Three CEOs shared their views on the 2012 economy on the campus of TCU in Ft. Worth in late October. The event was led by Dean Homer Erekson of TCU’s Neeley School of Business and Texas CEO Publisher, Pat Niekamp.
CEO, Impel Management &
Chief Administrative Officer, Medical Clinic of North Texas
Impel Management Services administers the business side of medicine and currently manages over 60 medical clinic locations in 21 markets in Texas, South Carolina and Tennessee – in DFW, Impel administers the Medical Clinic of North Texas by providing consulting, training and management services.
Health Care Services
While health care in some parts of the country is focused on caring for an aging population, in Texas the growth in the health care sector is coming from the number of people moving here as well as people growing older. Texas is projected to add over two million people by 2014 – almost double the national average.
The Metroplex is going to be one of the greatest recipients of that growth and that will mean investments in the infrastructure of health care will increase. The first requirement will be more physicians. With a rule-of-thumb formula of 50 primary care physicians for every 100,000 people, Texas will need over 1,100 doctors ready to practice family medicine in just two to three years to keep up with the forecast population growth. There will also be a need for surgical specialties, hospital-based physicians and medical specialists. When factoring in physicians who are aging and getting ready to retire, there will be an even greater need for more doctors.
As a result of demand exceeding supply, team based medicine with the physician acting as the CEO of the practice and delegating more patient care to physician extenders like physician assistants and nurse practitioners will become more prevalent. For every primary care physician, there are four to five staff members, so job growth in the health care sector will be strong.
Employer Sponsored Health Care
Employer sponsored health care is reaching crisis proportions. According to the Kaiser Family Foundation, family health care is at $15,000 per year with workers paying about 25 percent of the cost of premiums. With the inflation rate in health care averaging 9 percent per year, the cost is going to drive employers out of providing health care coverage.
Employers are adapting by cutting benefits, cutting services, increasing employee contributions, raising co-pays; and as a result, there are delays in services which will have an impact in the future. For now, 2012 is projected to have the slowest growth in the cost of insurance because people are delaying services and choosing not to go to the doctor. While the cost increase is slowing, the demand is not.
In the future there will be more accountability, measurement and change. Much of the change is being driven by the CMS [Centers for Medicaid and Medicare Services] who are bending the cost curve. Other changes to anticipate:
Lastly, in order to tackle costs the payment system is going to have to go from a volume based system to a value based system.
Health Care Economic Indicators – Population Growth*
Source: M. Ray Perryman, Economist
Large Employers Health Care Cost Increases Above The Consumer Price Index
Employers adjust by:*
Source: August 2010 survey report by the National Business Group on Health
Gary Martin, Chairman & President
Capital Southwest Corporation
Capital Southwest Corporation invests in businesses much like a venture capital firm does – but rather than using private equity to fund their deals, Capital Southwest is publically traded. Capital Southwest describes their business as, “Providing patient capital to exceptional businesses with significant growth potential.”
Capital Southwest Corporation has a portfolio of companies with about 45 percent of them operating as controlled affiliates. A controlled affiliate has Capital Southwest as an accredited investor and Capital Southwest directly or indirectly controls the company. As each organization faced the downturn, five key management principles kept each of the company CEOs on track:
1) Have a diverse background at the senior manager level.
This lesson was learned the hard way with a high flying company in the portfolio that suddenly had distributors stop buying from them. Everyone in the senior management level had the very same background, and while it was clear all the managers agreed on the upside, they couldn’t meet the changes on the down side. The reason? All the managers saw things the same, and unfortunately, it wasn’t the right solution. CEOs need to keep absolute diversity at the senior management level in order to have a 360 degree perspective in a very fast environment that changes quickly.
2) Cost containment as a habit.
Capital Southwest is in the financial business and has a substantial balance sheet – there is always cash available because that’s the inventory. Cost containment had never been a habit because none of the companies are low cost producers. On the contrary, Capital Southwest companies are price leaders and focus on margins and growing the customer base every year. Senior managers had a revelation in discovering how to extract a lot more value from vendors. Cost containment was a difficult venture, and the learning curve was exceptional.
3) Sharpened focus on risk management.
In a down environment, everybody is very busy. An unanticipated problem robs the company of management time and robs it of money. That’s critical – nobody needs surprises.
4) Systematically seizing market share.
Growing market share is a validation of the voice of the customer. Market share is the most perfect way to really understand what’s happening in the market. When a company is growing share, somebody is losing market share and there’s a great perspective on why the customer is making a decision. That same decision is going to be important on the upside.
5) Effective financial planning and reporting.
It’s critical to have good systems to generate information that people believe in. Those systems also have to be adaptable so it’s easy to cut out reporting and numbers that are no longer important to run the business. By and large, the financial side is very, very important and it helps monitor and control what the portfolio companies are doing.
Each of the five points were critical in bringing each company through the recession to the point where two of them are operating at record sales and earnings levels and two of them are going into an acquisition phase.
How to prepare for a recovery? See the list above.
Capital Southwest Corporation, Controlled Affiliates
The RectorSeal Corporation, Houston, Texas
Jet-Lube, Inc., Houston, Texas
Blue Magic, Inc., Conroe, Texas
The Whitmore Manufacturing Company, Rockwall, Texas
Smoke Guard, Inc., Boise, Idaho
Media Recovery, Inc., Dallas, Texas
John Arrow, CEO
Mutual Mobile, based in Austin, is a key player in providing consulting, design and development to blue-chip clients like Audi, Cisco, Dell, Samsung, Xerox and Google. Mutual Mobile, started by friends 2.5 years ago, now has a workforce of 190 people and is projecting to double in size in the next twelve months.
The Good in the Bad
One of the silver linings of having a recession is: it’s a lot easier to hire employees and it’s a lot easier to find office space and get a good deal in a down economy. When combining a great economic climate for starting a business with an emerging technology like mobile, the economy grows. Mutual Mobile started selling services by virtue of supply side economics, realizing there was an inequity in supply and demand – there was a supply of mobile engineers and the demand far, far exceeded the supply. It was the dot com boom that brought in all this talent to Texas – a whole new breed of people – and they were the people who initially filled the jobs at Mutual Mobile.
The Bad in the Good
Today, four out of five people hired at Mutual Mobile are relocated because they are coming into Texas from out-of-state because all of the available talent was immediately sucked up. In emerging technology, the unemployment rate is an unhealthy one-half to one percent and it is controlling growth. In order to continue growth, talent searches take place in Silicon Valley, Chicago and New York to bring talent to Austin, and as a result, compensation is way above market rates.
Educating Entrepreneurs – an Economic Jump Start?
In talking with students on the Stanford campus in computer science and business, many are going to start a business and many of them viewed that option as a very viable next step. At the University of Texas in talking with computer science students, many of the best students are planning to go to work for Facebook or Google or Apple. What UT students are not talking about is becoming entrepreneurs. In Silicon Valley students are involved in startups like students in Austin are involved in bands. Why is it in Texas students are not talking about being entrepreneurs as seriously as many of the students at Stanford and in Southern California?
Mutual Mobile is working with over a dozen Fortune 500 companies who are cutting spending on everything else except on new, emerging technology – enterprise mobility.
In health care the challenge is to take EMR [Electronic Medical Records] technology, migrate it to mobile, and make hospitals more efficient. There are now tablet applications that aggregate patient information for physicians, reduce hospital error, and reduce the time doctors have to spend with paperwork and bureaucracy. These are the types of efficiencies that don’t just help the hospitals, they help the patient.
If emerging technologies can be leveraged, that ‘s what’s going to end the recession. A key to the Texas economy and rejuvenating the rest of the country is starting new businesses: it is how life gets better with each incremental innovation. When the economy is bad, it’s the perfect time to start a new business.
Questions & Answers
Dean Erekson: We brought three people here today who are doing very innovative things. Let’s look at innovation and think about the labor force. We have people who have been displaced and others who are looking for new opportunities. When we look at employment, what challenges and opportunities do you see in Texas? Is this a good place to be or a challenging place to be?
Kennedy: From a health care perspective, it’s a very good place to be. For every primary care physician that practices, they are going to generate about $1.5 million in revenue for a hospital. It’s going to create a lot of jobs on the hospital side. For us on the clinic side, the growth in population is going to have a tremendous upside. We also have to better use technology so we don’t do everything face-to-face.
Martin: In our companies, we employ a lot of chemists. Over the years we have avoided new graduates because we didn’t have what we considered to be a training program. Therefore, we just paid more money to get more experienced people. In the last five years, because the demand has been greater than what was available to us, we have been bringing folks in from the university graduate level. This is a big area for chemistry majors. What’s going to happen with chemists is much like electrical engineers ten years ago – there are not enough of them. We have not yet considered outsourcing, but we most likely will have to consider that if we can’t find the staffing we need.
Arrow: One of the main virtues of the Texas economy is having a huge diversity of talent. Much of our hiring in different verticals comes from Texas. We employ people that don’t have any experience in mobile but have experience in health care, education, financial services and retail so we can help our clients in a more efficient manner. That’s what’s so great about Texas – its diverse labor force.
Dean Erekson: What is it that makes Texas innovative – what contributes to that?
Martin: I suggest that 15 years ago the cream-of-the-crop coming out of school naturally migrated to the large, Fortune 100 companies; that’s where they thought their home would be and their expectations were high. It was hard at small cap companies to recruit the star talent and I think that’s changed dramatically because of what goes on in Austin. They are creating younger entrepreneurs with a risk taking attitude – and when they are willing to work in a smaller organization there’s more risk and there’s more reward and that creates a spontaneity among different companies.
Dean Erekson: Do you see innovation in health care in this area? Do you see this an innovative area, or not?
Kennedy: Yes, I think the independent mindedness of Texans, having come from California originally, showed me there is a different way of thinking here and how people go about doing things. Once you get everybody on board, it’s a good journey.
Arrow: I think the quality of life in Texas is a lot better than many other places. It’s rare to find all of the different virtues we have here in Texas in one place. That’s something that continually draws the best of the nation and world’s talent here. For many of the people we’re hiring, we’re sponsoring visas for them. They didn’t just come for Mutual Mobile, but because there are other “pull” factors that brought them here. It is incredible how this state can draw the world’s best people to one location. We hear a lot of talk about Austin becoming the next Silicon Valley, well, I think we’re better than Silicon Valley and we shouldn’t try to emulate them.
Dean Erekson: I heard the term accountability a couple of times in the presentations, talk more about that. What kind of accountability do you see? Is there something new or is there a passing fad?
Martin: I think whether it’s in compensation systems, or shareholder requirements or it’s the government, we are seeing a higher and higher level of expectation and accountability. We can produce so much more information for ourselves, and that needs to get to shareholders about the better job we’re doing one year over the next. That creates expectations and further accountability.
Kennedy: For us, we’ve moved from being a cottage industry to being a business. We have gone from having physicians who have been the center of the universe to having patients being the center of the universe. They are accountable in a different way than just to themselves and we’re in a transition. Some physicians have resisted that. With consumerism, the patients demand more and your success and ability to market yourself is about showing you are able to be accountable.
Arrow: As a self funded, bootstrapped company we don’t have any external reporting requirements. We are accountable to ourselves and our clients. That’s an interesting situation in that you have total accountability for the upside and the downside – I find it liberating and exciting. Some people can find it taxing, but the only way we’ve been able to grow so fast and do it without growing pains is by taking that accountability thought process and making it practical throughout the organization. That’s why we love hiring entrepreneurs who have run their own businesses and give them control and autonomy to run their business unit as they see fit. They bring that same level of accountability when working with a client.
Dean Erekson: We’ve talked about consumer confidence and business confidence – the three of you are all pumped up. What’s the challenge there? What’s going on with consumer confidence and how do we deal with that to change it?
Arrow: The businesses we work with are not creating applications to have a namesake – our clients want to see a real business value. We look at the key performance metrics to figure out if consumers are actually going to purchase something. Doing these experiments and knowing we have this data that tells us what’s working and not working is what gives us confidence.
Martin: I’m not so certain that confidence at the consumer level isn’t really just a huge reaction to the satisfaction with what’s going on. It’s a world where we were certain we knew what was going to happen ten years ago as we looked forward, and all of a sudden everything started to wobble in very different ways. It’s difficult for most of the population to deal with it. As a company, we don’t do much in the way of consumer goods, we’re invested in industrial goods; even at the industrial level there’s procrastination, big tenders keep getting put off – and it’s not for a lack of funding, it’s that people are fearful of making a decision because there are so many variables.
Audience: Are there any positive shocks that can start the economy?
Martin: When I go into businesses we’re involved in, I don’t get a feeling of any big confidence issues, but I do think it’s going on in other parts of the country. We’re seeing new cars being sold and the retailers doing an acceptable volume in Texas. I do worry when we use national numbers to reflect the local economy.
Kennedy: The business model is changing to where there’s a partnership between the patient and the physician. It’s jointly developing a care plan and jointly looking at how to keep the patient in greater compliance. I think the uncertainty of the cost of health care has had an impact.
Arrow: One of the mantras we’ve stolen from medicine is the Hippocratic oath, “First, do no harm.” When you have a new technology, just like a new medical procedure, it’s very easy to do a lot more harm than good. If we can’t improve an organization, we’re not going to take that initiative on. It’s not sustainable and a good way to do business.
Audience: What’s the current situation in Washington having on your business and on the future?
Kennedy: It has a great effect on our business. With the budget cutting, getting people into medical school is challenging; the huge loans the physicians face when they come out of medical school and no way to address that, no primary care physicians, and getting cuts in reimbursements is difficult, plus, there’s not a clear direction of where we’re going. They are so diametrically opposed between the Democrats and the Republicans that it’s unclear whether we’ll be just facing budget cuts with CMS that are logical and something we can all agree on. Everyone agrees we have to change it, but how?
Martin: The first thing that strikes me is the question of the fear of loss that our government is really not working and not doing the services that citizens need – be it medical, highway, or economic development. The foundation that really exponentially brought the United States in to the industrial world had to do with the government facilitating and then getting out of the way when business needed a better path forward. The complaints I hear from everyone from the production floor to the C-suite is that we have new issues that we have to spend our time on. The other side is the incredible money that is getting wasted and it’s unfortunate in this day and age when we need better systems for the needy and for education, as a whole.
Arrow: For us, the best way to put it is: Government is a very inhibiting factor to growth. Just dealing with compliance alone is time we can’t dedicate to growing our business. Whenever you bring on an employee you have paperwork that needs to happen – multiple types of taxes like payroll, Medicare, worker’s comp, unemployment; every time you add a bureaucratic layer, it slows business growth. We’re talking about job creation in this country, and it seems to me you’d want to remove the roadblocks and make it as easy as possible for new companies to start and existing companies to add employees. It’s a frustrating process.
Audience: How can we promote an entrepreneurial spirit in colleges and around the nation?
Arrow: The biggest piece of advice I can give is to just go out and do something. Take something you’re interested in and passionate about and turn it into a business. It doesn’t need to be a grand master plan – I personally hate business plans. If you have an idea, it’s so easy to test it to see if it works. Look at the great companies that started with zero funding like Apple, Microsoft and Facebook, they did a leap of faith and realized they had something that works and figured out how to scale it up. The biggest roadblock is getting started, and you’re way ahead of everyone else when you try an idea and have it fail – you have to get the failures out of the way.
THE 2012 ECONOMIC CONFERENCE WAS PRODULY SPONSORED BY:
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