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By Brice Donovan (a.k.a., Thomas Derr)
Wayne, PA, US -- PRESIDENT Calvin Coolidge once noted that "the business of America is business."
Judging from recent international developments-glasnost, the opening of Mainland China, and the upcoming 1992 economic "merger" of Western Europe-it seems that basic idea is beginning to catch on in other countries as well. It's a trend that one Mainline Philadelphia rug dealer has found particularly beneficial. Jerry Sorkin, president of J.M. Sorkin, a specialty rug retail store based in Wayne, has found success by working closely with key officials in the Tunisian government to bring that country's rug designs to the U.S. market. That might not seem significant except for one minor point-Jerry Sorkin is Jewish.
NOT A PROBLEM: "Everyone knows of my Jewishness. Everyone knows I travel to Israel," Sorkin explains. "I have found that being open about these things in a country like Tunisia has probably been a benefit because they would have looked at me either as a complete kook or as someone who should be accepted because of his openness- and it really has been a door opener."
As a result, Sorkin says his candidness has been received by the Tunisians with the greatest respect, and while the Jewish-Arab problem is discussed openly at government levels, "at a personal level it does not exist."
Several significant problems do exist, however, in the different ways Americans and Tunisians tend to do business. Aside from the obvious cultural differences, there are also different expectations from the markets.
"The American market is a very demanding market," Sorkin explains. "People can go in and order a car in any color interior, any option they want --and the same applies when they are buying rugs. They want to know a six-by-nine is a six-by-nine and the blue is a blue.
"In a lot of third world countries, they may not be in tune to these nuances the way we are. And the correct response to these nuances can make the difference between something being right or wrong."
LOGISTICAL DIFFICULTIES: Other problems frequently exist with regard to packaging and delivery schedules. According to Sorkin, there tends to be "an eastern sense to time, and a western sense to time." For example, if a Tunisian manufacturer promised to get back to him within a month or six weeks, that timeframe often would not be taken as seriously by the Tunisians as the
Americans, Sorkin says.
The fact that no Philadelphia banks have direct relations with Tunisia also creates some logistical problems. Banks in each country use their own standard phrasing for documents that involve export financing and government regulations on export-and finding a mutually agreeable common ground has caused problems in virtually every transaction, Sorkin says.
In addition, because the U.S. Customs Service was unfamiliar with Tunisian products, there were problems in having appropriate values assigned to the merchandise.
"We also started developing the product at a time when an embargo was placed on Iranian goods -- and apparently a number of people in the rug industry tried to bring Iranian products through third world countries and through Europe," Sorkin says. "So for a time there was confusion at the import level over here."
Still, the most important obstacles that had to be overcome were centered in Tunisia itself, he adds. In many cases, the problem was very basic --such as communicating specific color requests to the Arab rug makers. As Sorkin explains, the American color palate is very different from what Tunisians are accustomed. As s result, when the Tunisians would dye the rug yarns, many times the colors would be far too strong for American tastes. But communicating the concept of a softer color was difficult-in Arabic as well as French.
"After coming back from one trip where I found it so difficult for them to understand, I explained my frustration to a Tunisian friend of mine who has been in this country for a long time," Sorkin says. "He said that people in Tunisia have no concept of colors being soft or muted; that this is a western concept."
Eventually, the problem was overcome by showing the rug dyers strands of yarn that matched the exact colors the American market demanded.
BAZAAR MENTALITY: But the biggest obstacle Sorkin had to overcome was the Tunisians' initial reluctance to conform to the production requirements of the American market. Prior to Sorkin's initiatives, a major part of Tunisia's rug exports were based on sales to European tourists. They bought the rugs in bazaars while visiting Tunisia, and then shipped them back to Europe.
Because of this, the Tunisian rug makers saw no reason to alter their production methods to meet the color demands or size requirements of the American market. With the Europeans comprising such a large part of the total business, it did not make sense to the Tunisians to begin producing odd sizes and tints for a market which still accounted for only a small percentage of total exports.
It was the seizure of the Achille Lauro cruise ship by terrorists that helped change their perspective, Sorkin notes.
"The Achille Lauro affair basically cut off Tunisia's tourist industry for the summer, and eventually caused the country to devalue its currency by ten percent," he explains. "The carpet industry really came to a standstill, because the people who they depended on-the tourists -- were not coming to buy. So they really had to search for export opportunities."
As a result, many Tunisian rug manufacturers began to reassess their approach to selling-what Sorkin calls the "bazaar mentality." The dealer in the bazaar is interested only in the selling situation that is immediately at hand-he cannot be interested in repeat business if he is going to come out the winner, he says.
But by refocusing their attention on the fashion demands of American buyers, Tunisian manufacturers hoped to make up for the drop in European sales.
AMERICAN TASTES: According to Sorkin, American tastes are very different from those of Europeans.
"When you go into a European home, it is very common to find a mixture of rugs with no intention of their trying to work with the furniture or the interiors," Sorkin explains. "For good or bad, Americans are very oriented to putting things together to coordinate as a fashion statement. They are not buying something just because it is interesting. They want to make sure if they buy a rug that it will also go with their draperies and sofa, and so on. So the color palate the Tunisians make for the Europeans simply would never sell here."
According to Sorkin, rug exports from Tunisia to the U.S. have never exceeded $100,000 even in the best of years. That's largely because the products were manufactured according to either Tunisian or European standards, he says. Sorkin expects to top that level in his very first year --with total sales perhaps reaching $200,000 to $250,000.
The key, he says, has been to take old North African designs that have been around for centuries, and standardize them to suit the tastes of American designers. The result is an innovative collection called "Desert Dreams," which Sorkin offers on a retail basis through his stores in Wayne and Cherry Hill, and on a wholesale basis through designer showrooms in San Francisco, Denver, Chicago, Los Angeles and Palm Springs. By this coming autumn, he hopes to have wholesale distributors lined up in another seven major U.S. cities as well.
DEVELOPING A NICHE: Sorkin says the line has sold well on both the retail and wholesale level. And the fact that the rugs are not inordinately expensive-room size pieces run from $1400 to $2700-is probably one of the major reasons.
"People who have gone out and looked at rugs find that a rather modest price point, particularly when it comes to being something that: first, isn't available elsewhere, so it's distinctive; and second, is very much on the forefront as far as color and look," he explains.
In that respect, the market thus is very specialized-and is geared toward the high end of the home interiors market. Finding that niche was a key factor as well.
"Until we developed the right colors, we would have been selling mostly to people who were looking for something kind of primitive and 'ethnicky,'" Sorkin explains. "But it was not something the greater design market wanted. In the rug industry, the furniture industry, and the fabric industry, the difference between that level and the mass market is color design. That's the bottom line."
To Sorkin, when one is able to reach the level of color and design that appeals to the designers, the rug begins to sell itself.
"It's the interior designers who set the trends and say to their clients, 'This is a look that is different; this is why I want you to use it,'" he says. "And they have probably been the greatest support thus far."
According to Sorkin, the typical consumers of his "Desert Dreams" line are young couples in their thirties or forties and who possess somewhat higher discretionary incomes-the so-called Yuppie market. As such, the focus has been on contemporary, high fashion tastes.
Sorkin says one of the main reasons he has focused on this particular segment of the retail rug market is that there are too many people, many of whom with greater resources, working the general commercial end.
"I've tried to build my retail business by being more design- oriented and doing things a large wholesaler or importer doesn't want to fool with," Sorkin says. "Business is so competitive nowadays. You either have to be a discounter who is going to slug it out and work on the lower margins --which means you have to have volumes and the resources to back up the inventory-or you have to specialize. That was the choice I had to make."
CREDIT CARD FINANCING: Another choice Sorkin was obliged to make involved the way his business was financed. After spending several years learning the rug import business, he decided to establish his own retail store and approached several of his former wholesaler suppliers for some long-term financing credit to help him establish his specific lines.
In addition, Sorkin says he opened up four or five different credit cards and took each one to its maximum credit limit-all together approximately $30,000.
"It meant a lot of sleepless nights, and it's not something I advocate," he explains. "But when you read articles in Venture and Inc., you find this is a common story everyone goes through. Once you get a track record of being able to pay back a loan of $8,000 or $10,000 at 19.8 percent interest, I think you have a lot more going for you."
One key advantage the credit card money gave Sorkin was the ability to present himself more credibly with the bank he approached for additional financing. Bank officials being what they are, informed Sorkin he would need to show evidence of some outside funding. In this case, that meant some combination of Sorkin's own money, the credit card money, or the funds he was able to arrange through several close friends whom he approached to be investors.
"And the investors said they didn't want it to be just their money-they wanted to know if I had a bank," Sorkin recalls. "So there was a certain 'Catch-22' point." At the same time, his suppliers wanted assurance that Sorkin would have enough money to survive for six months without using their credit for working capital.
"In a sense it was like having a three-legged stool-so that if one leg was pulled out, the stool wouldn't stand," Sorkin explains. "It was kind of a balancing act between all three with each one putting a dependency on the other two." And while it did help contribute to a number of sleepless nights, it only took six or eight months before all the players to realize that the program was viable.
Sorkin could legitimately add a fourth leg to his stool, which is his Middle East connections. And it is his ability to balance all of those diverse interests at once which makes this entrepreneurial effort particularly remarkable. How has it been possible? Perhaps the best answer lies in Sorkin's
broad view perspective of the world.
"In my own background as an undergraduate, my studies were in international relations," he says. "I think one of the cardinal rules you find is when everything else is not working, the one thing that does seem to work is business. So I think business can often be the first stepping stone, not just between Jews and Arabs, but I think in many places.”
By Vijay S. Kothare and Brice Donovan (a.k.a., Thomas Derr)
Philadelphia, PA, US -- THERE's no business like show business. At least that's what the folks at
McGettigan in Philadelphia seem to be thinking.
McGettigan, which has carefully built its reputation as one of the area's premiere corporate business and incentive travel agencies, is taking the idea of incentive travel a major step further. And as the idea takes hold among major clients, it may signal a major new trend in the business travel business.
The idea is the creation of complete motivational "environments" for major meetings of some of its incentive travel clients. These programs may include theatrical staging with specially designed sets, supporting literature and mailings, or a variety of other marketing support services for new product promotions, national sales meetings, or other major corporate get-togethers.
"If you go into any travel agency in the country and ask them if they do incentive travel, or are they involved with meeting planning -- you'll get a resounding `yes,'" says John F. Pino, Executive Vice-President of McGettigan Corporate Planning Services.
According to Mr. Pino, the travel industry traditionally has viewed incentive travel and meeting planning as a function of the travel logistics involved in getting people to and from the meeting site.
"In essence, that means getting people there, making sure they are okay once they're at the site, and getting them home," Mr. Pino explains. "From our point of view, in order to do an effective incentive travel program, you've got to be involved from the inception -- from the point where the people decide what they want to accomplish to the motivation, including, the fulfillment, and then the follow-up. If you don't do that, then you're just doing a part of the job."
John Pino cites statistics which indicate that for companies who regularly scheduled large meetings or do incentive programs for their employees, travel typically represents only 30 to 35 percent of the overall budget. Thus, what McGettigan is going after through what it calls its Motivation Division is a part of that remaining 65 to 75 percent of the budget.
DOING SOMETHING DIFFERENT: According to Norbert McGettigan, president of the company, it is the desire to do something different for its meeting attendees that often dictates how a company will spend the larger chunk of its meeting budget.
"Some of our special incentive clients want something really different and exciting," Mr. McGettigan says. "We work with a number of major air carriers -- American, United, TWA -- in providing special incentive packages. We also work with Air India because they have some very extensive tiger hunts in India, and also visits to the Taj Mahal. So we are used to providing that type of service for people who want something a little extra and very exclusive."
Still, providing that type of side-trip incentive isn't anything new for corporate travel agencies -- a realization which McGettigan and Pino were all too aware of.
"John (Pino) realized that most agents were basically alike. Everybody was doing the same thing -- retail business, package tour, charters -- and John had the foresight to realize we had to do something different and creative," notes Mr. McGettigan.
As innovative and creative as the idea was -- especially from the perspective of a travel agency -- it was still something that was nevertheless based on client need. Companies who continuously put on theme parties as a way of motivating attendees at their sales meetings will probably run out of ideas eventually, Mr. Pino notes.
"Our goal is to do something more imaginative, something that would be different from what others are doing right now that would still turn on a sales force of approximately 1,000 people," he adds. Other companies will be looking for a means of energizing new product introductions, or other major corporate meetings.
PUMPING THE SALES FORCE: One of the most exciting projects for McGettigan took place during the final week of August. The client was a major international pharmaceutical manufacturer. The occasion was the U.S. introduction of an anti-arthritic drug that already had achieved worldwide acclaim. The audience was the drug company's sales force, which numbers about 1,400. The meeting site -- Hollywood.
The program proposed by McGettigan had to satisfy several different levels of management at the drug company, including the promotion and marketing vice presidents, the sales vice president, and, ultimately, the company's board of directors. In all, about 25 people from the drug company were involved in the development of the general guidelines which McGettigan was required to follow.
"They told us to come up with what they said would be the most outstanding meeting that anyone has ever seen," says Mr. Pino. "That was their charge to us. So we took that back and developed over a period of three weeks what we thought was a meeting that would knock the industry on its heels."
The ultimate goal, according to John Pino, was to develop a program that would "get the sales force pumped up" about the fact that the new product was going to be launched in the United States for the first time.
The initial steps consisted of a series of three mailings to meeting attendees. In this phase, McGettigan was responsible for providing reports, and then managing the production of the mailing pieces. This work was done completely in-house by McGettigan staff.
"We prepared the mailings -- very elaborate work," says Mr. Pino. "The first consisted of a motivation piece on the destination itself. You need to hype the destination so people begin to look forward to the venue. At the same time, they begin to ask why are we going there? So that's an important factor."
The second mailing was designed around the plans for introducing the new product to the sales force. For McGettigan, this was a follow-up of an earlier service it provided -- the site selection of the meeting itself. This meant considering the general specs the drug company provided, and then recommending an appropriate site that would be big enough to handle all the meetings and activities planned. The site selected was a sound stage on the 20th Century Fox studio lot. And the theme of the second mailing tied closely into that venue.
"The third mailing got down to more specifics about the meeting and the components of the meeting," Mr. Pino adds. "Now, those details can involve anything that will serve to hype people. The idea is to just get them prepped for the meeting, get them in the right frame of mind."
HANDLING LOGISTICS: In addition, McGettigan handled the logistical planning of the meeting site. This is a key component for any corporate gathering, notes Mr. Pino. That's because what makes a meeting different isn't the hotel that is selected -- it's what happens in terms of content, and in terms of the kinds of activities that are planned. This national gathering involved three days of meetings, among 105 different sales districts, and some 1,400 sales representatives.
Of course, the logistical requirements for 15 people in a meeting room can be far different from a 50-person gathering.
"We're using VCRs, and we're using overheads," Mr. Pino explains. "But if you have more than 50 people in a room, chances are the overhead is going to be blurry. The images won't be as sharp and crisp, and the audience isn't gong to get what they need. In other, higher level board meetings, large conference tables may be needed to allow for personal eye contact. The client really depends on us to make those decisions, so our staff has to understand what works."
Logistical planning for this extravaganza was handled by 30 McGettigan staffers who took care of specking out meeting rooms and determining their requirements. And given the highly intensive and technical nature of these meetings, McGettigan's role was crucial, Mr. Pino says.
RESOURCE CENTER: The centerpiece for the three-day affair, however, was a 30,000 square foot "resource center" that was constructed on the 20th Century Fox sound stage and featured five three-dimensional sets depicting locales in London, Switzerland, Japan, Canada, and the United States.
"After the meeting attendees have gone through 12 hours of really intense sessions -- they will really need some release after that. We need something for them to mingle and have fun," explains John Pino.
The idea was to bring the world of this product to the U.S. launch site. This would give the sales representatives a chance to learn first hand about some of the successes and problems encountered in various markets throughout the world. "It's all very authentic," Mr. Pino explains. "You walk into `London' and there's an apothecary. And in the window is the product as it is marketed in London. So there's always that exchange where people can say: `how did it work in the U.K.? What were your problems?'"
Each scene is also staffed by a marketing person who can explain what the problems were initially, and how the drug company managed to overcome them.
"The idea is to share this global information and success. These people get office folks whom they never see, and all of a sudden they can talk about a problem in their district," Mr. Pino explains. "How did you handle this out there? And what can I depend on from home office out here? So it becomes a fun thing, and it's also an extension of the work force."
Such an extravagant exhibit is hardly inexpensive, Mr. Pino adds. But in terms of what the company is getting back in return makes it well worth the investment.
"Companies get even more payback when they are able to control the meeting environment and control the time," he says. "They get more time to get the message across. What we're offering is something where they can go in the evening where the business talk will continue. It's not all fun, but they will lighten up a bit, and they will be gaining real value and insight from their colleagues. That's truly what turns companies on about this. And it's something that doesn't exist anywhere else."
INFRASTRUCTURE: Of course, to be able to offer such a service has required an investment on the part of McGettigan as well. According to Mimi McGettigan, who is responsible for overseeing the administration and finances of McGettigan Corporate Planning Services, over the past five years one of the firm's primary aims has been to develop a carefully trained, internal infrastructure specifically to support the various types of services and products offered to its clients. Part of that infrastructure consists of a sales force and marketing department which single out potential clients for its motivational services.
Right now the incentive travel division accounts for 70 percent of the $40 million firm, with the motivational services making up 25 percent of that, Mimi explains. Norbert McGettigan expects the company to do $50 million in 1988. And at the moment, no other travel company is involved in that aspect at all, so the potential for continued growth looks bright.
More and more companies are doing meetings all the time, and while not everyone gets involved with special environments or pre- promotions of meetings, part of that reason may be because they are not aware of what's available.
"Every client has a different need and a different philosophy. Part of our job is to show them how they can more creatively spend the money they have budgeted for a meeting," explains Mr. Pino. "We might show them that they can include something like that for very little money more as it compares to what they would spend on a theme party."
In fact, it could wind up costing less, if John Pino's ultimate plan pans out. That involves re-renting many of the elaborate props or sets which the firm develops. This will enable McGettigan to recoup its investment in the original design and construction costs, which, he admits, is a very expensive proposition. And according to Mr. Pino, that's an investment other travel companies are not likely to make -- not in the near future, anyway.
"There is a huge investment involved -- not only in design and production of the sets, but also in the people," he explains. "We've had to create a whole new division with the expertise to provide these services. But I also feel we have the clients who are going to buy these services because we have a track record of meeting their needs."
That "trust" factor should not be underrated, Mr. Pino says. As a company, it has grown along with its clients, and thus has developed relationships of trust. That trust has continued to develop as meeting projects have grown larger and more sophisticated.
"Now we are a nationally known company. If we were an unknown in the market, we would have a hard time getting through with this new program. "But we think the potential market for this type of service is tremendous, because the next logical step in terms of sophistication is for major corporations to go in this direction," John Pino says. "And right now we're the only ones who have made the commitment to it."
By Thomas Derr
Philadelphia, PA, US -- AREA manufacturing firms are defying the trend that service industries are outstripping manufacturing by banding together.
The membership list of the Manufacturers' Association of Delaware Valley (MADV) is double what it was five years ago, and 300 more than it was three years ago.
It currently includes more than 875 local firms which employ more than 150,000 Delaware Valley residents.
How did MADV become the fifth largest organization of its kind (there are about 100) in the United States, especially during a period which included a severe recession?
According to Robert P. Hallenbeck, president of the 84-year-old organization since 1979, the chief reason is that MADV has "gone well beyond the traditional role of business organizations," which he says are often content to act as a clearinghouse for information of interest to members.
"Our posture is much more active," Hallenbeck says, "and much more oriented to actual business operations. We provide many direct services to members for which they would otherwise have to hire consultants, do themselves, or perhaps do without."
ONGOING RESOURCE: Paula Gill, Employment Manager at Roy F. Weston, Inc., the West Chester, Pa. environmental consulting firm, says Weston has been a member of MADV for three years, while her experience with the organization goes back six years.
Gill describes MADV as "an important ongoing resource for us, not just some consulting firm trying to sell us an occasional service." Weston has sent a number of its people to MADV courses and seminars in personnel administration as part of Weston's firm commitment to individual career development.
"They provide excellent training," she says, "and they are a much more cost-effective way of conducting the training than an in- house program would be."
Gill also points out that, in environmental consulting, there is a great deal of competition to attract and keep skilled personnel, especially environmental scientists.
"The salary trend surveys offered by MADV," she says, "are critical in helping us stay competitive in a number of skilled labor markets where we must actively recruit."
CREDIT UNION: Another example of direct member service cited by Hallenbeck is MADV's creation of a credit union in 1983, which now has 75 member companies participating on behalf of some 3,000 employees. It has $1.5 million in assets and is the only credit union in the country run by an MADV-type organization.
"Starting the credit union is a good example of how we focus our activities," says Hallenbeck. "It wasn't dreamed up as 'a nice thing to do' by a staff member. It was something the members wanted because their own employees wanted it. For many members, though, setting up a credit union on their own just wasn't possible, so we did it for them."
Similarly, MADV offers an employee placement service, training programs and a variety of employee benefits plans to member companies, which can offer them to employees, all at highly competitive prices.
This operational focus, according to Hallenbeck, is what distinguishes MADV from the various Chambers of Commerce.
"The focus of a Chamber," he explains, "is on the locality or region it serves as a total economic unit, whose interests it monitors and represents from the perspective of the business community at large. It's essentially a 'macro' kind of view, which is needed, and which the various Chambers do very well. MADV has what could be called a 'micro' view, with our focus on the companies in the area, and how they individually relate to the 'big picture.'"
LEANER, SMARTER: Hallenbeck says that MADV's priorities mirror those of the membership, and it is this approach which has been consistently attracting new members.
"When businesses came out of the '83 recession," he says, "they came out leaner, meaner and a lot smarter, and, more importantly, they were determined to stay that way. We are structured to help them do that."
Much of MADV's work is in the critical area of employee relations and employee benefits, according to Hallenbeck. MADV provides members with everything from detailed survey reports on trends in wages, salaries and employee benefits, to the actual preparation of employee handbooks.
"The smart companies have recognized that employee benefits are not simply a 'giveaway' mandated either by law or by a desire to be a 'good guy,'" says Hallenbeck. "They are part of what helps a company compete in the modern business world. Our members understand that, and, consequently, we devote a good deal of our resources to that entire area."
Paul A. Tanker, president of Paul A. Tanker & Associates in Philadelphia, a pension, employee benefit and actuarial services consulting firm, supports this view. Says Tanker: "Employee benefits packages are no longer just driven by the latest tax code changes. They're driven by demographic and cultural factors which, over the past two decades or so, have raised the expectations of employees, as well as their sophistication about what is and what is not a good benefits package.
"Good benefits plans attract and retain good employees. They have become a competitive tool in the market for top talent."
With the rise in employee expectations over benefits, however, has come a corresponding rise in the cost of providing those benefits, says Tanker.
"Providing the best possible benefits package at an affordable price is a real challenge."
Hallenbeck agrees, noting that "the quality and cost of benefits is an ongoing concern among our members, which is why we have devoted so much effort to finding solutions."
MADV, for example, offers its members group insurance plans in major medical, dental, life and disability lines, through the Kistler-Tiffany Companies of Wayne, in Pa. While some other business organizations also provide similar services, Hallenbeck says, they generally offer "canned" approaches, while MADV can tailor a package to the individual business.
DENTAL PLAN: Just recently, MADV endorsed an unusual voluntary dental plan -- the Dental Maintenance Organization of Pennsylvania, a division of Health Corporation of America (HEA), of Berwyn, Pa. According to Hallenbeck, the plan offers member companies the ability to provide an attractive dental plan for employees and their families at little or no cost to the company.
According to officials of the Dental Maintenance Organization of Pennsylvania, the dental plan requires no employer contribution and no minimum level of participation among employees. The plan uses a network of more than 350 area dentists in Philadelphia, Bucks, Chester, Delaware and Montgomery Counties who will perform most routine dental work for a flat annual fee and a charge of $5 per office visit. The network also offers specialty dental services at substantial discounts.
Hallenbeck says the plan was endorsed by MADV because it provides a needed service -- and the employer's only cost is the cost of arranging the payroll deduction for those employees who want the plan. And for the employee, the plan is attractive because, unlike an insured dental plan, there are no deductibles, no waiting periods, no limits on usage, no claim forms and no exclusions for previously existing conditions.
"We tell our members that cost containment is a critical component of a benefits strategy," says Hallenbeck. "And, whenever possible, cost-sharing with employees is a tactic which must be used. The Dental Maintenance Organization of Pennsylvania fits in with that advice."
William O. Daggett,. Jr., managing partner at the Kistler- Tiffany Companies, which is marketing the Dental Maintenance Organization of Pennsylvania to MADV members, said that the initial interest has been strong.
"This plan has hit home with a lot of companies concerned with offering quality benefits at a reasonable cost," Daggett says. "And they recognize that cost sharing, where possible is a reasonable approach."
Says Paul Tanker, "Cost sharing is a trend we are seeing more and more," especially among clients who opt for flexible benefits plans, which allow employees to select from a 'menu' of available benefits to match them to their own particular needs.
"But even outside a flexible plan, the tactic can and should be used whenever possible. The cost of benefits will not ever go down, especially with a philosophy in the Congress which says, in effect, 'provide more benefits to more employees,' and never mind who pays the bill."
EMPLOYEE TRAINING: Hallenbeck says that the employee training needs of MADV members are also of critical concern, especially in "an era when manufacturers are perceived by some people as the dinosaurs of the business world."
While he disputes that perception as a "cliché based on a superficial understanding of manufacturing," he says that manufacturers, who form the bulk of MADV's membership, must nonetheless be "future-oriented, constantly looking at how they can adjust to changing market conditions."
Employee training and retraining, Hallenbeck contends, should be part of that process. "A manufacturer, in that sense, is no different from a CPA firm or law firm, which must stay on top of developments in their fields to remain competitive.
"The training needs of a manufacturing operation are analogous to the continuing education needs of a professional or other service firm," he says.
Hallenbeck says that MADV's track record in employee training has resulted in a grant from the Ben Franklin Partnership to assess the training needs of member companies.
"The Partnership," he says, "is one of a handful of economic development groups in the country which fund 'advanced technology centers,' whose mission is to foster regional productivity growth in the manufacturing sector. As far as we know, this is the first time one of these centers has approached an organization like ours to assist them in getting business participation, rather than approaching businesses directly.
"Because of our close relationship with members and our familiarity with employee training issues, we believe we can create a mutually rewarding relationship for both the Partnership and our members."
By Thomas Derr
Philadelphia, PA, US -- WHAT do Rodney Dangerfield, Aretha Franklin and the Philadelphia Daily News have in common? They're all looking for a little respect!
For years the Daily News endured the unwanted and undeserved stigma of being the poor relation of the larger and more profitable Philadelphia Inquirer.
This stigma stems from the acknowledged perception that the parent company of the two papers, Philadelphia Newspapers, Inc., has played obvious favorites -- with the patrician Inquirer being the distinct choice over its tabloid cousin. Last year, for example, at a time when the Daily News was feeling the crunch of its biggest financial deficit, PNI instituted a policy that delayed the
distribution of the early morning Daily News edition -- thus giving the Inquirer a decided edge in the all-important center city market. Home delivery sales also tend to emphasize the company's Inquirer offspring, while the voluminous Sunday edition remains the Inquirer's exclusive domain.
GRAND EXPERIMENT: It comes as something of a surprise then, to find that PNI's newest innovation is aimed at revitalizing the Daily News and boosting its circulation. On March 30, the first copies of the Daily News PM edition rolled off the presses and onto center city streets and major commuter arteries, with the aim of enticing a potentially significant afternoon audience.
But in spite of past problems and premature rumors, this new project should by no means be considered as the newspaper's last gasp before oblivion, Daily News editor Zachary Stalberg is quick to point out.
"Basically, this is a grand experiment to see how many readers there are in the late afternoon for the Daily News," explains Stalberg. "We have had a late morning edition for a long time -- the early press run is at seven o'clock in the morning. And when you factor in distribution, that means it's distributed around nine, ten, eleven o'clock and it's technically an afternoon paper, but in fact it's a late morning paper."
At the same time, the Daily News has offered what Stalberg calls a number of "weakfish" afternoon editions which were basically little different from the early morning paper, and which offered readers no strong reason to consider them as being a true late afternoon alternative.
"There was some change some of the time, but it really depended on a big breaking story," Stalberg says. "So this is an effort to do something that newspapers don't generally do."
HOPE FOR SOMETHING: Initially, the main objective will be to heavily distribute the paper in center city and along the commuter routes -- in an effort to reach those people who are leaving center city and are looking for something to do at night after a full day's work. With that in mind, Daily News has developed what they hope will offer a number of irresistible advantages for afternoon readers of the paper.
"I think to succeed in the afternoon, there really has to be a focus on late news that is not available in the morning papers," says Stalberg. The day the case of alleged murderer Gary Heidnik broke offers a good example of the opportunity that is presented for an afternoon-oriented newspaper, he adds.
"The Heidnik case did not exist in either our first edition, or the Inquirer's last Wednesday," Stalberg says. "It may have gotten some play on the noon news at the TV stations, but I don't think a heck of a lot."
It wasn't until six o'clock or seven o'clock at night -- once people got home and had a chance to see their television set -- that they began to get a feel for the situation, he says. That is, unless that had picked up the Daily News.
"If they picked up the Daily News that day, they found a very complete treatment of that story," Stalberg says. "Our first day coverage, done for the afternoon edition, was better than the Inquirer's second day coverage, I believe. So there is really an opportunity, if we hustle, to get in there and hit the readers before they get home and before they turn on the six o'clock news."
EVENING GUIDE: Such late breaking news stories, together with more up-to-date business and sports information, as well as a big pull-out section on what to do at night will provide the main impetus for new readers. Those features will combine to offer potential readers a truly useful element, Stalberg hopes. Final stock market prices will not be covered, at least for the time being, because the market closes at four o'clock pm, while the paper's press time is two-thirty. If the demand for such information indicates potential feasibility, the decision to carry those figures will be made at some point in the future, he adds.
"The idea is -- if you haven't had a chance to think about what you're doing tonight, you'll put down that 35 cents for a guide to what to watch, what new club to go to, or what new restaurant to go to. So it will be a very relevant guide to tonight," he says.
There is, of course, a natural tendency to compare the latest PM endeavor with the city's last afternoon newspaper -- the Bulletin. But according to Dr. George Gerbner, Dean of the Annenberg School and Professor of Communications, that kind of comparison really isn't fair either. Gerbner notes that the Bulletin's problems involved the way it was managed, and "so many other pressures" that had little or nothing to do with the time of day at which it was published. In other words, the Bulletin did have some trouble in the afternoon, but it's not the afternoon that did in the newspaper.
GOING AGAINST TREND: Even so, the determination of the Daily News to publish an afternoon edition runs contrary to patterns established by the national newspaper industry, which "has pretty much given up on the afternoon," notes Stalberg. One of the main reasons for that is that publishing a late afternoon paper just isn't convenient.
"It's very difficult for us, or for anybody, to publish mid-afternoon, and still get it distributed on time through clogged center city streets," explains Stalberg. "That's a real problem."
At the same time, there has been a decided movement on the part of the newspaper industry to go after affluent readers in an aggressive way -- at the expense of anybody who is not. The busy executive takes 10 minutes in the morning to look at the paper with his or her cup of coffee, which is why the morning offers the best chance for reaching the affluent reader.
"I think that's been the perception. Our view is that the afternoon is when you can catch the affluent reader," says Stalberg. "Our view is not quite so elitist. We're just looking for readers. And I think readers of all sorts happen to read papers, or could read papers in the afternoon."
TARGET MARKET: Stalberg admits that the newspaper's initial target market tends to be skewed more toward suburban commuters and other groups that tend to be more affluent. But even though they are more likely to be white collar, it isn't necessarily that set of demographics which the paper is going after in its marketing plan. The intention really is to go after readers in general, not
necessarily affluent readers, Stalberg says.
"This company probably hasn't been as aggressive as it could have been in telling the story, but the fact of the matter is, the Daily News ceased to be a blue collar newspaper when the Bulletin folded, because that drove enough ex-Bulletin readers to the Daily news," says Stalberg.
According to Stalberg, the results of a recent marketing study show that the median household income of the Daily News reader is only slightly below the Inquirer's in the city, slightly below the Inquirer's in the suburbs, but still ahead of the population's overall median in both places.
So even though there are obvious differences between the Daily News audience and the Inquirer audience, those differences are not nearly as stark as many advertisers tend to believe.
Tied in with this issue is the fact that the Daily News' financial position has actually improved dramatically during the past year. In 1986, the paper's fiscal deficit was projected at $5.2 million. This year it will be closer to one million dollars. That could represent a swing, and point out, at least for now, that the paper is realizing what Stalberg says is its primary financial goal --
profitability by the end of the decade.
ADVERTISING STRATEGY: One of the major reasons for this turnaround is a joint advertising strategy among the Daily News and the Inquirer. And the arrival of the Daily News new PM edition is not intended to significantly change that strategy, Stalberg adds. Currently advertisers cannot buy solely into the PM edition, and no such plans are in the works.
"One clear goal that was established by the company last year was to sell the daily circulation of both newspapers as one as much as possible," Stalberg says.
At the same time, it was decided that no advertisers would be forced to buy into both newspapers. But even so, PNI wanted to emphasize the fact that there are two different daily newspapers which can be bought as one. This, in time, would make it possible to reach a much greater percentage of the two papers' overall potential readership, particularly in center city, Stalberg notes.
"If we can drive the circulation up, it helps the combination. And if we can give the people the perception and make them realize there are plenty of white collar readers reading the Daily News, it helps the newspaper. The fact is, there are already, but the advertising market doesn't quite buy that. They still see it as a blue collar paper," says Stalberg.
CAN'T CHANGE HABITS: According to Annenberg's Dr. Gerbner, that probably will be the key factor determining whether or not the Daily News is a success or failure.
"Advertisers traditionally have been less attracted to the Daily News than they have been attracted to the Inquirer," says Dr. Gerbner. "New the Daily News has undertaken a concerted effort to change that outlook, but it's not easy. Over the years, longstanding habits have been developed by different advertisers and subscribers, who represent different income groups."
There habits are unlikely to change overnight, Dr. Gerbner adds. But even if the new PM edition is not an overwhelming success, it should not affect the future of the newspaper, Stalberg says.
"The issue of PM and why we're going into the afternoon has almost nothing to do with the Daily News or its finances. Certainly it is no last ditch effort," he adds. "What it is is an attempt to see where the growth possibilities are."
WILL EXPERIMENT WORK? According to Stalberg, the Daily News can be profitable without making such a move at all, but PM is an effort to see where the paper can get readers without hurting the Inquirer.
"We know we can go earlier, or we know we could conceivably go earlier, but there is a likelihood that we would hurt the Inquirer," Stalberg says, "So we're trying to see if going later -- and really searching out the possibilities in that time slot -- will get us anything."
"It's an experiment, though. I really want to emphasize that it starts out as a limited experiment. It's mostly for center city, and there is no specific circulation goal attached to this. The idea is to put out an interesting and different product, market it well, and see what we get."
By Thomas Derr
Egg Harbor City, NJ, US – LEEK is probably not the first name you would select if you were a boatbuilder. But then, not many of us can choose our names. We can, however, choose our
professions. And for more than 250 years, boatbuilding has been the chosen profession of the Leek family.
It was sometime between 1712 and 1720, about the time a young runaway by the name of Benjamin Franklin was first setting foot in Philadelphia, that a Welsh immigrant named John Leak crafted his first hull along the Mullica River in New Jersey. Since that time, 12 generations of the Leek family (the spelling has changed slightly over the years) have dedicated their lives to the fine craft of boatbuilding.
Since those early days, the Leeks have served the seagoing needs of countless customers through times of peace and war. Their production lines have ranged from gigs, pinnaces, catboats, and yawls, to lighters, fishing smacks, topsail schooners, and small privateers.
PATROL BOATS TO PACEMAKER: "It wasn't until 1914 that my grandfather, Charles Platt ('C.P.') Leek first established a company to build pleasure craft," says John E. Leek III, president of Ocean Yachts, Inc., Egg Harbor City, NJ, one of the nation's leading producers of luxury sport fishing and motor yachts. Within a few years, C. P. Leek began to specialize in motorboats -- and was soon attracting the attention of boating enthusiasts from far beyond Atlantic City and its regional environs.
In fact, several sleek, speedy 50 ft. custom crafts were built by Leek for law enforcement authorities specifically for the pursuit of smugglers ("rum runners") during Prohibition. And during World War II, the firm produced a number of 77 and 80 ft. patrol boats for the British Navy. Then after the war, Leek and two of his sons, Cecil and Jack (John Leek, Jr., the current chairman of Ocean Yachts, Inc., and father of John Leek III) returned to the building of pleasure boats, with a line they called "Pacemaker."
"The period from 1957, the year my grandfather died, through 1968 was a period of major expansion for Pacemaker," says John Leek III, "During that time, when my father and his brother ran Pacemaker, they went from basically a one boat company to about ten different sizes and 27 different models."
In 1968 Pacemaker was sold to an Atlanta-based conglomerate, Fuqua Industries, which in 1973 sold the business to a California-based sailboat, marine hardware store manufacturing conglomerate, Mission in Marine. By 1977, however, the parent company had become something of an albatross for the adventurous Jack Leek, and so he left Pacemaker to form his own company.
OCEAN YACHTS: "During that period from the early 1950s, when my father started at Pacemaker, and was finally running the company, most of the partners who are here at Ocean Yachts also worked with him there," says John Leek III. "One was a line foreman, one was a purchaser, one was in engineering. So by the time my father left, those men had worked together in the construction of a number of boats already."
When Jack Leek left Pacemaker to establish Ocean Yachts, he asked those men, many of whom had worked with him for 15 to 20 years, to join him. All but one, who is since deceased, are still with the company.
The new company included one manager, a production supervisor, Sam Sherma, who is now vice president in charge of overall day-to-day production; his brother Vito Sherman, who is now a vice president of production; chief engineer Fred Metz, who is directly responsible for all final detailing, testing and warranty work; Jim Tash, production supervisor for 44 and 48 ft. Super Sport boats; and Terry Watson, vice president of research and development. All told, the eight partners (which include Jack Leek and his two sons, John III, and Ralph) bring over two centuries of boatbuilding experience to their young company. But young doesn't necessarily mean small, as Ralph N. Leek, vice president, is quick to point out.
GONE HOG-WILD: "We started this company in April 1977 in a building which amounted to something which was not much more than a big garage," he says. "We started out with intentions of building a couple, maybe three or four boats the first year, and possibly getting to a dozen, maybe 18, and staying at that level of production. It's just sort of gone hog-wild since then."
The fact is, today, less than ten years later, Ocean Yachts produces more than 130 boats annually in sizes ranging from 38 to 63 feet. Obviously, the company's growth has far exceeded all original expectations. But what makes that growth rate even more spectacular is the fact that it happened during some of the nation's most trying economic times.
"Those early years, 1979, '80 and '81, were the hard years as far as sales and manufacturing was concerned for the new product," says Ralph Leek. "At that time, even when you could borrow money, the interest rates charged were in the 16 and 17 percent range. But in spite of that, we still managed to maintain an average growth rate of about 35 percent."
"I remember Dad saying in 1979, during the height of the recession: 'You guys grew 40 percent this year.' Then in 1980 we were back to 22 percent, but for the nine years we have been in business, it has been an average 35.7 percent growth rate," says John Leek III. "I think our smallest growth years were something like 20 or 22 percent."
NEW PRODUCT SELLS: Meantime, he adds, competition was basically "dead in the water," and probably cutting back as well. "Part of the reason was we had a newer mousetrap, I guess," says John Leek III. "That oversimplifies it, of course, but we were new and growing, and gung-ho. And probably at that time we were expending much more effort to create a better product."
In addition, Ocean Yachts was not beset with the high overhead and fixed costs that are involved with many of the other companies, Ralph Leek explains. By contrast, carefully planned, gradual growth was their guideline.
"As we grew, we added on only what was necessary for the next immediate year or so," he says. "A year or nine months from then, when we saw the need, we then enlarged or expanded again. We did it in progression as it was necessary. We didn't build an ultramodern, high-tech facility that was twice as many square feet as we needed just to prove we could build a building. Actually, we were
very concerned about the possibility of overexpansion -- we didn't want to get hung out there on a limb with somebody sawing the branch off behind us. We didn't want to face the prospect of having to cut back to fill in voids. So we just expanded as we went along."
SEED MONEY: According to John Leek III, the initial capitalization of the company consisted of $200,000, which was largely financed by second mortgages which the eight partners took out on their homes, and a credit line of approximately $350,000. This year, that company which was founded with $200,000 seed money will do nearly $40 million in total sales. Naturally, that initial
capitalization is a distant memory.
"Basically, we have no debt," says John Leek III. "We have continued to grow at that rate without incurring any debt, as far as long-term loans or things like that. We do maintain a line of credit with a bank with which we deal from time to time -- usually it's when we have problems delivering our boats -- for instance, when the river freezes over. But as far as long-term debts, we don't have any, and haven't had any for seven or eight years."
That painstaking attention to cost-efficiency may be most evident in the actual production line.
"As far as production is concerned, we try to keep it as simple as we can," says Sam Sherma, vice president of day-to-day production. "Our production line is not high-tech. That word is being overused drastically. Our approach is more of a hands-on technique, as far as the amount of labor it takes. If you try to take some of the things we do here and duplicate them at other places, you couldn't afford to pay the labor costs involved."
EXTRAS ARE STANDARD: The key to that factor is that most of the equipment which goes on an Ocean Yachts boat is standard equipment for all the company's boats, Sherma says.
"We don't have drastic changes in construction from boat to boat. You know that every boat is getting a microwave, and a salt water washdown, and a garbage disposal, and a wet bar. It's getting all that equipment so it is planned out accordingly," he explains. "That means we don't spend 300 hours more this week to finish this boat, then the next boat is 300 to 400 hours shorter because it
doesn't have all the 'extras.' Ours is like a standard, or stock boat, but with the bulk of the equipment on them. That makes all the little niceties not as much of a headache as they might be someplace else, because we are doing it repetitiously week after week. Also, we don't have major fluctuations as far as specs and design drawings are concerned."
TAPPING SUPPLIERS: In addition, Ocean Yachts saves money by buying most of its equipment from suppliers, rather than producing it in-house. This makes it much easier for the company to determine exactly how much a particular item (e.g.: bunk beds, tables, galleys, stools, wet bars, etc.) adds to the cost of a finished boat, Sherma notes.
"We don't have the overhead of having an expensive in-house mill to do that kind of work," Sherma says. "These items are all made outside the shop and at the end of the month we are handed a bill which says 'this is what it cost.' Doing that work in-house can easily get you into a fuzzy area as to what things cost you or don't cost you. It may cost you what you think is a 10 or 15 percent premium, but most people aren't really being honest when they try to figure that out, because there is always someone trying to keep the price down low to justify the work. We avoid that."
ROLLING INVENTORY: At the same time, Ocean Yachts is able to avoid much of the cost involved in maintaining high in-house inventories for many items such as nails, plywood, and varnish.
"It's not that we have 'Japanese just-in-time' inventory and parts -- but it's not normal in the American way either, where they have three and four months of supply of everything on all their inventory, four times a year. We roll our inventory between 12 and 13 1/2 times a year, which is a little better than monthly. Nobody does that, in fact, nobody can touch that. Usually, if people can move it six times a year, then they think they're doing a good job," says Sherma. "And that is a key factor in the efficiency of the production of a boat, as far as we are concerned."
That, plus the company's policy of using common units for each size of boat produced, helps to keep inventory costs under control as well.
"We don't have bunk units for 38 ft. boats and 44 ft. boats, and three or four of each one for each model boat. We might have nine bunk units for the entire plant, instead of three or four for a 38 ft., three or four for a 44 ft. and end up having 20 in stock, which is where inventory control comes in," explains Sherma.
"It's strictly a production philosophy," says Ralph Leek. "It's geared to design and engineering, because you have to design and engineer the things to be able to do that. But it is more efficient, and there is nothing sophisticated about it. I'm sure every other company can do it -- it's so simple though, that you can overlook it a lot of times."
COMPETITIVE EDGE: What this does in the long run is keep Ocean Yachts boats competitively priced, because they are built at such an efficient level, says Ralph Leek. In addition, compared to the competition, the Ocean Yacht boats' basic equipment is much greater.
"When we sell a boat, everything is standard equipment. When the other guys sell a boat, everything you want on the boat is an option," Ralph Leek says. "Although the competition has made big inroads in that aspect over the last three years, when it comes to fishing equipment they still come up very short."
Not surprisingly, all of the owners at Ocean Yachts are also dedicated sport fishermen -- and so have a good deal of personal insight as to what kind of equipment a sport fishing boat should have. In addition, each partner is a working owner, getting involved daily in all crucial areas of design,
engineering, production and quality control, says John Leek III.
"We have a demo boat which is being used the year round either in Florida or up here," he says. "That's how a lot of improvements come about -- whether it be a major performance improvement or a minor interior improvement, such as moving a mirror from this wall to that wall. Our people live on the boats, they use them, and they understanding them.
"For example, the bait freezers in the cockpit, the washdowns in the cockpit, these things evolved only as a result of guys wanting that facility when they were out there fishing," he continues. "You would only know that if you were a fisherman. And those are the kinds of things you would look for when you went to look for a boat, because you know all those things are handy to you when you're out there on the water. After all, you can't walk back to the dock and get something when you're 75 miles offshore."
LISTENING TO DEALERS & CUSTOMERS: In addition, much attention is given to the comments and insights of both dealers and customers, says John Leek III.
"You need outside insight, and customers are good for that, because many of them are on the boat for a couple of months a year, or they might even winter on their boats in Florida," he says. "We listen to our dealers, too, which is something a lot of companies don't do. I think it's just something you're not supposed to do -- you're supposed to know everything already. But it's the dealers who listen to the customer's complaints and criticisms.
"And over six months, when they hear the same thing come up three or four times, you have to listen and take a look at it. It could be that something has to be changed or redesigned. But the bottom line is we have to make the customer happy."
And given the narrowness of the marketplace, that is an all-important factor, according to George Walter, Ocean Yachts' director of advertising.
"Compared with ten years ago, I think we are selling to people who are wealthier, and also seven or eight years younger than before," says Walter. "Very, very few people buy our boats that are the typical gray suit and tie, vice president of a large company sort of person. Our customers are mainly active, wealthy, entrepreneurial types. Most of them own their own companies or have just sold their companies."
VERTICAL MARKET: That broad caricature -- the high-powered, 35 year-old entrepreneur who may have just sold his business -- represents a very narrow, vertical market, agrees John Leek III.
"And I think it is becoming an even more narrow market. I think if you would have asked my father 15 years ago, he would have said probably 2.5 or three percent of the population was capable of buying one of our boats. Today, it's not that four or five percent can't afford it, but of those, only 10 or 15 percent are actually into boating," he says.
"There's no question, our typical customers have made it on their own," says Ralph Leek. "They're very active, and that's one of the things that brings them to us. Our boats appeal to that group. They like how it looks, they like how it feels. Our boats appeal to that group. Our customers like to go fast. They like that pizzazz."
There was a time, he adds quickly, when Ocean Yachts boats were so superior in terms of speed and interior design that the competition in the industry was shaken to the core.
SETTING INDUSTRY TRENDS: "There was a time when our boats, in the larger sizes for sport fishing, were the only boats around that did 30-plus knots. Now everyone does 30-plus knots," says Ralph Leek. "But before that, all they could manage was 25 knots, down to a 21 or 22 knot cruise. Our competition had to make engineering changes, and either put more power on it or change hull design or do something else to get to the point where they could get their boats to do 30 knots."
And the same story is true for interior design.
"The joke used to be: 'Oh, here comes another Clorox bottle,' because all the competition's boats ere basically white fiberglass, or light tan fiberglass. We never really built a Clorox bottle. Other companies did, and that has changed drastically in the last seven years. That's why there are interior layouts, use of space, designer fabrics, and other top-notch stuff on the inside, as far as all the little nice things are concerned," says Ralph Leek. "Now, I'm not saying we deserve all the credit for causing that, but we helped promote the interest. They would probably have done a lot of the things they are doing now, but we helped put a little pressure on them to get it done a little quicker."
HOLDING MARKET SHARE: And what does that portend for the future?
"Basically, we're still the young whips on the block," says John Leek III. "We blew everybody out by storm. We shot them right out of the water in the beginning. Now they've come on strong and are really doing a hell of a job. Our job is to make sure we have our act together so that we not only stay competitive, but also keep a little bit ahead, and hold onto our market share."
If history can serve as a navigational chart, you can bet there will be Leeks in the boatbuilding business for many years to come.
By Thomas Derr
Philadelphia, PA, US -- WHEN the notorious bank robber Willie Sutton was asked why he robbed banks, his answer was simple: "That's where the money is."
In fact, Sutton's skill and expertise were admired so highly by banking executives that when he was finally released from prison, Sutton became a consultant to the banking industry -- advising security directors and their bank officers as to the most effective means of ensuring the sanctity of their institutions.
Nowadays, however, it's likely that even Sutton's well-proven knowledge and experience in bank security would prove limited, at best. That's because banks, corporations and other institutions are now facing many modern "high tech" criminal challenges that Sutton probably never dreamed of.
MORE THAN LOCKS AND CAMERAS: "Corporate security today is more than locks on the doors, bars on the windows," and cameras in the lobbies," says Ian Murphy, president of Ian A. Murphy Security Data Systems, Philadelphia.
"Thanks to computers and modern telecommunications systems, if there is someone out there who really wants to hurt you or your company, he doesn't have to break into your building. He can just dial into your computer system," says Murphy, whose company is one of the nation's handful of security consultant firms specifically geared for the telecommunication, data communication and counter-surveillance security needs of business and industry.
"The corporations are not going to have to worry as much about handguns and burglars as much as they do about economic terrorism -- holding computers hostage, manipulating credit card files, and so on," says Murphy, "If I'm out to get your company, I don't need to blast my way into your office. I'll just dial in, and then I've got you. Because if I hold your computer hostage, there is nothing you can do. In addition, you won't even know that I'm there until I tell you -- and by then it may be too late."
UNAWARE OF THREAT: And according to Murphy, a major component of the current computer crime problem is that corporate executives -- and often their security personnel as well -- are either unaware of the threat, or are unwilling to admit that it exists.
There are computer bulletin boards, for example, which list the "dial-up" numbers and passwords for most of the major corporations, hospitals and universities in the nation. In addition, many of the computer systems of America's military installations are listed by name, dial-up number, and sometimes password.
ACCESSIBLE TO HACKERS: Following is a partial list of some of the corporations and government authorities whose computer systems are or have been accessible by computer "hackers" via telephone modem: TRW, Chase Manhattan Bank, the Sloane-Kettering Cancer Research Center, most of the telephone companies in the nation, the White Sands Missile base, the Advanced Research Project Agency of the Department of Defense, the Los Alamos Nuclear Research Facility, a New York City General Services computer, a Federal Aviation Agency computer, Dover Air Force Base, the U.S. Tactical Air Command, NORAD, two major oil companies that have operations in Philadelphia, and every major corporation in the country.
COMPETITION CAN GET YOU: "If a hacker can get these things, you can bet the Russians can also get these things," says Murphy, "And possibly even more important for the corporations -- their competition can get them too. If ABC Corporation is doing research into a new product line, and DEF Corporation wants to find out what they are up to, DEF Corp. can hire a systems programmer to go in every night and pull out nice, juicy, free information from the ABC Corp.
computer. and DEF doesn't have to pay for any of it. Now DEF comes out with the same product, at the same time, at half the cost. I've worked on cases where it happens all the time, and nobody knows that it's happening."
CORPORATE SPIES: According to Murphy, computer criminals and corporate spies are currently undertaking any number of illegal activities, including wiretapping, bugging of conference rooms or the offices of key employees, video eavesdropping, and so on.
"It's very easy. You can walk out of Radio Shack with $200 worth of equipment and pick up anything off any corporate computer anywhere," says Murphy. "You can tune right into it, insert passwords, authenticate messages -- you can do it all, and no one believes it."
Compounding the problem is the fact that security and law enforcement personnel are usually not qualified or capable of dealing with breaches of corporate computer systems.
POLICE NOT TRAINED: According to Murphy, the rise in computer crime is such a recent development that local police, and even the FBI, have not been able to develop effective training programs for their investigative personnel.
"Most of the agents and police personnel are more accustomed to dealing with 'conventional' crimes -- organized crime, drugs, murder, and that approach is often pervasive in corporate security departments as well, because so many former agents and policemen who retire end up there," Murphy says, "And they bring with them the tools and attitudes which they learned through 20 or 30 years of investigating bank robberies and kidnappings."
However, the myriad factors involved in computer crime makes it much more complex. Thus, the ramifications of potential security breaches can be particularly serious.
SECURITY BREACH: "You can affect accounts receivable, client lists, even cancel or change a bid," Murphy says, "Imagine if I get into your computer and change a bid or bug your client list -- I know of one company that lost $200 million worth of business because of a bugged client list. And they couldn't figure out for the life of them what happened."
Furthermore, even if a corporation does recognize that a security breach has taken place, or that it has become a real possibility, routine security measures often prove ineffective.
SPY ACCOUNTS: "There is one very well known case where the hackers set up spy accounts within the computer system they intruded upon so that when passwords were changed, that information got dropped onto a file the hackers created. That way, the hackers always knew what the new passwords were and they could immediately get back into the system. And there was virtually nothing they could do to stop them," Murphy says.
In addition, computer hackers utilizing a modern telephone network can single out specific corporate executives or key employees for covert activity just as easily as they can target a corporation.
"If I want to find out what a CEO makes, where he lives, how he pays his bills, all I have to do is run a credit check on him, and I get his whole report. Anybody could do it," says Murphy, "There are kids who have broken into TRW to get credit ratings on people whom they are targeting for electronic theft.
ELECTRONIC KILLING: "They kill them electronically. Your credit records are wiped out. Your driver's license may be revoked. They might even put you up on the national crime information computer for interstate flight to avoid prosecution, or whatever crime they choose. It's easy to do."
"If I go ahead and wipe you out electronically, that causes all kinds of economic problems," Murphy says, "You no longer have any identification, so technically you don't exist anymore. That means your credit cards don't work, your checking account doesn't work, your driver's license is no good. For all intents and purposes, you're dead."
Because of the computer hacker's complicated use of different telephone lines and long distance carrier systems, the odds are that these dial-up crimes will be untraceable.
CRIMES UNTRACEABLE: "The police can't trace it. Most hackers and computer criminals don't leave a trail -- it's the last thing in the world they would want. Furthermore, every Bell company out there will probably admit that it is almost always impossible to trace a hacker if he starts doing what is known as 'weaving' -- he goes from Bell to Sprint to MCI to ITT, on copper, on microwave,
and he is in six or seven different cities at once. He's in everybody's switches and you just can't find him."
Some of these corporate computer intruders do have a malicious reason for attacking out a company -- whether it involves a disgruntled employee, or outright embezzlement through manipulation of financial records, or even a hacker's disagreement with a corporation's political or social stands. But very often there is also a much more benign reason for the activity, Murphy says.
SIMPLY FOR FUN: "There are people who do it simply for fun -- they consider it the video game of the 1980s. It doesn't require a quarter, or even a great deal of skill. They only need a computer and a telephone and they can dial right in. It's very easy," he says.
But according to Murphy, the greatest threat to corporate computer security comes from employees of corporations, rather than outside hackers.
"The major potential problem for corporate security officers is the internal people," Murphy says, "Many of the employees in a major corporation put in their eight hours from nine to five and that's it. Once they leave, they don't want to think about that place."
INTERNAL THREAT: And according to Murphy, it is that kind of attitude which very often leads to the most severe computer security breaches. Some employees have been known to create problems on the system merely to relieve boredom. Others develop antagonistic attitudes toward the company because they have been passed over for an expected raise or bonus. Still others may see an easy way of making extra money either by selling secrets to competing companies, or by
reprogramming financial records to channel funds into "dummy" accounts.
The two most common factors that appear in each of these situations are the ease by which the action can be performed, and the difficulty involved in attempting to quickly recognize the problem and to pinpoint the perpetrator.
COMPUTERS DO AS THEY ARE TOLD: "The director of data processing is more worried about getting the payroll or the report out than he is about security," Murphy says, "He's not going to stop and count all the checks that are being printed. So if there are 2,016 checks instead of 2,015, he's not going to notice. But that check just went to someone who did nothing more than tie into the machine and tell it to issue him a check every week. And it will issue it. Computers only do what they are told, and they don't make mistakes. Only humans make mistakes."
HUMAN CARELESSNESS: Humans also make mistakes in their routine handling of even the most basic security measures, Murphy notes. Very often, passwords are taped to computer monitors. Log-on or dial-up numbers, as well as client lists and contracts -- things which should be privileged information -- are often left out in plain view, or end up in the waste basket where anyone can access them.
"It's called 'dumpster-diving'," says Murphy, "And there is no law that says I can't go through your trash -- because you threw it out. And if you don't want it -- I want it. And it works. Many companies throw out heads of client lists, or marketing strategies. I can find out exactly what they are up to. I can find out how much employees or executives are making -- all kinds of confidential
INDISCREET DISCUSSION: In addition, Murphy says there is a natural tendency for employees to discuss various aspects of the corporate system with vendors or service personnel who may visit the facility.
"It's called social engineering," says Murphy, "Employees will leave doors open. They will let strangers in. They will tell salesmen everything. If I go in as the telephone repairman, you'll tell me the world. Furthermore, I'm probably going to be able to wander freely throughout your entire building, ostensibly checking on telephone lines, but doing who knows what. One day it won't be me. It will be someone who doesn't like you or your corporation, and who is going to go in as the phone man and tap a line, or bug a conference room, or maybe even plant a bomb. It doesn't take much."
Bugging devices, according to Murphy, are getting so small, as to be imperceptible.
MORE THAN EQUIPMENT: "The typical corporate security officer isn't trained to protect the company," Murphy says. "If you don't know what to look for, you're not going to find it.
It's more than a matter of buying a software security package, or buying a hardware security package, Murphy notes. You have to mix the two. And if you have a network, then you would go into network security."
There are too many different ingredients in the problem of computer security for corporate executives or security officers to try to undertake them alone, Murphy says. Many of the ingredients are highly technical in nature, and require the expertise of a computer specialist. Others are more commonsense-oriented, but would probably be missed by someone who was not accustomed to undertaking such analyses on a day-to-day basis.
PASSWORDS CAN BE BROKEN: "Passwords and code numbers can be broken by anyone. A lot of passwords are the dog's name, the address, the wife's name, the car, the kids -- I can guess that," Murphy says.
"A lot of computer systems also have factory-installed passwords that come with the machine and no one ever bothers to change them. Log-on is DEC; password is DEC. If I know those two passwords, I have full control of that machine, and you can't do anything to stop me," Murphy says.
In addition, there is the matter of outside "service personnel" who periodically check on the systems.
"The people who come in to take care of the computers? I would watch them like a hawk. Then as soon as they leave, I would change the password. If I would let them dial in and use that same password, then I would have done an incredibly stupid thing."
THINKING DEVIOUSLY: "Part of this business is that you have to be devious," says Murphy, "Because if you're not, you won't be able to think the way your target thinks -- and that's the name of the game. And you have to be aware that the aggressor is always going to do something rash, no matter what everyone says about cold calculation."
That principle merely increases the magnitude of the problem for the corporations, Murphy says, because there are so many different issues and possibilities that have to be taken into account.
"I know of one company whose computer is being held hostage for a six-figure sum. The guy won't release it, and the company won't do a damn thing about it because they don't know how," Murphy says.
THE 'OSTRICH' THEORY: "Security usually isn't a simple, tangible issue for companies to consider. Admittedly, there is a certain amount of liability involved, and it costs money. But it will still be cheaper in the long run if a corporation is going to be willing to spend money with me to prevent a major breakdown, than if they wait until after it happens, when they will also have to pay the cost of lawsuits, damages, medical expenses, and bad publicity."
But still, for many corporations, the problem of corporate computer security will not become apparent until a major problem actually arises, Murphy says.
"It's called the ostrich theory. If I can't see it, it's not there."
By Thomas Derr
Bala Cynwyd, PA, US -- IN the golden days of radio, Mr. Keen, the "Finder of Lost Persons," thrilled listeners each week with his adventures as he traveled the world, tracking down individuals who apparently had vanished from the face of the earth.
Today, of course, the golden days of radio are gone. But Mr. Keen's exploits are being carried on -- by Steven J. Grossman, president of Keane Tracers, Inc., a Bala Cynwyd-based company which specializes in recovering unclaimed assets and locating missing heirs.
"When we spoke with shareholders for the first time and explained to them what we do, it would remind them of the old radio program of Mr. Keen. So as a result, when it came time to incorporate, we chose the name Keane Tracers and simply changed the spelling," says Grossman.
In reality, the predecessor company of Keane Tracers, Inc., had its beginnings about the time that radio's popularity was fading. In 1949, Grossman's father founded the Markham Co., a firm that was also dedicated to finding lost shareholders.
"The problem was, 'Markham Company' added nothing to our presentation," explains Grossman. "So we wanted something that would give people a really good idea of what we do. As soon as you say 'Tracer' they understand what we might be after or what kind of information we might want."
FORMIDABLE TASK: The challenge of reuniting missing people with lost or forgotten securities that they are entitled to can be formidable, Grossman adds. Very often, many years can elapse between the time and the owner becomes detached from his or her investment and the time Keane Tracers initiates its search.
Most commonly Keane Tracers is called in because a missing shareholder's or investor's asset is on the verge of being claimed by governmental authorities through the escheat process. Mutual funds, publicly-held corporations, banks and insurance companies will act as fiduciary for the assets or investments of their shareholders or investors, and if these monies are not claimed by their rightful owners within a certain period of time, they must be turned over to state authorities.
"There is an abandonment period for every state," says Carol B. Rosen, vice president at Keane Tracers. "In Pennsylvania it used to be 21 years. Now it's seven. If a shareholder cannot be located, or if an account sits with a bad address, where the mail is returned consecutively over the course of seven years -- after that period is up, the company is obligated to turn those funds over completely to the state."
Rosen notes the law dates back to the time of the Roman Empire, when properties that went unclaimed reverted to the ownership of the ruler. And it is that principle on which modern escheat laws are based, although the details are much more technical and legalistic.
SHORT TIME FRAME: "Every state has its own dormancy period, during which the funds lay abandoned," Rosen explains. "In New York, abandoned property is the second largest source of income for the state next to taxes, so New York lowered its escheat period to three years."
That relatively short time period, Grossman says, can put enormous pressure on New York-based companies, and shareholders who live in New York. "Sooner or later they have to do something," Grossman explains, "We try to get in there before it's later."
According to Grossman, the challenge to finding these missing shareholders comes from the fact that the last known address of the individual -- which is sometimes supplied by the company -- may be anywhere from five to 50 years old.
"When the last known address is that old, we are usually looking through public records to find what happened to these people," he explains. "This usually means researching death records, real estate records, probate records, and so forth, to find out who the heirs would be or the legal representative."
And the stories themselves often read like short vignettes of detective stories.
ARMCHAIR DETECTIVES: "Everybody, I suppose, is capable of pursuing a case logically from beginning to end -- what you do here, what the next step might be," notes Grossman. "But we pull out all the stops. We're kind of like armchair detectives -- and when the case calls for it, we'll even go out on the street."
One case that offered an interesting challenge for Keane Tracers involved some unclaimed money which belonged to a man named Frank Serpico, who owned some shares of stock in a corporation which underwent a merger.
"Frank Serpico was living in Brooklyn, at least that was the last address of record," says Grossman. "Now in this era, this was an old matter. But I went into the neighborhood and discovered that it was his family's address, as it turned out."
Except the Serpicos no longer lived there. And from Grossman's point of view, it's not difficult to understand why.
"Years ago, it was probably a nicer area, but when I finally arrived on the scene many years later, it was a fairly rough neighborhood by our standards," Grossman notes.
By talking to former neighbors of the Serpicos, Grossman determined that Frank Serpico's parents had indeed lived there at one point, but the father had since died. Grossman next looked up the father's death certificate, which provided a lead to a surviving daughter.
"The daughter told us that Frank was her brother, and he was indeed the New York detective," Grossman says. "She was able to confirm what the news had already told us -- that he was detached from the police force and perhaps in Europe. But through her we were also able to locate the accountant who represents his business affairs and financial matters, and this was the one person who was in contact with him while he was abroad."
For Keane Tracer's purposes, it was not necessary to extend the investigation further because the accountant was able to settle the problem of the missing shares on Serpico's behalf. As a result, Serpico became the recipient of several thousand dollars of which he had apparently lost track, and which he may otherwise have lost to state authorities through the escheat process had it not been for the work of Keane Tracers.
SENATORS TO STEELWORKERS: Keane Tracers' clients have included a number of celebrities and other notables besides Frank Serpico. Some of these people have included a Heisman Trophy winner, former senators, former members of the House of Representatives, and an Alabama supreme court justice.
"But if we showed you a list of a thousand people, it would consist of doctors, lawyers, steelworkers -- anybody that can invest," Grossman notes. "They are representative of all of us."
And it is these stories that are often the most touching. In some situations, for example, Keane Tracers will represent brokerage firms to locate individuals who at one time had invested in penny stocks which, as a result of mergers or acquisitions, have grown to proportions that are nearly unimaginable.
"In one case we uncovered some money belong to a husband and wife living in California," Rosen explains. "We learned later that the husband had died, and she had moved to Colorado, where she lived for many years on social security and disability payments.
"What we uncovered was that the husband and wife had purchased 1,000 shares of Interstate Stores, a company which has become better known as Toys R Us. And over the years that account had grown to be worth more than $100,000. So we were able to turn over a great sum of money -- and she had no idea that it was coming to her."
DON'T FORGET YOUR ASSETS: Grossman says it is very common for people to forget about older assets or investments, and at the same time, many don't realize just how important it is to be aware of the ramifications such a situation can have.
"Most people don't realize that the dockets as they exist today are such that even if you feel you are aware of an asset, but have lost touch with the holder of that asset, there is enormous pressure to have these monies declared abandoned so that the state can unilaterally sequester those funds -- even if you feel you have it in the back of your mind that these assets exist," he explains. "So just forgetting or not attending to an asset of yours could result in the loss of that asset."
At the same time, companies themselves should be equally concerned about the existence of missing shareholders, says Rosen. With the surge of mergers and acquisitions that has taken place recently, the number of lost or missing shareholders has likewise increased.
"If there is an acquisition or a merger, these companies often have stock certificates floating around the country that need to be redeemed for new shares of the new company," Rosen explains, and if those shares are not turned in, companies still must maintain the record on their books. For large companies that have a large asset base, such attrition can lead to significant numbers.
"Statistically, a company will lose from half a percent to two percent of its total shareholder base through attrition -- moving, dying, etc. That is the statistic I go into a company with, and when they look at their records, nine out of ten say that is a pretty accurate figure," says Rosen. "So if you are
talking about a company with over a million shareholders, you are talking about a large number of missing people. That's our reality; we can see a company that might have anywhere from ten to 10,000 missing shareholders."
Furthermore, it is not usually within the capabilities, expertise, or financial resources of the corporations to perform the kind of investigative work required to find shareholders that are missing, Grossman says.
REWARD: "If you are talking about thousands of missing people, companies are a little reticent about putting out that kind of money. What happens is it eats into the active shareholder expense, and they really should not bear the cost of paying for those that are missing," Grossman explains. "Moreover, there is only so much you can possibly hope to gain with a limited amount of dollars when you taken into account how much it costs to find somebody. So we are willing to spend our own dollars for the potential reward of entering into a percentage agreement contingent upon recovery for what we have uncovered."
And that process can be very complex at times. Grossman notes a case dating from the 1930s, involving a German oil company whose credits were blocked during the war and which was eventually turned into a royalty trust.
"These stockholders bought the stock for 75 cents a share, so 100 shares cost them 75 dollars," Grossman explains. "During the war the stock was no longer traded, and after the war the company reorganized. The oil fields started producing and the company came back into its own. Today, if you had 100 shares of stock you would be entitled to close to $40,000 with accumulated dividends."
However, Grossman adds, there is also a good chance that most of the original stockholders are no longer living. In addition, many of these stockholders' heirs are probably dead as well.
QUESTIONS: "So what is involved here? First of all, you have to ascertain -- did the person die? If they died, under what terms did they die? Did they leave a will, or did they die intestate? If we find the will, we find out who the heirs are, who would be entitled to this particular asset, and if we learn later on that these heirs are also deceased, we have to know who their heirs are and where they are. So if you come down a few generations, you can see people who would be scattered throughout the world. We have to bring them all together. In addition, we have to be responsible for all the paperwork. We leave very little paperwork up to the corporation," Grossman notes.
That maze of paperwork is largely the responsibility of Keane Tracers' on-staff counsel, vice president Debbie L. Zumoff.
"Since we are responsible for thousands of cases, there truly is a maze of paperwork involved," says Zumoff. "Being fully computerized helps to keep a handle on it. Because depending on the story, or the circumstances behind the death or the move, or the type of situation we are dealing with, different rules may apply. It can even be dictated by the specific merger, or acquisition or
buy-out. Each case is different."
LEGAL WORK: Furthermore, Zumoff says, there is a myriad of legal details involved because the company's work often involves the area of estates.
"We have to know the rights of legal succession within each state," she adds. "That means, for example, if somebody dies without a will, we have to know who is in line to make claims to these assets. And we have to know how to go about documenting that information to the proper state and the corporation in question."
But the technical aspects are only one part of the overall job. There are many other qualities which, according to Grossman, are essential to doing this kind of unusual work well. Chief among these qualities are patience, imagination, creativity and persistence.
"I don't use those words in a glib sense," Grossman intones. "You just can't be fixated on only ideas, because in the investigative aspect of it, you have to be willing to go with your instincts at times. You can't be close-minded, because people can be found if you search hard and long enough."
COMMUNICATING: "Good communications skills are also important," adds Zumoff. "Because essentially that's what we do. We talk to people, we deal with people hour-in-and hour-out on the phone and in person. And in order to get our message across, we have to be good communicators."
What comes across most clearly from talking with these modern-day sleuths is the feeling of genuine concern for the people they are representing.
"We are professionals. If not for that, we wouldn't close a single case -- we have to get the people on our side. And our methods have been tailored with that in mind. If we can't make the shareholder believe that we are bona fide, it's easy to see that they are not going to deal with us. But as soon as you tell someone you may have money for them, that almost always opens doors. Before that happens, we have to go down some weird alleys," says Rosen.
"It can get very involved," Grossman agrees, "Lot of options are open to us during the course of an investigation. But it's being able to put it together, and do so in a timely fashion that is most important. When you are dealing with thousands of cases, this very enjoyable process has to be expedited as quickly as possible."
"And very often, the people we deal with aren't even aware of what they have coming," explains Zumoff. "So there is definitely a happy side to what we do. We're like Robin Hood. We take from the big rich states and give money back to the people who are rightfully entitled to their money."
By Thomas Derr
Philadelphia, PA, US -- OVER the past few years, what began as a wave of corporate mergers and acquisitions has turned into an all-out high tide. And so far, that tide shows no early signs of cresting -- particularly in the area of "hostile takeovers."
At the time of this writing, Strawbridge & Clothier had just announced that it was the object of a hostile takeover attempt by New York investor Ronald Baron, through his newly formed Berry Acquisition Co. Although no action is yet planned by its board of directors, observers seem to feel that Strawbridge & Clothier will try to thwart the takeover attempt -- either through a recapitalization program, or through the implementation of a "poison pill" provision. Strawbridge
& Clothier's shareholders authorized a "poison pill" measure in 1984 when Baron first indicated his interest in acquiring the company.
TRADING UP: The dramatic increase in hostile takeover activity has probably been sparked by the recession beginning in the early 1980s, up to 1985, and the observation that many of the corporate assets which were being traded could probably be traded even higher if appropriate managerial steps were taken," says Dr. Harbir Singh, assistant professor in the Department of Management at the University of Pennsylvania's Wharton School.
According to Dr. Singh, one of the underlying assumptions sparking many recent hostile takeover attempts is that the management of companies that are targeted for a potential takeover attempt may not be fully utilizing its company's assets efficiently.
TARGETING LARGER FIRMS: The Strawbridge & Clothier/Baron affair also represents another distinguishing feature of the recent takeover wave -- the fact that larger firms increasingly are being made the targets of such takeover attempts. "I think one reason may be that the larger firms are being perceived by hostile acquirers as having certain lines of business which are less than profitable," notes Dr. Singh. "They therefore see the breakup value of the companies as being higher than their on-going market values." (Although Baron expressly stated that he does not intend to breakup the Strawbridge & Clothier organization, that possibility is apparently still a major concern for the company's current board of directors.)
According to Dr. Singh, it is this kind of background which has sparked the recent rise in hostile takeover activity, which in turn has sparked a proliferation of creative corporate defense tactics.
The names used to describe some of these defenses are often colorful -- "poison pills," "crown jewels," "shark repellents," "golden parachutes," and "greenmail" are just a few of the major strategies that companies have adopted to protect themselves against unwanted takeover attempts.
POISON PILLS are basically devised to make takeovers more expensive, or to make the target firm less attractive to a would-be acquirer. According to Dr. Singh, because of the way these strategies are devised, they can close out some bidders, but they cannot completely preclude the possibility of a takeover.
"The poison pill essentially would be the creation of a class of stock which becomes highly expensive, or the assumption of a large amount of debt that makes the acquisition more expensive in the event that there is a change of control," explains Dr. Singh, "It is triggered when there is a change of control, otherwise it doesn't come into effect. The poison pill defense has been somewhat
successful in stalling takeover attempts, but it cannot be seen as a defense to prevent takeovers."
That is a sentiment which was echoed by Joseph H. Parsons, Jr., assistant vice president for Communications and Public Affairs with the Rorer Group, Inc., Fort Washington, which established its own version of the poison pill in February, 1985.
"It does not prevent a takeover of the company," Parsons explains. "That is often a rallying cry -- that the poison pill will prevent a takeover, but we're not doing that, really."
TWO-TIER OFFER: What the arrangement will do, though, is protect Rorer against an unsolicited attempt to acquire the company which may include a partial or two-tier tender offer that does not treat all shareholders equally, or a creeping acquisition of shares in the open market -- or other abusive takeover tactics which the Rorer board of directors may feel are not in the best
interests of shareholders.
"The two-tier offer was common at the time our pill was put in. The way it works is that cash is offered for, say, 49 percent of the shares, and then notes, securities or bonds may be offered for the balance of the shares," says Parsons. "That often stampedes shareholders into accepting an offer, even though it may not be in their best interest. Very often the securities offered are junk
securities or bonds, which may have a high face value, but their intrinsic value may be less. That's the two-tier offer we were trying to prevent.”
Most poison pills are similar in nature. Shareholders are issued rights to buy a special class of company shares once a person or group either acquires 20 percent or more of the company's shares, or makes an offer to acquire 20 percent or more of the shares (for some companies the percentages are higher). Once the rights are exercised, shareholders can buy additional shares in the company, or if appropriate, in the acquiring company -- at prices that are highly advantageous. Thus, a would-be acquirer would be obliged to hand over a substantial part of its own equity to shareholders of the target company if the transaction were forced (thus, the "poison" in the poison pill).
SAFETY VALVE: On the other hand, many firms, such as Rorer, also have built-in safety valves to provide their boards of directors with enough time once the offer is made to decide whether or not the proposed acquisition would be good for its shareholders.
If board members decide the offer would be advantageous, they can redeem the poison pill rights before they are triggered. Rorer's policy calls for a 30-day period for board consideration. This
moratorium period can also be used by management to try to find a way out of the impending takeover -- for example, by negotiating with the would-be acquirer, or by seeking a merger with a more friendly "white knight" company.
Other firms do not have such a built-in safety valve. One famous case is that of Crown Zellerbach Corp., which had established a purchase-rights poison pill plan similar to that devised by Rorer, but without the 30-day period for consideration of the offer. As a result, Sir James Goldsmith, a British investor, was able to purchase more than 20 percent of Crown Zellerbach's stock, thereby automatically triggering the purchase rights plan. Had a more friendly company attempted to prevent Goldsmith's takeover by buying more shares, it would have been forced into swallowing the poison pill.
Meantime, Goldsmith purchased additional Crown Zellerbach shares on the open market to gain control of the company, but he refused to complete the takeover by merging those shares with his initial holdings. In so doing, Goldsmith effectively nullified the purchase -- rights of remaining Crown Zellerbach shareholders and is now apparently playing a waiting game until the purchase
rights are scheduled to expire in 1992.
EQUITY EXPANSION: Although not directly related to a hostile takeover attempt, Hershey Foods Corporation enacted a creative policy of its own in October, 1984. Hershey's action, which was described as an equity expansion stockholders vote, also established two classes of stock. The Class B stock has a voting proportion of ten votes per share, versus one voter per share for the common stock. The common stock also has a ten percent higher dividend and a new voting right for the minority stockholders -- the ability to elect one-sixth of the board of directors as a class.
As a result of this action, the corporation's traditional major shareholder, the Milton Hershey School, continues to hold 50.1 percent of total outstanding stock, but its proportion of voting control amounts to 80 percent.
"The net effect is that we have put ourselves in a position to support the continued growth of the company and meet our majority stockholders' requirement that they maintain voting control of the company," explains Jim Edris, manager of Financial Information for Hershey Foods Corp. Presumably such control would extend to potential takeover situations.
CROWN JEWEL: The crown jewel tactic is essentially a device to make the target company's most attractive asset unavailable to the acquirer in the event of a takeover. Unlike the poison pill, which is an action taken before the initiation of a bid, the crown jewel can be taken if there is a bargain already in progress.
"It is a defense where the target company actually sells off a unit of business which the acquirer wants," notes Dr. Singh. Thus, assuming the Clover discount department store chain is one of Strawbridge & Clothier's vital assets, the sale of the Clover chain would represent a crown jewel tactic that might ward off the consummation of Baron's takeover bid. (What that might do to the value of Strawbridge & Clothier's remaining holdings is, of course, another matter.)
SHARK REPELLENT: Similar to the crown jewel tactic is the device known as a shark repellent. Its timing is similar in that it often takes place while a bargain is in progress. Shark repellent involves the acquisition by the target company of some new assets which may be unattractive to a potential raider.
One of the more controversial defense tactics has been the subject of golden parachutes. This involves the provision of clauses in the employment contracts for several of the top layers of management, where if there is a substantial relocation, or severance in their job due to an acquisition or a change of control, these management personnel are awarded a sizeable payment.
Critics of golden parachutes charge that these policies encourage managers to welcome takeover attempts because it means a sizeable award to the managers, personally, when control of the company changes. In addition, they charge that golden parachutes, like poison pills and greenmail policies, tend to decrease the value of the company's shares when they are adopted.
VALUE OF SHARES: The Securities and Exchange Commission has noted, for example, that when a company adopts a poison pill to try to preclude a takeover, it statistically costs the shareholders about three percent of the value of the shares.
But according to Dr. Singh, recent research shows that in companies that have announced golden parachutes, stockholders have actually reacted favorably.
"This suggests that even though golden parachutes may be controversial due to the large magnitudes being triggered in the event of a takeover, these are large magnitudes of dollars in absolute terms, but not in relative terms -- relative to the size of the deal it is still a small amount," Dr. Singh explains. "And stockholders have reacted positively. The market value has generally gone up by about three percent when a golden parachute has been announced."
Dr. Singh offers two explanations for this somewhat surprising circumstance. First, when managers have golden parachutes, they may be more inclined to view takeover attempts with more objectivity. And second, the existence of the golden parachute may keep managers from getting caught up in trying to prevent a legitimate takeover because there is some room for discretionary behavior on the part of management.
"It is kind of a counterintuitive thing," Dr. Singh explains. "One would think that a golden parachute is going to be negatively received by stockholders, but then one realizes the golden parachute is only a part of the contract that a manager and the board of directors approves. Thus, the board rather implicitly accepts the managers' golden parachute as a necessary component of
Furthermore, the golden parachute is only paid when there is an actual change of control, Dr. Singh adds.
"It is a conditional payment -- which may be something else which the stockholders may respond to as well. The payment has not actually gone out yet, and if there is a bid that is appropriate, and if a relatively small proportion is taken right now and is being paid to the golden parachute, then so be it," he says.
GREENMAIL: Even more controversial than golden parachutes is the topic of greenmail. Greenmail is a play on the word blackmail, and it involves "paying off" potential corporate raiders by target companies to prevent would-be takeovers. In such instances, a large shareholder who is mounting a raid on the target company's stock is bought out at a price in excess of the price at which the stock is currently trading.
One of the biggest critics of such practices is Jesse M. Unruh, Treasurer of the State of California and one of the founders of the Council of Institutional Investors, a national body that is seeking to enhance the role of pension fund managers in corporate decision-making. Under Unruh's leadership, the Council is fighting such anti-takeover measures as greenmail, poison pills and golden parachutes, and is seeking greater shareholder control of publicly held firms.
Unruh recently appeared in Philadelphia at a special luncheon co-sponsored by the Wharton School and Packard Press, a Philadelphia-based financial printer. Speaking on "The Emerging Power and Influence of Pension Funds on Mergers and Acquisitions," Unruh noted the growing incidence of greenmail in corporate takeover activity.
"I watched Texaco pay the Bass Brothers some $60 million in greenmail; I watched a great family institution, Disney, paying greenmail successively to Saul Steinberg, then to Irwin Jacobs and then finally climbing into bed with the biggest greenmailers of all, the Bass Brothers, as partners. I watched as the massive holdings of these two large pension funds were subjected to being the
deep pockets out of which this greenmail was paid," said Unruh.
Thus, even though the target company may, for a time, retain its independence, the act of paying greenmail to a corporate raider will often have a detrimental effect on the company's own share values and financial well-being.
"In a greenmail situation, the raider is coming in and in a business situation, management executives are buying themselves out to hold onto their jobs," explains Philip J. Kendall, chairman of Packard Press. "So with a raider coming in, management looks at it and says: 'The hell with it, let's pay him off, get rid of him, let him go fight with somebody else.' And Mr. Unruh's presentation made it clear that that's really not right. And as a pension fund manager of trustee, you have the responsibility to get the best dollar for your investments, so you can't let management do that."
SAFETY VALVE: "From the pension fund standpoint, if management is looking for a way out, by working through a consortium of pension fund managers, they might be willing to set up a little fund that management could use in effect as a safety valve," Kendall says. "The key is to protect the shareholders' equity from being sued by people to protect their own positions."
GOING PRIVATE: Finally, there is what many experts refer to as the "ultimate" defense -- going private. Locally, this was the tactic employed by ARA Services, in December, 1984. According to Harry Ballinger, vice president of Public Affairs for ARA Services, ARA decided to top a hostile offer that was being tendered at that time and go private after having considered other options, including a poison pill.
"Basically we decided to force the whole issue," notes Ballinger. "It was our belief that once you consider a hostile offer, even if you turn it down, you are still opening the door for others of like mind to start taking a look at you. Based on that overall perspective, we decided going private was the best avenue for our shareholders."
"There has been a surge in leveraged buyouts in recent times," notes Dr. Singh, "And that surge is probably due in part to the great interest in corporate acquisition activity. Furthermore, it does constitute another way by which management can be in control, although it very often implies the assumption of a large amount of debt to effect the transaction, and the control may ultimately
be lower than anticipated because of the goal of the investor groups that may be involved."
Dr. Singh points out that there are a number of details that need to be managed well in a leveraged buyout, not the least of which is effective management of the process.
"As the information becomes public that the firm is going private, it is important that not much time is lost after that in completing the deal," explains Dr. Singh, "Because that window after it becomes public and before the deal is finalized is often a window which is capitalized on by other acquirers. But if that window can be managed well, then this tactic can be effective."
HIGH ACQUISITION RATE: And how effective are all these defensive measures in warding off eventual takeovers? Not very, it seems. Once there is a bid for a firm, the chances of it staying independent are relatively low, Dr. Singh observes. In fact, about 80 percent of all firms that have had bids on them eventually get acquired.
"This suggests that when there is a legitimate bid on a firm, there is probably some justification for it," notes Dr. Singh. "These defenses are often to send a signal that managers are going to make the takeover expensive and thereby essentially prevent any bids from being placed on it."
And though may of these defense tactics seem to many people to be extreme measures or overreactions to a constantly changing situation, the fact that most of these tactics do get implicitly ratified by at least the board of directors suggests that many of these are not outlandish or highly suspect, according to Dr. Singh. In addition, there is a very systematic process by which the
outlandish defenses do get identified, because of the great attention now being paid to these defenses, he adds.
"It is my general view in terms of the debate or the controversy about hostile takeover defenses that the controversy is largely misplaced," says Dr. Singh. "Transactions are controversial. Defenses are not controversial. Defenses in themselves are reactions to bids, or potential bids. And one cannot label defenses as being, per se, inappropriate."
By Thomas Derr
Philadelphia, PA, US -- THERE is a booming industry within the business world that is affecting the way corporate America conducts itself in the office. The temporary services industry has had an impact on business in ways only dreamed of ten years ago.
"Many years ago, the temporary help business was thought of as just a vacation replacement service during the summer," says Gerald Keller, president of London Temps of Philadelphia. "Business's original approach to a temporary was: 'Oh, a temp. What can he or she do?' Now, things are different. There's greater acceptance of the needs and uses of temps."
THE INDUSTRY: The temporary services industry, which began just after World War II, has seen its greatest growth during the last ten years.
According to Jeffrey Bettinger, sales and marketing manager for the Temporary Services Division of The Bettinger Co., Philadelphia, the total industry payroll has grown from $853 million in 1975 to $6 billion last year. And the U.S. Bureau of Labor Statistics projects a continued growth rate of about 50 percent by 1995. Not surprisingly, the temporary services industry is currently the third fastest growing industry in the U.S., behind healthcare and computers.
Statistics from the National Association of
Temporary Services (NATS) show that in 1985 there were between 2,200 and 2,400
temporary firms with 7,000 offices nationwide. NATS says these firms placed
approximately five million people last year, with 600,000 jobs filled by
temporary workers in any given week.
"Years ago," says Keller, "the employee cost an employer possibly 15 to 20 percent on top of the salary, including the other half of FICA, workers' comp, unemployment, gross payroll taxes and everything else put together -- holidays sick days, vacations, and so forth. That has been steadily increasing. In 1986 it's expected to be in excess of 42 percent. This rapidly increasing cost of benefits and employer taxes on permanent employees has made companies think twice about creating full time jobs to handle temporary needs."
PEAK & VALLEY STAFF: Management is also using long range planning strategies to compensate for fluctuations in business cycles. This results in what Keller refers to as "peak and valley" staffing.
"These peak periods vary depending on the company," says Keller. "Accounting firms are very busy from January to April 15, while a retail business is very busy in the fall and throughout the Christmas season. Banks may have peak periods at the end of each week, and insurance companies may be very busy in their claims department at certain times of the month or year."
Temporary workers are also used to cover maternity leaves and to help out during a hiring freeze. In addition, a temporary worker is often used to free permanent people and allow them to do a job that is more important to the company.
"Over 70 percent of a company's expenses on average, is in the area of human resources," Keller says. "With that in mind, firms can save quite a bit of money through the use of peak and valley staffing. What we're also seeing is that now the decision to use temps has become an upper-management level decision. This stems from the increase in the amount of money being appropriated for temps. As more money is being spent, the authority to use that money comes from a higher source."
ROFESSIONALS, TOO: Typically, people tend to think of temporary workers as being in support role positions -- clerks, secretaries, and word and data processors. But according to Norman E. McMahon, a partner at Romac & Associates, Philadelphia, that's only part of the story.
"Actually, only 60 percent of the nation's temporary workers are employed in clerical support positions," McMahon says. "Another 12 percent work in the medical field, nine percent in manual labor, and 20 percent in technical or professional capacities."
"Public accounting firms often charge their clients an exorbitant rate for entry-level accountants," says Mark S. Libes, JD, president of Accountants On Call, Philadelphia. "We can provide CPAs for approximately one-third of the public accounting firms' going rates."
At Workforce Temporary Services, the standard office and clerical services offered are supplemented by "PhDs, scientists, and chemists," notes vice president of Operations Gail Dampman. She adds that many of her firm's technically-oriented temporary workers are requested by employers in the continually growing industrial centers around King of Prussia and Wilmington, DE.
"The concept of professional temps is being enthusiastically accepted by firms both large and small," says Shelley Votto, marketing representative for Romac. "Many employers find that it is a legitimate way to contain labor costs, because many times they simply can't justify creating a full-time position for the amount of work they foresee."
REASONS BEHIND THE GROWTH: Overall, the temporary help industry simply cannot keep up with the ever-increasing demand for workers, especially since the easing of the 1983 recession.
Primarily, the reasons are economic. Companies can cut payroll expenses as much as 20 percent, because temporaries are typically paid less than full-time staff and are not eligible for the same costly health and fringe benefits.
"The secretary who used to receive $8,000 a year seven years ago is now earning $15,000 to $20,000 a year," London Temps' Keller says. "Back when it was an $8,000 a year position and the boss had two extra secretaries doing nothing, he could afford to say 'That's okay. They're not costing me much.'
"Today, he doesn't have extra back-up help as full-time staff because on top of her salary, that same secretary is getting 42 percent in employee expenses! This person is now costing him about $25,000; an increase in the range of 300 percent."
NEW SKILLS: In addition, rapidly changing technologies in both the clerical and technical fields have created new skill requirements to which the workforce responds slowly. The result is that employers are taking longer to fill permanent job openings. Temporaries are utilized to fill this hiring gap.
Very often, businesses that are computerized have many different facets of the business tied into the computer so that the absence of the equipment operator can have serious financial effects. And, because of the wide array of business computer systems and word and data processing equipment, the specific needs of individual businesses can vary greatly. Thus, proper training is often a key consideration for temporary placement firms.
One firm that is responding to that need is Career Planners, a center city-based placement firm which has established a separate division, the Career Institute, for the purpose of training applicants to satisfy the needs of its temporary services clients, according to Career Planners' president, Marilyn Ounjian.
STRATEGIC COSTS: But even with all the advantages temporary services can provide, there are still risks involved.
"If a client company uses a temporary service that is not equipped to handle large projects, or is not equipped to handle proper testing, screening and dispatching, that company can get into very real trouble," says Keller.
Temporary services that do not provide training, or do not pay wages and fringe benefits equal to those offered by permanent employers are less likely to be able to keep the intelligent, conscientious and skilled workers that their clients want to utilize. This imposes hidden costs in the firm of lower productivity.
"Plus," adds Keller of London Temps, "there are the insurances. A better temporary service carries very heavy insurances such as liability, errors and omissions, and other critical insurance areas."
Also, the government is tightening the tax codes that require freelancers to prove that they did not work under the direction of any employee of the client, he says.
Established professional temporary help services eliminate the possibility of investigation, costly penalties or turncoat employee lawsuits. Perhaps most importantly, they provide workers who have been screened and tested for required skills -- and are accountable for their performance on the job.
MATCH MAKING: The basic function of any temporary employment service is to get a specific job done for a customer in a cost-efficient manner. But matching the right temp with the right client can be an underestimated process.
Planning for the temporary should take place prior to when the temporary arrives, if possible. Some key points in receiving the highest rate of return on money spent for temporaries include:
· Look for specific skills. As Keller notes, "Just because someone can type 50 words per minute doesn't mean they are suited to every client who has a need for a 50 words-per-minute typist."
· Be realistic with the workload. One person cannot do the work of two.
· Be prepared for the temp, from the work to be assigned to the work environment.
· Designate one supervisor to avoid conflicting and confusing directions.
· Spell out all instructions.
· Periodically check on the worker's progress.
Clients should look for specific qualities such as genuine reliability -- individuals who appear on time and work for the duration of the work period, and provide consistent productivity at the site. The amount of work to be accomplished should be agreed upon by temp and the temp service, and cost for services should be competitive. Better temporary firms guarantee the results of their temps.
SCREENING: On the other side of the client company/temporary service equation, client companies have the right to expect temporary employees to be carefully screened and matched to their jobs before they arrive.
"London Temps prides itself on very careful screening and testing procedures," Keller says. "Our testing is extensive and we have one person assigned exclusively to the prospective temp. This person also conducts the reference checking and orienting. The better we know the temp, the better we'll be able to categorize them so we can match them with a client company when the order comes
Bettinger expressed similar sentiments, but also noted that although many temporary firms have turned to computer matching to perform much of the initial client needs/temp skills matching, ultimate matching cannot be left solely to the discretion of a machine.
And, according to Keller, just as it is important for a temporary service firm to visit and get to know how a client company works, the client company should, for its own best interests, visit the temporary service firm and see how its systems and procedures work.
BENEFITS OF TEMPORARIES: One study by the U.S. Department of Labor found that temporaries are engaged in productive work 90 percent of their time, as compared to only 70 to 75 percent for full-time employees. A similar study found that, based on a 40-hour workweek, temps averaged nine more productive hours a week than their full-time co-workers.
"There are two reasons for the higher productivity levels of temps," Keller explains. "First, they're not interested, nor do they know, the politics of the company, and second, temps are working 90 percent of their day, as compared to the 60 to 70 percent full-time employees work each day. Temps are not getting paid for their lunch hour or break time, they're not stale or tired on the job,
and they're not bored by the same old routine."
Finally, temporaries can help with in-house training. They act as "shock absorbers" when offices are converting from manual to computer systems, or from one computer system to another. While the full-time employees are learning the new systems, temps not only assist in their training, but because they are well-versed in the system, they can pick up the slack time of other work that must be done.
Keller observes that "there is no real typical temp. Many are people who have been superior workers on full-time permanent jobs for 20 years and who just want a different way of life. They want the flexibility that a temp's lifestyle offers."
As the use of temporary workers has grown, a better quality of worker has been attracted to the field. This includes technical temps in government, medicine, accounting, law, engineering and other areas. Some agencies also try to match their temps' work with their own particular interests. For example, law or accounting students may link up with companies in those fields, giving them a
taste of their future profession.
"Finally," Keller notes, "we're seeing early retirees who can't stand inactive retirement, heads-of-households with flexible hours that permit child-rearing, women re-entering the job market after raising families, and workers whose spouses are frequently transferred, all becoming temporaries."
NO STEREOTYPES: Finally, the caliber of temps has improved along with the quality of the services handling them.
The stereotypical temp no longer exists. Temps now come from all walks of life with a multitude of diverse skills that enable temporary services to meet their clients' needs. And companies benefit by being able to view the potential workforce without making major investments in corporate manpower.
All of this makes for a positive forecast for the temporary services industry, the client companies, the employee, and the general state of the U.S. workforce.