advice and information to help stop the spam!20031001]2003_fall.pdf · small business owner. e...

Advice and information to help you manage your business

theLEADING

SPAMMERS ARE CREEPING INTO YOUR NETWORK ARE YOU PROTECTED?

STOP THE SPAM!

VOLUME 4 ■ ISSUE 1 ■ 20 03

PLUS:Raising capital in thewake of a recession

Foreign aid:U.S. companies aresending work offshore

PUBLISHED BY Henry & Horne, P.L.C.

2 VOLUME 4 ■ ISSUE 1 ■ 2003

Dear Clients and Friends, Sometimes we can’t see the forest for the trees.

We get so caught up in our day-to-day work that we sometimes forget to take astep back to evaluate our efforts and celebrate our successes.

Our achievements the past fiscal year included strengthening our “one-team” culture through enhanced communication and project sharing, and improving on our already high-quality standards and controls. The result? Improved clientservices and stronger and more meaningful client relationships.

This fiscal year we are focused on leadership for ourselves and in partnership withclients. We will embrace our future by building on our traditional values andstrengths and redefining them as we move forward. The values of our past andhopes for our future will serve as a guide to continuously earn the trust andrespect of our clients, employees, business partners and the community.

We are proud of what we’ve accomplished in our 45-plus-year history; this year we were awarded the prestigious Best of the Best Silver Award from Bowman’sAccounting Report, which recognizes the highest fiscal and management perfor-mance. But we can never be satisfied. For that reason, we will continue to assesshow well we are meeting client needs, providing the best services, and working inpartnership with each other. Our ongoing plan is to focus on the fundamentalsthat drive success: quality services and strong relationships.

Our tagline is “People, Not Numbers, Are the Most Important Part of the Equation.”Keeping it at the forefront of our thinking and decision-making will always allow usto see the forest as well as the trees.

Sincerely,

Mark F. Eberle Managing Director

Our ServicesHenry & Horne provides an extensive array ofclient services for privately held companies. You may occasionally need one or more of our services listed below.

Businesses and Individuals • Accounting Services • Audits, Reviews and Compilations • Business Valuation • Litigation Support

Income Tax Consulting Services • R&D Tax Credit Services • Cost Segregation Studies • Estate, Trust & Gift Services • Financial Planning • International Tax and Consulting Services

Industry Specialization • Automotive Dealerships • Not-for-Profit • Government • Manufacturing

Subscription UpdatePlease complete and fax or e-mail your reply to the marketing departmentat Henry & Horne, PLC, or you may also call us at (480) 839-4900.Fax: (480) 839-4664 / e-mail: [email protected]

Please update your subscription list as follows:■■ Change of address–see below■■ Add the following new subscriber■■ Please discontinue sending The Leading Edge.

Name: ______________________________________________________________

Company: ____________________________________________________________

Address: _____________________________________________________________

City: ______________________________ State: ________________ Zip: _________

Phone: ____________________________ Fax: ______________________________

E-mail: ______________________________________________________________

Advice and

information

to help

you manage

your business

VOLUME 4ISSUE 1

2003

The Leading Edge

3

The Leading Edgewww.LeadingEdgeAlliance.com

The Leading Edge Alliance is an internationalorganization of large, independently ownedaccounting and consulting firms. Our membersare top-quality firms from around the countrywith deep client relationships and strong tiesto the community.

Alliance firms provide their clients with anunbeatable combination: the comprehensivesize and scope of a large national company,along with the continuity, consistency andquality service of a local firm.

With 39 member firms ranging in size from$7 million in revenue to more than $30 mil-lion, the combined revenues of Leading EdgeAlliance firms total more than $600 millionwith more than 4,000 staff. Fifteen of thefirms are in “The 2002 Accounting Today Top100 firms,” with 10 more just below the rev-enue required for entry into the Top 100.Many of the participating managing partnershave established themselves as leaders inthe public accounting profession; others areemerging as the trendsetters and trailblazersfor the future of public accounting.

Leading Edge Advisory CommitteeLinda Watson

Brady Ware

Kerry Pascetta CCR Group

Georgina GiannelliKGN Financial Group

Leisa Gill Lattimore Black Morgan & Cain, P.C.

Marshall LehmanLurie Besikof Lapidus & Co. LLP

Raissa EvansPannell Kerr Forster of Texas, P.C.

Elizabeth ReedPostlethwaite & Netterville

Karen Kehl-RoseThe Leading Edge Alliance

Kathy SauttersThe Advisory Board

in affiliation withCustom Publishing Group (CPG)

Wendy A. HokeEditor

Amanda HorvathArt Director

Stacy Vickroy, Trishia KarsnakGraphic Designers

Custom Publishing Group (CPG)Editorial & Design Services

Cover illustration byLincoln Adams

The Leading Edge is published quarterly by CustomPublishing Group, 812 Huron Road, Suite 201, Cleveland,Ohio, 44115, (216) 523-1212, FAX (216) 241-5458.Periodicals postage paid at Cleveland, Ohio.

VOLUME 4 ■ ISSUE 1 ■ 2003

theLEADING

contents

features

5 COVER: Stop the spam!Spammers are creeping into your network. Are you protected?

13 Raising capital in the wake of a recessionCapital markets are still suffering a hangover from the Tech Wreck

16 Foreign aidU.S. companies are outsourcing work offshore to save costs and more

departments

4 Preparing for disruption

4 IRS Web site offers ID numbers for businesses

8 Live versus ”Memorex”

9 News and information from our Firm

18 Client Edge: Jamison BeddingGiving customers and travelers the luxury of sleep for 120 years

19 The Leading Edge Alliance Members

THE LEADING EDGE

Winner 2003 AGD award for publication design


OPERATIONAL

4

Where were you when the lightswent out? If you were on the

Eastern Interconnect power grid onAug. 14, you were in the dark. Howprepared were you?

The best time to respond to a disasteris before it happens. A relatively smallinvestment of time and money now mayprevent severe damage and disruption oflife and business in the future.

Even if your area never has beendamaged, there is no guarantee that adisaster will not happen tomorrow. Justask the many businesses that foundthemselves out of power and businessback in August.

Here are some tips provided by the U.S.Small Business Administration (SBA).

Develop contingency plans to remain inoperation if your office, plant or store isunusable. Could you operate out ofyour home or a nearby storefront?Could you quickly transport criticalitems such as computers, inventory andequipment?

Keep extra hard-to-replace parts or sup-plies on hand. Store them off-site. If thiscannot be done, work with suppliers inadvance to assure a secure and adequatesupply.

Make computer network upgrades nowthat would prevent possible futurestructural or network damage.

Purchase or lease a backup generator tomaintain full operations or criticalfunctions such as refrigeration, light-ing, security systems, telephone sys-tems and computer control in the eventof a power failure.

Have back-up vendors and shippers inplace in case your primary ones are dis-abled. Set up relationships in advanceand maintain them. Place occasionalorders so that they regard you as anactive customer when you need them.

Guard against loss of your customer baseby diversifying your product lines, saleslocations or target customers. Companieswhose customers were located entirely inthe northeastern United States were hitharder by the blackout than those withcustomers in unaffected areas.

Make backup copies of all criticalrecords such as accounting, employeedata, customer lists, production formu-las and inventory. Keep a backup copyof your computer’s basic operating sys-tem, boot files and critical softwaresecurely stored off-site.

Pre-arrange with computer vendors toquickly replace damaged vital hard-ware. Keep invoices, shipping lists andother documentation of your systemconfiguration off-site, so you can quick-ly order the correct replacement com-ponents. Take care of vendor require-ments in advance so that replacementscan be shipped immediately.

Surge-protect all computer and phoneequipment through power and phonelines. A power surge through a tele-phone line can destroy a computerthrough a connected modem. Invest ina surge protector that has a batterybackup to assure that systems keepworking through blackouts.

Know your connections—gas, electricaland water—shutoffs and phone numbers.

Maintain an up-to-date copy of phonenumbers, computer and Internet logoncodes and passwords, employee phonenumbers and other critical informationin an accessible location. Develop anemployee “telephone tree” to rapidlycontact employees in an emergency.

Review your current business interrup-tion insurance coverage. Is it enough toget your business back in operation?Will it cover the replacement cost ofvital facilities? Make it an annual proce-dure to review and update insurancewith your agent or accountant.

Most CPA firms have consultingdepartments that specialize in helpingbusinesses create and implement busi-ness disaster recovery plans. Call yoursto learn more or visit www.sba.gov/dis-aster/getready.html#operations for moreinformation.

The Institute for Business & HomeSafety (www.ibhs.org) has a new guidefrom IBHS and the SBA that introducesdisaster planning and recovery for thesmall business owner. e

Preparing for disruption

1 2

54

3

The IRS now allows businesses to obtain employer identification numbers (EINs) directly from its Web site. New business

owners or their tax professional can go to www.irs.gov to apply and obtain their EIN via the Internet.

Simply enter EIN as a keyword to begin the process. No registration is required to use the system and the number is issued

immediately. The EIN online processing eliminates the need to send paperwork to the IRS and prevents the delay in issuing

a number that may result from an incomplete application form.

While the Internet is the preferred method, businesses may still obtain EINs by calling (800) 829-4933 from 7:30 a.m. to

5:30 p.m. (EST) or by mailing or faxing the Form SS-4, as provided in the form’s instructions. e

Source: SSA/IRS Reporter, Fall 2003

IRS Web site offers ID numbers for businesses

STOPTHE

COVER

THE LEADING EDGE 5

continued on next page

SPAMMERS ARE CREEPING INTO YOUR NETWORK. ARE YOU PROTECTED?BY WENDY A. HOKE / ILLUSTRATION BY LINCOLN ADAMS

What you may not realize is that the e-mail relay is enabled onthe server. And while you’re sound asleep, spammers have

activated software that seeks servers with open relays to do theirdirty work for them. As a result, while you are sleeping, a spam-mer has snatched the opportunity through that open relay to useyour server to send hundreds of thousands of spam e-mailsunder your company’s name, protecting his own identity in theprocess.

And you may not know that this is going on until you discoverthat none of your e-mails are getting through to clients and vendorsbecause your company now has been blacklisted as a spammer.

Spam is far more than annoying sales pitches. It can destroy yournetwork and your company’s reputation, resulting in lost business.So if you’ve only thought that spam was little more than lost pro-ductivity, you may be lulling yourself into losing your business.

According to CIO magazine, spam comprises half—that’s half—of all corporate e-mail in 2003. Some estimates show that rate mayincrease to 60 percent by November.

If your e-mail address appears in a newsgroup posting, on aWeb site, in a chat room or in an online service’s membershipdirectory, it also may find its way to spam lists, according to,“You’ve Got Spam: How to ‘Can’ Unwanted E-mail,” a report by theU.S. Federal Trade Commission (www.ftc.gov).

Spam is unsolicited e-mail from a variety of sources, eitherknown or unknown, that can clog servers and inbound mailboxesand contain attachments on everything from the annoying promo-tion to enhance body parts to destructive viruses that can shutdown your network, according to Gregory Price, director of tech-nology services for the Leading Edge accounting firm PKF Texas inHouston.

IT’S THE MIDDLE OF THE NIGHT AND YOUR SERVER IS HUMMINGALONG QUIETLY PROTECTING YOUR BUSINESS—OR IS IT?

SPAM!COVER

Spam comes to us in several ways, according toAlex Ziogas, director of technology consulting servicesfor Leading Edge accounting firm KGN FinancialGroup in Chicago.

When we subscribe to something or purchasesomething online, we unwittingly have our namepublished on a mailing list sold to a marketing com-pany. “Ninety percent of the time, you aren’t given thechoice about sharing your information. Often usageinformation is hidden in the user agreements thatmany of us disregard. Increasingly you have to go outof your way to say no, because the default answer isyes,” Ziogas says.

Spam-crawling software harvests e-mail addressesfrom Web sites. If your company Web site contains e-mail addresses, this software finds and farms any-thing that says [email protected]. Recentlycompanies have employed Web site developmenttools that block the crawlers, but humans still canharvest the information, according to Ziogas.

If you are a user on an ISP backbone, marketingcompanies can use software to track where you go onthe Internet. This sophisticated software can create adatabase from your back-and-forth e-mails. Unlessprotected by encryption, outgoing e-mail is verytelling, revealing where it’s going, where it’s comingfrom and what it’s saying.

There are software providers who send e-mail to mul-tiple name versions such as [email protected],[email protected] and [email protected], ina blanket attempt to find those few real addresses.

The caveat is that spammers harvest so many e-mails that they don’t know if they’re sending to a validaddress—unless you let them know you’re for real.

“You may get five to 10 junk e-mails for about aweek. If you just delete them, they will likely stop,”says Ziogas. “But if you open them or attempt tounsubscribe, then the spammers know they have alive person at the end of that e-mail address and willinundate you.”

THE BEST ADVICE? SIMPLY DELETE.Another caveat is to beware of cookies and similartech techniques. No, this isn’t diet advice. When youvisit a Web site for the first time, it can create aWindows temporary file with the site’s graphics. Thenext time you visit that site, it will pop up faster.While this quicker download may seem like a bonus,it also can come with another side. One Web trend isto track how many people come to the site, whatpages they view and how often they return.

Amazon uses tracking software that gives it infor-mation about the user. That’s called cookies, and it’show Amazon knows that last time you visited its siteyou purchased Tom Clancy’s latest book and this timeyou’ll probably want John Grisham’s new novel.

“We can opt to deny all cookies in our browser. Butthe influx of Spyware has altered the playing field,” saysZiogas. “Spyware operates cookies at a higher level thanyour browser can stop. It is now embedding cookiesinto the fundamental core of the computer called theregistry, where it is difficult to block. The registry func-tions like a table of contents for your computer.”

Spyware is much more ferocious because, unbe-knownst to the user, you’re seeing more and morepop-ups (sometimes 10 to 20 at a time), and you’rejust trying to get to Google.

“When you go online, the marketing company thatsnagged your information via spam says, ‘Hey, Jane’sonline, let’s send her stuff.’ As a result, you can’t goanywhere online without pop-ups,” Ziogas says.

Spybot Search and Destroy (available free fromwww.download.com) also can detect and removeadware sites from your computer.

OPTIONS TO CAN THE SPAMHow much of your day is spent dealing with unwant-ed e-mails? A few minutes, a half-hour? Do you eventrack how much time your employees spend?

In round numbers, KGN Financial Group, withnearly 100 people on staff, receives anywhere from3,000 to 6,000 unsolicited e-mails per day. Someusers get 50 to 200 each day. It can take up to a half-hour or more for each user to close unwanted pop-ups or delete unwanted e-mail. That adds up to 30minutes each day, five days a week, which means outof a 40-hour work week, two-and-a-half hours caninvolve lost productivity while dealing with spam.

6

COVER


continued from previous page

ONE FIRM’S FRUSTRATION TURNS TO SOLUTION

Duane Connell, IT operations manager for the Leading Edge accounting firmWarren, Averett, Kimbrough & Marino LLC in Birmingham, Ala., was fed upwith the mountains of spam filling his inbox daily. Fed up with the poor

results from using Outlook’s Junk Senders List, Connell and network administrator,Joe Vest, decided to create their own program.

It is similar to Outlook’s Junk Senders List, but is run at the Exchange 5.5 serv-er. “In doing this, we’ve ended up blocking lots of junk e-mail for the entire firm,”Connell says.

Here’s how it works: “First we gathered several user profiles based on OutlookJunk Senders Lists and merged them together into one big Junk Senders List, usinga little Visual Basic Scripting.

“We developed a VB.NET (visual basic) system to maintain the mass blacklist ofjunk senders. We’ve included an exceptions list so that we don’t inadvertentlyblacklist a domain that should never be blocked as subsequent updates are made tothe list. We’ve set up a ‘junk e-mail’ mailbox and have asked users to forward anyjunk e-mail they receive to that mailbox. Then about once or twice a week we updatethe master blacklist with any new junk e-mail additions.

“The system allows us to view these blocked e-mails and tally them by user. If wedo inadvertently block e-mail, we can recover it and e-mail it to its intended recip-ient. We also run a VBS script each hour against the Exchange 5.5 server to updatethe firm’s Intranet with a count of the number of e-mails we’ve blocked along withthe list of junk senders that are on our master blacklist,” Connell says.

The process has been in place for several months and the firm is blocking about12,000 junk e-mails each week. “My personal count has gone from a time-consum-ing 150 junk e-mails each day to about 10 junk e-mails. This has been a great timesaver for the entire firm,” he says.

For anyone on a tight IT budget, this could be the answer. For more information,contact Duane Connell at (205) 979-4100 or e-mail him at [email protected].

SSpam canDESTROY

your network and your

company’s reputation,

resulting in lost

business.

So how much are we talking about financially?According to PKF’s Price, an average employee hourlyrate is $50. There are 2,080 work hours in a year. Ifyour sales goals for the year are $500,000, the cost ofbeing down for one hour is $240.

Now multiply that times 20 sales people and it justcost your business nearly $5,000 to be down for onehour. A half-day event could cost your business up to$100,000. “Suddenly that $10,000 network securityfee doesn’t look so bad,” says Price.

Fortunately, technology is responding with moreand more solutions. Spam-filtering software is embed-ded in your e-mail program, such as MicrosoftOutlook. But if you’re truly bombarded, there’s notenough time to tell the e-mail program what to keepand what to delete, marginalizing its effectiveness.

There are other options to combat spam. Ad-aware(www.lavasoftusa.com/software/adaware/) is a share-ware program that costs about $15 to $45 for a 2MBdownload. Ad-aware finds as many as 300 differentSpyware programs tracking what you do online andasks that you be removed from the lists.

However, for each bit of progress, spammers seemto have more sophisticated responses. Now marketingcompanies have software that changes users. You canpurchase more sophisticated add-on software (about$30 to $50) to sit on your hard drive, though. It’s abetter solution than spam-filtering soft-ware, but it’s not the magic bullet,according to Ziogas.

For larger companies, there is theSurfControl (www.surfcontrol.com)program. At a cost of $1,500 to $2,000for a 100-user license, this sophisticatedsoftware can be put on a single comput-er (even a low-end computer) to act as aserver. All incoming mail comes to thiscomputer first, which then filters themail before sending it on to its intendedrecipient.

It can screen for categories such assex, alcohol, drugs, shopping, jokes, etc.The software assigns a filtering value forcertain keywords that fit those categories. When akeyword appears multiple times (such as the word‘buy’), the spam will be blocked.

Ziogas warns that although this is a solid system,it’s important that each company apply filtering valuesbased on its industry. “You need to make sure that cer-tain company names are not on the exclusion list,including your clients,” he says.

He recommends that you start with a higher toler-ance and let more spam through. You can tighten thefilter as you begin to assess what is getting through. “Ittakes one to two months to adjust the filters to causethe least amount of pain to the users,” says Ziogas.

There also are SurfControl monitor sites to whichyou can send junk e-mail and have the senders addedto the database. For a maintenance fee of $500 to$1,500, you can receive updated lists (often daily) ofknown spammers’ sites.

On the Internet there are 30-odd sites that monitorspam test servers. Operated as nonprofits, peoplebelong to these sites and report junk e-mail activity.They create a blacklist (or block list as some arecalled) that includes real companies on real serversthat spit out garbage. (See sidebar “Don’t get listedhere” for examples of some sites.)

“If your company made a mistake in network secu-rity and you find yourselves on those lists, it is nearlyimpossible to be removed,” Ziogas says.

And it may have happened purely by accident.For example, your e-mail server can receive andsend e-mail, and it also can relay e-mail. If you haveneglected to shut off the relay on your e-mail server(as described in the introduction), you may haveopened your network to spammers and hackers tosend outside e-mail to your server and then havetheir spam sent out under your server and yourcompany name.

“A spam company may have five different serverIP addresses, but if all have been blacklisted for send-ing spam, the company has to get creative,” saysZiogas. “Now it has access to software that looks forservers with open relays and uses other servers tosend its spam. Only now the spam company’s nameis hidden, but its e-mails go out and likely getthrough,” he says.

“We’re not talking about one e-mail everynow and then,” Ziogas says. “We’re talkingabout 200,000 e-mails every 10 minutes goingout through e-mail relay sites under your com-pany’s name. Pretty soon the CEO is not gettinghis e-mails and within two to three months yourcompany is blacklisted—all for not protectingyour server.”

Often companies need to call clients to beremoved from their spam filters, but the prob-lem potentially can be worse, according toZiogas. You may have to completely change IPaddresses. “When you can’t get off the blacklists,you need to change your IP address and all youruser names. Someone’s going to get your oldaddress. I don’t want it to be my client,” he says.

PROTECT YOURSELF WITH POLICIESThe Internet has been the great equalizer for smallbusiness, allowing it to compete with larger compa-nies for business. But small business owners must rec-ognize that it would not take much for a maliciouspiece of code to wreak havoc on its network and itsbusiness, according to Price.

“Small- and medium-size businesses are going tohave to spend more money on network security andvirus/intrusion protection. It’s going to be the cost ofdoing business, similar to workers’ compensation,”he says.

The balance comes in making sure that you’re notdoing such a good job protecting your system that youblock e-mails from customers, vendors and prospects.

Here are some recommendations from Price andZiogas to can the spam:

• Invest in good quality virus protection and anti-spamsoftware such as McAfee (www.mcafee.com) orSymantec (www.symantec.com). It won’t be 100-per-cent foolproof, but it will help decrease the amountof spam that gets through. These programs run about$50 to $100 per computer; however, companies maybe able to get a multi-user cost break.

• Companies such as Network Box (www.network-box.com) sit in front of a firewall to monitor yourserver for you. You may have to contract withsomeone to serve in a support function with such aprogram.

• Don’t have a cowboy mentality when it comes tonetwork security. You must have a controlledprocess. You don’t give your house key to everyoneyou know, so why give access to your network.

• Never overlook training your employees. Theyneed to be trained on what to do with spam thatgets through (hint: don’t open, simply delete). Ifyou don’t know the sender, don’t open the e-mail.

• Every month, it’s helpful to conduct a virus pene-tration review to determine the vulnerability ofyour system.

• Use secondary or hotmail (free) accounts whenconducting company purchasing or registering onWeb sites.

• Implement filters, policies and procedures for deal-ing with spam as soon as possible.

• Use freeware/shareware to remove Spyware. e

THE LEADING EDGE 7

DON’T GET LISTED HERE

If you haven’t been careful about networksecurity you could find your company black-listed by Internet spam-monitoring sites.

Getting on that list could ultimately result in beingforced to change your server IP address and yourentire company’s e-mail addresses. And it may stillbe months before you can prove you're not spewing spam to qualify for de-listing.

To find out if your company is vulnerable, checksome of these sites:• www.spamhaus.org• www.openrbo.org• www.spamcop.org• www.ordb.org• www.stopspam.com• www.banthespam.com• www.ihatespam.com

LATEST DEVELOPMENTSAs recently as Oct. 23, the U.S. Senate approvedthe first federal anti-spam legislation (97-0), prohibiting e-mail messages thatpeddle financial scams, fraudulentbody enhancements and pornogra-phy. The bill also includes a provisionallowing the U.S. Federal Trade Commission tocreate a “do not spam” registry similar to its “donot call” registry. e“We’re

talking about

200,000e-mails every 10 minutes

going outthrough e-mail

relay sites under yourcompany’s

name.”

—ALEX ZIOGASKGN FINANCIAL GROUP


MANAGEMENT

“I f you would like to speak to adisgruntled customer service

representative, press 1. For longanswers to common questions, press2. If you’re paying us money, press 3,and to speak to an operator, pleaseenter a credit card number….”

If you hate the popularity of auto-mated attendants, you’re not alone. Inthe two decades since commercial voicemessaging systems were introduced,phrases such as “voice mail jail” havebecome popular buzzwords in businesslingo. Clients complain that the systemstake away the human element, but inspite of this adversity, automated phonesystems have proliferated due to theirundeniable advantages.

A well-designed automated atten-dant system frees up your staff to bemore productive on other tasks, dis-seminates routine information to alarge number of callers, directs callsmore quickly and provides informationor routes calls after hours. The well-

designed system does the work of areceptionist or operator, but never hasa bad day, complains or needs time off.

Nevertheless, if the role of technologyis to enhance communication instead of hindering the connection betweenpeople, you should review many con-siderations before deciding if an auto-mated system is right for your business.

ASK YOUR STAFF, CLIENTS AND PROSPECTSThe most important step before imple-menting any solution is to know howyour staff, clients and prospects will usethe system. What types of calls come inand in what percentages? Do callersknow who they want to talk to or dothey need direction? How fast do theyexpect a response? What type of servicedoes your company provide and whichdepartments handle these requests?

For example, research could sup-port a brokerage firm turning off theautomated system during business

hours based on the immediacy of calls.An overseas parts manufacturer whodoes business 24/7, on the other hand,may decide the automated efficienciesare essential.

QUANTIFY THE COST BENEFITS Done correctly, the savings favor anautomated system. While a single recep-tionist’s annual salary runs $20,000 plusbenefits on the low end, an automatedattendant is a common feature of voice-mail systems, which can start at $6,000for a quality product.

DO THE MATHA system can eliminate the need formultiple receptionists, expensivedirect dial lines—which can cost acompany more than $1,000 amonth—and forwarded calls to busypersonnel. Your survey data should bea guideline of how to balance thereceptionist and automated functionsso that the chance of losing calls andtherefore business dollars is slim.

DETERMINE THE BEST WAY TO SET UP YOUR SYSTEM There are many options for an auto-mated system. A successful setup treatsthe caller as a person, and allows yourcustomer to reach his or her destina-tion quickly.

This often involves a combinedautomated and human solution. For

example, there are merits to having theautomated attendant pick up the linefirst with a friendly and cheerful prere-corded greeting describing a few mainoptions, including a directory to routethe caller promptly to the personwhom they are trying to reach. Mostsystems benefit by having a way to“zero out” or reach the receptionist atany stage in the automated system.

Companies that use direct dial lineswith lighter call loads can set up a sys-tem to activate after hours, and onweekends and holidays, so that callersstill can reach their intended voicemailbox. In turn, the system canphone, page or e-mail the individualwith the message, eliminating the needfor an answering service.

You can direct the caller to repeat-ed information, including directions,promotions or marketing messages, bylisting the option and pointing the des-tination in a pre-recorded message. Oryou can set up a back-door number ifthe majority of your call load is fromyour internal team, vendors or person-al contacts who regularly do businesswith your company.

Any of these options saves moneyand frees the receptionist to take onadditional responsibilities. In somecases, the receptionist position may beeliminated so that this person canwork in another capacity.

Remember, the company that createsthe best client experience wins. If youcan make this experience better withtechnology, do it. If your receptionist isconstantly saying, “Thank you for call-ing XYZ Company, please hold,” youcan’t live without it. e

Raissa Evans is the marketing coordinator at PKFTexas in Houston. You can reach her by [email protected].

Live versus “Memorex”

8

CAN YOUR BUSINESS LIVE WITHOUT A LIVE RECEPTIONIST?By Raissa Evans, PKF Texas

A WELL-DESIGNEDAUTOMATED ATTENDANT SYSTEM FREES UP YOUR STAFFTO BE MORE PRODUCTIVEON OTHER TASKS.

THE LEADING EDGE


theLEADING

Henry & Horne, P.L.C.Advisors to Business

9

Disposition of U.S. real property interests—TINs now requiredBy Debra A. Callicutt, CPA, MBA, Director

The Internal Revenue Service hasissued final regulations that require

foreign persons or foreign entities toobtain a taxpayer identification num-ber (TIN) prior to the disposition ofU.S. real property.

Generally, when a foreign persontransfers a U.S. real property interest,the transferee is required to withhold10 percent of the amount realized onthe disposition under Code Section1445. The foreign transferor mustreport the gain on disposition by filinga U.S. income tax return and claim thetax withheld against the tax liability.

Under the prior regulations, a for-eign person was not required to have aTIN for inclusion on his tax return ifthat person: (1) did not have any effec-tively connected income during theyear; (2) did not have any place ofbusiness in the United States; and (3)did not file a tax return in the UnitedStates.

Under the new regulations, foreigntransferors must include TINs on thetax returns, or documents pertainingto dispositions, occurring after Nov. 3,2003. The inclusion of TINs will helpthe IRS identify the foreign taxpayersand more easily match the withhold-ing applications, withholding taxreturns, notices and elections with thetransferors’ tax returns for compliancepurposes.

The IRS further stated that applica-tions for withholding certificates, andother notices and elections, will beconsidered incomplete and generallywill not be processed by the IRS unlessthe transferor’s TIN is provided.

Amounts withheld from the foreigntransferor must still be reported andpaid to the IRS on Form 8288 (U.S.Withholding Tax Return forDispositions by Foreign Persons of U.S.Real Property Interests) even if theappropriate TINs are not provided. Inthe absence of TINs, the IRS will notstamp or mail the receipts for the with-holding tax payments to the transferors.

In view of this important change of

requirement, foreign taxpayers mustapply for the TINs prior to the dispo-sition of the property. Please call uswith any questions. e

Debra Callicutt is a director in the Scottsdale officeof Henry & Horne specializing in international taxa-tion. She is an active participant in the internation-al group of Kreston International, and has served asan expert witness in her field. Debra can be reachedat (480) 483.1170 or [email protected].

10 VOLUME 4 ■ ISSUE 1 ■ 2003

H&H

A lthough component depreciationwas eliminated when the

Accelerated Cost Recovery System(ACRS) was enacted in 1981, anincreasing number of taxpayers are tak-ing advantage of a very similar alterna-tive that is sanctioned by the IRS.

Under the pre-1981 version of com-ponent depreciation, structural compo-nents of a building, such as roofs, wiringand plumbing could be separatelydepreciated over its estimated useful lifein a taxpayer’s business. The new ver-sion of component depreciation, popu-larly referred to as cost segregation, onlyapplies to elements of a building that are

considered personal property under theformer investment tax credit rules.

In spite of this limitation, cost segre-gation can generate significant tax sav-ings by reducing the period over whichdepreciation deductions are claimed.

Under the Modified Accelerated CostRecovery System (MACRS), a buildingis depreciated using the straight-linemethod over 27-1/2 years (for residen-tial rental property) or 39 years (fornonresidential real property). Cost seg-regation, however, allows recovery ofthe personal property elements of abuilding over a five- or seven-year peri-od (depending on the taxpayer’s busi-

ness activity) using the 200 percentdeclining balance method. The classifi-cation of building elements as personalproperty can also reduce state and localtaxes imposed on real property.

Cost segregation is not limited tonewly constructed or purchased prop-erty. A taxpayer who placed MACRSresidential or nonresidential real prop-erty in service after 1986, without allo-cating any costs to personal property,can receive permission to change itsaccounting method. Under this revenueprocedure, a taxpayer is allowed toreclassify building elements as personalproperty and claim a deduction for thedepreciation that should have beenclaimed on those elements.

Previously, the amount of unclaimeddepreciation was generally taken intoaccount as a negative (taxpayer favor-able) adjustment over a four-year peri-od. The IRS, however, has now reducedthe four-year spread for negative adjust-ments to a single year, generally effec-tive for tax years ending on or after Dec.31, 2001. (The reduction applies to anynegative adjustment resulting from achange in accounting method; it is notlimited to depreciation changes.)

Example 1

A taxpayer purchased a factory building(39-year real property) in January 1994.No cost segregation study was per-formed. In 2002, the taxpayer conductsa cost segregation study that allocates $1million of the original cost to seven-yearpersonal property. If the taxpayerrequests a change in accounting methodthat is effective for the 2002 tax year, adeduction of approximately $800,000may be claimed on the 2002 tax return.

This is the difference between the $1million depreciation that should havebeen claimed between 1994 and 2001,and approximately $200,000 of depreci-ation actually claimed over that period.

Personal property elements of newconstruction may, in limited circum-stances, qualify for first-year 30 percentor 50 percent bonus depreciation.Assuming a five-year recovery period,30 percent bonus depreciation andhalf-year convention apply, 44 percentof the cost of the personal property ele-ments can be deducted in the year thata new building is placed in service ifcost segregation is used and the compo-nents qualify for bonus depreciation.

Example 2

A newly constructed motel is placed inservice in January 2003 and $100,000of the cost is allocated to personal prop-erty items that qualify for bonus depre-ciation. These items are treated as five-year property (assets used by taxpayersproviding personal or professional ser-vices or engaged in a wholesale or retailtrade).

The first-year bonus depreciationdeduction is $30,000 (30 percent of$100,000). The regular first-year MACRSdeduction is $14,000 ($100,000 –$30,000) x 20 percent (first-year tablepercentage for five-year property, assum-ing the half-year convention applies).The total first-year deduction is $44,000.

If the personal property had beenincluded in the basis of the building anddepreciated as 39-year real property, the2002 deduction would have been$2,461 (2.461 percent of $100,000).

Bonus depreciation does not applyto used property; instead, the originaluse must begin with the taxpayer. Inthe case of self-constructed property,the construction must begin after Sept.10, 2001 and before Jan. 1, 2005. Ifproperty were constructed for a taxpay-er, it would appear that there could beno binding contract for the construc-tion in effect prior to Sept. 11, 2001, orMay 6, 2003 in case of 50 percentbonus depreciation.

New developments in cost segregationModified Accelerated Cost Recovery System

By Gary W. Fleming, CPA, Director / Jeremy Smith, Supervisor, Henry & Horne, P.L.C.

THE LEADING EDGE 11

The building must generally beplaced in service before Jan. 1, 2005. Anextended placed-in-service deadline ofJan. 1, 2006 should not apply becausethe personal property will not have arecovery period of 10 years or more.

The taxpayer in the preceding exam-ple could also separately depreciate anyland improvements such as swimmingpools, fences, playground equipmentand depreciable landscaping. Generally,land improvements are depreciatedover 15 years using the 150 percentdeclining balance method.

If an item attached to or contained ina building can be easily removed with-out causing significant damage and theitem does not relate to the operation andmaintenance of the building, it can gen-erally be classified as personal property.

Examples of items that have beenclassified as personal property underthis standard include: • removable carpeting• strippable vinyl wall coverings• window treatments• interior ornamentation—molding,

millwork, trim, finish carpentry, andpaneling that is not integrated intothe construction of the building

• moveable partitions• counters, cabinets, shelving• specialized windows (e.g., bank

teller’s window)• signs and lettering• raised floors• false balconies and other exterior

ornamentation• emergency power generators• security lighting, emergency light-

ing and decorative lighting• specialized equipment and machines

(e.g., kitchen equipment or factorymachines), including electrical dis-tribution systems and plumbing tothe extent used for specializedequipment and machines, fire pro-tection and air filtration systems

dedicated to the equipment andmachines, and HVAC and air condi-tioning units installed solely to meetthe temperature or humidityrequirements essential for the opera-tion of machinery or equipment(e.g., computers) or the processingof foodstuffs.

Most practitioners do not have thenecessary expertise to conduct a costsegregation study that is acceptable tothe IRS. The standards for such studiesare high. Thus, it is generally advisableto work with an outside consultant whospecializes in this area. Larger cost seg-regation firms include architects, con-struction engineers and tax specialiststrained to identify and value personalproperty components.

Cost segregation studies can identifyhundreds or even thousands of sepa-rately depreciable components in com-plex structures such as hospitals,restaurants and factories. In addition toidentifying personal property elements,the study must allocate the appropriatecosts to these items. Such costs includedirect material and labor costs, andindirect costs such as architect andengineering fees and impact and permitfees. In the case of an existing buildingwhere records are not readily available(e.g., contractor invoices, constructioncontract pay requests and changeorders), valuation experts may rely onstandardized cost estimation manuals.

Typically, a feasibility study is con-ducted free of charge to determinewhether the tax savings will justify thecost of the study. In many cases, thecost will represent a relatively smallpercentage of the tax savings. However,keep in mind that it is more expensiveto perform a cost segregation study onold construction since the necessaryrecords and documentation are moredifficult to obtain and analyze.

New developments

A public utility could not aggregatemultiple operational assets to meet therequirements of the self-constructedtransition property rule of section203(b)(1)(B) of the Tax Reform Act of1986 because they were separate unitsof property. Each asset must indepen-dently meet the requirements of theself-constructed transition propertyrule to be eligible for the InvestmentTax Credit (ITC). e

Gary Fleming, CPA, is the firm-wide director of taxation

in the Tempe office of Henry & Horne. He specializes in

tax planning and tax consulting services to high net

worth individuals, partnerships, corporations, and

small business. He has worked with companies in

manufacturing, distribution, professional service,

entertainment, and the real estate and related financial

services industries. Contact Gary at (480) 839-4900 or

[email protected].

Jeremy Smith, CPA, is a supervisor in the Tempeoffice of Henry & Horne. His areas of expertiseinclude tax and consulting work to businesses andindividuals. Contact Jeremy at (480) 839–4900 [email protected].

The classification ofbuilding elements aspersonal property canalso reduce state andlocal taxes imposed on real property.

12

H&H


A re you overlooking medical expens-es because you don’t think it’s

worth it, or don’t think you’ll meet theminimum threshold to claim a deduc-tion? If so then you could be missingout on certain tax breaks.

Medical expenses are claimed as anitemized deduction on Schedule A ofForm 1040. In addition, the deductionis limited to those medical expensesexceeding 7.5 percent of your adjustedgross income.

Generally, qualifying medical expens-es are those that would not have beenincurred but for the medical condition towhich they relate. There must be a director proximate relationship between theexpense and the diagnosis, cure, mitiga-tion, treatment or prevention of disease,or the expense must have been incurred

for the purpose of affecting some struc-ture of function of the body.

To be deductible, medical expensesmust be incurred on behalf of a taxpay-er, spouse or their dependents, andthey must be deducted in the year paidregardless of when the expenses wereincurred. Only those medical expensesnot reimbursed by insurance or othersources qualify for the deduction.

Some common examples ofdeductible medical expenses includedoctor, physician or dentist fees, pre-scription drugs, birth control pills, hos-pital and laboratory fees, eyeglasses andcontacts, medical insurance premiumspaid, long-term care insurance premi-ums paid, long-term care expenses inexcess of insurance/reimbursement andmiles traveled for medical care.

In the past, the Internal RevenueService has disallowed deductions forthose expenses that it deemed to be cos-metic. The IRS still says procedures donefor aesthetic purposes, such as teethwhitening, hair transplants and face-lifts,are non-deductible. However, they arenow allowing deductions for certainsurgeries that affect the function of thebody, such as corrective eye surgery, (i.e.radial keratotomy and LASIK).

Other not-so-common examples ofdeductible medical expenses includemodifications to one’s home to accom-modate a disability, such as construct-ing ramps and widening doorways tomake room for a wheelchair. If a modi-fication is a permanent improvement toyour home that increases the fair mar-ket value of the property, only a portionof the expense is deductible. To bedeductible, the improvements must bemade for medical and not architecturalor aesthetic reasons.

Also deductible are expenses for anexercise program if recommended by adoctor as treatment for a specific condi-tion. For example, the extra cost of aspecial diet over the cost of a normaldiet when prescribed by a doctor;acupuncture; cosmetic surgery to repairburns; and special education costsincurred on behalf of your child wherethe primary focus of the school’s cur-riculum is to enable students to com-pensate for or overcome disabilities,and to prepare them for future normaleducation or normal living.

Ultimately, the taxpayer has the bur-den to show that he or she is entitled toa medical deduction upon dispute bythe IRS. You must carefully documentall expenditures, save all receipts andwork orders, keep careful records ofyour transportation expenses, and doc-ument the medical reasons for theexpenditures.

We are confident that careful consid-eration of the above items, along withcountless other examples not men-tioned, will assist you in benefitingfrom your out-of-pocket medical costs.Please contact us if you have questionsor would like more information. e

Jeremy Smith is a supervisor in the Tempe office ofHenry & Horne specializing in providing tax andconsulting work to businesses and individuals.Prior to Henry & Horne, Jeremy worked for a CPAfirm in Northwest Ohio performing tax, audit andconsulting services for small to medium sized busi-ness and individual clientele. You can reach Jeremyat (480) 839-4900 or [email protected].

Mike Hyland is a staff accountant in the Tempeoffice of Henry & Horne specializing in tax forsmall corporations and individuals. Prior to join-ing the firm, Mike worked for brokerage companiesin the Chicago Mercantile Exchange, focusing onmarket quotes, trades and buy and sell orders. Youcan reach Mike at (480) 839-4900 [email protected].

Medical expenses—are you overlooking them?By Jeremy Smith, Supervisor / Mike J. Hyland, Staff Accountant

Examples of deductible

medical expenses include doctor,

physician or dentist fees,

prescription drugs, birth control

pills, hospital and laboratory

fees, eyeglasses and contacts,

medical insurance premiums

paid, long-term care insurance

premiums paid and long-term

care expenses.

FINANCIAL

13

The Tech Wreck of 2000 seems as if it’s old news, but it has left capital marketswith a wicked hangover. High-risk capital has been wiped out, and those who

didn’t lose money are so paranoid that they won’t take risks. That makes raisingnew money pretty tough.

The reality is that there are billions and billions of capital dollars out there justlooking for investment. This huge supply is often referred to as capital overhang(think large beer belly). The problem is that many business owners don’t knowhow to tap that keg.

Banking rates have never been better, but with financial institutions sufferingbig losses, bank loans are difficult to obtain. “We have all this money and low-cost debt available, but investors are too nervous to employ it,” says Jeff Klank,director of mergers and acquisitions for Leading Edge accounting firm BradyWare in Dayton, Ohio.

When most people talk about capital, they are referring to equity or sellingstock, which is the most expensive kind of capital. The cheapest form of capitalto raise is debt—short- and long-term loans and mezzanine debt.

“Debt is cheaper than equity. You pay it back and it goes away. Equity is for-ever,” says Paul McAllister, director of Witan Securities LLC, the investmentbanking division of the Leading Edge accounting firm KGN Financial Group inChicago.

“It’s never more important than now to have financial advisers,” says Klank.“You can spend a lot of wasted time unless you understand what you need, whyyou need it and who you’re asking for it, because you really only get one shot,”he says.

continued on next page

THE LEADING EDGE

“DEBT ISCHEAPER

THAN EQUITY.YOU PAY IT

BACK AND IT GOES AWAY.

EQUITY ISFOREVER.”

—JEFF KLANKDIRECTOR MERGERS & ACQUISITIONS

BRADY WARE

IN THE WAKE OF A RECESSIONRaising capital

CONVENTIONAL LENDERSTerm loans are the cheapest source of capital. Banks willlook at your company’s historical profits, ability to repay andcollateral. If you need to raise $1 million to pursue a newproduct offering, you probably can borrow from a bank ifyou have a good track record. If you’re a smaller firm, youhave limited options, says Klank.

“Banks were lending money based on the inflated expec-tations of their customers and they lost big. It’s difficult toraise capital,” adds McAllister. “In the hangover of the techdays, banks are skittish. Raising capital through banks for allbut the cleanest companies is impossible,” he says.

“Larger banks are driving down cost structure and tryingto do more with less. They can’t afford to make the smallerdeals,” says Klank.

Although large national banks are harder for the middle-market company to approach for financing, a number ofregional banks appear to have stepped in to fill the niche offinancing smaller investments.

All lenders understand that the past 12 to 24 months havebeen particularly difficult for businesses to meet profit goalsand achieve bank covenant requirements. Managementmust be prepared to articulate the causes of any downturnin profitability. Perhaps most importantly, though, manage-ment needs to present an achievable business plan designedto demonstrate adjustments made to return to profitabilityand stabilize the company.

ANGEL INVESTORSWe’ve heard a lot about angel investors recently and Klankexplains why. “If you took the aggregate of all angel capitaland all venture capital, there is four times as much angelcapital as there is professional venture capital.”

The problem is that these investors don’t advertise. “Theseare cash-out entrepreneurs who recently sold their businessfor a nice return and may want to invest in, but not start,their own business. Or they are high-net-worth retired exec-utives with great retirement packages and management skillsthat they’d like to use. Or they are simply high-net-worthindividuals with inherited money who would like to take astab at a business. Angels are successful businesspeople, notnecessarily experienced investors,” says Klank.

The best way to reach them is through your financial orlegal adviser.

Individual angel investors can set their own investmentthreshold, pricing an investment any way they choose. Butin return, they may want a say in the business. Institutionalinvestors have to raise the bar to meet what the investors inthe fund expect.

FINANCIAL


continued from previous page

14

There has been little activity surrounding Initial Public Offerings (IPOs) in recentyears, but IPOs are another way to raise cash, according to Paul McAllister, direc-tor of Witan Securities LLC, the investment banking division of the Leading Edge

accounting firm KGN Financial Group in Chicago. In fact, the IPO market is beginning toshow some signs of life, he says.

Going public is a good option for a private company that has been generating prof-its for a while and has demonstrated that its business model works. If you choose tooffer your company in an IPO, McAllister cautions that you must be mindful of the dif-ferences between public and private companies.

“If you raise public money, you’ve decided you like to live in a glass house. You willhave to disclose everything. Particularly for business owners whose companies havebeen private for a long time, that’s a tough change. It’s the culture of living in a fishbowl that kills more deals,” he says.

The Sarbanes-Oxley Act of 2002 has added significantly more regulatory disclosuresand procedures to publicly held companies, their officers, directors and advisers. Whilethe debate goes on regarding the success of the legislation, there is no debate aboutthe additional time and cost associated with compliance, causing an additional barrierto entering the public markets.

Some smaller companies offer and sell securities without registering the transactionunder an exemption known as Regulation D. Reg D exempts companies that seek to raiseless than $1 million in a 12-month period from registration.

It also exempts companies seeking to raise up to $5 million, as long as the compa-nies sell to 35 or fewer individuals or any number of “accredited investors” who mustmeet high-net-worth or income standards. “You must be extremely careful of securitieslaws. I would recommend that you check with your attorney and employ a registered broker/dealer to handle this deal,” says McAllister.

Although the Securities and Exchange Commission is the main enforcer of thenation’s securities laws, each individual state also has its own securities laws and rules.Known as “Blue Sky Laws,” they regulate both the offer and sale of securities, registra-tion and reporting requirements for broker-dealers and individual stockbrokers doingbusiness (both directly and indirectly) in the state, and investment advisers seeking tooffer their investment advisory services in the state.

“Reg Ds are time consuming and difficult to place,” says McAllister, stressing againthat it’s important to have sound financial and legal advice. e

OTHER METHODS FOR RAISING CAPITAL

THE LEADING EDGE

VENTURE CAPITALVenture capitalists are experienced, professional investorswho manage a fund, usually comprising 20 to 30 limitedpartners. “A venture capital (VC) firm is looking for a ter-minal event, say five to seven years down the road, whenthey can reap significant benefits (in excess of 30 percent)from their investment,” says McAllister.

“Limited partners expect to get all their money back anda substantial return on the investment in 10 years,” saysKlank. “There’s a lot of pressure in a VC firm to employ themoney in the first five years and get cash back in the sec-ond five years.”

How much of a return do VCs expect? “The general ruleis five times return in five years,” says Klank, adding thatventure capital is not for everyone.

“Venture capital guys traditionally have been piranhasthere to finance high-risk deals,” says McAllister. “Whenfinancing high-risk transactions, the cost always will behighest for the owner.” But the payoff also could be poten-tially higher.

For example, if you have a $4 million business and youreceive an order to sell into all Wal-Mart stores, you’d needto raise a lot of cash quickly. You project that your compa-ny will grow to $25 million. You get a venture capital firmto invest $1 million because it sees the growth potential. Inexchange, the venture capital firm expects to receive 20-percent ownership interest in your company. So by thetime you reach $25 million, the venture capitalist hasmade five times his initial investment ($25 million x 20percent = $5 million), but so have you. Your 80-percentownership interest is now worth $20 million ($25 millionx 80 percent = $20 million). “That’s the leap of faith,”explains Klank.

MEZZANINE DEBTAs its name suggests, mezzanine debt is a hybrid or com-bination of equity and bank debt.

“Mezzanine investors don’t want to own your company,but they may want a seat on your board. They will helpfinance acquisitions or expansions. There will always be abit of risk, known as an air ball—the amount of money thecompany borrows that is not covered by hard assets suchas inventory and receivables versus soft assets such asgoodwill,” says McAllister.

“Financing is a blend of many levels,” says Klank. “It’salmost like artwork. It’s a puzzle on how to integrate andnegotiate with various sources.” Mezzanine investors willlook at a company’s past performance to determine its pre-dictions (and risk) on future performance.

If a venture capital firm wants five times its money infive years (38-percent return on investment) and a bankoffers prime plus 1 percent, which is about 6 percent, anda mezzanine investor offers 12 percent, those three sourcesbalance out to returns in the low 20s. “Some people getsticker shock, but if you look at the blended cost of capi-tal, the terms are not so bad,” says Klank.

OVERCOMING HURDLES TO THE MARKETPLACEAccording to McAllister, financial markets are an exercisein group psychology. “The tech run-up was based on aherd mentality. Market frenzies are statistically unavoid-able. And remember markets rise on rumors and fall onnews,” he says, explaining why when the Federal Reserveannounces a drop in the interest rate, the impact is felt onthe markets before the actual rate is cut.

Corporate profits have improved, low-interest ratesremain (although that’s not likely to continue), but thecountry and investors remain skittish. Unemploymentremains high and as long as that continues, there’s a feelingthat all is not well with the economy.

But there’s a silver lining for business. Fundamentally, if you’re a lousy company, you shouldn’t be able to getcapital and succeed, according to the theory of economicDarwinism. “But a good value-related proposition shouldbe able to transcend a bad economy to get money,”McAllister says. e

“FINANCING IS A BLEND OF MANY LEVELS.

IT’S A PUZZLE ON HOW TOINTEGRATE AND NEGOTIATE

WITH VARIOUS SOURCES.”

—JEFF KLANKDIRECTOR MERGERS & ACQUISITIONS

BRADY WARE

15

FOREiGN AID

16 VOLUME 4 ■ ISSUE 1 ■ 2003

OPERATIONAL

You’re working late one nightand your computer crashes,

so you jump on the phone andcall for technical support. Youwind up talking with an incredi-bly knowledgeable technicianwho sounds as if he may beIndian. Although this doesn’tseem unusual to you, what youmight not realize is that he’s actu-ally talking to you from India.

According to a study done byGartner Inc., a research and advi-sory firm based in Stamford,Conn., by the end of 2004, oneout of every 10 jobs within U.S.-based IT vendorsand IT service providers will move overseas. Indiaand China are where U.S.-based companies are find-ing large pools of highly trained workers—cheap.

There are those who are concerned about theimpact on the U.S. economy when high-tech jobshead overseas. But there are others who believe thatthis will drive growth and innovation—and betterjobs—to replace those that are leaving.

We’ve been down this road before during the1980s when auto and manufacturing jobs were leav-ing our country. And while we are not likely to seethose jobs return, this latest exodus of technologyand service industry jobs could lead to more high-skilled, higher-paying jobs.

The key will be encouraging an educated andhighly trained workforce.

WORK DONE RIGHT—AND FASTWe live and work in a 24/7 world. Tina Ferguson,president of the one80 group, a strategic marketingfirm based in Plano, Texas, found that when sheturned to India to outsource Web development, shereceived high quality work—fast.

She was working with a U.S.-based offshore devel-opment company that was outsourcing computerdevelopment to India for U.S. companies thatrequired scalable, accelerated development solutions.

U.S. COMPANIES ARE

OUTSOURCING

WORK OFFSHORE TO

SAVE COSTS—

AND MORE

Canada, Ireland, China, Argentina,Ghana, Romania, India and thePhilippines all are hot spots for

outsourcing services, ranging fromsoftware research and development todata entry and call centers.

Low wages and technological infra-structure offered at non-U.S. outsourc-ing businesses can save companies bigmoney on rudimentary tasks. The WorldInformation Technology and ServicesAlliance (www.witsa.org) can help youfind hundreds of firms. e

WHAT’SBEING SENT

OUTSIDETHE UNITED

STATES?

This company used the Microsoft model to accel-erate development. During its heyday of develop-ment, Microsoft developers and engineers didn’tmiss a beat since, while they were asleep in Seattle,counterparts in India were working on the software.

“I work with start-up companies and establishedfirms, but was seeking a more affordable Web devel-opment solution that also could be done in less time.My client had contacts in India that needed marketinghelp, so we started working together,” she says.

Ferguson found a Web developer in India throughElance (www.elance.com), a resource for freelance tech-nology service providers. Because she was new to thisprocess, Ferguson says one Indian company offered todo work for free to see if a working relationship waspossible. “While I did pay the company for the servicesin the end, the free offer made it ‘risk-free’ to try beforewe actually committed ourselves,” she says.

The partnership, for the most part, has been fruit-ful. “Although I partner with a team of Web develop-ers and designers stateside who work at reasonablerates, many of the start-up companies still couldn’tafford a Web site,” she says. She keeps design in the

United States and sends Web develop-ment/HTML to India.

Although there was no language barrier, Ferguson realized that she had tothink logically and systematically andwrite everything in a way that could be understood easily. “I realized fairlyquickly that I couldn’t have the outsourced developerwork directly with the client. I needed to have themwork through me,” she says.

Today, she works with both stateside companiesin Dallas and two companies in India. “When I workwith a client who needs a $50,000 Web site, butdoesn’t have the budget, I outsource the HTML toget the project in on budget,” she says.

She’s very up-front with companies with whom shedeals. “I’m sensitive to the state of the U.S. economy.Marketing budgets are dwindling. I feel strongly thatto help our economy, we have to offer viable market-ing solutions—no matter what the budget. Ultimately,this will put more people back to work,” she says.

Ferguson doesn’t have to sacrifice when outsourc-ing. “They work so fast and work six days a week.

They hardly ever make mistakes. I would befine keeping work here if I could find some-one to work that fast,” she says.

So far the experience has been a positiveone. “Outsourcing is not the magic bullet, butthe work ethic I’ve experienced is that the cus-tomer is always right and that if something is

wrong, they will stay late to get it done,” Ferguson says.And how much is Ferguson saving her clients by

going to offshore Web developers? “We can save any-where from 25 percent to 75 percent, depending onwhat a client is accustomed to paying. A Web designthat typically costs $10,000 can cost $1,000 in India.Of course we also have to build in time to facilitatethe back and forth required.”

Perhaps there’s a lesson to be learned for statesidecompanies not involved in outsourcing as well. “I’mimpressed with the way these offshore companieshave handled business,” says Ferguson. “Their phi-losophy is: ‘We want your business, we’ll work to getit, we’re grateful for the work and we’llget it back to you in two days.’ That’swhat my clients need.” e

THE LEADING EDGE 17

Dave Evans, president of Trio China in Guan Dong, a Cantonese provincein China, is no stranger to working in a foreign country.

As an engineer with RCA, he brought a team to China to set up a manufacturing operation—an effort that was supposed to take six weeksactually took eight months to get the first product offline.

“It became evident that we could not get the product out if we didn’thave someone here in China to oversee the manufacturing operations,” hesays. Today he’s started his own company as a liaison for companies thatwant to set up manufacturing in Asia.

For a company exploring offshore activity, it’s important to note a num-ber of ongoing issues, the first of which is the culture.

“As a client hoping to locate a manufacturing facility, I’m looking for thebest quality at the best price. But your representative may be looking for afactory that will give him the best cut for bringing the business,” he says.

Communication is important, even among those who speak English. It’s very important to be incredibly literal in your instructions and expectations. “Chinese engineers and business people are very intelligent,but even if they understand English, they might not interpret it as youexpect,” he says.

Start with extremely clear plans and a well-definedproduct. “A lot of companies have a tendency to take a productto 98-percent completion and then try to work out the remaining 2 percent onthe line. That won’t work unless you can afford to have a team of engineers incountry to see it through,” he says.

Negotiating the cultural and logistical differences can pay off big time.Evans works with Gibson Labs, a division of Gibson Guitar, and soughtquotes for die-cast tooling for an amplifier’s aluminum chassis. In Americathat quote was $1 million. “I was able to bring the designs to China and getit made for $250,000. There’s that much difference (75 percent) in cost,especially for items that are labor intensive,” he says.

Evans says he’s not unsympathetic to American workers who are out ofwork. “It’s a worldwide economy and companies are no longer trapped byboundaries. I don’t like to see people struggling and out of work, but froma practical standpoint, the CEO of an American company has to produce thebest product for the best price in order to please the shareholders. Formany, the answer is to move manufacturing offshore.” e

For more information, e-mail Dave Evans at [email protected].

”WE CAN

SAVE ANYWHERE

FROM

25 PERCENT

TO 75 PERCENT.”

—TINA FERGUSON

MOVING

OPERATIONSOFFSHORE


CLIENT

JAMISON BEDDING

18

I f you’ve stayed in a Marriott, a ChoiceHotel or even some Holiday Inns, chances

are you’ve slept in a Jamison Bedding bed.Located in Nashville, Tenn., Jamison is a

fifth-generation family owned business andis the fourth-largest bedding provider in theUnited States.

It recently acquired a more worldly distinction by obtaining a license to manu-facture and sell British-based Hypnos Beds,which hold warrants from the late QueenMother, Queen Elizabeth II and soon,Prince Charles.

If Jamison President Frank Gorrell’sancestors knew their company would beholding a royal warrant (only a select fewsuppliers do, including Jaguar, BentleyMotorcars, Royal Doulton China andWaterford Crystal), they’d probably rollover in their graves, says Gorrell.

But perhaps it’s not so unlikely, consider-ing that since 1883 Jamison has establisheditself as the finest quality bedding availableanywhere in the world.

According to Gorrell, whose mother wasa Jamison, the company has three divi-sions—retail (selling to customers in ninesoutheastern states); hoteliers (it has beenthe exclusive vendor to Marriott since1966); and now licensed manufacturer ofhigh-end luxury beds (Hypnos fromEngland, which is the exclusive supplier ofbedding to the royal household).

“We’ve really created a niche for our-selves, offering high-quality products at avalue to retailers. And we’ve created a nichein the hotel industry,” Gorrell says.

His introduction to Peter Keen, owner ofHypnos Beds, was quite serendipitous.“Liggett & Platt is a company that mostbedding manufacturers buy their coilspring units from,” explains Gorrell. “Aboutfour or five years ago, Liggett set up opera-tions in the United Kingdom market andbegan supplying Hypnos.”

It turns out that there were many simi-larities between the two companies—Jamison and Hypnos. Both were long-timefamily owned companies, both served thehigh-end hotel industry and both had aninterest in providing the highest qualityproduct for customers worldwide.

After visits to Nashville and Buckinghamshire,England, the two companies set to work.“Hypnos beds are a handmade product, usingthe finest natural materials (silk, rubber fromtrees in Malaysia, New Zealand wool and cash-mere). It took us about a year to get ouremployees trained, set up the supply chain andlaunch the product (which Jamison did in

September at the grand opening of theMarshall Field’s State Street store in Chicago).

“Generally, we were not able to sell prof-itably outside of a 300-mile radius due toweekly deliveries. But with this high-endproduct, we can now afford to expandnationally,” says Gorrell.

He and his team have targeted nationalchains, including Marshall Field’s, upper-end furniture stores, specialty stores andhigh-end linen stores.

Although the past couple of years havebeen tough for the company—new con-struction in hotel chains practically driedup after Sept. 11, 2001, and expansion andrefurbishing also were halted—Gorrell hasseen retail sales pick up since Labor Day.

“The one thing in a hotel that has to bereplaced if it’s worn out is the bed. Whathotels are selling is a good night’s sleep,” hesays. And he also believes that the additionof the luxury Hypnos beds will boost sales.

“There’s not another bedding companythat has the royal warrant. It’s an exception-al product (selling between $3,000 and$6,000) that is handcrafted, not made on aproduction line,” he says.

Jamison makes beds to Hypnos specifica-tions, but uses U.S. sizing rather than met-ric and makes box springs that fit typicalU.S. bed frames versus the divan-style that’spopular in Europe.

And just in case you’re wondering whoelse is sleeping in a Hypnos bed aside fromthe royal family: Gorrell says he doesn’thave any big names in the United States,but that Russian President Vladimir Putin,former Spice Girl Victoria Beckwith and theSultan of Brunei all sleep on Hypnos beds.

Hypnos Beds will be available atGlabman’s Furniture in Los Angeles, so itsoon could also become the choice beddingof the stars. e

Jamison Bedding is a client of Leading Edge accountingfirm Lattimore, Black, Morgan & Cain, P.C. in Brentwood,Tenn. The firm handles audit work, administers the compa-ny’s pension fund and assists with technology for Jamison.

Giving customers and travelers the luxury of sleep for 120 years

”WITH THIS HIGH-END PRODUCT, WE CAN NOW AFFORDTO EXPAND NATIONALLY.”—FRANK GORRELL, PRESIDENT, JAMISON BEDDING

advice and information to help stop the spam!20031001]2003_fall.pdf · small business owner. e...

Documents