In the 1990s I worked with USWEST (now Qwest) Communications in a major effort to create better communications between management and union workers. At the outset, relations were hostile, distrustful, dysfunctional, and in many cases counterproductive. Management and the union, however, were seeking to form a mutually supportive partnership. But realizing even tiny steps toward that end seemed next to impossible. Our first task was to identify the “what’s in it for me” part of the assessment process. Our campaign— we dubbed it “Bridging the Gaps”—lasted about two years and shaped some of the material in this book. The key lesson was this: For this proposed partnership between management and the union to work, interdependence would be key. Having one group dominating the other would kill the relationship.
Management first had to find out what the union’s needs were. Through months of research—involving questionnaires, interviews, focus groups, feedback sessions, and so on—many needs were identified, clarified, and communicated. In the same way, union members learned more about the management side of the business—about dealing with economics, competition, regulation, and shareholders. Discovering what each party needed from the other was enlightening.
Finding the right partner takes time. Don’t be discouraged if a partner you thought would be ideal does not work out. Companies should interview at least three potential partners before selecting one. In a way, it’s a lot like dating.You don’t necessarily marry the first person you go out with. In business, you don’t want to form a partnership with the first potential partner you meet. Someone better suited to your needs may come along at any moment.
In the Bank of America/Exult case, the bank knew it wanted to outsource its human resource capabilities and Exult wanted to demonstrate to others that it could manage a business on that scale. But as they explored their partnership, they discovered they might benefit in other ways. For example, Exult manages the payroll for many of its clients. Those payroll services could be managed through Bank of America, providing both seamless service for Exult’s clients and additional business for the bank.
In the Explore Stage of Partnership Development, your main concern is finding out what a potential partner wants. You already know what you want because you’ve completed the Needs Assessment Tool. When you first contact a potential partner, make sure you share your information first. This will demonstrate your willingness to be open and direct. Make it clear that you’re looking for an equitable partner. This engenders openness and invites the other party to disclose information.
If this potential partner expresses an interest in the possibility of working together, ask them to explain what expertise they have, where they’ve been, and where they’d like to go. And make sure that you listen attentively to their answers. The point is to learn what they need and how you might fulfill that need. Stick to possibilities. Don’t ask for specific commitments or plans yet. If they’re still interested in working together after you’ve exchanged some information, explain the Partnership Continuum model. Explain how the model helps people communicate effectively and provides a blueprint for creating mutually beneficial partnerships. With this tool, you can see what information you need to give and get. At the same time, it will help your potential partner communicate more easily. It will put the discussion where it belongs: in the context of partnerships. To help you structure this discussion, ask your potential partner to complete the Partner Compatibility Analysis with you. While you’re getting information from your potential partner, you’re also providing information about yourself and where you want to go.
The next step is to evaluate the potential of each candidate on the list. Building a potential partner matrix for a small computer firm, like the one shown previously, can help organizations visualize how each prospect might satisfy their needs. In the example, the firm’s needs are to develop new products, expand its market, and secure new distribution outlets in order to stay competitive. Based on how each prospect might meet the listed strategic needs, the firm would probably want to take a closer look at PC Products and Nokomis as partnering candidates. After identifying these two candidates, it would then need to determine what it can offer to them.
If you’re going to sell your potential partner on the idea of partnering,you need to know what you have to offer. As with any sales transaction, if there’s no need, there’s no sale. People do buy things they don’t need, of course. But what happens after the sale? They return the product. They discount the transaction and never repeat it. The sales relationship is short-lived. If you want a good, strong partnership, it will pay you to bring your potential partners up to speed on the partnering process you are using to partner. You can do this by helping your potential partners identify their needs as well.
The importance of asset allocation, or deciding what percentage of a portfolio to devote to various asset classes, cannot be overstated. Especially equity and corporate bond investors spend enormous efforts on picking individual investments, while they spend relatively little time on deciding what types of stocks or bonds to buy into their funds. Numerous empirical studies have shown that a large part of money managers’ performance can be explained by asset allocation, not by their selection of individual stocks. Therefore it should be just the opposite. Investors should spend most of their time on overall asset selection and ignore individual investments for the most part. When a stock performs well, invariably stocks from the same asset classes follow in parallel. The primary goal should be to pick the right asset classes in order to outperform. Asset allocation is not easy and requires completely different skills than the selection of individual investments, but it is less detailed, and it rewards skilled investors generously.
Before 2001, credit played a minor role in the asset allocation of private as well as institutional investors. This is due to the fact that there was no easy and cost efficient way to replicate the performance of credit markets appropriately.
Derivative contracts, in particular credit-linked notes on corporate bond indices, have a variety of uses: to gain synthetic exposure, as an arbitrage tool, to effect overlay strategies and to invest cash balances efficiently. The growing popularity of JECI and Trac-X as well as the exchange traded funds on the iBoxx Euro Liquid Corporate Index and the Goldman Sachs USD InvesTop Corporate Bond Index demonstrate the rising sophistication of market participants in the credit markets. They have realized that using a benchmark index that also has a liquid derivative contract can be of great benefit to investors.
The index market is becoming increasingly competitive and commercial. With little differentiation in construction methodology, competition between index providers is focusing on brand. Nevertheless, investors have to keep in mind their intended usage, be that fund management, trading, advice or research.
More and more investors are beginning to focus on transaction costs, and in less liquid market segments also on market impact costs. Clearly, good liquidity is an important factor in reducing market impact. International investors in particular are increasingly looking for liquid benchmarks and securities. This is reflected in the large cap bias found in many of the newer indices and exchange traded funds that are often based on very focused indices like, for example, the iBoxx Euro Liquid Corporate Index.
Investors’ benchmarks, strategies and horizons change. Indeed the pace of change has accelerated in recent years, be it moves from pure government benchmarks to aggregate indices, from broad market to large cap benchmarks, or to indices that include issuer constraints. In these circumstances, institutional investors are becoming more focused on transition costs as they change their benchmarks. Index series that encompass a wide range of benchmarks and styles with similar methodologies have an advantage here.
Histories of indices will be used by investors and their consultants to formulate strategic allocation policies. Asset allocators and academics also have an interest in long data histories when building allocation models. The asset–liability modeling exercises that many pension funds and insurance companies now undertake on a regular basis to review strategic benchmarks, all tend to use historical volatilities and covariances that are derived directly from index histories. There may be some advantage to investors in using the same index for the ongoing fund management benchmark as that used in the prior modeling exercise.
Conflicts of interest can only damage the standing of an index. Suspicion surrounding the motives of interested parties is almost as bad. The involvement of investment banks in index compilation tends to create such suspicions, particularly around constituent review time. Most bond indices are proprietary indices that use trader pricing. Thus they are susceptible to be biased by the positioning of the trader. For short positions, for example, the trader has an interest in pricing the bond on the lower end of the market.
Even the absence of positions on the trading book can distort an index, because those bonds are not marked actively. Indicative prices are highly susceptile to be erroneous. Hence, indices that are owned by exchangesor rely on the pricing of more than one investment bank are more likely to be accepted as independent. Especially among institutional investors the iBoxx index family has attracted a lot of interest, because it relies on pricing information of seven investment houses.
Capitalization rate? I know you’re thinking this is starting to sound complicated; definitely third-year college accounting. Well before you close the book, allow me to explain. First, it sounds way more complicated than it is. In numerical terms, the capitalization rate is the net operating income divided bv the purchase price:
Capitalization Rate = Net Operating Income -T- Purchase Price
So now you’re thinking, “Ken, how can I calculate the capitalization rate when I don’t have a purchase price yet? That’s what I’m trying to figure out through this whole exercise after all. Don’t tell me algebra is involved!” No, algebra is not involved. This is actually really easy. The purchase price here is actually the purchase price trends for a comparable building in your market. So this very complicated sounding word is actually something you can get very easily from brokers, real estate agents, or even the pro forma document for the property. The people in the business—your team members—will either know the capitalization rate for your market or help you calculate it, and that’s all there is to it.
Keep in mind, at this point in the process your goal is to get an idea of the ongoing services and repairs as well as upgrades the building may need. Later in the process, you’ll go into lots more detail. This is the time to put rough numbers on paper and analyze if the cost of the needed repairs will still allow you to be profitable. There is a real balancing act between spending enough to get the place in shape and overspending. Again, your property management representative can help you determine many of these costs.
The goal throughout this whole exercise is to get a picture of where your expenses are and try to find ways to do things better, smarter, and for less money. Those increase your net income and increase your profitability. So what are the expenses? To answer that question, we’ll turn to the pro forma expense table. It shows the seller’s anticipated expenses for the coming year (the pro forma column) and the actual expenses for the prior year.
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