Center for Management of Emerging Companies

Crisis Management

Recent events, from terrorist attacks to widespread product defects to man-made natural disasters to disclosures of illegal and unethical activities among senior executives at well-known high profile companies, have led to enhanced emphasis on the art and science of "crisis management."  This post provides an introduction to crisis management including risk factors for potential crisis situations and tips on setting up and administering a crisis management program.

Prudent Governance Practices in Troubled Times

The directors, as well as the senior officers, of every corporation have specific duties with respect to identifying and managing the risks associated with the business activities of the corporation.  Under state corporation laws, for example, directors and officers must satisfy their fiduciary duties of care and loyalty and this generally means that they are required and expected to exercise reasonable judgment in overseeing the activities of the corporation by, among other things, developing internal reporting and monitoring systems that will allow them to keep abreast of material risks.  Once a material risk has been identified the directors and officers must exercise their good faith business judgment to manage those risks in an informed and disinterested manner.  In addition, Section 404 of the Sarbanes-Oxley Act places explicit burdens on the leaders of public companies to regularly assess the effectiveness of their internal controls and stock exchange requirements, such as those mandated by the New York Stock Exchange, require that members of the audit committee of any listed company must discuss the company’s policies with respect to risk assessment and management as well as the company’s major financial risk exposures and the steps management has taken to monitor and control such exposures.  Finally, any actual or perceived failure with respect to risk management will likely expose the company and its directors and officers to intense scrutiny by the media and the financial community that may substantially damage the reputation of the company, impair its ability to obtain additional capital and trigger inquiries from regulators.  The current state of the economy raises the level of risk for everyone and directors and officers of every company, as well as their advisors, should review this week’s report on prudent governance practices in troubled times.

 

Some Advice for Troubled Times

Recently I had an opportunity to prepare an article on renegotiating and managing contracts when markets turn sour for the quarterly newsletter of the Arizona Chapter of the Association of Corporate Counsel.  The newsletter includes several pieces of good advice for troubled times. 

Records Retention Policies and Procedures

Risk management is an important topic these days for all businesses and founders and executives need to understand the contractual relationships of their firms and be able to access all necessary records quickly and efficiently.  In order to be sure this can be done companies must create and maintain records retention policies and procedures.

Managing an Organizational Change Program

Organizations should continuously monitor their external environmental to determine what changes have occurred that may trigger a need to alter the key design components of organizational structure and culture.  For example, changes in technology, customer requirements, economic factors or competition can all change the landscape for an organization and adaptation is necessary for survival.  In order for organizational change to be effective a formal change program should be created in advance to ensure that members of the organization are fully informed of the changes and that they understand why change is required and how it will impact them and the entire organization.  A change program should incorporate mechanisms for obtaining feedback and constantly reinforcing the changes given that it is often difficult to change accepted behaviors and ways of conducting business.

• Has a customized change management program been prepared?  The change management program should take into account the specific characteristics of the proposed change and the history and culture of the organization.

• Has consideration been given to how the individual members of the organization will react to the proposed changes and how their day-to-day activities for, and interaction with, the organization will be impacted?  Consideration of these questions should guide decisions about supporting mechanisms such as communications and training.

• Have the lead sponsors for the change initiative been identified and are they at the appropriate level within the organization to be effective?  Sponsors should be active and visible leaders of the change initiative with authority to make and monitor all necessary funding and organizational design decisions.

• Does the change management plan include an effective strategy for communicating with members and external stakeholders of the organization?  An effective communication plan will be targeted to appropriate audiences, rely on various communication channels (e.g., meetings, face-to-face conversations, newsletters, presentations, Intranet Q&A, etc.) and provide for feedback to ensure that the change initiative is understood.

• Does the communications program include clear answer to key member questions such as “why are we making this change” and “what will happen if we don’t make this change”?  Members may find the broader vision of organization leaders to be interesting; however, they are usually most concerned about what it all means for them personally—another implicit question that each member has is “what’s in it for me”.  An effort should be made to preserve and honor the good things of the past even if changes are now thought to be necessary.

• Have managers and supervisors been involved in development and implementation of the change management program?  Managers and supervisors are crucial to success of any change program because they have close relationships with those that report to them and are best situation to manage how their direct reports experience and respond to the proposed changes.

• Does the change management program include adequate training for managers and supervisors?  The important role of managers and supervisors has been described above and it is essential that they be given the tools necessary to become and remain effective advocates of the change process.

• Does the change management program include strategies and plans for handling resistance that may arise from within the organization?  A distinction can and should be made between proactive strategies—which involve anticipating in advance which issues will be raised by members and crafting responses before the program is initiated—and reactive strategies—which include pre-established policies for reacting to unforeseen objections that arise once the program has begun.

• Has the organization established systems that will facilitate collection and analysis of feedback and measurement of progress toward the initial goals of the change program?  Before the program is launched the goals should be clearly defined in ways that permit objective measurement and feedback tools should be created and tested.

• Does the change management program include plans for continuous reinforcement of the proposed changes?  Any change in the way that things are down within an organization takes a long time to be absorbed particularly when the change related to deeply embedded values and norms.  The program must take a long-term approach and include strategies for reinforcing the new values and norms that the leaders wish to implement.

This material will appear in Alan Gutterman’s publication entitled “Business Transactions Solutions” and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.  Alan Gutterman is the Founder/Principal of Gutterman Law & Business (www.alangutterman.com), which publishes the Emerging Companies Blog and the Business Counselor Blog, and a Partner of The General Counsel LLC (www.thegeneralcounsel.net).

 

 

 

Forces for Organizational Change

Today I will continue with the theme of organizational change that I started on in my last post by providing a brief overview of the key forces that drive companies to consider changes to their human resources, functional skills, technology, and organizational structure.  The need to undertake some form of organizational change can arise from any of the same forces that define the environment in which companies must compete: competitive forces, economic forces, political forces, global forces, demographic forces, social forces and ethical forces.  Examples of how each of these forces can impact organizational design include the following:

• Competitive forces generally require actions that will allow the company to keep up with and surpass the skills of competitors with respect to efficiency (e.g., cost of production), innovation and product quality and reliability.
• Economic and political forces continuously impact the market conditions and rules under which companies produce and sell their goods and services and will cause them to reconsider how and where they engage in production and sales activities.  The rise of economic and political unions (e.g. European Union) and increasing use of free trade agreements has changed traditional notions of market entry strategies and provided foreign competitors with new advantages.
• Global forces are clearly important as companies expand into new foreign markets with different languages, cultures and business practices.  Changes in the organizational structure will be required in order to allow companies continue to achieve the economies of scale and other advantages associated with global strategies while simultaneously acting like a local firm in foreign markets and satisfying the specific requirements of customers in each country.
• Demographic forces are important internal and external factors for companies.  In the workplace companies must address the rising levels of diversity among personnel and must create and effectively administer managerial and reward systems that take into account the needs and expectations of employees drawn from a wide demographic spectrum.  In the marketplace companies must be prepared to tailor their products and services to the unique demands of specific demographically defined customer groups.
• Social forces have a substantial impact on what employees expect and want out of their careers and the companies they select for employment.  Employees have a keener interest in lifestyle balance that employers must consider accommodating and firms must also be prepared to offer employees more opportunities for professional development through training and job rotation.
• Ethical forces are continuously pushing companies to embrace socially responsible business practices and act in an honest and ethical manner.  Laws and regulations pertaining to ethical behavior have proliferated in the United States and in many foreign countries and companies must establish and follow internal rules and procedures to ensure that laws are obeyed and ethical problems are brought to light, independently reviewed and positively resolved.  Ethical forces are also at work when companies develop strategies to carry out their activities in ways that preserve the environment and respect the human rights of others (e.g., ensuring the foreign suppliers refrain from operating “sweatshops” and otherwise mistreating their workers).

The content in this post has been adapted from material that will appear in Business Transactions Solutions (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

What is Organizational Change?

In a prior post I discussed the pace of innovation that companies should follow and suggested that it often made more sense to embark on a strategy of evolutionary change to products and technology rather than attempt the difficult feat of revolutionary change that requires completing overturning the way things have been done in the past.  Related questions arise in the area of “organizational change,” which is the process by which companies move from the current state to some desired future state in order to maintain, and hopefully increase, organizational effectiveness.  Companies must continuously evaluate the need for redesigning their organizational structure to deal with changes in their business environment and ensure that the mechanisms and procedures for coordination and control continue to operate effectively.  They should create and implement strategies for planned organizational change in order to strengthen and expand the value-creation activities of the firm.  For example, even successful companies should understand the need to re-align its resources and core competencies in ways that will allow them to continue to grow through the introduction of new products and/or entry into new markets.  Unplanned organizational change may also be needed in situations where companies have fallen on hard times and need to move quickly to restructure their organization in order to survive and launch new business initiatives.

The most common targets for organizational change initiatives include human resources, functional resources, technological capabilities and organizational capabilities:

1. The skills and abilities of the managers and employees of the company (i.e., human resources) are essential to the efforts of the company to develop and maintain its core competencies and thus establish a competitive advantage.  Accordingly, an important part of continuous organizational change for any company is taking the necessary steps to strengthen its human resources through training and development, socializing new employees into the organizational culture of the company, consciously altering cultural norms and values to keep them consistent with current company strategies, and establishing promotion and reward systems that effectively motive personnel and sustain morale.
2. The ability of functional departments to increase their value-creation capabilities depends on identifying and implementing necessary changes in their organizational structure, culture and technology.  As companies grow and competitive conditions change the relative importance of functional departments will also change and companies will be forced to realign the resources that are invested in particular functional activities.  For example, as the pace of innovation increases in the company’s chosen market the essential focus of organizational change may be in the functional area in the form of a transition from the traditional function-based organization to a product team structure that is more effective in accelerating new product development.
3. Companies may seek organizational change through strengthening their technologies capabilities in order to improve their ability to rapidly develop and launch new products, reduce manufacturing costs, increase the quality and reliability of products, and create customized versions of products to achieve differentiated advantages.
4. An important, but often forgotten, source of organizational change is planned changes to the organizational structure and culture of the company in order to enhance the ability of the company’s human and functional resources to create new value.  For example, a company can modify its organizational structure to improve communication and coordination between functional departments.

While the targets of organizational change can be categorized in the manner described above, it usually necessary to make appropriate changes in several areas at the same time in order for the company to actually achieve the targeted goals and objectives for increased value.  For example, assume a company decides to launch a whole line of new products based on technology that the company has not controlled or used in the past.  In order to pursue this strategy the company will need to recruit the necessary human resources (e.g., scientists and engineers with training and experience in the relevant technology) and support their activities by investing in the necessary functional resources and technological capabilities.  In addition, changes will need to be made in the organizational structure and culture in order to integrate the new business activities into the company and ensure that other functional departments and business units are willing and able to support the initiative.  Among other things this may mean spinning off human and other resources from various functional departments and placing them into a new product team structure that is better suited for the innovative activities necessary for the planned new products to be developed, launched and supported.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (2008) and is present with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

 

Contract Review & Approval Procedures Part II

In my previous post I discussed the importance of contract review and approval procedures as part of a company’s overall control environment. As companies get larger and the scope of possible contracts expands they opt for a fairly comprehensive form of contract review and signature authority policy.  Such a policy might cover the following areas:

• Overview of the contracting procedures;
• Responsibilities of parties initiating contracts;
• Requirements regarding formal bidding procedures (i.e., requests for proposals);
• Subject matter and funding approvals;
• Legal department approval;
• Risk management issues including use of insurance and indemnification provisions;
• Time frames for review and approval process;
• Contracting authority;
• Board of directors’ actions and documents evidencing board actions;
• Processing of funding requirements for contracts;
• Retention of contracts and recordkeeping requirements; and
• Contract administration and performance review.

The policy should emphasize that contract review is much more than simply following a series of formal steps and procedures and it is essential that all officers, managers and employees initiating a contract be held personally responsible for reviewing and understanding the proposed terms of the contract and ensuring that appropriate insurance requirements and indemnification provisions are included therein.  In addition, every effort should be made to remove undue pressure from the review process and persons initiating a new contract should allow sufficient lead time to allow for completion of any required review and approval process described in the policy.  In many cases a complex contract may require several months of negotiation and preparation and departments that may be impacted by a contract should be notified well in advance of the expected start date for the contract.  As a general rule, six to eight weeks should be set aside for legal review and review by other departments.

The policy should clearly delineate the responsibilities of everyone involved in the contract process.  For example, all officers, managers and employees initiating a contract:

• Are responsible for reviewing and understanding the proposed terms of the contract and ensuring that: the language in the contract accurately reflects the business goals and objectives of the company and the department or unit initiating the contract; the contract is in the best interest of the company; the company will be able to fulfill all of its obligations under the contract in a cost-effective and timely fashion; and the language in the contract is clear and consistent and addresses all material contingencies that can be reasonably foreseen for the life of the contract.
• Are responsible for ensuring that all of the necessary approvals described herein are obtained and that sufficient time is allocated to allow all persons involved in the review and approval process to fulfill their responsibilities in an orderly fashion.
• Should, before the company invests time and resources in the contract review process, prepare a description of the business case for the contract, including the goals and purposes of the contract, the reasons for contracting with the particular party, and the expected benefits and costs associated with performance of the contract.

All departments involved in performing the company’s obligations in a contract should be responsible for timely and full review of the proposed contract.  Among other things, authorized representations of each department should be responsible for reviewing and understanding the proposed terms of the contract and ensuring that the department will be able to fulfill all of its obligations under the contract in a cost-effective and timely fashion and the language in the contract relating to the duties and obligations of the department is clear and consistent and addresses all material contingencies that can be reasonably foreseen for the life of the contract.  In addition, all departments are responsible for complying with all other company policies and procedures relating to post-signing administration of contracts and fulfillment of contractual obligations.

The content in this post has been adapted from material that will appear in Business Counsel Update (Summer 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Contract Review & Approval Procedures Part I

One of the most important elements of the control environment is any business is the establishment and use of formal policies and procedures for reviewing and approving contractual arrangements with third parties that will create legal rights and obligations for the company. 

Ideally some sort of contract review and signature authority policy will be put in place very early in the company’s existence since contracts of various types will be needed from the time that the company first opens its doors.  Many times all of the contracts under consideration during the start-up phase will be discussed by all of the founders because it easy to do so in light of their close proximity and the absence of layers of management personnel when the company is still small.  The problems begin to arise, however, when founders and other senior managers start to assume more responsibility for particular areas of the business and the input from other founders and managers becomes more limited due to the lack of time, problems with communication and the fact that the other persons are themselves preoccupied with their own projects. 

While the senior managers in a particular functional or business area presumably have the most skill and experience with respect to contracts that they initiate it is nonetheless important to have some independent review of the business case for the contract and the potential risks to the company of assuming the legal and operational obligations included in the contract.  For example, all functional areas that might be involved in fulfilling the company’s duties under the contract should be consulted in advance to verify that they will be able to perform as anticipated.  Contract review is also necessary to avoid conflicts with commitments that someone else in the company may have already made with other parties.  Finally, contract review is needed to be sure that independent parties are reviewing the terms of each proposed transaction and that persons initiating a contract do not have some “vested interest” in the selection and use of the contract partner.

Procedures for contract review and signature authority should accomplish at least two main purposes—establish the process for the review and approval of proposed contracts by various departments (e.g., legal, finance and other departments involved in the fulfillment of obligations created under the contract) and identifying which persons within the company have the authority to approved specified transactions or activities and thus execute a proposed contract on behalf of the company.  Ideally the contract review process will also provide an opportunity for evaluating the proposed contract in the context of the company’s overall business strategy.  This can and should occur through the creation of a business case for each proposed contractual arrangement (or at least those contracts that are “material” in light of the company’s business) that describes the key rewards and risks associated with the contract, explains why the contract is important to the company’s business plan, establishes performance milestones, and suggests procedures for monitoring performance under the contract after it is executed.  The business case process forces the initiating party to think through each proposed contract and become an informed internal champion for the relationship and also serves as an important information and communication tool for senior management to the extent that they are being kept in the loop as to the specific activities and tactics that are being used to further the company strategy that has been established at the top of the hierarchy.

The content in this post has been adapted from material that will appear in Business Counsel Update (Summer 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Basic Elements of an Outsourcing Agreement

As companies continue to turn more frequently to outsourcing solutions for back office processing services it is important executives and senior managers to have a basic understanding of the key elements of an outsourcing agreement.  While every deal is different there are some guiding principles that can be applied in most instances.

First, while the parties obviously contemplate a long-term relationship with significant investments on both sides it is wise to provide for a “pilot period” during which the parties can evaluate how the services are being provided and whether they can establish procedures and protocols that will allow them to achieve the goals and objectives for the contract.  One of the key planning tools for the contract is the preparation and acceptance of an implementation plan and schedule that will be appended to the contact as an exhibit.  The plan and schedule should include acceptance tests that would need to be completed before the services can begin.  The pilot period would commence on the “implementation completion date,” which is the date that the acceptance tests are completed.  The parties should schedule a full-scale review of service provision to be completed on or before the end of the pilot period.  Assuming that the arrangement continues beyond the pilot period the agreement should specify the initial term of the contract and procedures for renewal and extension.  In that regard it is very important for the client to insist on “termination assistance” that ensures that the services will continue to be available for a reasonable period following a decision to terminate in order to allow the client to make arrangements for a new vendor or performance of the outsourced services on its own.

Obviously one of the most important parts of the contract is the description of the services to be provided to the client by the vendor and the parties should prepared a detailed schedule of services that includes objective measures of the anticipated “service levels” as well as an overview of possible incidental services that are not specifically described yet are likely to be required in order for the goals and objectives of the contract to be achieved.  The description of services should be accompanied by a schedule of fees and appropriate details regarding the manner in which the vendor intends to provide the personnel necessary to achieve the mutually agreed service levels.  The parties should be prepared to discuss any changes in the level of services due to increased or decreased demand by the client and/or changes in applicable laws and regulations.  The vendor should be prepared to provide the requisite training for its personnel and render reports to the client regarding the level and quality of services provided under the agreement. Among other things the reports should cover employee work hours and absenteeism and the volume and quality of work performed by vendor employees based on mutually agreed performance metrics.  Weekly and quarterly business reviews should also be conducted.  Finally, a procedure should be established for reviewing possible requests by the client to the vendor for new services during the term of the contact including preparation and review of a written proposal for new services that include an analysis of the additional resources that the vendor would need to devote to the relationship.

Other key issues that need to be covered in this type of agreement include communication procedures, including designation of relationship managers by both parties; identification of key vendor personnel who will be dedicated to performance of the activities contemplated under the agreement; allocation of ownership and usage rights with respect to any intellectual property that may be created or exchanged during the relationship; force majeure procedures; billing and payment procedures; representations and warranties; dispute resolution procedures; events of default and termination procedures; notice procedures; and governing law.

The content in this post has been adapted from material that will appear in Going Global: A Guide to Building an International Business (April 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.