opportunities for supplier development, for example by transferring best practices in manufacturing, purchasing, and R&D—as well as energy efficiency—to key suppliers. This opens the possibility of still lower costs and improved operational performance, in addition to helping suppliers remove more carbon from their supply chains.

About the Authors

Chris Brickman and Drew Ungerman are principals in McKinsey’s Dallas office.

Notes

¹See “How companies think about climate change: A McKinsey Global Survey” on mckinseyquarterly.com, February 2008.

strategy+business magazine

by Gwen Moran
7/01/08
Community college partnerships are training workers with made-to-order skills.

In 2005, Greenville, Mich., seemed like just another textbook tale of a town hit hard by plant closings: Several companies...had abandoned the town between 2003 and 2005, resulting in the loss of more than 4,000 jobs. But Greenville got a chance to bounce back in January 2006, when United Solar Ovonic (USO), a subsidiary of Energy Conversion Devices, which manufactures solar energy components, considered a move to the area.

Representatives from Montcalm County, which includes Greenville, offered ... training funds as incentives to bring in USO. The company was concerned, however, that ... plenty of people seeking employment...were not experienced in building complex solar panel components. So Montcalm County ... guaranteed that Montcalm Community College could ... deliver a certificate training program for technicians based on job descriptions provided by the company. ... By June 2007, Montcalm Community College was training 50 solar energy technicians; this allowed USO ... to ramp up production at its facility ahead of schedule.

When an area ... lacks skilled workers, the solution often lies with the local community college. ... Today, community colleges bridge the worlds of business, government, and education, says James McKenney, vice president of economic development and international programs at the American Association of Community Colleges. More than ever, they are creating fast-track training and workforce development programs ...

... In response to Cargill’s needs in Eddyville, [Iowa], nearby Indian Hills Community College launched a bioprocessing training program in 1996 ... says Janet Paulson, project coordinator of the Iowa Bioprocess Training Center (IBTC), a division of Indian Hills ... Cargill ... initially requested that the college offer specialized training for food-processing technicians. In the late 1990s and early 2000s...the college expanded its program, fueled by demand ... from Cargill, as well as ... Ajinomoto USA Inc., Ajinomoto Heartland Inc., and Wacker Biochem Corporation. Finally, the college opened the US$2 million IBTC in 2004 with funding from those partner companies, as well as ... from two regional energy companies, which saw the benefit in keeping big food-processing customers well-supplied with skilled labor...

Finally, the IBTC also conducts skills assessments for Cargill. ... The cost to Cargill is less than it would be if company employees conducted the assessments, according to Cargill’s training manager, Kim Barfield.

Savings through Custom Training
In 1998, Northrop Grumman Corporation signed a contract with the Navy to design the next generation of large-deck aircraft carriers at its Newport News, Va., location. This meant the company would need at least 600 additional trained employees ... Northrop Grumman managers worked with Thomas Nelson Community College to customize its training partnerships ... [which] allowed Northrop Grumman and Thomas Nelson to tap prospective workers from different demographic segments by reaching out to high school students, the unemployed, and those in search of a career change.

Northrop Grumman saved about $80,000 per employee per year of training with its local made-to-order training program. ...

Making It Work
...In the planning stages, be prepared to spend time developing the program, in addition to possibly funding part of it. Cargill was involved from the start with the Indian Hills programs, devoting management time to developing the curricula ...When the IBTC was launched, Cargill donated land and equipment.

Similarly, Northrop Grumman donated $50,000 worth of time and equipment per year to the program at Thomas Nelson. School officials estimate that the company commits nearly $2 million per year to all aspects of the pipeline, including the salaries of apprentices, training fees, and tuition reimbursement. However, Northrop Grumman estimates that its return on investment is more than $6.00 for every $1.00 it spends...

These programs work better when they support an industry cluster rather than an individual company, says Robert P. Leber, director of education and workforce development at Northrop Grumman and chair of the Virginia Workforce Council. ... In Northrop Grumman’s case, building a large ship ... has a vast need for students coming out of the school’s welding, electrical, and other shipbuilding-related programs as it begins work ... However, as the ship nears completion, demand wanes, so the college has developed relationships with other companies, including a truck manufacturer that requires similar skill sets, to keep employment options open for students coming out of the program.

Community colleges are more entrepreneurial than many larger institutions and more comprehensive in resources than most private training facilities. That, combined with the favored status they enjoy in workforce development strategies, makes them effective partners and educators across industries.

Author Profile:

---

Gwen Moran is a freelance business writer based in Wall Township, N.J.

News Articles [PLANSPONSOR.com]

July 30, 2008 (PLANSPONSOR.com) – The family of a grocery store employee who later died from cancer has won a legal battle with a federal judge’s ruling that the worker’s pension administrator breached its duty by not telling him of a more advantageous pension option.

U.S. District Judge, David A. Katz, of the U.S. District Court for the Northern District of Ohio ruled in favor of the estate of Allen Anderson against the Northwest Ohio United Food and Commercial Workers Union and Employers' Joint Pension Fund (NEBA).

Katz ruled that an ... ERISA fiduciary has a duty to inform beneficiaries of their material circumstances and other beneficial information under the plan. ...

According to the ruling, Anderson worked for 30 years for a Kroger grocery store in Ohio... After his terminal cancer diagnosis, the ruling said, Allen contacted the fund's administrator, ... to talk about his situation.

NEBA informed Allen he could return to work ... with the same disability and health insurance benefits; retire and receive retiree health insurance; Katz noted that would not cover his future costly medical treatment.

The other option would be to retire and continue his health insurance under the Consolidated Omnibus Budget Reconciliation Act (COBRA). ... NEBA never told Allen about a 10-year certain pension that would have provided Allen's heirs significantly greater benefits after his death than the other options provided.

A Need to Disclose

Katz was unconvinced by the fund's argument that it did not need to provide information to Allen about the 10-year certain option because Allen ... did not specifically request information about that option. That does not excuse a fiduciary from explaining pension options that are in an employee's best interest, Katz asserted.

... Allen returned to Kroger's active payroll in October 2005, but died from his cancer the following month.

Allen's brother and executor of his estate, Paul Allen, submitted a claim for benefits under the 10-year certain option, but the fund determined that Allen's estate and heirs could not posthumously collect on that option because it was only available if a participant retired and received his first month's pension check before dying. Paul Allen later took his fight to the courts.

The case is Anderson v. Board of Trustees of the Northwest Ohio United Food and Commercial Workers Union and Employers' Joint Pension Fund, N.D. Ohio, No. 3:07 CV 576, 7/28/08.

Fred Schneyer
editors@plansponsor.com

News Articles [PLANSPONSOR.com] - Plan Violated Fiduciary Duty by Not Fully Revealing Distribution Options

Green building is taking off in the construction, design and real estate development worlds, and for good reasons. But with green reward comes unique green risk.

Risk & Insurance July 1, 2008

By Matthew Brodsky

The tallest green building in the United States rises above Philadelphia like a tribute to the sky. ...

Of course practical business reasons were behind the decision of its developer, Liberty Property Trust, to go green with the 975-foot so-called Comcast Center--environmental and energy benefits and, especially, improved worker productivity.

"These elements combined will result in a healthier work environment, will promote a productive work environment, and reduce risk issues that might be caused by use of toxic substances in the operation and maintenance of the space," says John Gattuso, senior vice president, urban and national development, at Liberty...

"We think those buildings that aren't LEED will be increasingly obsolete," says Gattuso....

Liberty isn't alone in seeing this. As William Hazelton, senior vice president of environmental risk at ACE USA, explains, clients that he's dealt with have had "significant economic drivers" in spending more to get a building green certified.

Green certification is a way to gain third-party, independent and international recognition that a project produces less waste, conserves water and energy, supports the health of its occupants, stamps a smaller carbon footprint, and possesses socially responsible, warm and fuzzy benefits.

The two certification methods are the U.S. Green Building Council's LEED program and the Green Building Initiative's Green Globes program.

"We believe they're safer, better construction," says Steve Bushnell about green buildings. Bushnell is product director, commercial business, with Fireman's Fund, which pioneered special property coverage for them in 2006....

Ashley Katz, a spokesperson for the USGBC ... cites the 2000 study by William J. Fisk at the Lawrence Berkeley National Laboratory that suggests that $20 billion to $160 billion in annual savings can be had from the effect of better indoor work environments through improved worker performance.

Ann Butterworth, underwriter for Liberty Mutual's recently released Green Select property endorsement, ... [calls] up stats about how green buildings ... have as much as 9 percent lower operating costs, 7.5 percent higher building values, 3.5 percent higher occupancies and 3 percent higher rents.

Green builders can also enjoy government incentives, such as tax abatements and breaks. ...

GREEN RISKS

... Many construction materials and building techniques are new, untested. Will they work as promised? ...

Another thing to consider when building and underwriting such construction: it tends to cost more.

... Some of these buildings ... could be built "tight," says Rick Craig, national environmental practice leader with Beecher Carlson. ... [Which] is great from an energy efficiency standpoint. But it's not good from a condensation and a mold growth standpoint, he says.

...Gattuso uses the Comcast Center's 120-foot-high winter garden entrance as an example. In ... a green space, [cooling] is achieved with a combination of wider window mullion for more shade, dark stone floor that wicks heat away from its surface, a radiant cooling system underneath, and an exhaust system above that allows hot air to rise and escape....

Take living, or vegetative, roofs. They are ... a roof with soil, sod, trees, bushes, flowers, and even animals ... They are attractive from a climate risk and sustainability standpoint, says Lindene Patton, climate product officer with Zurich, because they control heat, provide refuge for wildlife in the urban jungle and act as a carbon sink (or absorber).

But they also weigh a lot ...

Or, again getting back to mold, living roofs might leak. Patton says a liner system can mitigate against this. But Bushnell points to a number of buildings in British Columbia where this problem has already sprouted. ...

... Bushnell suggests green building owners have to manage tenant expectations, or risk exposing themselves to errors and omissions claims if tenants don't see expected energy cost savings. The owner could also be liable if tenants degrade a building's certification by using nongreen finishing materials. ...

GREEN INSURANCE

..."What we've basically done is said, you're willing to do that with green products, or actually have a LEED certified building, then we're willing to give you a discount on the normal premium rates," says Joe Boren, CEO of AIG Environmental...

Another reason AIG is willing to offer the discounts is because of the notion of these projects being better built, especially when it comes to indoor air quality...

... Both contractor's pollution liability and premises pollution liability policies have been used to support LEED-certified projects, according to Hazelton at ACE.

Craig says that a CPL policy with mold and indoor air quality coverages built in can work to protect against the aforementioned water issues.

...The carriers spoken with for this piece acknowledged that part of the reason that they're offering green products is because of the demand coming from clients. ...

MATTHEW BRODSKY is senior editor/Web editor of Risk & Insurance®.

July 1, 2008

Copyright 2008© LRP Publications

strategy+business Summer 2008

by Timothy Hoying, Ashish Jain, and Madhu Mukerji-Miller

In many service industries, customer experience is emerging as a valuable way for companies to differentiate themselves from the competition and to in­crease market share. Most companies understand this, but many are unable to improve interactions with customers enough to make a difference. Why?

There are two types of dis­connects that get in the way of delivering the useful, pleasurable, and repeatable experience that customers de­mand. The first is the “needs disconnect”: Organizations find it difficult to step into their customers’ shoes and understand their real needs, relying instead on tools that do not yield the insight required to service key customer segments effectively. 

The second type is the “organizational disconnect”: Companies make it too difficult for customers to get the service they want without being shuffled among departments and receiving contradictory messages. ...

The needs disconnect became apparent in the results of two surveys conducted by our firm in 2006, one asking customers what they need and the other asking business leaders what they believe their customers need. More than 1,200 customers weighed in on the quality of service in four industries — retail banking, brokerage, health insurance, and airlines — as did executives from leading organizations across these sectors. When they were asked to rate the importance of eight customer service elements — speed, professionalism, responsiveness, timeliness, product and service expertise, accuracy, fees and charges, and personalization — the two groups diverged in every category. ... 

These disconnects are unlikely to be resolved through a onetime initiative. Rather, it will require an ongoing effort to understand the customer and apply that insight strategically. A four-step “outside-in, inside-out” technique is effective in helping an organization design and deliver a successful customer experience program.

1. Segment customer needs from the outside in. A holistic un­derstanding of customers requires that companies recognize the various dimensions of customer need. They include the functional (what the customer wants the service offering to do), the behavioral (which delivery channel and what mix of offerings the customer prefers), and the demographic (how the customer’s needs vary by life stage, age, gender, and geography). ... 

After determining customers’ actual needs, the company should figure out which of them it is already addressing and whether those efforts are effective. By knowing what it does well, a company can leverage its strengths and define what customers will associate with that company.

2. Design the customer experience from the inside out. A com­pany should not attempt to address every customer need. Rather, it should focus on those that are of the greatest concern to the customer but also produce the greatest benefit for the company. ... 

3. Measure the true customer experience. Measuring the impact of the customer experience on a company’s bottom line is both essential and difficult, and it takes careful consideration of both qualitative and quantitative feedback. ... Measuring customer loyalty yields a stronger tie to return on investment and other key indi­cators. Customer loyalty benchmarks include changes in customer retention, cross-sell, share of wallet, and conversion of referrals to new customers. ...

4. Close the loop. To develop the ability to continuously read and address the changing needs of customers, organizations should establish communication and information loops across their organizational silos. They must also build in the capability to constantly monitor their customers, staff, and competitors. ...

There is no single, perfect approach for organizations to effectively deliver a mutually rewarding customer experience. For some companies, customer service re­sponsibilities may be decentralized; for others, they may be assigned to a dedicated department. The right choice depends on the organization’s culture. At the heart of it, customer service excellence is the product of powerful processes that cut across organizational functions and are reinforced by strong and explicit leadership.

Author Profiles:

---

Timothy Hoying is a vice president with Booz & Company based in Chicago and New York. He leads the firm’s service operations work for the banking, consumer finance, capital markets, and insurance sectors. 

---

Ashish Jain is a principal with Booz & Company based in Chicago. He works in service operations and financial services, focusing on banking, consumer finance, and insurance sector clients.

---

Madhu Mukerji-Miller was formerly a principal with Booz Allen Hamilton in New York.

---

Also contributing to this article were Booz & Company Principals Curt Bailey and Amit Gupta.

Beware of replacing sloppy manual methods with sloppy automated ones

By Joni Youngwirth

InvestmentNews

June 16, 2008

Consistent, replicable and scalable processes can save advisers time and money. ...

At firms that have not created a system for doing work ... time is often spent completing less productive tasks, and ultimately, profit decreases.

In contrast, at a firm with effective processes, clients are handled in the same fashion, and they receive the same level of service. ...

Nevertheless, it won't work well if you replace sloppy manual processes with sloppy technological ones.

Technology alone can't solve problems. It can't design the processes you need and it doesn't work in a vacuum. Moreover, technology just cannot help with some matters.

That is where systematic manual processes are as important as technological scalability. ...

Here are three categories of processes that require a system, and a partial list of examples within each category.

1. Operational processes unique to your firm: Applying criteria for categorizing clients, applying tiered service for clients based on category, ...

2. Operational processes for a firm working with other companies: Setting up accounts, ...

3. Management processes: Business planning, conducting employee performance reviews and budgeting.

A simple approach to creating repeatable processes is to name a process to document, define the points at which the process starts and stops, write "start" and "stop" on sticky notes, and post them at the top and bottom of a flip chart page.

In between, list the different tasks that take place using sticky notes for each task. ...

Once you have agreed on the steps, format the sticky notes into a work document.

Instead of writing prose for a procedure, list the steps in checklist format.

Remember, procedures should be reviewed at least annually. ...

[Integrating] automated processes into your contact management system allows you to delegate follow-up tasks after client meetings to different people simultaneously. Also, you can check that the actions are completed. ...

Only active management ensures compliance by others.

THE ISSUE OF SCALE

...Do you really need to focus on scalability too? The answer may be no. ...

However, you may want to take the time if you wish to:

• Bring on additional advisers and leverage systems you have created without others' having to reinvent your wheel.

• Maximize the value of your practice when it is time to transition.

• Enhance staff productivity, especially in times of turnover.

• Enhance profits by ensuring that staff uses time productively.

...

Joni Youngwirth is a vice president of practice management at Commonwealth Financial Network in Waltham, Mass. She can be reached at jyoungwirth@commonwealth.com.

The McKinsey Quarterly

Matt J. Hirschland, Jeremy M. Oppenheim, and Allen P. Webb

July 2008

Saving energy went out of style when oil prices plunged during the second half of the 1980s and much of the 1990s. But Amory Lovins and the Rocky Mountain Institute—an entrepreneurial, nonprofit think tank he cofounded in 1982 to develop and implement advanced solutions for energy and resource efficiency—soldiered on. ...

In an interview with McKinsey’s Matt Hirschland, Jeremy Oppenheim, and Allen Webb, Lovins argues that businesses acting quickly to make their operations more efficient will gain a significant competitive advantage. He also discusses why executives often overlook seemingly simple energy- and money-saving solutions, describes the relationship between energy and carbon efficiency, and suggests that companies and their markets will outpace policy makers in the race for solutions.

 Amory Lovins

Vital Statistics : Born November 13, 1947, in Washington, DC

Education : Studied at Harvard College, 1964–67, and Oxford University, 1968–71, where he was a Junior Research Fellow

Career highlights

Rocky Mountain Institute (1982–present)

• Cofounder, chairman, and chief scientist

Fast Facts

• Visiting professor and lecturer at universities (1978–present), including the University of California at Berkeley and Riverside, the University of British Columbia, Dartmouth College, the University of Colorado at Boulder, the University of St. Gallen, Peking University (now University of Beijing), and Stanford University
• MacArthur Fellowship recipient (1993)
• Wrote 29 books on diverse topics, mainly energy related
• Recipient of the Blue Planet, Volvo, Onassis, Nissan, Shingo, and Mitchell prizes; the Benjamin Franklin and Happold medals; ten honorary doctorates; honorary membership in the American Institute of Architects; Foreign Membership of the Royal Swedish Academy of Engineering Sciences; and the Heinz, Lindbergh, Jean Meyer, Time Hero for the Planet, World Technology, and Right Livelihood awards

---

The Quarterly: Given the economic benefits of saving energy, why haven’t companies already seized all the opportunities available to them?

Amory Lovins: ... CEOs don’t see ...

... Even without risk-adjusting your discount rates, saving energy is among the highest-return investments anywhere. But it tends not to get attention, because energy is only 1 or 2 percent of the cost of doing business, ...

...[C]hief executives confuse the top and bottom lines. ... I was talking to the head of a Fortune 50 company ... about an engineer who had just cut $3.50 per square foot per year off the energy costs in one of the company’s plants. ...[H]e said he couldn’t get excited about energy, because it was only 2 percent of his cost of doing business! ...

I had to do the arithmetic and show him that if he hypothetically achieved the same result in his 92 million square feet of facilities worldwide, his total net earnings would rise by more than 50 percent. ...

The Quarterly: What should top executives do to focus attention on these kinds of details?

Amory Lovins: When Ken Nelson was at Dow Louisiana, he held a contest on the shop floor to see who could come up with the best ideas for saving energy and reducing waste. The employees came up with ideas that yielded a 173 percent return on investment. Twelve years and nearly 900 implemented projects later, they had added $110 million a year to Dow Louisiana’s bottom line. Their average ROI was over 200 percent, confirmed by audit. ...[H]e had created a culture of measurement, curiosity, and improvement.

Ken had the interesting theory ... that you should not give people bonuses for suggesting such savings... And he had the even more interesting theory that he shouldn’t tell other executives and managers what he was doing, because management attention would spawn all sorts of management mantras and bureaucratic procedures that would slow things down.

The Quarterly: So if your boss doesn’t know about it and you’re not getting paid more for it, what’s the incentive to suggest improvements?

Amory Lovins: It’s why you became an engineer in the first place: the joy of doing great engineering and coming up with really cool stuff that works better and costs less. When engineers experience whole-system design—optimizing not just parts but entire systems, giving rise to higher savings at lower cost—they’ll never do things the old way again. ... Unleashing human creativity is an irreversible process.

Creating a culture of curiosity and measurement is immensely important. ... I was once in a building that had a 50-kilowatt load of unknown origin. We had to trace all the wires to find the cause: an electric snow melter ... that was running 24/7, every day of the year ... Such waste is all over the place! And until you have a culture of measurement and curiosity, you won’t find it.

The Quarterly: Do you have any tactical suggestions for executives trying to create such a culture?

Amory Lovins: I would set up a lending library of measuring tools and give a weekly prize for the person who came up with the most fascinating number about how the company’s processes were actually working in ways other than the ways it thought they were working. ...

The Quarterly: More broadly, how do you think CEOs should be approaching energy efficiency today?

Amory Lovins: Aggressively. They should think of energy and resource efficiency as a key source of competitive advantage. In my team’s latest redesigns ... we consistently found about 30 to 60 percent energy savings that could be captured through retrofits, which paid for themselves in two to three years. In new facilities, 40 to 90 percent savings could be gleaned—and with nearly always lower capital cost.

Moreover, seldom-counted side benefits can be far more valuable than the direct savings. For instance, ... a 0.6 percent gain in labor productivity would have the same bottom-line effect as eliminating the energy bill. But we routinely see ... a 6 to 16 percent gain in labor productivity in efficient buildings with better thermal, visual, and acoustic comfort. When people can see what they’re doing, hear themselves think, breathe cleaner air, and feel more comfortable, they do more and better work. We also see 40 percent higher retail sales in well day-lit¹ stores, 20-odd percent faster learning in well day-lit schools, and better clinical outcomes in green and efficient hospitals. ...

The Quarterly: In your experience, to what extent can reducing carbon emissions be as financially attractive for businesses as reducing energy consumption?

Amory Lovins: ... Early movers in more diverse, dispersed, renewable or other low-carbon forms of energy are finding strong competitive advantage. These choices may, for example, insulate you from energy supply problems such as power failures or gas interruptions. They can eliminate fuel price volatility. And they can earn you carbon credits that you can sell to your competitors. ...

The Quarterly: What should companies be thinking about when it comes to alternative energy?

Amory Lovins: ...[M]icropower—by which I mean on-site or decentralized energy production, such as waste-heat or gas-fired cogeneration, wind and solar power, geothermal, small hydro, and waste- or biomass-fueled plants... Micropower is beating the central model because it’s cheaper and has far lower financial risk; ...

The Quarterly: What role do you see for regulators in promoting energy efficiency and low carbon emissions?

Amory Lovins: Traditional environmental regulations are becoming antiquated. ...

... A “feebate”—a combination of fee and rebate... When you go to the dealer, you see that vehicles of the size you want have various efficiencies. Purchasers of the inefficient ones will pay a corresponding fee. That revenue is then used to pay a rebate to buyers of the efficient models.

Automakers would actually make more money this way. After all, they will want their models to be more efficient ... This often means adding more technology content, which has an inherently higher margin than the rest of the vehicle... And of course, the manufacturers that do this first and best will also gain market share....

And for the electricity sector...the most important policy innovation is decoupling the profits of utilities from their sales volumes. ... In other words, the utilities are rewarded for cutting your bill, not for selling you more energy.

The Quarterly: What are the implications for the regulatory strategies of companies?

Amory Lovins: Environmental strategy is ... about redesigning your company’s processes and products so that regulation is relevant only to your competitor, not yourself. The real leaders are going to be smart companies that see the competitive advantage in leading energy transformation in their sectors. ...

About the Authors

Matt Hirschland is a consultant in McKinsey’s Brussels office, Jeremy Oppenheim is a director in the London office, and Allen Webb is a member of The McKinsey Quarterly’s board of editors.

Notes

¹The light is derived from sources such as windows and skylights.

Don’t be fooled by technological uncertainty and the continued importance of regulation; solar will become more economically attractive.

The McKinsey Quarterly

Peter Lorenz, Dickon Pinner, and Thomas Seitz

June 2008

A new era for solar power is approaching. Long derided as uneconomic, it is gaining ground as technologies improve and the cost of traditional energy sources rises. Within three to seven years, unsubsidized solar power could cost no more to end customers in many markets, such as California and Italy, than electricity generated by fossil fuels or by renewable alternatives to solar. By 2020, global installed solar capacity could be 20 to 40 times its level today.

... Even if all of the forecast growth occurs, solar energy will represent only about 3 to 6 percent of installed electricity generation capacity, or 1.5 to 3 percent of output in 2020. ...

... Several technologies are competing to win the lowest-cost laurels, and it’s not yet clear which is going to win. ... Fueled by ever-increasing flows of new equity from venture capital and private-equity firms—$3.2 billion in 2007—innovative new competitors are entering the sector, and with them the potential for excess supply, falling prices, and deteriorating financial performance for some time.

...Even in the most favorable regions, solar power is still a few years away from true “grid parity”—the point when the price of solar electricity is on par with that of conventional sources of electricity on the power grid. ...

The birth of a sector

The solar sector includes a diverse set of players, including the manufacturers of the silicon wafers, panels, and components used to generate much of today’s solar power, as well as the installers who put small-scale units on individual roofs, utilities and other operators setting up enormous solar collection systems in deserts, and start-up companies striving for breakthroughs such as lower-cost thin-film technologies. ...

Beyond subsidies

Government subsidies have played a prominent role in the growth of solar power. ... Without such policies, the high cost of generating solar power would prevent it from competing with electricity from traditional fossil-fuel sources in most regions.

... Over the last two decades, the cost of manufacturing and installing a photovoltaic solar-power system has decreased by about 20 percent ... The cost of generating electricity from conventional sources ... has been rising along with the price of natural gas...

As a result, solar power has been creeping toward cost competitiveness in some areas. California ... combines abundant sunshine with retail electricity prices that ... are among the highest in the United States—up to 36 cents per kilowatt-hour for residential users.¹ Unsubsidized solar power costs 36 cents per kilowatt-hour. Support from the California Solar Initiative² cuts the price customers pay to 27 cents. ...

During the next three to seven years, solar energy’s unsubsidized cost to end customers should equal the cost of conventional electricity in parts of the United States (California and the Southwest) and in Italy, Japan, and Spain. These markets have in common relatively strong solar radiation (or insolation), high electricity prices, and supportive regulatory regimes that stimulate the solar-capacity growth needed to drive further cost reductions (Exhibit 1). These conditions set in motion a virtuous cycle: growing demand for solar power creates more opportunities for companies to reduce production costs by improving solar-cell designs and manufacturing processes, to introduce new solar technologies, and to enjoy lower prices from raw-material and component suppliers competing for market share.

...From now until 2020, installed global solar capacity will grow by roughly 30 to 35 percent a year, from 10 gigawatts today to about 200 to 400 gigawatts³ (Exhibit 2), requiring capital investments of more than $500 billion. ... Even though this volume represents only 1.5 to 3 percent of global electricity output, the roughly 20 to 40 new gigawatts a year of installed solar capacity would provide about 10 to 20 percent of annual new power capacity over that period. This level of installed solar capacity would abate some 125 to 250 megatons of carbon dioxide—roughly 0.3 to 0.6 percent of global emissions in 2020.

Evolving technologies

... At present, three technologies—silicon-wafer-based and thin-film photovoltaics and concentrated solar thermal power—are competing for cost leadership. Each has its advantages for certain applications, but none holds the overall crown. ...

Silicon-wafer-based photovoltaics. ... [I]t faces two challenges that could create openings for competing approaches. For one thing, though it is well suited to space-constrained rooftop applications ... the solar panels and their installation are costly: larger quantities of photovoltaic material (in this case, silicon) are required to make the panels than are to make thin-film photovoltaic solar cells.⁴ Second, companies are starting to approach the theoretical efficiency limit—31 percent—of a single-junction silicon-wafer-based photovoltaic cell...

Thin-film photovoltaics. ...[T]hin-film technology⁵ has been available for many years ... Thin film trades off lower efficiencies against a significantly lower use of materials—about 1 to 5 percent of the amount needed for silicon-wafer-based photovoltaics. The result is a cost structure roughly half that of wafer-based silicon. ...

... The lower efficiency of thin-film modules⁶ means that they are currently best suited to large field installations and to large, flat rooftops. Furthermore, the longevity of these modules is uncertain... Of the most promising thin-film technologies, ...cadmium telluride—has truly reached commercial scale, and some experts worry about the toxicity of cadmium and the availability of tellurium. ...

Concentrated solar thermal power. ...[C]oncentrated solar thermal power,⁷ is the cheapest available option today but has two limitations. ... [Concentrated solar thermal power systems require almost perfect solar conditions and vast quantities of open space... In addition, the ability of concentrated solar thermal power to cut costs further may be limited, because it relies mostly on conventional devices such as pipes and reflectors...

The road ahead

The extent and speed of this emerging sector’s growth will depend on its ability to keep driving down the cost of solar power. No single player or set of players can make that happen on its own....

Solar-component manufacturers

The fundamentals are clear for photovoltaic-component manufacturers ...: ...significant R&D investments to stimulate continued efficiency improvements, as well as operational excellence to drive down manufacturing costs. ...

...[T]he manufacturers of components for silicon-wafer-based and thin-film technologies should focus on fundamentals, such as manufacturing costs, efficiency improvements, and the movement of prices for raw materials.

Raw materials. Polysilicon is the main raw material for silicon-wafer-based solar-cell manufacturers...

... Many observers have therefore been predicting that global polysilicon production capacity will at least triple from 2005 to 2010, while our forecasts indicate that demand for the material will only double during the same period. This mismatch suggests that the spot price of polysilicon could drop from over $200 a kilogram to levels previously seen in the semiconductor industry—as little as $30 to $50.  ...

Production process technology. The way companies manufacture solar cells has the largest impact on the cells' efficiency and their cost. ...

Producing in low-cost regions. Many leading silicon-wafer-based photovoltaic solar companies are located in high-wage countries. These manufacturers produce cells that are typically more efficient than those produced in lower-wage countries... Yet countries like China and India will inevitably gain an overall cost advantage by developing the skills needed to produce more efficient cells. ...

Utilities

...[T]hese companies do have assets in the solar era, starting with strong customer relationships. They are also in a good position to integrate electricity generated at large numbers of different locations (such as rooftops) into the existing network. ... One way of leveraging these assets would be to form partnerships with component manufacturers. ...

Governments and regulators

The decisions of regulators will affect not only utilities but also the entire solar sector. During the march to grid parity, well-understood and targeted subsidies will be critical to build the confidence of investors and attract capital. The impact of government policies in rapidly growing emerging markets such as China and India will be particularly important for the pace of the sector’s growth. ...

While the optimal regulations for different countries will vary considerably, all governments should focus on a few major factors.

• Clarify objectives. ...[R]egulators must decide whether they want to increase energy security, lower carbon emissions, build a high-tech manufacturing cluster, create jobs for installers, or any combination of these goals. ...
• Reward production, not capacity. ... Production-based programs, which reward companies only for generating electricity, create incentives to reduce costs and to focus initially on attractive areas with high levels of sunlight.
• Phase out subsidies carefully. ...[S]ince solar power could eventually be cost competitive with conventional sources, regulators must adjust incentive structures over time and phase them out when grid parity is reached.

Solar energy is becoming more economically attractive. Component manufacturers, utilities, and regulators are making decisions now that will determine the scale, structure, and performance of this new sector. Technological uncertainty makes the choices difficult, but the opportunities—for companies to profit and for the world to become less dependent on fossil fuels—are significant.

About the Authors

Peter Lorenz is an associate principal in McKinsey’s Houston office, where Thomas Seitz is a director; Dickon Pinner is a principal in the San Francisco office.

The authors wish to acknowledge the contributions of their colleagues Joel Conkling, Stefan Heck, and Christer Tryggestad.

Notes

¹Residential retail electricity prices in California increase with the end customer’s usage.

²The California Solar Initiative provides $3.1 billion of subsidies to install 3 gigawatts, or 3 billion watts, of capacity by 2017.

³One gigawatt = one billion watts. As a point of reference, the capacity of a typical coal plant is about 0.6 to 1.0 gigawatts.

⁴Silicon absorbs light less well than the materials currently used to make thin-film photovoltaic solar cells, so they must be thicker to absorb the same amount of light.

⁵Leaving aside nanoscale materials and technologies, there are currently four promising thin-film technologies: cadmium telluride, copper indium gallium diselenide, amorphous silicon, and thin-film polysilicon.

⁶A module is a collection of cells that have been connected together to generate higher current and voltages.

⁷Photovoltaic systems use semiconductor materials to convert light directly into electricity. Concentrated solar thermal power uses mirrors to reflect sunlight onto fluids, which heat up and then pass through a heat exchanger to generate steam and drive a turbine. Such technologies include parabolic troughs, power towers, linear Fresnel reflectors, dish Stirling systems, and solar chimneys.

This article has been updated to reflect factual corrections provided by the authors.

Private Wealth June/July 2008

By Patrick Hunter - 06/4/2008

In recent months, captive insurance companies have come to the forefront of the insurance industry. And as a result, there has been increased interest in what they are and in what benefits they provide, as well as questions about whether they are a viable option for companies. ...

What Is A Captive?

A captive insurer is a privately held insurance company, one that can be a subsidiary of a business that it insures. It issues policies, collects premiums and pays claims just like a commercial insurer; however, it does not offer insurance to the public.

While a captive can be a great financial tool, it will not work for every business. In order to create and operate a successful captive insurance program, the operating company must generally have a substantial amount of risk. ... Other characteristics that make a business more suitable to a captive insurance scheme are when it has:

• Profitable operations, with taxable income ranging from $1.5 million to $100 million;

• Self-insured or uninsured business risk of $250,000 or more;

• 100 or more employees; and

• Commercial insurance expense of $500,000 or more.

... When properly employed, a captive insurance strategy can help a business owner better manage his or her insurance costs, control claims, accumulate surplus in anticipation of unforeseen business problems or catastrophes, and accumulate wealth with tax advantages....

Looking At Risks

The first step for a business owner, regardless of industry, is to take a closer look at the overall risk that your business faces. You should examine risks that are typically insured by commercial property and casualty insurance and consider risks that are already self-insured. A good place to start is by carefully reading your property and casualty insurance policies. This will allow you to see what is covered and what is not. In fact, most policies exclude potentially catastrophic business events such as a product recall or construction defect.

Once you have taken inventory of the various risks, you must assess each one and determine a strategy to address it. For example, certain risks cannot be insured in the commercial marketplace and others must be insured, such as worker’s compensation, which is a requirement in many states....

If the risk is already being self-insured by the business, then structuring a captive enables that business to transfer that risk off its balance sheet and get a tax benefit. For example, a manufacturer that does not have coverage for a product recall can now transfer that risk to a captive via an insurance premium. Thanks to unique insurance company taxation rules, captives rarely pay tax on income in the year in which it is received. What this means for the manufacturer is that a product recall can now be financed on a pretax basis. ...

Finding A Qualified Provider

... When determining if a captive is appropriate, it is important to choose your service provider by examining the following aspects:

• Client references: Check with a provider’s other clients to find out if they are satisfied.

• Experience and track record: Successful captive management takes a combination of accounting and insurance skills. A captive manager’s staff should include people who are qualified in both areas. In addition, one should learn about the manager’s history. How long has the captive manager been in business? How many clients have been audited and what were those results?

• Multiple domiciles: A company should ask if the management team is experienced with multiple domiciles, which can give you more flexibility.

• Ingenuity and creativity: The captive manager should have the ability to develop creative approaches for new programs or to even restructure an existing program.

• Actuarial services: If the captive insurer has an in-house actuary, it may have conflicts of interest. In addition, certification by an independent actuary often has more credibility with insurance and tax regulators.

• Cost: Fees should reflect the value of the services provided. If you want a basic bookkeeping service, the price should be low. Other services will cost more.

Developing and initiating a captive program may not be suitable for all companies, but by employing the tactics outlined in this article, you can make the decision that best suits your company’s needs.  

---

Patrick Hunter is associate director of Alta Holdings LLC, a global leader in captive structuring, formation and     management. He can be reached at (714) 433-2939 or r phunter@altaholdings.com.

How to stay in control when the unthinkable happens

MyBusiness Magazine June/July 2008

by Karen J. Bannan

In November 2006, while Nichole Yarbrough, owner of Shepherd, Texas-based Shepherd Auto Sales, and her husband were at a car auction, thieves broke into her truck and stole her purse, which contained credit cards, checks, $5,000 in cash and more than 40 car titles--ownership papers for all of the used cars on her lot. The theft could have put Yarbrough out of business permanently. But it didn't. Thanks to a lot of old-fashioned legwork and a little gumption, she replaced every lost title, and within two months, her lot was running at 100 percent again.

Yarbrough's story is a perfect example of how a single act can change the course of your business. It's also proof that, unless you plan ahead and take every precaution, your business and livelihood can be completely destroyed through no fault of your own.

"I think the biggest mistake people make is not planning for command and control after a disaster," says Leo A. Wrobel, author of Business Resumption Planning (CRC Press, 2008) and owner of Dallas-based b4Ci Inc, a business continuity firm. "Companies don't plan for the worst, and they don't plan on what they'll need to come back from the worst."

For the Record
The worst, Wrobel says, can come in many forms, including natural disasters, fires, floods, embezzlement, theft, lawsuits or even something as simple as an extended loss of telephone, Internet or electric services. In every case, unless you've got a Plan B, you've got a problem.

Shepherd Auto Sales' Yarbrough ... tightened security both on and off her car lot, installing cameras and locking her office door, especially if she's alone. She also makes copies of every form and title that come into her office--and stores them separately from the originals. ...

This is a smart policy, and one that should not only apply to paper-based forms, but also to electronic forms, files and information, says Lori C. Adamo, the president of Code Red Business Continuity Services. 

...She says, "At least once a week all your data should leave your site automatically so if there's a disaster like a theft, fire, earthquake or hurricane, you've still got a copy of your business information."...

Unfortunately, New Orleans-based Southern Hospitality Catering couldn't have prevented its losses, which included losing its location and all of its food for more than two months and having most all of its employees leave. But its owner, John Rowland, says he came back from near ruin because he had been socking away about $100,000 in an emergency account. ...

"Owners should have three months' cash on hand or at least have easy access to the equivalent in credit to carry them through an emergency," [b4Ci's Wrobel says ].

Losing From Within
Not every threat comes from the environment. Your customers and employees, as well as strangers posing as customers, can also wreak havoc on your business--something Mecki Kosin, president of Quincy, Ill.-based Travel House of Quincy, discovered firsthand.

In October and November of 2006, Kosin got calls from someone posing as a physician who wanted to purchase airline tickets for people he called his "associates." Using credit cards to fund the purchases, the impostor rang up more than $16,000 worth of charges. ... Kosin's customer was actually an identity thief ... When some of the true owners of the cards noticed the fraudulent charges, they complained. The credit card companies sent back the charges, and Kosin was responsible for the damages.

David Majercik, who owns Williamsburg General Store Inc., had ... a trusted employee he caught dipping into the cash register. To this day, he's not sure how much was taken, though he says it's definitely in the "hundreds of dollars range." ...

Both Kosin and Majercik say they have taken preventative steps to avoid being a victim again. In Kosin's case, she now requires a credit card imprint and signature for all customers who walk in off the street, and a telephone approval for all phone orders. ...

Majercik ... won't hire anyone without a thorough background and reference check, and he assigns cashiers to specific registers, so if one is short, he knows who was working it that day. Another way to prevent employee theft, b4Ci's Wrobel says: Limit access to cash, checks and securities. "Accounts should be password protected, and owners should put operating and security standards in place so a manager can't spend more than $500 without a second signature. Make sure you're shredding all documents that contain sensitive customer and business information."

When It's Out of Your Hands
For Soo and Jin Nam Chung ... own a dry cleaner in Washington, D.C., were sued when a customer complained that they lost his pants. The $65 million lawsuit rang up more than $100,000 in legal fees...

... It was a high-profile case with a large award request attached to it, so they got plenty of press and support, which is unusual. What's not so unusual, says Mendi Sossamon, one of the lawyers representing the Chungs, is the fact that they were sued at all.

...Thankfully, there are ways to protect your business, she adds. The first order of business is forming an LLC or by incorporating, both of which can be done without a lawyer's help. This shields your personal assets from the lawsuit. Another tip is having liability insurance. "If the Chungs had insurance it could have covered any legal fees and damages," Sossamon says.

And the final strategy--one that served all of the above business owners well? Keeping a positive attitude--Southern Hospitality Catering's Rowland says this made the real difference when he was facing the loss of his business.

"We were told that 80 percent of all the small businesses in New Orleans wouldn't make it," Rowland says. "Right off the bat I said, ‘I'm going to be in that other 20 percent.' You have to believe."

---

NFIB.com
Learn more about protecting your business from a crisis in the "Insurance" section at www.NFIB.com/toolsandtips.

---

Staying in Survival Mode

Every crisis requires a specific plan to keep your business afloat. Our experts share their methods for preventing the following crises:

Disaster: Backing up is essential, says Lori C. Adamo, president of Code Red Business Continuity Services. Every week you should move copies of electronic files, titles and forms off the premises in case of disaster. You can also store records using an online data backup service, such as Mozy.com, IronMountain.com or EVault.com.

Theft: Business theft can come at the hands of anyone... Mecki Kosin, president of Travel House of Quincy, ... now requires a credit card imprint and signature from every customer. Theft can happen internally, too: David Majercik, owner of the Williamsburg General Store, combats employee theft with video surveillance and by performing extensive background checks on potential employees.

Lawsuit: "Having liability insurance is important," says Mendi Sossamon, a lawyer who represented Soo and Jin Nam Chung when a customer of their dry cleaning business nailed them with a $65 million lawsuit for losing a pair of his pants. Also, forming an LLC or incorporating can help protect your personal assets, Sossamon says.

MyBusiness | Full Story

 Companies get creative in offers of cash, annuities and other products

InvestmentNews

By Lisa Shidler
June 9, 2008

Corporate cutbacks may provide an opportunity for financial advisers: to help employees who have lost their jobs analyze the increasingly complicated buyout packages that companies are offering.

General Motors Corp., for example, recently offered employees buyout packages that included cash payouts, annuity options and tax-free contributions to their 401(k) plans. ...

Many companies are offering similarly complex packages, said Ted Feight, president of Creative Financial Design in Lansing, Mich.

"You're going to see [more of] these creative offerings, because [employees] didn't bite on the first one," he said. "[Companies] are fishing, and they'll see which bait works best."

Enlarge This Photo  Tom Ruggle

While buyout offers will continue to become more creative and will include more options — driven by employers' motivation to cut costs — that doesn't necessarily mean that the choices are better, said Tom Ruggie, president of Ruggie Wealth Management in Tavares, Fla. ...

"The offers are more imaginative, but if you read through all of the BS, you basically find it's a cost-cutting deal for the companies," Mr. Ruggie said. "They want to get rid of employees — typically, older people — who have escalated to higher salaries."

If annuities are offered, Mr. Ruggie said, advisers must spend a significant amount of time determining whether taking the annuity is in the client's best interests. ...

Enlarge This Photo

Jobs on the line: Workers like these at a General Motors plant are being offered complicated buyout packages.

Tax considerations are driving another payout choice — allowing employees to put pretax dollars into a 401(k) plan, said Charles Ballard, a professor of economics at Michigan State University in East Lansing. Where lump-sum payouts are taxed immediately, the same amount of money deposited into a 401(k) plan will grow tax-free until it is withdrawn.

"I think we'll see all sorts of creative ways to do this, because employers can give employees a bigger bang for the same buck," Mr. Ballard said.

Company officials said they have begun offering these new options this year to give employees greater incentive to leave. ...

The most creative part of GM's offering is its retirement incentives, said Dan Flores, a GM spokesman. ...

The GM incentives came from the company's overfunded pension fund, and workers did not have to pay Federal Insurance Contributions Act (FICA) taxes.

"We were interested in a program that employees would be interested in, and wanted to give them as many options and choices as possible," Mr. Flores said.

Enlarge This Photo Craig Carnick

Outside the auto industry, other companies are getting creative as well, said Craig Carnick, a certified financial adviser and principal of Carnick & Co., a fee-only financial advisory firm in Colorado Springs, Colo. ...

"We've seen some very interesting things in terms of employees' being let go and then rehired as consultants," Mr. Carnick said.

He said more employees have received more attractive joint survivor benefits than in previous years. "It's become almost a no-brainer to select the joint survivor payout," Mr. Carnick said.

E-mail Lisa Shidler at lshidler@investmentnews.com.

MyBusiness Magazine June/July 2008

Ranked the No. 2 problem by small business owners: The cost and availability of liability insurance

Joe Nelis' family has been entertaining others for 50 years at their Holland, Mich., theme park, Nelis' Dutch Village. But Nelis wasn't amused one afternoon six years ago when a park visitor from Wisconsin tripped and fell on one of the park's brick pathways.

...The offending brick the Wisconsin visitor tripped over was less than a half-inch higher than the others around it. But because the elderly woman had fallen somewhere else a month earlier, the second fall meant she had to have hip-replacement surgery--and she wanted the Dutch Village to pay for it.

...Over the course of the year, the cost of her healthcare ballooned, while Nelis' insurance adjuster continued to argue that the Dutch Village wasn't responsible. ...

... Nelis himself spent hours dealing with the issue--valuable time that he could have spent on his family's business. But when Medicare's team of cost-recovery lawyers came after Nelis' insurance adjuster, the Dutch Village's company settled, and a few months later, Nelis received a non-renewing letter from his insurance company.

...The non-renewing letter was bad news, as it made it even more difficult to get coverage from other companies. When Nelis finally did secure new liability coverage, his annual costs jumped from $45,000 to $80,000. ...

A growing crisis
As costly, time-consuming and frustrating as Nelis' case was, it's just one of the thousands of small business stories across the country that point to the need for liability reform. Small business owners rank the cost and availability of liability insurance as the second most important problem facing small business today (behind the cost of healthcare), according to a 2004 study by the NFIB Research Foundation.

"The fact is that NFIB members and the millions of small businesses across the country are prime targets for outrageous liability suits because they do not have the resources to defend themselves," says Karen Harned, executive director of the NFIB Small Business Legal Center. "Small businesses cannot pass on the cost of liability insurance to consumers or pay the large lawsuit and insurance awards without suffering losses."

Even if small business owners haven't been sued, the threat of a lawsuit is a real fear for nearly half of NFIB members, according to an NFIB Research Foundation National Small Business Poll. ...

A few years ago, Tiger Joyce, president of the American Tort Reform Association, an organization dedicated to reforming the civil justice system, spoke with the attorney of a major corporation who told him that they didn't consider cases where plaintiffs were seeking less than $1 million as very serious ones. "But to an NFIB member, a case like that would be life or death," Joyce says. ...

Small business, big target
Stopping frivolous suits is one of the most important steps of tort reform. Last year the NFIB Small Business Legal Center won a significant victory in the fight against a notorious abuser of the Americans With Disabilities Act. Jarek Molski filed more than 400 ADA lawsuits in California, establishing a clear pattern of abusive litigation--the majority of it targeted at small businesses. In each case, Molski filed suits without ever mentioning the problem to the business owner. He and his attorneys intimidated hundreds of small businesses into settling their cases--until 2004, when one business owner took on the fight.

The NFIB Small Business Legal Center filed a brief in the case, supporting the business owner who had been targeted by Molski. The court sided with small business, labeling Molski a "vexatious litigant" who wasted the court's time and perverted a well-intended law meant to provide the disabled with suitable access to public accommodations.

"The sad truth is that not all small business owners are able to challenge such drive-by lawsuits," the NFIB Legal Center's Harned says. "Only in rare instances do these small businesses have the resources and principled desire to fight frivolous threats." ...

"Small businesses are the target of so many of these frivolous suits because trial lawyers understand that a small business owner is more likely than a large corporation to settle a case rather than litigate," Harned says. "Small businesses don't have in-house legal counsel to inform them of their rights, write letters responding to allegations or provide legal advice. They don't have the resources needed to hire an attorney nor the time to spend away from their business fighting small-claims lawsuits."...

In addition to the financial and emotional stress a lawsuit brings upon business owners, many who have been sued say one of the most frustrating aspects of the ordeal is the lack of control. Like NFIB member Joe Nelis, small business owners often have no say over the final outcome. Instead, their insurance companies make the call and often end up settling--setting a dangerous precedent and encouraging future filings.

For Nelis, the experience left him fed up with insurance companies and the entire litigation process. "It really makes you look long and hard at the self-insuring part of it like the big companies do," he says. "I'd have accumulated hundreds of thousands of dollars since the incident happened five years ago. That would have given me some options when dealing with insurance companies. But you can't go without it. If something catastrophic happened, I'd have to hand over the keys to my business."