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Need advice on how to add value in the '90s?

Need advice on how to add value in the '90s?

Quality--the ultimate

financial weapon

"Perceptions is the fundamental keynote of quality," declared Larry Liberty, president of the Liberty Counsulting Group. "If the customer thinks the product is outstanding, then it is," he stated.

Pointing out that customers who are happy come back and spend money, Liberty quoted the following statistics:

* The average "wronged" customer will tell eight to 16 people.

* Ninety-one percent of unhappy customers will never purchase services from you again.

* Companies lose 14 percent of their customers because they are dissatisfied with the product and 68 percent of their customers because of an attitude of indifference by the owner, manager, or some employee.

* It costs about five times as much to attract a new customer as it costs to keep an old one.

* A problem that will cost $1.00 to prevent will cost $10 to fix when it is broken before it is sold, and $100 if it breaks when in the public's hands.

Liberty stated that he hoped that his presentation would make each financial executive "an active investigator of the quality of the quality process." He declared that while many companies have quality improvement programs today, some work and some don't, because the companies are not talking to customers.

"If your business methods and procedures are designed to make your business efficient and not to help the customer, then your methods and procedures are out of context with quality," he said. Customer satisfaction, employee satisfaction, and profitability are linked, and quality improvement leads to market share gain and ultimately to higher capacity utilization, greater employee productivity, and lower costs.

Liberty concluded that quality improvement never ends. It happens through people, and it is a journey that requires energy and attention all the time.

Can health care

costs be reduced?

"Based on current rates of spending, current GNP growth, and the current structure of the economy, if health care cost inflation continues at its current pace, by 2035 health care will absorb 100 percent of the gross national product," proclaimed Dallas L. Salisbury, president of the Employee Benefit Research Institute.

He called this "absurd" but pointed out that there is evidence that "we are not yet ready to take the steps to bring [increases in health care costs] under control." While many have pointed to the Canadian system as a possible solution, Salisbury pointed out that in addition to having a younger population, the Canadian system developed over 26 years. It also has components that do not appeal to the United States population.

If we are going to continue to spend as much on technology, we can't have a system like Canada's, said Salisbury. He pointed to Oregon, where a program has been instituted to limit government payments for the most expensive procedures. However, he said, "Everyone wants full medical care, of the highest quality, and we want it now!" As the population ages, we will devote an increasing proportion of GNP to health care, unless we are willing to consciously accept less, he advised.

Turning to the cost of retiree medical care for corporations, Salisbury stated that this is one area where companies might get the right to pre-fund on a tax-favored basis, if they are willing to give up the right to asset reversions.

He chastised Corporate America for saying that it doesn't want to provide participation standards, that it is not willing to accept vesting standards even at termination of employment, that it doesn't want the ability to advance fund, but that it also wants the ability to cancel at any time and take back all the money.

"When this is what Corporate America says on Capitol Hill, the presumption is that companies are not serious about wanting to provide the beneift," Salisbury declared. Many in Washington and in the American Association of Retired Persons (AARP) expect companies to walk away from their obligation, he continued, and they would rather companies say so sooner than later.

If companies would say it sooner, AARP would have the basis to lobby for increased preferences and funding for Medicare, according to Salisbury. "Compromise depends on Corporate America saying clearly what it wants," he concluded.

Pension assets--what's

the right level of risk?

"If the economic factors are right, all the other problems can be solved" in selecting the investment vehicles for pension fund assets, according to Irwin Tepper, president of Irwin Tepper Associates and a member of a panel on pension assets. Depending on the company's risk tolerance, asset choice will be based on the pension plan's liability growth rate, volatility, and correlation with capital market performance, he continued.

General market forces, interest rates, and inflation will be the dominant factors over time in fund performance, in his opinion. A menu of assets could be "tossed up" today, Tepper said, and a manager might be able to pick, but it should be a dynamic process that changes over time.

Dale F. Frey, chairman of the board and president of General Electric Investment Corporation, and Fred G. Weiss, vice president of planning and development of Warner-Lamber Company, both concurred with Tepper's view that the asset mix should not be static.

Frey described how General Electric had diversified its assets. Historically, he said, pension funds have invested in publicly traded stocks and bonds. GE began investing in real estate in the 1950s, in private placements in the 1970s, and in the international markets in the late 1970s.

A diversified portfolio should outperform a stock/bond portfolio at any given risk level, Frey told the attendees. Alternatively, at the same return level, a diversified portfolio should have less volatility. Illustrating GE's results for the audience, Frey pointed out that the diversified portfolio increased the return by 120 basis points a year from 1984 to 1988.

Weiss agreed that allocating funds among the major asset classes is now recognized as the major determinant of the risk and return of a fund. But, he asked, "Who should make the asset allocation decision, and how?"

Giving a brief history of pension fund management, he said that most funds started out purchasing annuities from insurance companies as this was safe and the return was clear. While there was no risk or volatility for the company, there was little return. Companies then moved to bank trust companies that made the asset allocation decision and promised higher returns. There was, however, no fixed rate of return.

Then funds went to independent managers, Weiss related, first to balanced managers and then to specialty managers. The companies found that by deciding on the types and numbers of managers, they were making the asset allocation decision. Guidelines were set based on a belief that, over the long term, certain asset classes would outperform others, Weiss continued.

Then came tactical asset allocation, leading to large shifts in funds, facilitated by the arrival of derivatives. Pension funds saw a shift from qualitative to quantitative asset allocation, but now, Weiss stated, some funds are moving back to the more traditional forms of selecting asset classes.

As an example of the decisions companies must make in connection with just equity investments, Weiss gave the following choices: Domestic or international equities? Large capitalization managers or small "cap" managers? Value managers or growth managers? Active managers or passive managers?

Weiss recommended that companies discuss alternative ways of making decisions on asset allocation. Should decision-makers be professional managers, in-house professionals, or committees of management? Is the decision implicit or explicit? Strategic or tactical? There is no right way to make the decision, the concluded.

Export financing

advice for medium-size

companies

How can small- and medium-size companies finance their exports? A generally discouraging view was given by Christine Topoulos, vice president of Citicorp. Because domestic markets boomed in the 1980s and the strong dollar held exports down, there are now fewer trade specialists in industry and banking, according to Topoulos. Smaller companies will not get attention from money center banks, she said, and if they go to regional banks, they will hear that the banks have gotten out of the export financing business.

Some regional banks will assist in export letters of credit but only to maintain a relationship with an overseas bank in order to be in the more lucrative import letter-of-credit and import financing business. "So where do companies go for assistance?" Topoulos asked.

She advised hiring a professional contract worker to handle trade finance needs. Like outside accountants or lawyers, these professionals are paid on a fee basis. Unlike consultants, they work within the company and act like they are part of the staff.

Topoulos listed a variety of services that export financing specialists could provide, including:

* Helping write policies and procedures for dealing with international business.

* Analyzing bid documents and total financial packages to respond to bids.

* Setting up a system for collecting international receivables.

* Determining terms of payment for overseas customers based on country risk that they have analyzed.

* Finding the protection a company needs to take greater risk on overseas transactions.

* And the helping marketing and sales groups incorporate financing techniques in the planning for new and current products.

The services of professional export financing specialists are limited only by a company's needs, said Topoulos, and by a company's willingness to pay the fee. However, this is a new field and export financing specialists are hard to find, she cautioned her listeners, unless they are recommended by "your banker, insurance broker, or someone who is already doing business with your company."

George Woods, import-export manager of H. Muehlstein Co., advised patience in establishing an export business, stating that any international venture will need time to establish its niche. He said that this must be a time during which gaining and keeping market share must take precedence over short-term profit.

In addition to legal, financial, purchasing, and sales staff support, Woods believes that the export function must be supported by staff experienced in logistics and distribution and customer service. Logistics and distribution people must be familiar with and provide accurate cost analyses of warehousing, packaging, and transportation. Customer service staff must be knowledgable about documentary credits and requirements specific to the country, such as consular requirements, pre-shipment inspection, import licenses, other inspections, and any U.S. regulations.

Exporters also need to establish a relationship with an international freight forwarder who is positioned globally to expedite current business and to accommodate future business. Woods concluded with the encouraging message that an agent may be enough to begin an export operation.
COPYRIGHT 1990 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Deitsch, Mimi
Publication:Financial Executive
Date:Jul 1, 1990
Words:1747
Previous Article:Two tangles ahead: risk management and corporate governance.
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