Tag Archives: March 2009

money stack

Credit Unions Were Well Capitalized Leading Into The Recession

Arizona credit unions are weathering the rocky economy fairly well, but not without some bumps and bruises along the way. More than 20 of the 55 credit unions in the state have seen their bottom lines slip into the red. Even so, conservative and prudent lending policies that steered them away from the risky subprime market, and the fact they are well capitalized, have put credit unions on solid financial ground.

Insiders say the No. 1 measure of solvency is capital, and credit union capital ratios are considered quite healthy.

Credit unions, which are not-for-profit institutions and do not have stockholders to satisfy, nevertheless are feeling the pain of their members who have lost jobs or might even be in danger of mortgage foreclosure or bankruptcy.

Michael Hollar, vice president of business financial services for the 68,000-member Arizona Central Credit Union, describes the percentage of its loans that are in delinquency as “fairly high.” As of late last year, 1.67 percent of Arizona Central’s loans were in jeopardy, compared to 0.5 percent 12 to 18 months earlier.

If a payment is 11 days late, the credit union contacts the member to find out what the problem is. If the payment is 60 days late, steps are taken to ease the member’s financial pain by extending the amortization and lowering the interest rate.

“From a bottom line perspective, we were well into the red in 2008, roughly $6.5 million,” Hollar says.

“The reason is that we put a significant amount of money into reserve for loan losses. Every time we write something off, we put that much into reserve.”

Through 11 months of 2008, Arizona Central had put $10.6 million into its reserve fund, compared to $1.6 million for the corresponding period in 2007, reflecting the result of troubled loans.

“People walk in with the car keys and say they can’t make the payment anymore,” Hollar says. “It’s amazing. We’re lucky to get 50 cents on the dollar on that vehicle when it is sent to auction. Values are down. We’ve had a fair number of home equity loans that we wrote off. There’s no equity in the home anymore. The first mortgage is probably more than the house is worth.”

The goal was to pack as much bad news into 2008, so Arizona Central could hit the ground running in 2009, Hollar says.

Most credit unions have a very strong capital base. Any capital ratio to total assets in excess of 7 percent is considered by the National Credit Union Association to be well capitalized. In the past year, Arizona Central slipped to more than 10 percent from 11 percent, still well above the 7 percent plateau.

“We’re still north of 10 percent,” Hollar says. “As far as long-term stability, there are no issues. We’re not panicking by any means.”

The sinking economy, however, led to some changes in Arizona Central’s already conservative lending policies. Home equity loans that were offered for 100 percent of a home’s value, now are limited to 80 percent.

Steve Dunham, CEO of Canyon State Credit Union and board chairman of the Arizona Credit Union League and Affiliates, assesses the industry’s status: “I think we’re doing pretty well.”

He cites such factors as credit unions being not-for-profit organizations chasing quarterly profits, and avoiding higher-risk activities, including subprime and no-documentation lending.

“That helped protect us,” Dunham says. “Capital at credit unions was at an all-time high going into the recession. Credit unions started out with very good capital, and we still have very good capital at this point. By and large, I think credit unions will weather the recession very well.”

At Canyon State Credit Union, the 20th largest in the state with $140 million in assets, the number of members who are encountering financial difficulties is accelerating somewhat, Dunham says.

“As they have difficulty, so do we,” he adds. “As unemployment rises, more members are losing their jobs or having their hours cut. Real estate loans that everybody thought were well collateralized, with the drop in real estate values, now we’re discovering they are not so well collateralized. We’re very conservative as far as identifying what that real estate value is.”

Like other credit unions, Canyon State works with its members to help them through tough times on a case by case basis.

Even though some credit unions are operating in the red, Scott Earl, CEO of the Arizona Credit Union League and Affiliates, doesn’t expect consumer members to see much difference when it comes to borrowing. However, credit unions might require more documentation before awarding a loan than they did a year or two ago, he says.

At First Credit Union, where defaulted loans have increased mostly for autos, Carolyn Cameron, vice president of business development, says membership actually rose slightly in 2008 to nearly 60,000.
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“We stepped up our relationship building, our marketing efforts, working hard to attract new members and retain our current members,” Cameron says.

On the financial side, Cameron says, “Our very strong capital position prepared us to weather fluctuations in economic conditions. We also added provisions for dealing with increased loan losses. We eliminated construction loans, and we came out with an assistance program for members having trouble.”

Assistance may involve deferring or reducing payments, and reducing interest rates to help borrowers get back on their feet, she says.

What is it going to take to turn the economy around? Dunham, chairman of the Credit Union League, says the answer is simple.
“In Arizona, we need to absorb the excess real estate that’s available and get home building started again.”

software

Failing To Honor Copyrights On Software Could Cost Company Thousands

If you use software in your business, a little knowledge about an often misunderstood area of the law could save you tens and possibly hundreds of thousands of dollars. The area of the law is copyrights — but don’t stop reading just because you know you would never illegally copyright software. I have had many clients come to me faced with serious financial sanctions who thought they did nothing wrong.

Perhaps you have never heard of the Business Software Alliance. You are lucky. If you don’t have written agreements with your employees about computer usage, you need to reconsider. And if you have no interest in reading that long license agreement before you click “accept” … well I can’t blame you, but you should at least read it before you make any extra copies of the program.

Let’s start with the basics. Microsoft owns the copyright on Word, Auto Desk owns the copyright on AutoCAD, and Adobe owns the copyright on Acrobat. If you “bought” any of those programs or any other software, you really only licensed them. Whether you bought a CD in the store, downloaded it from the Internet for “free” or it came bundled on your new computer, your use is subject to whatever conditions the copyright owner wishes to impose. If you exceed your permission, then you are violating the copyright. Another basic — you are responsible for the actions of your employees, even if you did not know they were violating the copyright law.

Now let’s discuss a few common myths. Each of the following statements is absolutely false: (1) I can make extra copies for my own use as long as I don’t give or sell them to third parties; (2) I don’t use that computer anymore, so I can just copy the program onto the computer that I do use; (3) it was free on the Internet so it is in the public domain; and (4) they are not interested in going after a small company like mine.

The only way to really know whether an archive copy is permitted or how many different computers you can legally load the software onto is to read the terms of the license that you accepted when you downloaded or installed the software. Don’t assume. Don’t rely on the representative who sold it to you and don’t rely on your tech person. In almost every instance where one of my business clients was accused of copyright infringement, the business assumed or believed that the extra copies were permitted.

Finally, let’s discuss the myth that your business is too small to attract attention and why you should familiarize yourself with the Business Software Alliance (BSA). The BSA is a trade association for copyright owners and it has one purpose — the protection of the copyrights of its members. Its members range from big players like Adobe and AutoCAD to smaller software companies. By turning these enforcement issues over to the BSA, the companies can focus on what they do best — write and develop software. What the BSA does best is locate, negotiate with, and sue infringers. A popular source of information for the BSA is disgruntled former employees. The BSA periodically runs advertisements offering rewards for information. No case is too small and no business is too small for the BSA. Also, the BSA’s idea of negotiation is to slightly discount the full damages. Since copyright laws provide for statutory damages of up to $150,000 per infringement, plus attorney fees, the exposure is significant and the alternative to accepting their proposals is daunting.

With just a few preventative measures, you can protect your business. First, educate your employees on the dangers of unauthorized copying and implement written policies and contracts that prohibit or provide a protocol for any software downloads or copies. By having appropriate policies, you may decrease the amount of damages that can be claimed against you. You will still be responsible for your employees’ conduct so it is important to educate and re-educate your employees on the importance of following the policy.

Another preventative measure is to review your current software and licenses. Un-install any extra copies that are not authorized. When you add a new computer, do not install any software from previous computers without reading the license provisions and determining whether the new install is authorized.

Most importantly, treat copyright protected intangible property such as computer software like you would treat tangible property such as fixtures and equipment. Teach your employees to do the same. You wouldn’t steal or even borrow your neighbor’s car without permission. Respect the intangible property of others in the same way and you are far less likely to find yourself on the wrong side of a copyright infringement claim.

The Ubiquitous Topic Of Green Is Popular For A Reason — It Works

The Ubiquitous Topic Of Green Is Popular For A Reason — It Works

Lake Superior State University may not be too well-known, but it does generate some publicity each year with the release of its annual List of Words to be Banished from the Queen’s English for Mis-use, Over-use and General Uselessness.

Those who tire of hearing or reading certain words and phrases go to the Michigan university’s Web site and nominate them for consideration. The big losers for 2009 are the word “green” and such related phrases as “going green.”

Good luck with getting those banished — especially in Arizona.

Many who have been beating the drum for energy efficiency, water conservation and sustainable business practices have found willing ears in executive suites across the state.

General Dynamics C4 Systems in Scottsdale is just one company that has proactively embraced standards set forth by the U.S. Green Building Council under its Leadership in Energy and Environmental Design, or LEED, Green Building Rating System.

Genesis Worldwide Enterprises in Cottonwood took a bold step forward in 2005, when it installed an 84-kilowatt photovoltaic power system, which then became the second-largest private commercial solar power system ever installed in Arizona.

It’s impossible to log onto Web sites for such utility companies as Arizona Public Service, Salt River Project or Tucson Electric Power without being directed to information about their green programs and services.

And if none of that is convincing enough, consider this. Light rail has come to the Valley of the Sun with the debut of a 20-mile, $1.4 billion system in late December.

Granted, these are just some of the steps Arizona businesses and municipalities are taking along the road to sustainability. But they are important steps.

“We could get a lot better than we are, but we’re doing pretty darn good,” says Charles Popeck, president and CEO of Green Ideas Inc., an environmental building consulting firm in Phoenix, and one of the founders of the USGBC’s Arizona chapter.

And Popeck sees a general acceptance of sustainability principles throughout the Arizona business community, not just among specific industries such as high-tech firms.

“I’d have to say it’s across the board. Everyone seems to be catching onto it,” he says. “The reason is it’s just common sense. I mean, how can you argue with saving water and saving energy?”

Bonnie Richardson, the new chair of USGBC Arizona, believes the decision to go green usually starts at the top.

“I think it really comes from the corporate philosophy,” she says. “I do think that folks in high-tech businesses have been exposed to more of the new ideas and so they tend to be more willing to embrace and try things out. However, I think we’re now at that tipping point where it just makes good financial sense for businesses to do this, and that’s where it’s going to be a lot easier for people to adopt it.”

John Neville, a sustainable systems consultant and president of the Sedona-based networking organization Sustainable Arizona, emphasizes those financial considerations in terms of a willingness to go green.

“Sustainability means the ability to last,” he says. “And if you look at your business and make business decisions based on the idea that you’re going to last a long time, then you look at your expenses and your income in a different way. If all you’re concerned about is next quarter, then you make your business decisions differently and you’re not going to be sustainable.”

When LEED-accredited professionals like Popeck, Richardson and Neville talk about sustainability and business, they oftentimes are referring to companies and institutions that are seeking one of the various levels of LEED certification.

According to the USGBC, “LEED promotes a whole-building approach to sustainability by recognizing performance in five key areas of human and environmental health: sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality.”

In fact, the nationally recognized LEED certification system is not just restricted to new construction. There are ratings programs for existing buildings, schools, commercial interiors and retail spaces among several others. Each category has a specific checklist that earns points for applicants. The more points earned, the higher the rating level with basic certification at the low end and the LEED Platinum level at the top.

Those going for new-building certification can earn points, for example, by locating a building on a site that accommodates alternative transportation methods for its employees, maximizes open spaces, utilizes water-efficient landscaping, has on-site sources of renewable energy and implements a construction waste management program.

USGBC Arizona includes a statewide list of completed LEED-certified projects on its Web site.

Popeck argues that green buildings are no more expensive than any other type of new construction.

“I think the biggest misconception out there is that it has to cost more upfront. It certainly does not,” he says.

When costs go up, it’s usually because someone decided to go for LEED certification well after the design process got under way.

“That is a typical problem out there and then people say, ‘Well green building costs more.’ Well it doesn’t really cost more,” Popeck says. “It’s because you designed your building twice that it cost more.”

Companies can recoup some of the expenses involved in greening their buildings through government tax credits and utility company rebate programs. But there are also significant savings from taking a green approach. This can include lowering the price of energy and water, as well as trimming shipping costs by sourcing construction materials locally or rethinking product packaging.

So why isn’t everyone going green these days?

“Of course, the downturn economically has hurt us,” Richardson says. “But I don’t think it was particular to green building. I think it was just across the board because our construction industry here was really devastated and it’s going to take some time for all of that to come back.

“So we’re no different than any other part of the country where the downturn is slowing growth for some of our new businesses and also, perhaps, people aren’t confident to make big investments at this moment.”

Neville seconds that.

“Everyone kind of pulls in during an economic slowdown,” he says. “It’s difficult at times when you have cash-flow issues. It’s very difficult.”

Neville is certainly not opposed to companies jumping into the green movement with both feet, but in some situations he thinks it’s actually better for companies to take incremental steps.

When he works with a business or government entity, they start out by analyzing the organization’s mission.

Neville outlined the process: “You take a look at, ‘What am I trying to accomplish here? How does my business work?’ Whether it’s a business or running a city or running a school, you say: ‘How does this work? What are all my businesses processes? What are the things that really please the customer?’ And then, ‘How can I do those and get rid of the other things that I’m doing that are ridiculous?’

”He points to a printer who saved money while going green by switching from inks containing volatile organic compounds. This eliminated the need for filing a toxic release inventory report every year, which involved hiring an outside firm to conduct an audit.
“Going green is getting better at your job. It’s doing your business better,” Neville says. “Becoming more sustainable is becoming a higher-quality business, a more efficient and effective business. That’s really what it is.”

Richardson, who works as an architect and principal planner for Tempe’s transportation division, says it’s important for those promoting sustainability to make outreach and educational efforts during a downturn.

“As we recover, there will be people with a lot more ideas about what they want to do with their business and what direction they want to go,” she says. “What’s really interesting is that once you get people looking into it, they recognize that there’s significant savings for businesses that decide to grow their business green.”

Anthony Floyd, another LEED-accredited professional, manages Scottsdale’s green building program. His city does a lot more than just talk the talk when it comes to environmentally responsible building.

In 2005, Scottsdale passed a resolution mandating that the city adopt a LEED Gold policy for designing, building and constructing new municipal facilities. The Granite Reef Senior Center, which opened in 2006, became the city’s first such building to earn LEED Gold certification. There is a new fire station that was going through the certification process earlier this year.

The Scottsdale green building program is primarily a residential program, but it plays an important role in terms of influencing commercial entities.

“When we started the residential program, after a few years of that we realized that we needed to start practicing what we were preaching,” Floyd says.

They set the bar high, he says, because “we realized we need to lead by example.”

Floyd serves as a green-strategies resource for various Scottsdale departments, other Arizona communities and numerous organizations. In early 2008, he put together a report for the AZ Minority Green Business Conference titled “Greening the Building Process.”

The report contains pertinent strategies, facts and figures. But it also covers a practice known as “greenwashing.”

“It’s just like whitewashing,” Floyd says. “I mean, there are a lot of companies out there that are advertising themselves as being green. But you really have to look deeper.

“There are multiple attributes to green building and there are shades of green.”

Like manufacturers that freely trumpet the sometimes debatable health benefits of their products, there are others who “mislead consumers regarding the environmental practices of a company or the environmental benefits of a product or service.”

Floyd uses the example of a business that may have sourced some construction material locally and uses that as a reason to promote itself as being green.

“But that’s greenwashing,” he says. “Just one particular product is not going to make a building green. It’s about the strategy and the design, and the combination of materials and resources that determines the overall greenness of the project.

“You can’t just look at water and say you’re green. You can’t just look at energy and say you’re green. In a building, you have to look at everything.”

But water and energy are two important considerations in Arizona, where the first may be scarce before long and the second can be extremely costly during summertime.

“In most of the LEED buildings that are being done, there is real focus on both water and energy,” Richardson says. “And that’s a new tack for Arizona.”

There are various ways to trim the use of potable water, such as installing low-flow fixtures and waterless urinals, harvesting rainwater and landscaping with native plants as Tempe does at its new transportation center.

“As long as water is relatively inexpensive, it’s a little harder to make the case that that investment turns around quickly,” Richardson says. “But I think over the next five years, there’s going to be a lot more discussion about how valuable water is in the desert and how we really need to change attitudes about managing it in a better way.”

Water efficiency is a major issue for Popeck. “It’s my pet peeve, really,” he says. “Yet every time you go into one of these project team meetings, you know, no one seems to get it. Everyone thinks the water’s unlimited. And it’s just really not.”

The need for energy efficiency and renewable energy are not just arguments coming out of Washington, D.C., these days.
Neville likes to say that the least expensive energy around is energy you don’t use. Energy is among the highest expenses on business ledgers.

“Whenever possible,” he wrote in a Sustainable Arizona position paper, “developments should incorporate energy technologies that rely on available, renewable, clean energy sources, such as solar, wind, ground-source, geothermal and other beneficial resources.”

Floyd is similarly inclined.

“If you’re green and you’re in Arizona, you need to be doing renewable energy,” he says. “It’s not an option. If you’re green, you should be generating a portion of your electricity using solar.”

There’s another, equally important part to this strategy, Floyd argues: “You need to start by reducing your energy load by being energy efficient. And then once you do that, you get a bigger bang from your solar buck.”

Pick the Right Employee

Hiring The Right People Is More Important Than Ever, But Are You Asking The Right Questions?

When the economy slows, companies tend to slow their hiring and expect more from their existing employees. It quickly becomes critical that employees perform up to these new, heightened expectations. For those positions that companies do hire for, selecting the right candidate becomes more important than ever. However, many hiring managers tend to ask the wrong questions, focusing the interview on traits that are very trainable versus those traits that a company cannot train.

Hiring managers tend to focus questions on experience for the position, systems knowledge, actual time spent doing the job with previous employers, etc. In fact, these are actually poor predictors of a candidate’s success in the workplace. Generally, only employees applying for professionally educated positions (e.g. engineers, chemists, attorneys, etc.,) are exempt from this best practice. So what should you focus your interview on?

Focus of questions
Center your questions on traits that take more effort to develop. Interview questions should dwell on attention to detail, the candidate’s passion for the job, their initiative, and their self-confidence, to name a few.

There are many hiring managers that value a relative lack of experience (and many human resource managers that agree). Candidates without experience tend to lack the bad habits typical of those with experience. It is often easier to train a green candidate from ground zero (sometimes called growing a candidate organically) versus “untraining” an experienced candidate’s bad habits and then inserting the desired habits. A candidate who has worked for several companies doing similar roles and is now in your office looking for a job may have a significant number of bad habits and has a track record of leaving previous employers for “employment competitors.”

Experience is one of the easier items to give a new hire. However, try giving a new employee stronger customer-service skills, greater self-confidence to deal with those problem vendors, or a hunger for doing a great job. Those are not easily trainable, so those traits are what an interview should focus on.

Types of questions
Spend your time asking the candidate behavior-oriented questions. Typically, these questions start with phrases like, “Tell me about a time when you …” or “Give me a specific example of a time when you …” When asking these behaviorally focused questions, it is critical that the candidate gives you one specific example. Further, ensure he isolates his role in his example; don’t allow him to use words such as “we” or “our.” If he does, ask him what his specific role. This helps ensure his answer provides you with the information you need.

The days of asking, “If you were a tree, what kind of tree would you be and why” are over. The current trend is asking negative questions — questions that force a candidate to talk about her weaknesses. This helps you see her willingness to admit mistakes, how she has handled mistakes in the past, and — most importantly — what she has learned from those mistakes.

Sample questions
Putting these guidelines together is the key to a solid interview. Some general, behaviorally focused questions include:

Tell me about the last time you had a disagreement with a co-worker and what you did about it? — Listen to what the issue was over, how productive and mature the approach was, and what he specifically did to solve the problem. Candidates who have a passion for their work will work to resolve issues with co-workers and will keep the boss informed of personality clashes, typically without asking for intervention.

Tell me about the biggest mistake you made in the last 12 months and what you learned from it. — This negative question forces the candidate to take ownership for a relatively large mistake and should end with her telling you what steps she took to ensure a similar mistake (e.g. a time-management snafu, a relationship-building blunder, etc.) would not happen again. All employees make mistakes. Admitting them and taking corrective steps is the absolute most an employer can ask from their employees.

Give me your top three strengths and your biggest developmental need (weakness). — It is very telling to hear what a candidate believes are his behavioral strengths, as well as his biggest need. Listen for strengths that are traits you cannot teach a candidate (e.g. passion for the job, ability to work with others, etc.). Do not let candidates get away with telling you that their biggest need is that they work too hard or plan too much. Tell your candidate to dig deeper.

Interviews can be very useful at pulling out the different strengths and weaknesses of a candidate, as long as the interviewer is focused on the right personality traits and asks the right questions. Pull their experience from their resume, but pull their personality from their interview.

Small Businesses getting help in down economy

Despite Weak Economy, Credit Unions Are Providing Financial Assistance To Small Businesses

When talking about credit unions and business loans, the key word is small. The percentage of business loans to credit union assets nationally is about 2 percent; business loans in Arizona average about $240,000, compared to $180,000 nationally. And because the loans are relatively small, the focus is on small businesses. Federal law caps credit union business loans at 12.25 percent of total assets.

“With business loans hovering at around 2 percent, it tells you that a lot of credit unions are not doing business loans. But they have plenty of room to assist businesses,” says Scott Earl, CEO of the Arizona Credit Union League and Affiliates.

One of the reasons that a majority of credit unions, especially smaller ones, don’t dabble in business lending is because of the level of expertise required.

“You need to be fairly sophisticated,” Earl says. “Traditionally, larger credit unions have the ability and staff support to make business loans.”

Of course, not all business loans require a lot of sophistication. Perhaps a teacher has a summer job doing yard work and needs a trailer to haul things around. In fact, many of the loans go to sole proprietors, and some involve small-business owners who were turned down by a bank.

“We hear stories like that all the time,” Earl says, “and not because of economic conditions.”
Traditionally, a credit union gets involved in business loans because some loans are too small for the average bank — not worthy of their time and effort. That’s probably a bigger issue during an economic boom, Earl says.

“We’re making business loans. You hear about banks pulling out of business lending. But we have not done that,” says Mark Olague, assistant vice president of business lending for Desert Schools Credit Union.

He tells of a business prospect who had a construction loan with a bank and was having difficulty getting timely advances. Not only did the credit union make the construction loan, refinancing was approved for commercial loans on several of the client’s other Phoenix area properties, as well.

“We were able to step up and do the construction loan for that small business, making our member happy,” Olague says. “The key regarding the credit union world is that not only are we here to service business loans, we’re looking for relationships. We are relationship-oriented.”

In addition to providing an attractive interest rate on a business loan, credit unions offer such services as a checking account, credit card options for sales and purchases, and a 401(k).
“We’re like a one-stop shop,”

Olague says. “We can make loans for an overdraft line of credit for as small as $2,000 or for the purchase of a business vehicle for $30,000 to $40,000. Generally our footprint is from $25,000 to $2 million.”
Desert Schools’ business members generally seek loans for purchasing a fixed asset to start a new business.

“We’re not entertaining startups,” Olague says. “Normally, we’re looking at businesses that have been in existence for at least two years.”

All, however, is not rosy among credit union business members. A few have had bankruptcy issues and cash flow difficulties.

“We’re here for them in good times and bad times,” Olague says. “We may modify their loan to make payments easier for the interim.”

At First Credit Union, which has been making business loans for four years, Joe Guyton, senior vice president of credit, says he’s not seeing startups like he did a year earlier.

“The economy is clearly having a big impact on the capital needs of beginning a business,” Guyton says.

“There are not many people out there with the confidence to start a business. Our business members are coming in to maintain their borrowing relationship. They are concerned about losing that relationship. The amount of inquiries regarding new projects has almost dried up — anything with construction dollars on it.”

Although some business members have filed for bankruptcy, because First Credit Union is relatively new to business lending, the impact on it is considerably less than it would be on a major bank, Guyton says. Fewer than 1 percent of the credit union’s 60,000 members are businesses.

“We’re in a good position to continue to help them,” he says.
Michael Hollar, vice president of business financial services for Arizona Central Credit Union, says most of his business members are struggling. Last year, when gas prices skyrocketed, business members making deliveries took a huge hit. They were looking for alternate sources of fuel and were not seeking loans to buy new vehicles. They repaired what they had.

“A few of the savvy ones, when interest rates started dropping on the real estate side, came in to refi a loan with lower rates,” Hollar says. “We accommodated most of them. We charged a fee, but they were OK with that, rather than staying with the same payments.”

The volume of loan requests dropped considerably during the last three-to-four months of 2008. There were a few startups, mainly from people who had been laid off and were trying to go into business for themselves.

“In this environment, there is very little interest in businesses buying a new piece of equipment or looking for a building,” Hollar says. “They’re hunkering down to ride out the storm, hoping that 2009 brings a brighter day.”

Mixed Use Development

Mixed-Use Developers Urged To Plan For Defect Claims Before Signing Contract

Developers of mixed-use projects can reduce the likelihood of costly construction defect litigation by anticipating risk and allocating responsibility at the time of contract. Unfortunately, developers often assume that the standard industry forms provide sufficient protection.

These forms, however, rely heavily on good faith for resolution of issues in the future. There are certain approaches developers can take to protect them, prevent construction defects and resolve issues arising from them.

Determine project function and likely defects prior to contract
The developer’s contracts with contractors and designers are best structured after the developer has arrived at a clear “big picture” understanding of how the project will function. Gaining this understanding includes consideration of regulations, financing, insurance and marketing plans specific to the development. It would behoove the developer to conduct a “what if” analysis to determine the defects most likely to result from failures in the design or construction.

Knowing how the project will function and what defects are most likely to arise places the developer in the best position to craft project-specific core objectives for negotiation of the contract.

These core objectives related to defects should include:
A clear allocation of responsibility and accountability for preventing critical defects.

A determination of comprehensive insurance and bonding requirements based on an assessment of which risks can and should be covered.
A clear statement of how disputes will be triggered and resolved during and after completion of the project.

Resolution of disputes deserves particular attention given the implications of technical issues and the possible need to involve numerous categories of potentially responsible parties. The solution will differ from project to project.

Beware of the economic loss rule
Developers sued for construction defects invariably look to the designers and contractors for indemnification. If the designer or contractor is not held financially responsible however, the developer may remain on the hook even if subcontractors are truly at fault. Subcontractors can be immune from liability for construction defects under a principle known as the “economic loss rule,” which provides that a party whose claim is based upon a financial loss caused by construction defects is only entitled to recover under contract theories against those with whom it has a direct agreement. To the extent the economic loss rule applies, it prevents the developer from suing the responsible subcontractor, unless the subcontract provides otherwise.

Developers concerned about the economic loss rule typically require in the prime contract that each subcontract include text specifically indemnifying the developer from suits for construction defects caused by the subcontractor, and names the developer as an “intended third-party beneficiary” of the subcontract with the right to directly sue the subcontractor.

Require indemnification and defense
Developers typically do not cause construction defects, and assume the insurance furnished by the designer or contractor should be the primary source of payment for all related costs, including defense costs. Yet, under the standard industry form indemnity, the primary responsible party does not provide for defense. To address this gap, developers can explicitly require a defense obligation in addition to indemnity.

Nip the issue of warranty claims in the bud
There is the potential for confusion and discord in efficiently responding to warranty claims, given there will likely be multiple parties potentially responsible for the design and construction. Developers concerned with this concept should negotiate contract provisions for a “warranty response contractor” to ensure warranty/defect claims from third-parties are responded to and accommodated promptly, with allocation of responsibility being addressed later.

If the developer envisions the project to be above average in quality of design or construction — which is normally the case in upper-end developments where quality of construction administration is considered important to minimizing defects — the contract should memorialize that expectation. Otherwise, the enforceable measure of performance could be the minimum standard, which may make it more difficult for the developer to prove a breach of the standard of care and increase the likelihood of defects due to lower performance standards. To avoid disputes, the contract should reflect any understanding that performance will exceed minimum standards.

Contractual language dealing with any or all of these concepts is only as effective as the effort given to integrate them with the other contract provisions, as well as the core objectives, so that the entire contract clearly addresses the parties’ expectations for the specific project.

Keep Workers Working

Ways To Keep Workers Working In A Troubled Economy

Our current job market is struggling through one of the worst periods of unemployment in memory. The unemployment rate continues to creep toward the unspeakable double digits, a number not reached in Arizona for more than 25 years. Whatever name is attached — downsizing, rightsizing, re-sizing, layoff, offboarding, reduction-in-force, restructuring — the result is the same: lost jobs in the name of economic turmoil that has no conscience.

Whether you are amazed at the statistics or whether you are one, there is no doubt you have watched the economy take a frightening toll on your workplace. Those who are fortunate enough to still earn a paycheck have had to watch their co-workers walked out in myriad reduction-in-force actions that have dominated news media from California to Florida. Few companies have been spared in their attempts to balance their books by slashing one of the most expensive items on their check register — payroll costs. It’s an ugly story that plays out in all corners, and there is little confidence that the worst of the cutbacks is behind us.

Local public job assistance resources have been overwhelmed. According to Patrick Burkhart, assistant director at Maricopa Workforce Connections, the no-charge centers have approached capacity in their attempts to provide local job seekers with a head start on hunting for new positions. The MWC has experienced a 100 percent increase in year-over-year traffic in its centers, which currently assist up to 500 job seekers per day in each of the two “one stop” centers. While laid-off workers range from the highly skilled to laborers, preparing them for their next opportunity is often an exercise in futility. With so few available positions, and no job growth predicted for 2009, it becomes a cruel parody of “all dressed up and no place to go.”

Corporate executives cannot be blamed for adding to this unemployment quagmire. Their directive is to ensure financial survival through any legitimate means available. For most, that means a consideration of reducing work force costs, which may include not only wages, but also significant associated costs of health and welfare benefits, matching 401(k) contributions, profit sharing, tuition reimbursement, training or other company-provided benefits or perks. There is also an indirect impact on the company; a deterioration of employee loyalty, decreased customer confidence, and perhaps most importantly, a sense of apprehension among employees in fearing a loss of their own jobs. The result may have an effect on employee productivity and in retaining and attracting the best and brightest talent for the future.

It is no wonder then that reducing headcount is considered a last resort among decision makers. But what should companies do to prevent having to announce the dreaded “L” word, as 60 percent of surveyed U.S. companies plan to do in 2009, and thereby disrupt internal work operations for perhaps the long term? Executives first need to create a realistic vision of the direction of their business, attempt to recognize the timing of the “bottom” for their industry, and then set a plan in place to preserve a profit margin that will sustain the business. This analysis has become the key leadership initiative that guides decision making, and may ultimately affect the survival of the company.

It is said that desperate times call for desperate measures. If so, companies are often cornered into making tough sacrifices in the name of survival. Human resources can play an integral role in the strategic analysis of the business plan, and while cost reductions must be considered to save jobs, there may also be time for process improvement opportunities.

Among budget initiatives to be considered:
Freeze unnecessary discretionary spending — Travel for other than customer visits, employee “business” lunches, social events, overtime, temporary help, consultants, new software, advertising, and conferences or training that are not critical can be curtailed.

Wage considerations — In addition to a bonus and wage freeze, consider a salary reduction, perhaps only for those earning above a targeted salary. Depending on work requirements, consider a reduced workweek in exchange for the wage reduction, or have a temporary company shutdown. Suspend any policy that allows employees to cash-in vacation or paid time off (PTO) accruals, and instead mandate they use the time.

Company contributions to employee programs — For companies that need to make a more serious dent in expenditures, cutbacks may be made in the health care plan design, tuition reimbursement, 401(k) match, or company paid life insurance or disability plans.

Don’t expect employees to express appreciation for these types of actions, but every wage earner in today’s work force understands the reality of a balance sheet and its affect on his or her job. While employees usually bear the brunt of company cutbacks, there are actions HR can propose that might soften the impact.

Cross training and skill enhancement — A business slowdown is an excellent time to prepare employees to assume additional job skills for the future through on-the-job cross training.

Solicit employee input — Using employees to provide savings suggestions will enhance their buy-in and may even improve morale. Above all else, they want to keep their jobs and when viewed as a partnership with the company, will help foster mutual respect.

Job transfer — Either as an assignment of temporary resources or a long-term solution to unbalanced workloads, employees may be interested in moving to a new function with a different career path.

Communicate — Employees may be more understanding of the company’s plight if they are able to share the news along the way with no surprises.

Today, we still find ourselves in the middle of a sluggish economy that has turned into a marathon, but the finish line must be somewhere down the road. Leaders who can see that far will make the right strategic decisions in the best interest of their organization and its employees. Those who consistently communicate that vision, and take action to save jobs wherever possible, will find a loyal work force ready and willing to enjoy better times ahead.

Companies Can Get Better Understanding Of Customer Experiences Through Service Blueprinting

Companies Can Get Better Understanding Of Customer Experiences Through Service Blueprinting

Not too long ago, Mike Tully discovered something important about the perception of time. The AAA Arizona president and others in his organization were not on the same clock as members requesting roadside assistance.

AAA Arizona measured effective responses from the point when its personnel dispatched tow trucks until those trucks actually arrived on the scene. Members started their countdowns from the moment they phoned in for help. Sometimes that meant a difference of eight or nine minutes — something that became abundantly clear when members called back before tow trucks even hit the road.

Fortunately, AAA Arizona and many other businesses are now gaining important customer-experience insights through a technique called “service blueprinting,” which asks organizations to evaluate and improve services by looking at them through the eyes of customers.
The concept of utilizing the customer’s perspective to develop a comprehensive service blueprint dates back several decades to a technique first discussed by G. Lynn Shostack, a one-time Citibank vice president, in the Harvard Business Review. The tool has evolved through the years and, now, has been outlined in great detail by three researchers with ties to Arizona State University’s W.P. Carey School of Business.

“Service Blueprinting: A Practical Technique for Service Innovation,” was published in the California Management Review this past May and co-authored by Mary Jo Bitner, Amy L. Ostrom and Felicia N. Morgan. Bitner is academic director for ASU’s Center for Leadership Services and the PetSmart Chair in Services Leadership at the W.P. Carey School of Business, while Ostrom is an associate marketing professor there. Morgan, a former ASU doctoral student, is an assistant marketing professor at the University of West Florida.

In working with companies, Ostrom says, it became apparent there was a need for an in-depth paper that included case studies of businesses that used blueprinting and realized its value.

“The technique, in a broad sense, is really focused on having people internally within an organization come together to help them really understand what it is they’re offering to the marketplace,” Ostrom says.

The objective is to get a handle on the actual customer experience and look for ways to improve and innovate. It involves mapping everything from face-to-face customer contact to behind-the-scenes support services.

“You end up getting a very, very clear diagram of what the customer’s walking through,” Tully says.

AAA Arizona was able to identify something of an annoyance for customers dealing with different departments. As a company that provides multiple products ranging from insurance to travel assistance, it’s not unusual for members to take care of different needs on a single call. AAA discovered customers were being asked to provide the same membership information each time their call was transferred from one department to another.

The organization now has a vice president who works on tightening up the service encounter for customers, eliminating any unnecessary hoops they’re being asked to jump through.

The benefits of a service blueprint can be wide-ranging. Organizations are able to chart how they provide services to customers, and then compare those findings with competitors’ practices.

“When you’re able to do things that customers value and do them better than your competitors, I think in general, that puts you in a much better situation,” Ostrom says.

Although some companies already make considerable efforts to understand their customers’ needs, oftentimes they don’t quite have a big-picture view of everything customers go through as part of the service experience. Blueprinting provides such insights and may indicate the need for additional research.

And, as Tully suggests, satisfied, happy customers usually deliver stronger profits.

“I clearly think it does contribute to bottom-line performance,” he says.

Blueprinting is not just something for service-oriented businesses.

“Any company can use it because every company, to be honest, tends to be (a) service business when you really think about what they do,” Ostrom says.

A company might not be focused on providing services for external customers, but every company provides internal services.

Developing a comprehensive service blueprint requires collaboration across an entire organization, with input from front-line employees, middle management and senior management.

“This process of bringing people together within the organization that don’t tend to talk to one another normally gives them a picture of what the customer experience is that’s just different than they get through other techniques,” Ostrom says.

Service blueprinting is also flexible and can be modified to address a company’s unique situation. Examples include a business that interfaces exclusively with customers online or one that has to target the needs of different types of customers.

Ostrom has been working with companies on service blueprinting for some time through the Center for Services Leadership. But her first daylong workshop was scheduled in January and future such workshops are in the planning stages.

The full-day format allows Ostrom ample time to offer an overview of the technique and then guide attendees through the modification process.

“We find once people learn the tool and get some exposure to working with it in their own context, that gives them the knowledge they need to go back and start using it more widely within their own organization,” she says.

organized desk

Creating More Efficient Workspaces Can Increase Productivity And Reduce Costs

Bracing for austere times ahead, office leaders have two obvious places to cut back: payroll and real estate. No one would suggest that cutting staff is an easy or enjoyable thing to do, but it can be an opportunity. Space freed by reductions in payroll can be reorganized to improve workplaces, bolster worker morale and raise productivity.

Even before the recent financial crisis took hold, Gensler’s research found that 36 percent of U.S. office space is considered by the workers using it to be ineffective. This is in large measure because the nature of work is changing. Formerly the domain of so-called creative industries, collaborative meetings and group work scenarios have assumed priority over individual focus time.

Reducing office space as a cost-cutting strategy can actually create inefficiencies if you simply shrink space and continue with the same workplace model. Gensler’s recent workplace survey found that firms that provide appropriate workplaces for the type of business conducted have higher levels of employee engagement, brand equity and profit, with profit growth up to 14 percentage points greater than those with less effective work environments.

If layoffs have left you with too much space for too few people, look into whether you can unload space through subletting or simply returning it to the landlord. There can be a real negative psychological impact among employees who always are aware that there’s an empty desk next to them. At the same time, a little more breathing room can boost spirits and productivity.

Before making any plans, take a look around the office and really understand how space is being used. Observe how people are working in the office, how areas are really utilized. What’s empty? What’s overcrowded? Where have people been doing workarounds to make space effective? Look for wear patterns, improvised equipment and furnishings, over-flowing desks, unused conference rooms, etc.

When you’re ready to take action, consider these possibilities:
Make sure you’re getting the most out of your space by converting as many spaces as possible from single-use spaces into multipurpose spaces. A reception area can double as a client area, employee café, community space and optional work area. This approach will require furniture that supports multiple uses.

Wireless capability makes your office one big workspace. Anyone can go to any corner of the workplace to huddle in groups or get away from everyone for some solitary focus time.

By strategically locating amenities, you can increase the opportunities for incidental, as well as intentional, collaboration among staff members.

Branding the workplace nurtures corporate culture and improves a sense of teamwork and pride in the work produced. Color, art, graphic images and printed messages used in strategic locations can be powerful.

Improve visual connectivity among colleagues to promote collaboration and social interaction. This can be achieved in several ways: employ an open office plan, install low-panel workstations and reduce the number of closed offices.

Create space by increasing density and clustering meeting rooms. Create collaborative social zones in the space outside of those areas. This energizes public areas while reducing space taken up by circulation paths.

Place workstations and open collaborative spaces along window areas, and put offices inboard to bring light deeper into the space. Natural light in workspaces raises productivity and reduces energy costs.

Accommodate telecommuting when appropriate. You can save on real estate, energy costs and demonstrate an interest in your employees’ work-life balance. With mobile workers, be sure you have space in the office that gives them easy access to the tools they require and the people they need to connect with.

Perhaps before going all in, make small changes and monitor the results. It is important to assess your workplace layout before making any changes and to evaluate the results after implementation. Observation and surveys are effective ways to validate what’s working. Once your workplace environment changes are complete and have been occupied for a few months, verify that your design is advancing workplace goals. Consider evaluating your space every two to three years to help keep your workplace effective.

Ask where you’ve captured real estate efficiencies. Have you been able to get double and even triple use out of some spaces? Is every part of your office space being deployed in the service of supporting work activities? Are your employees more connected, informed, collaborative and productive? Ultimately, your new design should deliver improved business performance.

Creating a more efficient, collaborative and accommodating workplace is something that pays dividends even in financially distressed times. A proud organization with employees who enjoy going to work and who feel the company cares about them will work harder and more effectively no matter the state of the economy.

Selling Businesses

Tips On Finding A Buyer For Your Company In Tough Economic Environment

Yes, the lofty business valuations supported by an overabundance of cheap debt have come and gone, but valuations are still attractive by historical standards and deals are still getting done. The companies that are achieving the highest valuations, best terms and actually getting to the closing finish line are approaching the market in a more systematic and pragmatic fashion. Even in today’s turbulent economy, it is still possible to achieve an attractive deal for your shareholders.Here are some practical tips CEOs should consider before endeavoring to sell their companies:

Strategic buyers are driving valuations
Corporate buyers are back with a vengeance after years of being at a significant competitive disadvantage relative to private equity groups flush with cheap debt and the ability to over-leverage deals to justify higher and ever higher valuations. While the market uncertainty has certainly made everyone more cautious, many companies have responsibly maintained conservative balance sheets and are actively seeking acquisition opportunities. You can expect a more thorough and lengthy diligence process, but the strategic buyers are often the most attractive and viable liquidity event available for most sale candidates in today’s market. Most sellers should now focus their efforts on well capitalized strategic buyers to achieve the most favorable outcome for shareholders.

Private equity groups are down but not out
Typically, private equity groups (PEGs) seek significant debt leverage on their equity investment to achieve higher equity returns. With the unprecedented collapse of the debt markets, there is little to no debt available for a typically structured PEG transaction. However, some PEGs specialize in full capital structure solutions, essentially underwriting their own debt for the deal. These PEGs are especially attractive in today’s market. Many of these full-capital-solution PEGs are understandably looking to capitalize on their unique advantage by acquiring companies at lower deal valuations, so they are not likely to outbid a well capitalized strategic buyer. At the same time, many traditional PEGs are still flush with cash and need to put the money to work, so they are accepting lower returns and are pursuing deals with more conservative capital structures. While PEGs are less aggressive on valuations across the board, they should still be approached by most sellers and included in any sales process intended to maximize valuation. Don’t count out the PEG world entirely, but at the moment, the smart sellers are focused more intently on well capitalized strategic buyers.

Create a competitive environment
The primary function of an investment banker is to identify all the likely potential buyers for a company, both strategic and financial, and then create a competitive environment whereby you are able to achieve the best possible transaction for your company by comparing various alternative proposals simultaneously. The best transaction usually involves numerous factors that are specific to each seller, but will generally include price, terms (cash, stock, earnouts, etc.), certainty of closure, cultural fit, and many times other qualitative factors. The sales process is part art and part science, and the experience of your investment banker is critical to achieving the optimal outcome. You should carefully evaluate the expethem, and be sure to ask for client references. Occasionally, a one-off negotiated sale can achieve an optimal outcome, but more often than not, a professional process run by an experienced investment banker will yield far superior results.

Create value with pro-forma “add-backs”
The primary valuation metric in most deals is a valuation multiple based upon earnings before interest, taxes and depreciation (EBITDA). Most buyers are willing to give credit for reasonable pro-forma “add-backs” to EBITDA. If you raise your EBITDA, the purchase price is raised correspondingly by a factor of the purchase multiple (every dollar you gain here can add $5, $6 or $7 to the purchase price). This can be a huge value creator, and can increase the valuation achieved for your company by 10 percent to 30 percent in most cases compared to relying on Generally Accepted Accounting Principles (GAAP) EBITDA. A professional investment banker is well versed in the types of issues that can effectively be positioned for “add-back” credit. These typically involve one time or unusual expenses, investments that GAAP won’t allow you to capitalize, excess salary draws (salary that should be viewed as dividends), M&A process costs, and certain legal costs, among others. This is another area where a good investment banker can add significant value to a transaction by providing good advice identifying and negotiating for these items and not leaving any economic value on the table.

Run your business and leverage your advisors
Letters of intent, or LOIs, are almost always non-binding; you don’t get your check until the deal closes. It can be a long and frustrating process managing the due diligence and documentation process, often taking between 8 to 12 weeks and hundreds of hours of time that can be a serious distraction from running your business. Make sure you have a point person on the management team to coordinate, and most importantly leverage off your legal advisors and investment bankers throughout the process. Good lawyers and investment bankers can take a good portion of this burden off your shoulders and leave you more time to run your business. This is critical. If the interim financial results of your business suffer as a result of your management team being distracted, this can sideline your deal or at the very least result in a downward renegotiation of valuation. Run your business, run your business, run your business. Nothing is more important.

Dependable Solar Products - One Arizona Small Business Going Green

Dependable Solar Products: One Arizona Small Business Going Green

The year was 1976. Before “going green” was the worldwide movement that it is today, Lane Garrett left his job to become an entrepreneur in energy management and conservation. By 1992, he had formed ETA Engineering, a distribution and engineering business specializing in various solar products. After distributors suggested that forming a separate company for installation would be a wise strategic marketing move, Garrett founded Dependable Solar Products in 2005.

Although ETA had been in business for more than a decade by the time Dependable Solar Products was founded, like any new business it ran into some difficulties.

“The challenges were capitalization to build the company, which was provided by stockholders,” Garrett says, adding that “getting the word out and getting some name recognition” was another issue.

Luckily, since ETA had been operating for several years, “we had all the technical expertise, engineering and experience, so that wasn’t a problem,” Garrett says.

Together, ETA Engineering and Dependable Solar Products have helped to put Arizona on the map for solar energy. ETA Engineering offers a full line of renewable energy products and services, and also designs systems such as photovoltaic power plants. They currently have projects in Arizona, New Mexico and Utah, with more on the way including three in South Africa. Dependable Solar primarily installs solar modules (panels), as well as conducting some wind work.

“We do installations for power companies, industrial applications, as well as homeowners,” Garrett says.

The sizes of the systems vary, ranging from smaller systems that are just over a kilowatt in size, all the way up to large megawatt-plus size.

“If we look at the range of systems depending on size of homes and how much energy people use, it would go from usually 3 kilowatts (as a small system) to 10 kilowatts or more for some of the local people located in the mountains. Typically three to four range in size,” Garrett says.

In addition to the solar services it provides, Dependable Solar Products offers a multitude of green products.

“We provide a range of conservation — green — and energy-generating products such as wind turbines, lighting of all types, swimming pool circulation pumps, remote systems (off the utility grid and running 100 percent on solar), photovoltaic modules, high efficiency air conditioning, insulation (and more),” Garrett says.

The company also installs high-efficiency appliances, solar-powered golf cars, and even self-composting toilets. Essentially, the company has the ability to work in any area where electricity is used.

Currently, Dependable Solar Products has two locations, one in Scottsdale and one in Mesa. However, Garrett hopes to expand significantly in the coming year.

“We are planning this year to set up locations in Tucson, Denver, Albuquerque (N.M.) and Northern Mexico,” he says. “We hope to continue to grow at a rapid rate.”

While Arizona has sunshine to spare, incentives in other states make them more appealing solar energy destinations. However, in recent years this has changed significantly. Tax credits and the return on investment for solar energy are increasing, giving consumers more reasons to switch to solar.

“With the corporation commission and a lot of push through the Legislature, that situation is changing and now Arizona is much more competitive with other states.

“GPEC (Greater Phoenix Economic Council) and other organizations in the state have been working to change (incentives). The Arizona Solar Energy Industries Association has been active in changing incentives. I think chances of additional improvements are looking much better,” Garrett says.

With the rising cost of energy, solar is becoming the leading alternative for many and Garrett is thrilled to see that his long-time passion is finally becoming a reality.

“It’s one of the best investments you can make,” Garrett says. “I’ve been wishing for the coming growth, and to see it now is my favorite aspect.”