Progressive Rentals February - March 2008

Hiring Practices and the Immigration Debate By Phillip M. Perry

Looking for Loyalty in All the Right Places By Bud Holladay

Fractional Ownership By Geoff Williams

Hiring Practices and the Immigration Debate
By Phillip M. Perry

Federal regulations are tightening up in ways that target employers of undocumented workers. Worse, state governments around the country are creating a confusing patchwork of laws that penalize employers who hire undocumented foreign nationals, following the failure of Congress to pass comprehensive immigration reform last summer. Last year, state lawmakers considered more than 1,560 bills related to immigration and enacted 244 of them in 46 states, according to the National Conference of State Legislatures. That pace was triple the previous year and the NCSL expects more such activity in 2008. (The organization’s complete report is available at www.ncsl.org.)

“The states are having to pick up where the federal government did not come through,” says David Kotick, managing partner of Apsan Law Group, an immigration law firm in New York. Businesses nationwide are assessing the impact of Arizona’s new immigration law, believed to be the strictest in the nation. The law does the following: Encourages people to contact their county governments when businesses are suspected of employing illegal immigrants; Allows the county to revoke the business license of an employer who knowingly hires an illegal immigrant; Requires all Arizona businesses to use E-Verify, a federal online database, to confirm that new hires have valid Social Security numbers and are eligible for employment.

The law is being challenged in court by the Arizona Chamber of Commerce and Industry. “It’s crystal clear that the employer sanctions law will harm the state economy,” says Chamber President Glenn Hamer. “It’s simply a question of degree.” Another high profile state is Virginia, where more than 50 pieces of immigration-related legislation are expected to be considered in 2008. One law would revoke the business license of any employer found to hire undocumented workers; another would require employers themselves to pay any workers’ compensation claims for undocumented employees. A coalition of businesses and trade groups called Virginia Employers for Sensible Immigration Policy has been created to fight the laws.

Even municipalities are getting into the act. “Many local communities are fighting illegal immigration by targeting businesses,” says Kotick. “Employers who hire undocumented aliens face steep fines and the loss of their business licenses. Some laws even mandate jail time for repeat offenders.” Whatever your state, you are subject to federal regulations that require you to verify the employment eligibility of anyone you hire. “Every individual, once hired, must be asked for documents that prove their identity and their work authorization,” says Carlina Tapia-Ruano, a partner at Chicago-based Tapia-Ruano & Gunn, an immigration law firm (www. trgpc.com). The employer must have each hired individual fill out an I-9 form, titled “Employment Eligibility Verification,” issued by the U.S. Citizen and Immigration Services, a division of the Department of Homeland Security. (To avoid any appearance of discrimination, the law requires that you have individuals complete this form only after being hired, not during the recruitment process.)

You can download a copy of an I-9 form from www.uscis.gov. Click on “Immigration Forms” and then “Employment Eligibility Verification” or I-9, toward the bottom of the list. On part 1 of the I-9 form, the employee enters basic information such as name, address, Social Security number and date of birth. Just as important is the section on the employment status of the individual. There are only three choices here: The individual is either: 1) a U.S. citizen; 2) a legal permanent resident, or 3) an alien authorized to work until a given date. The employee must sign and date the form. In part 2 of the form, you must certify that you have made sure the documents provided by the employee establish the individual’s identity and employment authorization.

What documents are acceptable? There is an extensive list on the back of the I-9 form. Any one document from a list of 10 is acceptable as proof of both identity and employment eligibility. (A passport and a permanent resident card are two examples.) Additionally, there are nearly two dozen additional documents that have been certified as proof of one of the two criteria. Part 3 provides space for updating the form’s information after a worker’s previous work authorization has expired. “The law requires that the signatures and the information be completed within three days of the employee’s hire date,” says Tapia-Ruano. “Many attorneys recommend that employers attach photocopies of the reviewed documents to each I-9, to help protect the business in the event of an audit.”

Av o i d i n g  e r r o r s

Gathering documents is one thing. Making sure they are authentic and that all of the blanks are filled in correctly is another. Failure to do so can be costly. Penalties for errors can range from $1,000 to $10,000 per violation. “The penalties can accumulate very quickly even with a single I-9 form if there are numerous violations,” says Tapia-Ruano. “Some employers have been hit with hundreds and thousands of dollars in penalties and fines.” Even employers who make innocent mistakes can be fined, says Tapia-Ruano. “If a receptionist or whoever is assisting employees in completing the I-9 forms makes mistakes, then even if the workers are U.S. born citizens, the employer is subject to fines. The fact that this can happen repeatedly makes employers very uncomfortable.”

Employers should make sure that everyone who helps employees fill out I-9s is trained to avoid as many errors as possible, suggests Tapia-Ruano. “And I would encourage an internal audit of I-9s on a periodic basis. Don’t wait for an audit by the Department of Homeland Security.” While the I-9 form looks simple, attorneys caution employers from making these common errors: Illegal bias: Avoid charges of discrimination by requiring every employee—not just the ones whom you believe are from another country because of their appearance or their speech—to fill out an I-9 form. Entry errors: “Any mistakes can or will result in fines,” says Tapia-Ruano. One of the more common errors is incorrect indication of the employee’s immigration status.

An employee with a work visa, for example, may have erroneously filled in “permanent resident.” Such a mistake is significant even if done innocently. “It is the employer’s duty to make sure the entries are accurate.” Over-restrictive documentation: Avoid requiring documentation that is more restrictive than what the law mandates. An employer might be tempted to do this to simplify record keeping, but it is illegal and can lead to fines as well as charges of discrimination. “The I-9 provides a list of documents that are acceptable as proof,” says Tapia-Ruano. “You must accept the employee’s decision as to which of the listed documents to provide.”

Failure to assess authenticity: The employer must not accept documents that a reasonable person would suspect were fraudulent either because they look doctored or look like duplicates. Procrastination: Another mistake is to put off the task of examining the employee’s documents and getting the I-9 in order. “It’s not uncommon for employers to wait more than three days,” says Tapia-Ruano. “Again, that can result in fines.” Allowing expi ration dates to slip by: Many employees have permission to work for only a limited period. “You need a system to continue to verify the employment status of an individual throughout the period of employment,” says Tapia-Ruano. Prior to the expiration date, ask the employee to present new verification documents. It’s important to retain these I-9 forms in a safe place. “At any time, the Department of Homeland Security or the U.S. Department of Labor may come around and perform what they call an ‘employment audit’ of I-9s,” says Tapia- Ruano.

S a f e -h a r b o r r u l e s

The U.S. Social Security Administration has long been in the practice of sending “no-match” letters to employers when workers’ names and Social Security numbers on W-2 Forms do not match the SSA records. In the past, employers had never been sure what to do after receiving these letters. Should a worker who cannot reconcile the discrepancy be fired? “In many cases, employers have kept the employees on board, fearing that a termination decision based on a nomatch letter might lead to charges of discrimination,” says Angelo A. Paparelli, managing partner of Paparelli & Partners, an immigration law firm with offices in New York City and Irvine, California (www.entertheusa.com). “After all, there can be legitimate reasons why a no-match occurs. A female employee might have gotten married, for example, and changed her name to her husband’s without notifying the Social Security Administration.

Or the Social Security Administration could have misspelled the name.” Indeed, the Web site of the U.S. Immigration and Customs Enforcement division of the Department of Homeland Security states that, “an employer who takes action against an employee based on nothing more substantial than a mismatch letter may, in fact, violate the law.” Times, though, are changing. Today’s employers face more severe fines for hiring illegal immigrants and there is a general national mood shift against undocumented foreign nationals. Many observers, therefore, are concerned that employers will opt to risk discrimination lawsuits over the federal government’s civil and criminal penalties for employment of undocumented workers.

“The fear is that many people will be terminated based on foreign appearance and name,” says Paparelli. As partial mitigation for this problem, in August 2007, the Department of Homeland Security issued new regulations intended to clarify matters while providing a “safe harbor” for employers who hire foreign nationals. The regulations define what steps employers must take within what time periods to avoid legal liability for hiring undocumented workers. While the safe-harbor regulations were intended to reduce ambiguity, employers still face the costly task of checking and double-checking documents. And the safeharbor regulations carry their own heightened risk of financial penalty. “The procedures defined in the rules are not really voluntary,” says Paparelli. “The employer who fails to carry out the defined steps risks being charged with ‘constructive knowledge’ of the employment of workers who lack the right to work.

This would put the employer in violation of immigration laws.” An injunction by a federal court in late 2007 delayed implementation of the new regulations. However, the reprieve is expected to be short-lived. “We’re currently seeing what we can do to address the concerns that the judge entered in order to see whether we can get the injunction lifted, and then go forward with this regulation,” Homeland Security Secretary Michael Chertoff recently told Congress. The government has stated that it intends to reissue the safe-harbor rules in revised form to satisfy the court’s concerns. This delay provides employers with additional time to study the proposed rules as well any related regulations that are likely to flow from the federal pipeline. (For details, see the sidebar, “Safe Harbor for Employers.”)

Staying informed

Many feel that recent changes in federal regulations represent an attempt to shift the border control effort from the government to the private sector. “Employers feel an unreasonable burden is being placed on their shoulders to control undocumented employees,” says attorney Tapia- Ruano. If more is expected of the employer than ever before, though, it only highlights the need to maintain vigilance in hiring procedures. As the face of America’s workforce changes, employers can be sure there will be additional changes in federal, state and local regulations.

J Phillip Perry is a business writer based in New York City.

Looking for Loyalty in All the Right Places
By Bud Holladay

Let any store lose a 60-inch flat-panel TV and somebody at corporate will let the dogs out; the world will stop spinning until the missing inventory is recovered, Homeland Security is notified and all systems are adjusted. Does the same thing happen when a two-year employee is lost? How about when a longtime customer just goes away? If you have been listening to many experts or any of your peers, you have probably heard that loyalty is dead. Arguably, in some companies it’s merely on life support and family members have been notified.

But there is hope from an unlikely source: a 12-year-old book from that pop-culture factory, the Harvard Business School Press. In 310 pages, the authors blow up just about everything most of us thought we knew about loyalty, customer retention and the pursuit of profit. Along with making the proposition that value creation should be the primary aim of business, it introduces something called loyalty based management. Plenty of evidence is offered up showing how such a shift in focus can easily generate up to a 50 percent improvement in performance over the next five years.

The book is The Loyalty Effect: The Hidden Force Behind Growth and Profit, by Frederick F. Reichheld (and Thomas Teal). I found my copy in the storeroom of a company that is going broke. You may have to find yours online; if your company is also going broke you might want to pay extra for overnight shipping. Reichheld asserts that loyalty is neither a substitute for profit nor a gimmick for making easy gains or advances. His findings are based on 10 years of research as a key player at Bain Co., the global equity capital firm founded by current presidential hopeful Mitt Romney.

Reichheld’s responsibilities there included evaluating companies that Bain had an interest in acquiring. Being a naturally curious fellow, he came to wonder why some companies that seemed to have every conceivable advantage in the marketplace failed to outperform competitors that they should have flattened long ago. What he discovered might be akin to the Holy Grail of Growth. The most identifiable and effective financial advantage one company can hold over another is having a vastly higher rate of retention across its employees and customers. More than pricing, more than costs of production or distribution, more than marketing, the rate at which your company retains its customers and employees will determine its financial performance over the long term.

Reichheld puts it in terms we all understand: “Each time we found a performance record that was hard to square with the traditional economics taught in business schools, we also found a company with superior loyalty. Each time we found a company with outstanding loyalty, we also discovered a company that was delivering superior value to its customers and employees, and, at the same time, generating inexplicably strong cash flows to fund internal growth.” Value, not price, Reichheld and others assert, is a measurable commodity if you know what to measure. He illustrates his point with examples of companies that raised their customer retention rates by just 5 percent and improved the value of a customer by as much as 100 percent.

Figure all the new products, replacement goods and add-ons that a top tier rent-to-own customer can account for over several years and it’s easy to see the financial impact of holding on to your best customers. That means through business cycles, economic cycles, product cycles and sales cycles. ∂ Reichheld focuses on two costly mistakes that companies make in adding customers. The first is a general failure to quantify or study customer defections so long as replacements keep coming along. Second, most companies measure the wrong things to reach inferior conclusions about customer retention.

Defining the “right customer” and measuring the impact of his loyalty on the financial health of the business is simply too complicated for many to bother with. The Loyalty Effect demonstrates how to do it, in language that any business leader can understand. The right customer, according to Reichheld, is one with a long and unbroken history with the company, who keeps agreements, maintains a high level of loyalty to the company and its values and regularly sends other blue-ribbon customers or offers suggestions on ways the company can improve its delivery of products and services (“build value”).

Reichheld claims that financial performance supersedes demographics in identifying this type of customer. Such customers universally prove to generate higher returns with less risk and lower cost of handling. It’s hard to argue that anything positive results when new employees service newly acquired customers and at the same time try to reshape the business relationships already in place with old customers. Yet that is where most of our sales and marketing campaigns are designed to take us. The Loyalty Effect explains how a company can break this costly and unrewarding cycle and reinvest in a cycle of loyalty, learning and value creation to hold onto its best customers and its best employees.

Nearly everybody knows about Mazlov’s “Hierarchy of Needs.” Perhaps only a handful has ever heard of its counterpoint, the “Hierarchy of Loyalties,” formulated by Harvard philosophy professor Josiah Royce. Maybe that’s because his book, The Philosophy of Loyalty, was published a century ago and has never been featured on Oprah. Royce determined that loyalties arrange themselves in a hierarchy much like human needs are grouped. At the lowest level is loyalty to individuals. Then comes loyalty to groups. At the pinnacle is our practical devotion—“ loyalty”—to a set of values and principles. It is our devotion to principles that tells us when and if the time has come to end our loyalty to an individual or group. Loyalty to principles overrides all other loyalties.

Managers who never learn this are doomed to failure by the weight of masses of people churning through their otherwise excellent processes. The overall theme running through The Loyalty Effect is that money spent on most employee initiatives and clever “loyalty” programs could be better spent studying the company’s value system and devising training methods that would encourage managers and workers to exemplify, communicate and uphold company values in their dealings with each other, with customers and with shareholders. Old Josiah was prescient in stating that the successful business is the one that gains the most devotion to its principles, not its principals. What employee ever quit a job because he didn’t like the price of a refrigerator or the service schedule on Wednesday? About value creation.

The Loyalty Effect describes two kinds of profit. Virtuous profit is the result of creating value, sharing it and building assets. Those assets include human capital of the customer and the employee type (a notion certain to give your CPA heartburn). Destructive profit comes from exploiting assets to generate the shortterm earnings demanded by bankers, investors and most owners. That means giving up on the oldest, most valuable customers and employees because the company has simply run out of ideas on how to keep either and is unwilling to restructure itself so that tenured workers can find profitable ways to better serve longstanding and well understood customers. In other words, build value. Firms that practice loyalty-based management integrate customer acquisition, benchmark hiring and compensation, productivity improvements, learning, motivation and the building of value.

They do not celebrate short-term gains in counts or numbers that are easily manipulated and prone to wild swings. Based on his findings, Reichheld describes a loyalty based company thusly: “Revenues and market share increase as the best customers come into the business, building repeat sales and safe, low-cost referral business. Because the company offers great value, it can be more selective in new customer acquisition. This stimulates sustainable, profitable growth from reduced outlays.” Sustainable growth enables the company to attract and retain the best employees. Consistent delivery of superior value to worthy customers increases employee loyalty by giving people pride and satisfaction in what they do. As the long-term employee gets to know his long-term customers better, he learns how to deliver still more value— further reinforcing both customer and employee loyalty.

Loyal long-term employees utilize OJT to reduce costs and improve quality on their own, further enriching the customer value proposition and creating high productivity. The company can then use this productivity surplus to fund superior compensation and better tools and training— further reinforcing employee productivity, compensation growth and loyalty. Spiraling productivity coupled with the increased efficiency of dealing with loyal customers generates the kind of cost advantage that is difficult for competitors to match. Sustainable cost advantage coupled with steady growth in the number of loyal customers generates the kind of profits that are very appealing to investors, which makes it easier for the firm to attract and retain the right investors (or, in some cases, lenders or partners). The list of companies that have been successful using this approach includes many household names across dozens of industries, including retail. A third of the way through The Loyalty Effect, the author offers something called a “Generic Model of the Seven Economic Effects Associated with Employee Loyalty.”

Although that comes dangerously close to Harvardspeak, the model is elegant in its plainness, addressing recruiting, training, efficiency, customer selection, customer retention, customer referral and employee referral. Get these right and your business grows exponentially. Get most of them wrong and, well… ∂ Changing old practices takes equal amounts of courage, confidence and cash in the bank. Reichheld reminds us that people learn, organizations don’t. The burden is on senior management to lead the charge. Loyalty does not percolate up from the bottom because of slogans, pretty stores or promises. The things that create loyalty—principles, values, ideals—must flow down from the top and be seen walking around the back room, the hallways, the front office, the company picnic. Reichheld and Royce, writing a century apart, agree that employees who do not share your values cannot share your beliefs; if people do not share your beliefs, you are communicating in a vacuum, talking about goals and objectives that interest no one and will never come to fruition.

A little chicken sandwich company from Georgia made huge inroads in the fast-food industry with two simple but bold statements: pay a store manager half of the profit earned by his unit and close every store on Sunday. It’s no coincidence that manager turnover at Chick-Fil-A runs to about 5 percent annually. Five percent! Chick-Fil-A managers stay long enough and have a big enough stake in the P&L that they are tireless in discovering any wasted dollar, any overlooked source of new revenue. Contrast this with the manager at the pizza joint or rent-to-own store across the street who may be there a couple of years at most and spend those in constant search of the “home run.”

A $100 monthly cost-saving just doesn’t mean much, unless you work for Chick-Fil-A and you know that half of that $100 a month is yours, every month for an average of 14 years! If your business is suffering the effects of high employee turnover and a rapidly churning customer base, or you are just not having as much fun as you once did, I recommend you spend a few hours alone one evening with The Loyalty Effect. You won’t be lonely long.

Fractional Ownership
By Geoff Williams

The market for luxury items is taking a cue from the rent-to-own industry here was, we thought, a natural order to the universe. It’s difficult to imagine that anyone in the industry liked it, but nobody questioned that here and there certain groups and individuals attached a negative stigma to the notion of renting to own. Voss Graham, business consultant and author of The Three Games of Selling, put the rent-toown image problem bluntly: “It will take a media blitz to change the perceptions that people—including the middle class—have of the industry.

That image is the product is cheap and quality is low.”But there is a trend infiltrating the affluent and upper middle class societies. A trend that begs a couple of questions: Is the negative image of rent-to-own passé? In fact, are other consumer groups and companies actually starting to follow the path created by the rent-to-own industry? This trend is called fractional ownership. The idea is pretty simple, really.

Instead of buying a private jet, yacht or exotic car, wealthy people have instead been buying a part of their luxury item. So rather than owning an entire Mercedes-Benz CL 600 (with a retail price of about $120,000), they might lay claim to one-fifth of it: the car being at their disposal 73 days out of every year and the rest of the time with someone else. Which is perfectly reasonable, says author Robert Shemin, a multimillionaire and author of How Come That Idiot’s Rich and I’m Not? (Crown, March 2008). “I tell people that ownership and renting are purely psychological,” says Shemin. “People love to own things for piece of mind and there are certain assets that are a good investment.”

The good investment assets, however, are few and far between when it comes to keeping up with the Joneses. Fractional ownership goes beyond the enormous—and typically enormously depreciable—assets such as cars, yachts, jets and helicopters or even race horses. For example, Bag Borrow or Steal is a Seattle-based company that allows its customers to rent ladies’ luxury goods like Tiffany’s jewelry or designer handbags. Wish you could afford a $5,000 designer purse? No problem: pay a monthly fee, anywhere from $20 to $100 a month, and you can “own” handbags and jewelry until you’re tired of them—and then mail the product back and/or replace it with something new.

The company is a startup that investors believe will succeed. The company so far has raised more than $12 million. And there’s already competition from the online store, FromBagstoRiches.com, which tags itself as “the affordable alternative to buying designer handbags.” Whether it’s fractional ownership, renting handbags or whatever you want to call it, something different is in the air. Even some financial experts are seeing the wisdom in sometimes paying for access instead of going for complete ownership. Shemin says that “absolutely,” he can see how the concepts of fractional ownership and rent-to-own are becoming less distinguishable. “It’s all similar and people are becoming more aware of rent-toown.

It’s still fairly new. I mean, 30 or 40 years ago, you couldn’t rent to own.” Well, you probably could, but we know what he means. Rent-to-own stores could not be found in every neighborhood in the 1960s and 1970s as they are today and, if there were image problems during the 1980s and 1990s, the first decade of the 2000s is looking decidedly different as businesses creatively adapt to consumer needs and budgets and are borrowing concepts from each other. Yes, it sounds off-kilter, but rent-to-own has been co-opted by the mainstream. If the wealthy don’t want to “fractionally own” a car or a yacht and they don’t want to blow a wad of dough on the whole thing, they can join a membership club and “rent” the exotic cars and yachts.

Meanwhile, the rich, middle-class and poor all see the value in using Netflix, where you pay a monthly fee to “rent” whatever movies you want to watch. You keep the movies as long as you want—they’re yours—but you keep paying that fee. Or you trade the movies for something else. Either way, you’re continually paying a smaller monthly fee instead of spending the much higher purchase price right up front. Greg Tanner, franchise development director for Aaron’s Sales and Lease, certainly sees how his own industry and the fractional ownership industry seem to be approaching each other’s territories. “We used to be located in the back alleys,” says Tanner, “but we’ve seen our business increase to middle America, because we’ve positioned our stores right next to the Best Buys and Circuit Cities. We’re where people shop. Our philosophy is that lower-income people will shop up.

They’ll come to the mall, right? But middle America and above, they will not shop below or far below their income level. They’ll come to a point and stop. “We don’t even use the words ‘rent to own’ in our slogans any more,” says Tanner. “We’re just Aaron’s. You can pay cash, use Visa or MasterCard and do 90-dayssame- as-cash. We use the term ‘lease.’ We’ve gone completely away from the term ‘rent’ because, you know, they can bring it back anytime they want.” And Tanner notes that just like the women who fractionally own or rent purses, “when you buy, say, a widescreen TV from us and a few weeks later you think, ‘Well, shoot, I wish I had that one,’ you can send yours back to us and you can get a new one. It is,” says Tanner, “a shared ownership.”

But the general public will never see it the way Tanner does without educating the public, says Graham, who aside from writing about sales is also the CEO of the InnerActive Consulting Group in Cordova, Tennessee. Graham thinks the rent-to-own industry shouldn’t worry about advertising so much as changing the public’s perception. “If people actually read an ad, it’s for some factual information or a validation of an existing program,” says Graham. He feels that going after local newspapers, television and radio stations—something the RTO industry has often done when, for instance, becoming involved in community charities—is the way to change hearts and minds.

But how do you do that? If Graham were king of the rent-to-own industry for a day, he says that he would “focus on the small-business people first, the ones who work out of their homes, small offices, shared offices or executive suites. These people do not have the capital in most cases to invest in furniture and fixtures—yet can pay the monthly fee of a rental. Since some of these people will actually grow their business and have to hire more people and rent bigger spaces, they will require more furniture.” And how did Graham come to think this way?

Because, just as the affluent and middle classes have been, his own perception changed. In 1991, he and his wife, Robin, moved their business from the home to a suite of offices. “As a business advisor,” says Graham, “I had learned that furniture was a bad investment—since it would depreciate immediately after being purchased, like an automobile, and there would be little resale value. Using the rent-to-own process, we saved our cash, had some security knowing they would take everything back if our venture was not successful and still got nice, though not high-end, quality furniture that we are still using 16 years later.”

As more Voss Grahams experience those type of results and as more people rent or fractionally own everything from purses to Porsches, the feel-good mood toward renting to own seems to be marching toward the industry. And even if it doesn’t, maybe it doesn’t matter. As Shemin says of the relatively young rent-to-own industry, “As people become more educated and consumers become more sophisticated, the businesses get better.” In other words, fractional ownership and renting high luxury items on a short-term basis won’t hurt the rent-toown industry. It may even—if just fractionally—help.

Geoff Williams is a freelance writer based in Ohio. His e-mail address is gwilliams1@cinci.rr.com.