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Build Connections–Increase Productivity and Morale

A recent study published by Deloitte Research titled “It’s 2008: Do You Know Where Your Talent Is?: Connecting People to What Matters” explores the interesting issue of how to build “connections” between people within organizations that will provide the highest return in terms of productivity and innovation.  Managers have long recognized the importance of communication and collaboration between employees, particularly in these days when companies are becoming more global and employees who need to work together are located in distant locations.  For example, companies often strive for teamwork through the creation of project teams and make substantial investments in IT resources that facilitate rapid communication and information sharing.  However, Deloitte claims that there are certain types of connections that are more valuable than others and argue that companies must recognize and support three very different kinds of connections with their organizations—connections with other people; connections with a common and worthwhile company purpose; and connections with necessary resources.  A few specific recommendations in this area follow:

  • Give managers the time that they need to engage in networking activities and communications and encourage all employees to create and maintain networks and relationships within the company to learn more about their colleagues and share new ideas that can ultimately be used to enhance company performance.  This can be done by making new networking tools, such as video and various forms of e-communications, readily available; however, be sure that employees understand the need to keep their networking relationships to a manageable level of the time will cease to be effective.
  • Build the connection with a sense of purpose by making an effort to provide employee with fulfilling job activities and opportunities to expand and use their talents.  This means implementing focused and continuous enrichment programs that are designed to prepare employees for new challenges as opposed to simply training them to do their current jobs more quickly and efficiently.  This approach can reduce turnover and keep motivation within the workforce at higher levels.
  • Make sure the employees have easy access to the information that they need to perform their jobs.  This means investing in technology that allows employees to work efficiently with delays caused by waiting on others to provide answers or data.
  • Connection to resources goes beyond access to information to include access to the support and time that employees need to learn, think, rejuvenate and collaborate.  This means assisting employees in overcoming personal challenges that may prevent them from focusing on work, such as finding suitable daycare for their children, and making sure that time is set aside for them to tinker with some of their own ideas for products, services or processes that may ultimately provide value for the company.  Office layout decisions should be made with an eye toward creating spaces for collaboration as well as areas where employees can go to be free of disturbances so that they can concentrate on a specific problem or idea.

Pre-Dispute Agreements to Arbitrate Come Under Fire

Since the enactment of the Federal Arbitration Act in 1925 there has been a strong federal policy in favor of arbitration absent a showing of legal or equitable grounds for revocation of the contract that includes the arbitration provisions.  Areas in which the use of arbitration provisions have often been contentious include franchise, consumer and employment contracts and franchisees, dealers, consumers and employees have often argued, largely without success, that arbitration requirements in those contracts should be avoidable on the basis of “fraud in the inducement.”  However, if the Arbitration Fairness Act of 2007, which was introduced in Congress in July 2007, becomes law, pre-dispute agreements to arbitrate statutory defined “franchise,” “consumer,” and “employment” disputes would be unenforceable.  Of note is the fact that the Arbitration Fairness Act would not only apply to agreements that went into effect after the date that the Act became effective but would also apply retroactively to contracts that had been entered into before the effective date.  The Arbitration Fairness Act would essentially re-write existing contracts and substantially alter the strategic positions of the parties in the event that a dispute covered by an arbitration clause arises.

Obviously the following definitions of the “disputes” that would be subject to the Arbitration Fairness Act are extremely important:

  • "Franchise" disputes include those arising under any contract whereby (1) a franchisee is granted the right to engage in business under a marketing plan prescribed in substantial part by the franchisor, (2) the operation of the franchisee’s business is substantially associated with a commercial symbol such as a trademark or logo, which designates the franchisor or an affiliate of the franchisor, and (3) the franchisee is required to pay a franchise fee, either directly or indirectly.
  • "Consumer" disputes include those between a "person" (which would not include an organization) and a seller or provider of property, services, money, or credit with respect to goods or services obtained for personal, family, or household purposes.  In general, a consumer dispute would not include a transaction in which goods or services are obtained for business purposes; however, small businesses could seek to invalidate an arbitration clause in cases where the contract was between "parties of unequal bargaining power."
  • "Employment" disputes include those between employees and employers using the definition of employee-employer relationship found in the Fair Labor Standards Act.  Arbitration provisions in collective bargaining agreements would not be subject to the Arbitration Fairness Act.

Another important change included in the Arbitration Fairness Act is that the courts, applying federal law, would have the authority to decide whether an arbitration provision is enforceable.  Current law generally places the issue of whether a dispute must be arbitrated in the hands of the arbitrator unless the parties have expressed a preference for a court to decide in the specific arbitration agreement.

The changes for success of the Arbitration Fairness Act are uncertain at this point; however, it is an interesting development worth watching closely.


Do Your Homework on Your Venture Capitalist

It used to be that entrepreneurs looking for venture capital financing were the ones who had to bear the lion’s share of due diligence and personal scrutiny.  Since most venture capitalists invested in people as much as in products or markets they would often commission detailed background checks on founders that focused on common problems areas such as misrepresentations of employment background, failure to disclose personal issues that might be indicative of character, and a history of litigation or other legal issues (i.e., bankruptcy or DUI convictions).  The concerns of the venture capitalists are understandable given the large sums of money that are in play when an investment decision is made; however, entrepreneurs often felt beaten and battered by the process, particularly when venture capitalists made aggressive demands regarding the terms of the deal and management of the company once the funding was completed.  Recently though entrepreneurs have been provided with a vehicle for leveling the playing field and gathering their own information on prospective financial partners before moving too far down the long road that often needs to be traveled before a venture deal is closed.  The answer?  It’s a new web site called The Resource for Entrepreneurs

As noted in an August 7, 2007 article in the Wall Street Journal titled Web Site Puts the ‘Vent’ into Venture Capital: “TheFunded lets entrepreneurs rate venture firms according to five different criteria (track record, operating competence, pitching efficiency, favorable deal terms and execution assistance) and also write reviews of firms and their individual partners.”  Currently membership is screened and limited to current and former founders and CEOs of companies, as well as some senior managers.  Current founders and CEOs can use the site for free while others pay a modest annual membership fee.  Members get to see the entire content of postings while visitors get to see the first few sentences—which may be loaded with feedback that is not welcome public disclosure for venture capitalists.


Reasons for Unsuccessful Offshoring

During 2007, the failure of outsourcing arrangements, particularly in China, became headline news.  Primarily for quality failure reasons, a number of US and European companies including Sony and Bausch & Lomb had to recall goods that they had made in China.  According to an article appearing in the July 27, 2007 edition of Fortune Small Business, The True Cost of Outsourcing to China, many US companies are now rethinking the advantages of outsourcing to China in light of these recent product recalls and bans.  The following story from that article is illustrative:

When Amber McCrocklin launched Paws Aboard, she followed a pattern familiar to thousands of small-business owners. McCrocklin, now 35, had created a line of gear for pet owners who like to take their dogs on their boats. She started by handcrafting boat ladders, life jackets, and waterproof leashes with the help of a local engineer.

When the orders began pouring in, McCrocklin decided to shift operations to China, which could trim costs by half and give her time to design more products to expand Paws Aboard (….

Then the problems started. The clasps on her life jackets were breaking, the shipments were late, and her contact in China was unresponsive. McCrocklin’s patience finally expired when she opened a container of 3,000 leashes-all defective. "The colors were completely reversed, and the logos were all upside down," she says. The factory would not make good on the order, and McCrocklin didn’t want her clients, retailers and online stores, to see the shoddy work. "I’m not sure if I’ll ever be able to sell these," she says.

As a result of this and other examples, outsourcing to China-standard procedure for thousands of entrepreneurs-is being more carefully reconsidered. Companies are now adding to their Chinese production costs a "recall allowance".  In some cases, the total cost is more than the cost of retaining production in the US.  Another solution referred to in the FSB article is the use of in-country consultants to assist US companies with identifying and selecting outsourcing partners and managing the outsourcing arrangement.  For example, a consultant may locate a foreign manufacturer and ensure quality control by regularly inspecting the production line and overseeing packaging and shipping of the products.  In some cases the consultant will assume liability for defects in the products; however, the indemnity is only as good as the financial resources of the consultant and the ability of the US firm to compel payment and usually carries a high price tag in the form of a commission for the consultant.  As always, great care must be taken in conducting due diligence on these consultants and US companies are counseled to seek recommendations and performance histories from trade associations and other firms involved in the import of similar products.  And, of course, US companies should always be mindful of the following common reasons for unsuccessful offshoring:

  • Failure to adequately qualify providers;
  • Initial aggressive demands made on providers;
  • Outsourcing innovative or unstable activities;
  • Inadequate investment of time and capital;
  • Management problems;
  • Non-overlapping business hours;
  • Staffing problems;
  • Lack of a clear and efficient change process; and
  • Lack of technical tools to manage the relationship.

It should be noted that market conditions are changing and that US companies and their potential foreign outsourcing partners are each taking steps to mitigate some of the risks of an outsourcing relationship and improve the chances of success.  For example, foreign firm are voluntarily improving their security and quality control procedures and increasing English-language training for their workers.  In addition, some outsourcing companies are beginning to open up facilities in Latin America so that they can work in the same time zone as their US-based clients.  For their part, US companies are changing their view of outsourcing arrangements from a cost-driven, customer-supplier model to a true strategic partnership.  This means investing additional resources in communication and managing the relationship including regular meetings and designation of specific managers to work exclusive with outsourcing partners to ensure that all goes well.


Signs of a Miserable Job (or Employee)

Why do companies have trouble keeping valuable employees?  At least part of the answer may be that the person has simply become miserable in his or her position.  The concept of the “miserable job” is the subject of best-selling author Patrick Lencioni’s latest book—The Three Signs of a Miserable Job.  While I prefer non-fiction when it comes to discussing business issues, Lencioni’s “fable for managers (and their employees)” regarding the sources of job dissatisfaction provides food for thought, but not a complete answer.

Well, just what are the three signs of employee unhappiness?  According to Lencioni, the first is “anonymity”–the feeling that your supervisor doesn’t really know or care about you at a personal level.  The second is “irrelevance”—the feeling that your job simply doesn’t matter.  The final sign is “immeasurability”—a feeling of lack of control caused by the absence of objective measures of job performance and professional development and the need to rely on the unpredictable whims of others to learn just what is considered to be successful behavior within the company.

Not surprisingly, Lencioni believes that the three signs are closely related—as companies grow people more distance develops between people leading to a growing sense of anonymity; then, as people begin to lose touch with one another they get less and less feedback on the quality and importance of their work, which leads to the feeling of immeasurability; and, finally, as people lose track of how their work fits into the total picture they gradually begin to feel irrelevant.

Can the “miserable job,” or more correctly, the “miserable employee,” be avoided?  Let’s hope that managers can do so by understanding and apply some basic techniques of empathy, attentive oversight and proper job design.  The fictional manager in Lencioni’s book tries to get to know his workers through outings and asking simple questions about their day-to-day lives.  He also makes an effort to remind employees about how valuable their work is to customers and other departments within the company.  Finally, he devises ways to enable employees to grade themselves against objective measures of customer satisfaction.  These are all good lessons; however, they need to be genuine and part of the larger process of evaluating employee performance and distributing rewards.  For example, allowing employees to grade themselves does not solve the immeasurability issue if bonuses and promotions are dolled out based on subjective factors over which employees have no control and may not even be aware of.

Obviously there is more to job dissatisfaction (and preventing it) than just the three signs identified by Lencioni.  The book itself touches on other motivators such as the size of the paycheck that an employee receives and it is widely known that managers are admonished to offer their employees more autonomy and opportunities for advancement in order to retain them and keep them from seeking greener pastures.  Nonetheless, the book is an interesting read and a reminder to managers to regularly consider how employees are being impacted at a personal level as the company grows and changes.

By the way, ever feel miserable (or something else) after you receive an e-mail from a colleague?  Well, that’s no surprise to Kristin Byron, the author of “Carrying Too Heavy a Load?: The Communication and Miscommunication of Emotion by E-Mail,” which will appear in the Academy of Management Review in January 2008.  Based on her research, which is briefly summarized in a note appearing in Fast Company, she reports that e-mail messages are consistently perceived by recipients as being more negative than the sender intended and even e-mails that the sender wrote to convey a positive message are often misinterpreted by the recipient as more neutral.  The lack of formality associated with e-mail—short terse sentences, misspellings, and no opening or closing to the message—contributes to the perception that messages are more negative than they are intended to be.  Sounds like this is another reminder that face-to-face contact or a phone call should be used at appropriate times to make sure that there are no misunderstandings even if you think your e-mail messages have been clear and concise.  Moreover, the personal touch is a good way to reduce distance and avert the problems of anonymity discussed above.


Exit Interviews for Terminated Employees

Exit interviews at which employees are advised that their employment is being terminated are typically handled by experienced (hopefully) personnel in the HR department.  In most cases, the legal department is involved only to provide advice on any legal issues associated with the termination decision (e.g., making sure that the grounds for termination does not run afoul of federal or state discrimination laws or that the facts support a conclusion that the employee has breached an agreement with the company arising out of the employment relationship).  However, the general counsel or another attorney in the legal department responsible for employment matters should be sure that HR personnel understand and follow a few basic rules when they actually sit down to tell an employee that he or she has been fired.

First of all, whenever possible the employee should be warned and counseled before things get to the point where a termination meeting is held.  Problem employees should be given clear evidence of their performance problems, clear objectives that need to be satisfied in order for improvement to be recognized, and a limited time frame for improvement.  This is not only fair to the employee it also reduces the risk that the company will find itself involved in a lawsuit asserting wrongful termination, retaliation or discrimination.

Second, make sure the HR personnel have a short script or checklist that can be referred to as a guide for making sure all necessary issues are addressed during the meeting.  The HR staffer should know in advance what he or she is going to say and should be accompanied by a back-up to document the meeting and provide a sense of security for the person talking to the terminated employee.  Plans should be made in advance for disabling the employee’s access to his or her computer and other electronic devices while the meeting is going on and the employee should be told that this will occur to avoid any surprises.  Whenever possible, the termination should be done at the close of business on Friday or first thing Monday morning before the employee has started work activities.

Third, during the meeting the HR staffer should stay focused and avoid getting side tracked by small talk or questions that are no longer relevant.  The person conducting the termination should get directly to the point and refuse to answer questions such as “who will take my place” or “how will the Iceberg project get completed.”  Once the employee has been informed of the decision he or she should be told about certain issues that will be relevant during the post-employment period—COBRA coverage, references, and compliance with non-disclosure and non-competition agreements.  This is also the time to collect all company equipment include laptops and cell phones.

Finally, while the HR staffer should be firm and clear when delivering the bad news, an effort should be made to preserve the dignity of the terminated employee.  If the employee becomes angry or upset, acknowledge those feelings and perhaps give the employee a moment alone to recover his or her composure.  However, if it appears that the employee may become violent then it’s time to terminate the meeting and bring in reinforcements to escort the employee from the building as quickly as possible without raising interest among the other employees.  Inform other employees on a “need-to-know” basis that the employee is no longer with the company and make sure that the employee’s duties are immediately absorbed by others.  In fact, quietly plan for the change well in advance so that there is no disruption to the business.

Firing an employee, even though the employee is clearly a poor performer, is never easy and most managers concede that it is one of the toughest things that they have to do.  In fact, many managers allow weak employees to stay on much longer than they should because they want to avoid confronting them with the news that they are no longer part of the company’s future.  If the company has a formal process in place for the termination process it will be better for everyone involved!


Internal Investigations After HP

Most of the legal dust has settled from the debacle in the Hewlett Packard boardroom that culminated in resignations, indictments and convictions in late 2006 and the first half of this year.  What we are left with are some valuable new insights on to how an internal investigation should be conducted.  To learn more, see the article on this subject that appeared in the December 2007 issue of Business Counsel Update published by West/Thomson: Internal_Investigations_Post-HP.


Hit the Ground Running II – Getting Organized

Last week I did a post that described the key documents that you should obtain and review before you get start a relationship with a new client, either in an in-house role or as an “outside” legal advisor.  Just as important as collecting the information is making sure that you try and put everything in some sort of organized context so that you can go back and review the materials again as needed and also reconfigure the information in a way that allows you to begin developing a picture of how the client operates it business and carries out its legal and other compliance activities.  One obvious thing that needs to be done is the creation of a filing system for the documents; however, in this post I wanted to cover a couple of other ideas that you should consider.

First, as you’re going through all the public documents and/or proprietary business plans that are not distributed outside of the company you should develop you own “executive summary” that includes the information that will be most essential to your activities and which you will need to know as you are speaking with executives, managers and outside business partners.  Some of the information you will need includes the following:

  • The major current product lines of the company and the domestic and foreign markets in which the company is actively selling and promoting those products;
  • Key new product or service development areas and the projected geographic and customer-defined markets for such products or services;
  • Indicators of historical and projected financial performance for the company as a whole and for specific business units;
  • The current capital structure of the company including issued and outstanding shares and shares reserved for issuance upon exercise of options, warrants and other convertible securities;
  • Schedules for shareholder and board meetings (including meetings major board committees such as the audit and compensation committees) as well as for regular management meetings within the company (e.g., weekly or monthly meetings of the heads of various business units); and
  • Contact information for board members, senior executives and key managers.

As you are putting together your executive summary you should take a shot at creating your own short description of the historical development of the business including key milestones such as the release of new products and services, creation or dissolution of major business units, acquisitions and divestitures, and changes in senior personnel.  Getting a sense of how the company has evolved over the last few years provides valuable context and can give you a better perspective on why the company operates in specific ways.

Another thing you should do while you are getting up to speed is try and review comparable publicly available information on the company’s competitors.  For example, you should obtain the periodic reports and proxy statements of other companies active in the company’s markets to get an idea of how they view the overall business environment and the steps they have taken within the last few years to build, contract and change their businesses, products and services.

Once you have completed all of this preparatory work you are ready for next steps . . . interviewing the key players and putting together your initial agenda of the issues that you would like to tackle during the first few weeks and months of your engagement.


Drafting Effective Restraints on Post-Employment Competition

A former employee possessing knowledge about an employer’s business can have a significant advantage if he or she attempts to compete directly with the employer.  Although, as a general rule, the use of proprietary information by any former employee would be prohibited under the terms of any agreement relating to intellectual property rights, a business can and should seek additional protection against this form of competition by having employees sign noncompetition agreements that prohibit them from competing with the employer following the termination of their employment relationship.  However, care should be exercised in drafting these types of agreements to ensure that they will be enforced.  To learn more, see the article on this subject that appeared in the January 2007 issue of Business Counsel Update published by West/Thomson: Drafting_Effective_Restraints_on_Postemployment_Competition.081007.pdf 


What is an Emerging Company?

The term “emerging company” is frequently used; however, there is still no widely accepted definition of the term and the characteristics of the firms that might fall within the scope of the definition.  This post will not resolve the issue but it will nonetheless provide some ideas of the types of companies that are the focus of The Emerging Companies Blog.

It is telling that the terms “emerging company” and “emerging growth company” are used interchangeably. While I selected the former for the title of this blog it should be understood that a growth-oriented strategy is a key element for the types of companies that I am interested in.  Also, while I will discuss the trials and challenges that small groups of entrepreneurs will go through during the very earliest stages of conceiving and starting their business (i.e., the “concept” stage), my real interest is in what happens after the “next great idea” has left the garage or the laptop in the attic and landed in its own discrete working space with human and financial resources obtained from outside the founder group. 

Applying these conditions, and a few others, I think that a working definition of an “emerging company” should begin by focusing on newly formed or reorganized companies that have successfully survived the early challenges that typically drive 80% – 90% of new firms out of business and established a resource base and organizational structure suitable for sustained growth.  One very important implicit assumption in the previous sentence is that the founders, other senior managers and outside investors have all targeted growth and expansion as a key goal in the overall strategy of the company.  In addition, emerging companies are built on the assumption that the desired growth will come from some new and unforeseen development that totally changes the dynamics of the market in which they are competing—technological breakthroughs, dramatic shifts in the costs associated with satisfying existing consumer needs, identification of new consumer needs and/or sociological or economic changes.  It is the job of the managers of the emerging company to embrace and exploit these developments by identifying business opportunities and creating new products or services to take advantage of them.

Whether or not a particular company is “emerging” is sometimes assessed by reference to how the company stands with respect to certain key business and financial characteristics.  These characteristics not only test the current and projected financial performance of the company—measured by revenues, sales, profit margin, cash flow, etc.—to determine whether the business has been, and will be, generating steadily increasing revenues at above-average rates, but also examine whether the company has the resources and strategies in place to grow rapidly.  Specifically, in order to qualify as “emerging” a company should demonstrate all or most of the following characteristics:

Management: Probably the most important success factor for any business is the presence of qualified, experienced and credible management and this is especially true in the case of emerging companies since they must face and overcome turbulent and challenging conditions as they move quickly through several growth stages. Ideally, the founder(s) and other senior managers should be experienced in the target industry and each of them must demonstrate a strong entrepreneurial spirit and dedicated focus on the business.  In any event, the company must have a management team in place rather than just one person acting as the CEO.

Distinctive Competence:  A company should have a distinctive competence in one or more areas that are essential to competitive success in its particular market.  Examples include proprietary design technology (e.g., patents and trade secrets), manufacturing know-how, a unique brand, or extraordinary services.

Market:  Emerging companies tend to be technology-oriented that have the potential to achieve annual revenues of at least $50 million on a profitable basis within three years after launch and ultimately attain a market valuation in excess of $1 billion within five years after launch.  While the current size of the market is relevant the more important consideration is whether the market is expected to grow and expand rapidly in the future and, in fact, many require that the company be competing in an industry that itself is considered to be “emerging”.  A related issue is whether the company has a sensible and believable strategy for distributing its products and services within the target market. 

Strategic Alliances: Emerging companies must have, or be in the process of developing, relationships or contracts with recognized companies in the industry in order to demonstrate the credibility of the company’s business model in the marketplace.  Strategic alliances can provide access to technology and other needed resources and allow the company to scale up its manufacturing and sales activities quickly without having to make substantial capital investments.

Products:  Emerging companies have innovative distinctive products, processes, or services that can dominate a niche market segment.  Ideally the company will be able to begin commercialization of its products immediately following completion of development without delays caused by the need to overcome regulatory hurdles; however, biotechnology and life sciences companies certainly fall within the definition of emerging companies even though they generally must wait several years before their products are approved for release to the public.  It is also a positive sign if customers must make recurring purchases of the company’s products and services.

Margins and Cash Flow: Actual or potential gross margins and/or cash flow should be large enough to permit financing of growth over an extended period of time, and produce a favorable return on invested capital.

Food for thought . . .

Where does your company or client stand in relation to the various characteristics of an emerging company listed above?  What characteristics might be the most important?  At what point should the founders begin to structure their business model and strategies to guide the company into the profile of an emerging company?