Subscribe to Inc. magazine
BUYING A SMALL BUSINESS

CEO's Notebook

CEOs give advice on: boning up on employment law; making the most of customer feedback; finding big-time IT for your small company; and streamlining the due diligence process.
Advertisement

Hands On

The HR minefield

Here's what you should--and probably don't--know about employment law
BY CHRISTOPHER CAGGIANO

What you don't know can hurt you--especially in court. Employment-related lawsuits are on the rise, as are the amounts awarded in compensatory and punitive damages. "It's one of the biggest legal trends of last few decades," says Fred Steingold, a lawyer and the author of The Legal Guide for Starting and Running a Small Business. "Numerous laws and court decisions have been carving out [new] employee rights, and employees have become better informed and more aggressive."

What do you really need to worry about? Here are a few key areas:

The Internet. "The law hasn't been clarified yet," says Steingold. "It's still too new." But some areas are already problematic. Web surfing is one. Employees with Internet access can pull off and disseminate offensive content. Employers can also be liable if a worker takes copyrighted material from the Web and reconfigures it for company use.

Then there's E-mail. In harassment or discrimination cases, E-mail can become an enormous problem during the discovery phase of litigation. "Having E-mail is creating documentary evidence," says Mary Dollarhide of Paul, Hastings, Janofsky & Walker in Stamford, Conn.

Your E-mail policy should outline proper use of company resources and advise your employees that you may be monitoring and archiving their cybermissives.

Wrongful discharge. According to Steingold, the riskiest action you can take is to fire someone without knowing the legal rules. "That's when the really large verdicts are possible," he says. Many postfiring lawsuits charge employers with breach of contract. Not a problem, my employees are at-will, you say? Well, you may be more vulnerable than you think. Employee handbooks and job-offer letters, improperly handled, can undermine the at-will relationship.

A performance-based termination should never be a surprise, so make performance appraisals as candid as possible. "Often a supervisor will shy away from hard criticism," says Miriam McKendall, a partner at Holland & Knight in Boston. "Then if an employee's performance is called into question, it's harder to discipline or terminate them."

Sexual harassment. Recent U.S. Supreme Court decisions have widened legal protection to include both genders. Also, the courts have become more focused on the perception of the person subjected to the behavior. Many states now require companies to have a corporate sexual-harassment policy. But you also need to have a clearly defined reporting procedure and an investigative process that you actually adhere to.

Disabilities. Authorities can't seem to agree on what exactly constitutes a disability. Courts have proved unpredictable. One way to help protect your company is by maintaining up-to-date job descriptions, so there's never any question regarding the essential functions of each job.


HR red herrings
For all the recent shifting of the legal ground, some areas of potential employer liability are actually a lot safer than you might think. Despite the warnings you may have heard over the years, here are two areas in which you probably don't need to worry as much as you do:

Interview questions. This one sure gets a lot of watercooler talk. But even though certain probing interview questions may be technically illegal--examples include "Would your spouse be moving along with you?" or "Are you planning on having any children?"--they are not a major source of lawsuits, according to Fred Steingold. "People ask the wrong questions all the time," he says. "But you don't really see the major cases unless a pattern is involved."

Mary Dollarhide agrees that the questionable interview query is not a litigation hotbed. "You don't see a lot of this, except in connection with cases regarding the Americans with Disabilities Act," she says. When a candidate gets the job, he or she is unlikely to quibble over a dicey question. Still, it's a sound practice to give proper training to anyone in your organization who does hiring interviews.

Employment references. It's also a good practice to answer carefully when someone calls to ask you about a former employee's performance. Many companies now have policies about supplying only titles and dates. But that can be frustrating to other employers; just think how important that information is to you when you're evaluating a candidate for your company. Wouldn't it be great if we could all be just a bit more open?

Well, according to Steingold, you probably can. "You don't want to savage the person or psychoanalyze them," he says. "But as long as you stick to documented facts, you should be fine." A number of states have passed laws that attempt to protect employers who in good faith tell the facts as they see them. Even so, Miriam McKendall suggests you have outgoing employees sign a release stating that you, as their former employer, are permitted to give out performance information.

Being open when asked for references is especially important when a former employee was engaged in criminal activity while on your payroll--bringing an unlicensed gun to work, for example. "That's not only appropriate, it may be your duty," says Steingold. "You could be held liable for failing to disclose that." -- C. C.


Hot Tips
International companies can sometimes offer good prices on services. Case in point: Rider McDowell of Knight-McDowell Labs, in Carmel, Calif., wanted to trademark the name of several products. Friends referred him to a San Francisco law firm, whose eye-popping fee for a U.S. trademark was nearly $15,000, with more charges for registration in other countries. But while visiting Vancouver, McDowell contacted a local company, Dean Palmer Intellectual Property Law, and asked for a price quote on trademarking. Palmer's fee was 75% less than the U.S. firm's. And the Canadian company could handle international trademarks to boot. "It was great," says McDowell. "I spent, total, about $15,000 for registration in 22 countries," including China, Switzerland, and Brazil. -- Mike Hofman

Coffee uber-retailer Starbucks generated advance publicity for a new Web site by promoting its premiere at another site--one it knew was visited by its target customers. As the coffee chain prepared to move its Internet presence from America Online to the Web last summer, Starbucks managers announced the news at a site where they thought their customers would see it: Lilithfair.com. As a 1998 sponsor of the concert event, Starbucks received a glowing write-up and a valuable link on the tour's site. "It let people know when we'd be launching the Web site," says Internet manager Heidi Wells, "and we got some experience in linking." The strategy can work just as well for newly renovated sites. --Susan Greco


Due-diligence dividends
In 1994, Derrick Rowe had a $5-million two-way-radio company that serviced oil rigs in the North Atlantic out of St. John's, Newfoundland. The business was relatively healthy, but Rowe had big ideas. He gave it a new name--Stratos Inc.--and quickly moved to enter a tough-but-growing global market: mobile satellite service.

The problem was capital. Satellite equipment is expensive. Rowe didn't think he could raise enough to start selling satellite time to big corporations. So he devised a strategy that would give him long-term credibility with investors.

Rowe knew that several large communications companies were running unprofitable mobile-satellite divisions. If he could acquire those business units at fire-sale prices, he could get into the business cheaply. But his first moves needed to be smooth if investors were going to fund the rest of his plan.

Rowe's first acquisition target was IDB Mobile Communications, a troubled company co-owned by Worldcom and Teleglobe. IDB wholesaled satellite time to carriers like Sprint and AT&T. Rowe persuaded IDB to let Stratos serve as a distributor for its services--in essence, becoming a retailer to IDB's wholesaler. But his larger mission was to gather intelligence about the company so that he could later make an informed bid.

In return for selling IDB's service, Rowe got a window to the company's soul. He soon decided that the reason IDB had floundered was that the company never tailored its service to customers' needs. "IDB really needed to beef up customer care," Rowe says. "Nobody at IDB was on the front end talking to users."

In 1996, Rowe made a calculated offer and swapped 30% of his own stock for Teleglobe's 50% stake in IDB. The transition to new ownership went very smoothly, since IDB's staff already knew Rowe. "It was welcomed by us because people had been exposed to Derrick and were very impressed with his style," says IDB vice-president Joanne Suppa.

"We went in quickly and built a direct sales force," Rowe says. The following year, Stratos bought Worldcom's stake for $5 million in cash, plus $1.5 million in convertible shares. Today Stratos is where Rowe wanted it to be: it sells hardware and satellite time to communications companies like CNN as well as to the military. It has completed four acquisitions since IDB and had $91 million in sales last year. Rowe says that his hands-on distribution experience has taught him "all the tricks" of the industry for superior due diligence. --M. H.


Big-time IT for small companies
Have you ever dreamed of outsourcing your entire IT burden--cheaply? A few start-ups are teaming up with tech-industry veterans to help small companies rent high-powered software--namely, enterprise-resource-planning (ERP) packages from SAP and PeopleSoft that, until now, only companies with more than $50 million in sales could afford.

The start-ups--dubbed application-service providers (ASPs)--provide a way for ERP makers to target small businesses. "PeopleSoft wanted a partner that could focus just on midmarket and under," says Jim Zemlin, director of marketing for Corio, an ASP in Redwood City, Calif. Corio implements and supports PeopleSoft systems for midsize customers, charging a flat fee of $100,000 to $150,000 and monthly rent of about $850.

"We could not have purchased PeopleSoft all out. It would have been well into the millions," says Alan Fraser, president of Vertical Networks, a Sunnyvale, Calif., start-up that inked a three-year contract with Corio.

As upstarts like Corio, USinternetworking, and FutureLink have led the ASP charge, large players like EDS have begun offering leasing deals with systems makers J.D. Edwards and SAP, respectively. Meredith McCarty, a senior analyst at International Data Corp., predicts this year's spending on enterprise ASPs will be $150 million and forecasts a $2-billion enterprise ASP market by 2003. "It's still emerging. The big hurdle is just the evangelization of the concept," she says.

Not everyone is convinced, though, that this is a good idea. Daniel Maude, CEO of Beacon Application Services, a $14-million consulting firm in Framingham, Mass., believes the cookie-cutter approach of ASPs--in which basic copies of the software are leased by many different clients--won't work for midsize companies, whose size and complexity demand individualized solutions. "If you want something that runs your business, as opposed to just runs a business, you'll stay in-house," he says. --Ilan Mochari


My Biggest Mistake

LILLIAN VERNON
Founder and CEO of the Lillian Vernon Catalogs

There are so many flukes in the catalog industry that you have to constantly assess what your customers want and need. I like to listen to the phone calls we get from people ordering merchandise. I probably spend some time once a month listening in on calls or talking to customers. I encourage my executives to do the same.

That practice helped us a few years ago, when the prices of paper and postage went up. Paper accounts for a huge percentage of the overhead for a catalog company like ours. We cut back the number of pages in each catalog, and we stopped mailing one catalog of sale items entirely. From customers' calls, I realized that our reaction to this setback was all wrong. Neither of our actions was a good decision. I reversed them in short time.

But we had made an even bigger mistake with our product mix. When the price of paper went up, we raised the average price of our merchandise. Essentially, we said to ourselves, "Let's sell more expensive items because our overhead has gone up." But again, listening to customers set us straight. People look to us for practical, hands-on "happiness" items. They can't find good household goods that easily, but we have them. In fact, that's the guts of our business. People were always really excited about our less expensive items, anything from $40 down to $10 in price. They would say again and again, "It's the little extras that make me happy."

That's not to say that everything in our catalog has to be value priced. But those items that are, are our most popular things. In listening in on customer phone orders, I got the sense that our catalog had gone too high-end. The strategy we followed when the price of paper went up was wrong, and we've completely reverted since then.

The Lillian Vernon Catalogs is a $250-million specialty on-line and catalog retailer based in Rye, N.Y.


THE QUOTABLE ENTREPRENEUR
"Hiring senior managers for a small company is a heinous process. My advice: at the outset, make managers put up blood money to cover their first year of salary. This serves as a down payment on a share of ownership in the future. If you do that, you won't have to worry about a person's motivation."

--Steve Wald, President of Naturally Knits, an $11-million manufacturer of knitted fabrics based in Gastonia, N.C.


In a former life

MARK WATTLES, 39
CEO of Hollywood Video

Present life: CEO of Hollywood Video, a $757-million chain of 1,322 video stores headquartered in Wilsonville, Oreg.

Former life: Mormon missionary. Wattles became a missionary at the age of 19. "It required self-discipline," he says. "Once in the field, you wanted to make wise use of the Lord's time, so you never sat back and relaxed."

Lessons learned: "It taught me self-motivation and perseverance in a challenging, unstructured environment. It also taught me how to hear 'no' and stay positive.

"That was useful--years later--in 1993, when I was trying to go public. I knew I needed the cash to grow fast or I'd end up having to sell to Blockbuster. But we had only 15 stores. We were wondering how to get underwriters to return our phone calls."

Wattles did complete an IPO in July 1993. "People are rejecting you left and right, but you go on saying 'I've got a job to do' to yourself. When I was a missionary, I might spend two weeks knocking on doors before I got a yes, yet it would just seem so great when it happened. It's been almost 20 years, and I could still tell you the story of every single yes I heard." -- I. M.


Feed back the feedback
Walk into the Rhode Island gift shop called OOP and you will be dazzled--if owners Jennifer Neuguth and David Riordan have done their job well. "The whole store is designed around the idea of good clean fun," Neuguth says.

Plenty of gift stores are fun, but their novelty soon wears thin. OOP is an exception, as its 10 straight years of revenue growth-- from $200,000 in 1990 to $1.3 million today--have shown. Location is part of the equation: the gift store sits just down the street from Brown University and the Rhode Island School of Design, in Providence. But an equal part of the store's success can be attributed to its ability to predict what will charm customers. To that end, Neuguth and Riordan aggressively solicit customer feedback, and they continually use the information to fuel growth and change.

The process starts with a 30-question customer survey that is passed out in the store. "We do tons and tons of surveys," Neuguth explains.

The motivation for customers' participation is cold, hard cash. "I'll send customers a $5 gift certificate to thank them for sending a survey back to the office," Neuguth says. But she exacts a price for her generosity. "We won't just hand the gift certificate to them," she says. "They have to give us their address so we can mail it to them. That way, I can also send them propaganda later on."

OOP's ever-growing database now contains 9,000 names, a good portion of which came from the surveys. Every person whose name is added quickly hears from the store. "We try to show customers that we provide great customer service, even with this," Neuguth explains. "We think it works as a marketing tool for us." And to mitigate direct-mail sterility, Neuguth includes a handwritten note, a newsletter, and a small gift. "The survey people usually become really great repeat customers," she says.

But more than providing material for a database, the surveys tell Neuguth and Riordan how to keep their store new and exciting. "We learned from the surveys that our customers' least favorite thing was anything low-end," Neuguth says. "We used to have a lot of chocolates and candy and tchotchkes in the store, but we took a whole unit of 40 jars off the floor because of the survey results. We're now selling product more quickly--in terms of dollars per square foot."

Neuguth has also figured out a unique way of using survey feedback as testimonial advertising. She prints the best customer kudos on tissue paper, which her sales associates use to wrap gifts. Current wrapping-paper comments include:

  • "The men who work here are so cute."
  • "I used to have one of those when I was a kid."
  • "I don't need any of this stuff, but I want it."

The promotional tissue amuses customers and reinforces the fun, lively vibe the owners want to create. "People like to talk about a store," Neuguth asserts. "They like to communicate. And the tissue encourages them to do this." --M. H.

Last updated: Aug 1, 1999




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: