Perspectives Summer 2013

College of Business at the University of Illinois at Urbana-Champaign

YOU’VE GOT MAIL. OR DO YOU?

Summer 2013

Perspectives

I

’m an economist. And we economists don’t rely on theories or opinions as evidence of

a row, the number

[ CONTENTS ]

success or failure. We believe that you look to the market for data as proof.

So while opinions on the state of the Illinois economy and its impact on higher education

may not paint the brightest picture, the evidence in our College proves that a degree in

of applications to our

Business from ILLINOIS is a valuable commodity. This year, for the third year in a row, the number of applications to our College set an all-time record. And that’s strong market

College set an all-time

evidence that we’re doing things right at ILLINOIS. But that doesn’t mean we’re not looking at ways to be even better. In fact, we’re focused

record. And that’s strong market evidence that we’re doing things right at ILLINOIS.”

on enhancing the educational experience for our students in several ways. First, we’re creating online learning initiatives that are a complement to, not a substitute for, our traditional courses. The use of digital content strengthens our brick-and-mortar classroom offerings as well. We’re also committed to using the College brand to expand our international work. By building new relationships in countries like China, India, and Brazil we will expand educational opportunities for all our students. We also continue to develop our corporate contacts to grow our Executive education program, including our EMBA program in Chicago. And all three of these initiatives are enhanced by our commitment to attract and retain the best faculty, many of whom you see featured in this issue of Perspectives.

we’re continuing to do things right at ILLINOIS. Sincerely,

Josef and Margot Lakonishok Endowed Dean

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Is Home Delivery Forever?

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Be Super

What does the future hold for the United States Postal Service?

Take the steps to distinguish yourself from the competition.

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The Write Words The use of plain English impacts investors’ behavior.

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Footing the Bill Showrooming pits online retailers against brick-and-mortar stores.

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Wild Ride RFID technology knows no bounds.

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Quality Measures How do inspections affect quality control in manufacturing environments?

The Red, White, and Debt Blues What should we do about the debt ceiling?

DEAN Larry DeBrock MANAGING EDITORS Mary Kay Dailey Tracy McCabe EDITOR Cathy Lockman

SHORT TAKES

CONTRIBUTING WRITERS Tom Hanlon Cathy Lockman Doug McInnis PHOTOGRAPHERS Tricia Koning Thompson • McClellan Photography College of Business at the University of Illinois at Urbana-Champaign

Perspectives YOU’VE GOT MAIL. OR DO YOU?

DESIGNER Pat Mayer

ON THE COVER Declining revenues and an inflexible cost structure are an unprofitable combination. But that’s just what faces the U.S. Postal Service. Jaimi Goodfriend, adjunct lecturer in finance, takes “a look inside” the USPS business model and what it means for future mail delivery.

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IN-DEPTH

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Larry DeBrock

Summer 2013

[ MY ] PERSPECTIVE

For nearly 100 years, our College has been educating the best and the brightest. As an economist, I look at the success, loyalty, and generosity of our graduates as evidence that

SUMMER 2013

“For the third year in

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Intersections

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60-Second Profile

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History Lesson

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The Main Event

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Reality Check

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100 Words or Less

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The Reason Why

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Parting Shot

The University of Illinois at Urbana-Champaign is an equal opportunity, affirmative action institution.

Printed on recycled paper with soybean ink.

[ COvER STORy ]

USA

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2013

USA

2013

If this were a race, the United States Postal Service— the deliverers of “snail mail”—would be the tortoise.

Anyone you designate as their competitors— FedEx, UPS, the Internet—would be the hares.

As in the fable, the USPS is not in the lead.

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FOREV

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USA

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Is Home Delivery

FOREVER? 2

paid government employees, averaging about $83,000 per year. Their cost structure remains as inflexible as a mailbox. They have been saddled with prefunding their retirees’ health benefits by making annual payments of about $5.5 billion in a 10-year span.

And they are restricted in their ability to create new revenue streams by their own stepparent, the U.S. government.

Can the United States Postal Service survive? Can they even finish the race they are in?

RETURN TO SENDER “Their hands are tied,” says Jaimi Goodfriend, adjunct lecturer of finance and director of the Investment Banking Academy for the College of Business. “Other firms have a wide range of options to improve profitability, but the post office is severely limited in its flexibility. For example, most firms can cut costs by exiting unprofitable business lines. The post office loses money every time it delivers a letter, but they can’t cut that.

Further, they don’t get to merge like

Pe r s p e c t i ve s S U M M E R 2 0 1 3

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he postal service conjures up images of bulkiness and slowness. For good reason: They have 574,000 employees; they operate 260,000 vehicles (the largest fleet in the world, which in 2009 consumed 444 million gallons of gas at a cost of $1.1 billion); and in 2011 they delivered 177 billion pieces of mail.

They’ve been hit hard by their competition. Their revenues have declined sharply. Thanks to a strong union, they are among the highest-

3

FOR EVE R?

U.S. Postage 18¢

Legislation has required the USPS to pay $5.5 billion each year for 10 years to prefund retirees’ health benefits

More than 400 million gallons of gas are used each year to operate nearly 260,000 vehicles

There are 574,000 employees in the USPS, and the average salary is $83,000 per year

a FedEx and Kinko’s does to vertically integrate, cut costs, and diversify their revenue streams.”

A primary problem is their business structure, says Seung-Hyun Hong, associate professor of economics. “Their cost structure is inflexible, partly because of the universal postal service obligation that requires the USPS to provide services even in unprofitable areas.”

Hong notes that the USPS was given the postal monopoly to meet the universal service obligation, but that’s not enough these days because of declining revenues. “One solution to the current problem is to find other sources of revenues as foreign postal services have done when modernizing their services,” Hong says. “I don’t know if the USPS would be successful; that’s another story. But the problem is that’s not even possible at this moment. Their hands are tied in terms of both costs and revenues. Especially with the law enacted in 2006, the post office cannot do non-postal business anymore.”

In addition to the business structure problem, the 2006 Postal Accountability and Enhancement Act (PAEA) forced the USPS to prefund its future health care benefits to retirees—to the tune of about $5.5 billion per year through 2016.

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“They have this ridiculous debt burden due to government mandates that would bankrupt any business if you think about it,” Goodfriend says. “Historically, the post office was profitable, but it was forced to borrow to fund its obligations. Now it’s so steeped in debt

that all of its cash flow—and then some—is being used to repay it.

Without the [PAEA] in place, they would have been fine.”

Goodfriend points to other struggling companies who have been bailed out by their parent companies.

“But the USPS is funded by a very

“The problem is it’s a quasi-federal agency.

Everything is determined by Congress, and they have to follow what they say. They can’t run like a private business.”

Seung-Hyun Hong

broke parent,” she says. “They are largely restricted by the government with their business development.

The sustainable, door-to-door delivery service operates at a loss, so it’s not likely they can use that to fund growth. Management can’t ask mom and dad to improve things.”

Indeed, when the postal service announced earlier this year that it would reduce annual costs by about $2 billion by trimming Saturday delivery service, Congress mandated that they continue Saturday delivery.

“Stopping Saturday service would help a little bit, but not a lot,” says Hong. “The fundamental problems are still there with the declining revenues. It’s not going to change the trend.

“The problem is it’s a quasifederal agency,” Hong continues.

“Everything is determined by Congress, and they have to follow what they say. They can’t run like a private business.”

SIGNED, SEALED, DELIVERED? Hong notes that while the USPS earned more revenue in 2012 than UPS and FedEx ($65 billion to $53 billion to $43 billion, respectively), the rate of compensation to revenue tells the truer story. “The ratio of com-

pensation and benefits for current employees in the USPS is about 73 percent of their revenue,” he says.

“For UPS and FedEx, it is about 52 percent and 38 percent, respectively. It’s worse when including pension and benefits for retirees— then it’s about 94 percent for USPS. Of course, this is partly because of the universal service obligation that needs manpower to deliver mail everywhere, but it still suggests a serious problem facing the USPS.” Hong says the postal service peaked financially around 2006, but that the PAEA was only one reason for its decline. “The fundamental problem is that its revenues are determined by market forces, but its major costs related to compensation and benefits are determined by the federal government,” he says. “And the market has changed over time.

People are using the Internet for email and for online bill payments.

Revenues from single-piece firstclass mail deliveries have dropped from about $20 billion in 2000 to about $10 billion in 2012. But despite their efforts to reduce costs, the USPS does not have much flexibility in adjusting the main part of its costs, unlike its counterparts in the private sector,” Hong says.

The USPS delivers more than 177 billion pieces of mail each year and operates 31,000 offices

It is estimated that by discontinuing Saturday delivery the USPS could save $2 billion per year

that operates 31,000 post offices and has more than half a million employees.

GETTING THE STAMP OF APPROVAL

“They have this ridiculous amount of debt due to government mandates that would bankrupt any business.”

Jaimi Goodfriend “The cost structure is ruining the post office,” Goodfriend agrees.

“Most businesses would be able to reduce costs to survive. They need to have Congress step in and work on their cost structure.”

When the mandate of the PAEA ends in 2016, “it will ease the burden a little bit,” Hong says. “But the main problem is that if they keep doing the

same thing they are doing and don’t find new sources of revenues, their profit is going to decline. That’s pretty clear.”

In 2011 the postal service announced it would eliminate 28,000 jobs, closing 252 of its 461 processing centers (at its peak, it operated 673 processing facilities). But that’s a few drops in the bucket for an agency

So what would help the USPS? “There are two solutions,” Hong says. “You can go back to the original system, when they were a full government agency. It would still be a problem, but it would be part of a bigger problem. Another solution is to renounce the universal service obligation, and let everything become private and let the post office start new businesses. Of course, neither solution is ideal.”

For all of their problems, Goodfriend says, the USPS is still relevant.

“You have to get mail,” she says.

“And there are certain types of mail that cannot be emailed or replaced electronically. Door-to-door delivery must continue to exist. Bulk mail has to be mailed. There’s a place for their service. There’s a decreased need, but it’s still there.”

Hong agrees. “They will survive.

The government won’t let the USPS go bankrupt. They won’t disappear.

And, over time, when the problem becomes even more severe, they may come up with a better solution.”

Tom Hanlon

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Pe r s p e c t i ve s S U M M E R 2 0 1 3

remains as inflexible as a mailbox.

USA

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the highest-paid government employees. Their cost structure

44¢

36 cents

strong union, they are among

USA

declined sharply. Thanks to a

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competition. Their revenues have

USA

They’ve been hit hard by their

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BESUPER

UNLEASH THE POWER OF YOUR PERSONAL BRAND

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f Toyota was the only automobile manufacturer and McDonald’s was the only fast-food restaurant, there would be little reason for either of them to take the time and spend the money to establish themselves as a brand.

Likewise, if you were the only accounting graduate, marketing manager, or investment broker in your state, your city, or even on your block, you might not see a reason to do any self-promotion.

If there’s no competition, there’s no real incentive to differentiate yourself.

“In any situation where there’s a monopoly, there’s less of a focus on branding,” says Tiffany White, associate professor of business administration and Bruce and Anne Strohm faculty fellow. “However, when there is competition, you have to give people a reason to choose you. That’s true whether you’re talking about building a corporate brand and selling a product to a consumer or building a personal brand and selling yourself to an employer.”

Competition, it seems, is the mother of invention or, at least, of reinvention.

FLEX YOUR PROFESSIONAL MUSCLE Just what is a personal brand and how do you go about establishing it?

“It’s a set of skills and characteristics that distinguishes you,” says White. “It’s what’s true about you or what people believe to be

true about you, because perceptions are reality to stakeholders such as clients, recruiters, and employers.”

She suggests that you carefully consider these questions as you establish your brand image: (1) What is unique about me and the skills that I bring? (2) Are these attributes meaningful and valuable to employers? (3) How can I communicate their value to others?

“These questions give you a reason to think strategically about what you have to offer, at what price, and through what promotional means,” says White. “There’s an experience of being you that you must be able to communicate to others. You have to unpack the benefit for employers and educate them about how what you bring to the table will add value to their organization.”

White explains that the process is different depending on where you are in your work life cycle.

Young professionals, for instance, are establishing their brand with the choices they make inside and outside the workplace. They need to determine what they are going to stand for and how to tell that story to others. Those in mid-career have already made those decisions but might not have actively managed their brand or found a way to tell their story in a way that distinguishes them.

“Just like consumer brands are always examining their position, and repositioning when necessary, you need to be constantly evaluating, enhancing, and investing in your own brand. Sometimes, seasoned professionals can get comfortable in their wheelhouse, which can land them in a place

“There’s an experience of being you that you must be able to communicate to others.”

Tiffany White

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where the world has changed and they haven’t. And at the same time, there are competitors, new groups of employees, that can do the job more efficiently, effectively, and maybe creatively.”

White uses the example of Blockbuster, which found its niche and did little to enhance it. Along came Netflix, with home delivery, and Redbox, with 24/7 rental and return, and out went Blockbuster.

“You have to actively manage your brand to see what the competition is bringing to the party,” explains White. “It’s not just promotion. There’s a very introspective component to it as well. You have to assess what’s happening in your career space, what you can offer, what you’re going to emphasize, and even what new industry or skill you are willing to take on.”

And even if you haven’t deliberately built a brand, you have one, says White. So it’s better if you decide to take the responsibility for managing it; otherwise, it might get managed for you.

“For mid-career professionals, especially, branding is an important thought experiment that allows you to be strategic in your professional objectives, to consider where you want to go and how you want to get there. And in the event that you are already there, it allows you the chance to consider how you can maintain the position you have and enhance the brand image that got you there.”

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Cathy Lockman

Perspectives SUMMER 2013

[ MARKETING MATTERS ]

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[ CORPORATE STRATEGy ]

The Write Words readability guidelines and one that ignored those guidelines and was therefore harder to read. The two press releases were then shown to a group of test subjects drawn from an online pool.

If the press release contained favorable financial news and was

highly readable, the participants were more likely to say they would invest in the company than if the press release contained the same information but was harder to read. And if the press release contained unfavorable financial news, they were more likely to avoid in-

“[Less-sophisticated investors] feel that they can better rely on information that is easier to process. They don’t do this consciously.

And if you draw their attention to this, most revise their judgment. It’s like they realize they have reacted to the slick packaging of a more readable disclosure.”

Kristina Rennekamp

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vesting in the firm if the press release was easier to read than if it was not.

The research, published late last year in the Journal of Accounting Research, provides evidence that less-sophisticated investors can be influenced by language.

“They feel that they can better rely on information that’s easier to process,” Rennekamp says. “They don’t do this consciously. And if you draw their attention to this, most revise their judgment. It’s like they realize that they have reacted to the slick packaging of a more readable disclosure.”

Of course, many investors are more sophisticated and aren’t swayed by the packaging. They just want the facts. “Prior research shows these investors are less likely to rely exclusively on the narrative provided by the firm itself,” she says. “They know exactly what details they’re looking for and are more likely to go straight to the sections of disclosure documents that contain them.”

What does this mean for business? Rennekamp says corpora-

tions should be aware of these findings when they’re working on disclosures, particularly if they have a lot of less-sophisticated investors in their investor base.

“They need to be careful that they don’t simplify their disclosures so much that their target audience feels like they understand them when they don’t.”

STRAIGHT TALK Rennekamp’s work falls in the arena of investor psychology, a subunit of the field of behavioral economics. In recent decades, research in behavioral economics has forced a broad rethinking of classical economic theory, which held that participants in the marketplace acted rationally. But in the 1970s, researchers Daniel Kahneman and Amos Tversky began investigating marketplace behavior and found there was more at work than rational thought. Though their work initially received mixed reviews, their ideas caught on. In fact, Kahneman was co-recipient of the 2002 Nobel Prize in economics.

Rennekamp’s own interest in the field began while she served as a graduate assistant for a marketing professor at the University of Iowa. The professor’s work focused on consumer reactions to food labeling. In one test, the professor wanted to know whether consumers were more likely to buy a package that said hamburger was 80 percent lean than one labeled 20 percent fat.

As it turned out, 80 percent lean carried the day, even though both labels conveyed the same information. “I found this to be intriguing,” she says. “It seemed so cool that such small changes could affect people.”

When she began her own research as a Ph.D. student at Cornell’s Johnson Graduate School of Management, she focused on investor reaction to language. She’s now working on a second paper, which tests investor willingness to invest in a foreign company when information is presented in concrete terms and when it is not. For instance, one set of test subjects

might get documents that highlight abstract descriptions of corporate assets, while a second group might get documents in which more concrete descriptions are highlighted—one share of stock, for instance.

Rennekamp and her research colleagues found test subjects were more willing to invest in foreign corporations that highlighted their financial information in concrete terms than those that did not. Rennekamp is working with Brooke Elliott, professor of accountancy at the College of Business, and Brian White, assistant professor of accounting at the University of Texas–Austin.

Rennekamp’s work has made her more than a little cautious when it comes to her own investments. “I do some of my own investment research,” she says. “But given that I also do research into the psychology of investing, I have a pretty good understanding of my own limitations. So mostly I invest in mutual funds where the research is done for you.”

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Doug McInnis

CUT TO THE CHASE Financial disclosures are written to inform investors, but conveying that information in a way that also protects the corporation often adds legal jargon and complicated construction.

Kristina Rennekamp recommends the following tips for writing clearly: • Use active voice rather than passive • Use more personal pronouns • Avoid complex words • Eliminate ambiguity • Avoid repetition • Define terms • Use short sentences • Use bullet points and white space in formatting • Choose easy-to-read fonts for your publication And above all, remember your audience. Write with an intelligent, interested reader in mind, but one who isn’t necessarily familiar with your specific industry’s legal jargon and technical terms.

Pe r s p e c t i ve s S U M M E R 2 0 1 3

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ifteen years ago, the Securities and Exchange Commission told corporations they should use plain English in their financial disclosures whenever possible. They even published A Plain English Handbook to help them.

It has 77 pages.

Communicating complicated financial information in “plain” English may not be simple, but, simply put, readability plays an important role in how investors perceive the information they receive from corporations.

A new study from the College of Business bears this out.

Research conducted by Kristina Rennekamp, assistant professor of accountancy, found that more readable disclosures produce stronger positive reactions from less-sophisticated investors when the news is good and stronger negative reactions when the news is bad.

Rennekamp created a fictitious press release in two formats, one that conformed to the SEC’s

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[ E-COMMERCE ]

“E-commerce gives customers more power because of the choices they have. And customer power makes retailers vulnerable.

Retailers have to be willing to experiment, or they will pay the price.”

FOOTING THE BILL WHO PAYS THE PRICE FOR ONLINE RETAIL?

Ramanath Subramanyam

T

“Traditionally information technology has been about infrastructure rather than value creation,” says Michael J. Shaw, professor of business administration and Leonard C. and Mary Lou Hoeft Chair of Information Systems. “But IT can be used to develop customer experience. It is really all about getting the customer engaged and about developing a strong relationship and loyalty.

Showrooming is an example of not

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having that loyalty.” That loyalty, he adds, comes from the synergy created between the physical and digital channels, resulting in a positive customer experience.

Customer experience is vital to retailers, Shaw says, because “when you develop loyalty with customers, when they enjoy the ambience, they are more willing to make the purchase.”

Perspectives SUMMER 2013

he Digital Age has changed the way we live—and shop—forever.

One of those changes is evident in showrooming, where consumers examine merchandise in brick-and-mortar stores and then shop online for lower prices. Showrooming highlights the battle between retail and e-tail, and some experts believe that many retailers who stand pat won’t be standing for long.

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“Information technology can be used to develop customer experience. It is really about getting the customer engaged and about developing a strong relationship and loyalty.”

Michael Shaw

SHOWROOMING RISKS

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a limited number of retailers, such as Nordstrom, Sephora, and Nike, which aim to “make the customer’s visit the best possible experience when they come there,” including providing in-store mobile conveniences that contribute to the buying experience.

“Showrooming creates the potential for interesting interactions between brick-and-mortar channels and the Internet channel,” says Shaw. “The emergence of the mobile channel complicates the issue, but it also has the potential to provide creative solutions for the consumer and the retailer.” and-mortar retailers, like Best Buy and Target, for instance, have gone to the policy of matching the prices of major online competitors. They allow customers to bring up the online price on their mobile devices and match it on the spot, so customers can walk out with their products and the retailer can ring up the sales.

Ramanath Subramanyam, associate professor of business administration, says that physical retailers that acknowledge and proactively

react to what is being done in the digital world are the ones who will survive. Those that embrace the digital will do even better than that, he says; they’ll flourish.

“Many firms don’t understand that part of the consumer’s experience is likely to be completed online,” says Subramanyam. “The problem has been retailers’ hesitancy to change the way they operate in response. But, what if the retailer embraces the strengths of the digital experience?” He points to

Category

Examples of Products

Showrooming Risk Level

Commodity

Hardware, paper products, office supplies

Low risk

Semi-commodity

Electronics, computers, books, DVDs, toys

High risk

Touch and feel (standardized)

Most apparel, cars

Moderate to high risk

Touch and feel (personalized)

Houses, high-end designer fashion

Moderate risk

SHOW ME THE PRODUCTS Where do consumers go when they want to look at products before they buy? Which retailers are most frequented by showroomers?

A recent survey of nearly 15,000 U.S. consumers was conducted by Placed, a firm specializing in measuring and analyzing consumer location data. The study found that the top ten retailers most at risk of showrooming are: • Bed Bath & Beyond (with an index score of 127, meaning that showroomers are 27% more likely to visit the home goods retailer than the average consumer) • PetSmart (125) • Toys“R”Us (121) • Best Buy (120) • Sears (119) • Barnes & Noble (118) • Kohl’s (117) • Target (115) • Costco (114) • JCPenney (114)

RETAIL SOLUTIONS Shaw points to one retailer, Uniqlo, who uses LCD mirrors to allow customers to see a product— a jacket, say—in any color the store has without the customer needing to try on a new jacket. Using a tablet, a clerk can simply click on a color choice and the customer can see her- or himself in that color in the LCD mirror—or, as one manufacturer of the mirrors calls it, the “Magic Mirror.” Through the tablet, the clerk can take pictures of the person wearing whatever colors the person wants, and the person can then email the photos to others or to her- or himself or share them on Facebook.

Customers who experience such service, Shaw says, will be much less likely to showroom than those who merely browse the racks.

“I like to look at it as a way to use IT innovation,” Shaw says. “It demonstrates the blurring between the physical and digital channels.

The solution is to create synergy between the two channels.”

Subramanyam adds, “Traditionally, the view has been that the online and brick-and-mortar channels are independent from each other, but there are many excellent examples of firms that merge those two into a much better overall customer experience.”

Restoration Hardware, a home furnishings retailer, was experiencing financial duress, Subramanyam says, until it embraced the digital channel, showcasing what it had.

“Consumers don’t care whether the product comes from the store or online,” he says. “They gave their

customers a window into the online world, showing them the product they were interested in and other similar products as well.

They didn’t treat the online channel as separate from the physical one.”

DUKING IT OUT While some retailers are looking to combat the effects of showrooming on their bottom line by price matching or embracing unique IT tools to improve the customer experience, others are taking a much different tactic.

Celiac Supplies, an Australian retailer that specializes in gluten-

free groceries, recently announced that they will charge customers $5 for in-store browsing, with the fee being refunded when they make a purchase in the store. While the policy has sparked some Internet outrage from consumers, the store defends the new practice as necessary to compensate for the time employees spend explaining products to customers and to encourage serious shoppers and discourage showroomers.

While the jury is still out on whether other retailers will pick up on this strategy, Subramanyam believes that such a practice is more likely “to engender customer dis-

trust and make it difficult to gain new customers.”

A NEW RELATIONSHIP BETWEEN CUSTOMERS AND RETAILERS The access to digital channels has not only changed the way we shop; it has changed the relationship between customers and retailers, says Subramanyam. “The conventional belief has been that the retailer knows more about products than the customer, but that’s often completely switched around these days,” he says. “Customers have so many different ways and means to learn about products.

They have infinite options, and if stores don’t rethink how they can tap into the customers’ mindsets, they are in trouble.”

To stay out of trouble, Shaw says, retailers need to develop complementary products and services, creating an environment where mobile devices or tablets and in-store kiosks are used for searches so that people enjoy the whole shopping experience. “Retailers should focus on creating the customer experience to attract customers and make the experience enjoyable so at the end of the process they are successful,” he says.

“E-commerce gives customers more power because of the choices they have,” says Subramanyam.

“And customer power makes retailers vulnerable. Retailers have to be willing to experiment, or they will pay the price.”

Tom Hanlon

•

Perspectives SUMMER 2013

As Shaw notes in the chart below, there are four categories of retailers that have varying risk levels for showrooming. The first category, commodity, is not at risk because its business is already primarily conducted online. “The semi-commodity category is the hardest hit by showrooming,” Shaw says. “At the physical, or brick-andmortar, channel, it’s hard to add any more value to the product.”

Consumers shopping for semicommodity goods are especially price sensitive. Many come into a retailer armed with their smartphones, examining merchandise in person while searching the Internet for the lowest prices for the same product. Some may even make their online purchases right from their devices while standing in the retailer’s sales aisle.

While this behavior can mean big business for e-retailers, like Amazon.com, it obviously is a big bust for the retailers that showroomers frequent, like Bed Bath & Beyond, PetSmart, and Toys“R”Us, which have the overhead of the physical locations, the products, and the employees. In response, brick-

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[ INTERSECTIONS ] THE PEOPLE Kevin Jackson, associate professor of accountancy, his ACCy 301 students, and the local non-profit community THE IDEA To offer a new way to approach the teaching of professional and corporate responsibility THE RESULTS Provides students with an opportunity to expand their professional skill set and offers valuable consulting services to local non-profit organizations

ONE GOOD IDEA LEADS TO ANOTHER

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art and environmental education, providing a donation center for quality materials, and financially supporting the efforts of the CU Schools Foundation.

Jackson explains that while volunteering himself with the College’s Social Entrepreneurship Institute, he met many local non-profit leaders, like those from The I.D.E.A. Store, who were looking for exposure to business ideas, processes, and methods. “I thought that it would be a great match to provide non-profits with objective, fresh ideas and to give my students an opportunity to grow their business skills while providing a benefit to the community.”

For Patricia Guerra, a senior from South Holland, Illinois, the ACCy 301 service-learning project certainly fulfilled those objectives—and more.

“First of all, I didn’t even know that a place like The I.D.E.A. Store existed.

It has a very unique mission and approach, and it opened my eyes to how a non-profit can be innovative in serving its community. The consulting work we did was a great experience for building our skills, and for me the exposure to the store and its operation was beneficial, too,” she says.

Tyler Spitz, a junior from Batavia, also worked on The I.D.E.A. Store project. “The balanced scorecard analysis was an important accounting application to learn and performing it for a non-profit was especially valuable. It makes you look at things a little differently. Just because it’s a

non-profit doesn’t mean it shouldn’t run like a profitable business. Organizations like The I.D.E.A. Store pay a different kind of dividend by reinvesting their efforts in the community to make it better.”

Spitz and Guerra’s group focused their project on measuring the organization’s performance in terms of customer base, advertising, revenue, pricing, and points of differentiation.

They presented recommendations to the store’s management, including suggestions for a presence on Pinterest, posting projects made with materials available at The I.D.E.A. Store, and possible sales of school supplies at the beginning of each semester at locations on campus as a way to offer affordable supplies to students and promote the store to that population.

Gail Rost, executive director of the CU Schools Foundation and cofounder of The I.D.E.A. Store, says the partnership with Business students is a valuable one. “As a small non-profit, we have the challenge of demonstrating to the community that we are accountable to our mission and at the same time are mindful of our bottom line. With an earned-income enterprise such as The I.D.E.A. Store, we are exploring a new concept of revenue stream. The support from Kevin’s class not only helped us gain extremely useful conceptual and applicable information, it helped us with exposure to the community and student perspectives and to build important relationships.”

DIFFERENCE MAKERS Jackson says feedback he’s received from many non-profits show the students’ work makes a difference. “Some organizations have our students present their analysis and recommendations to their board of directors. Other times, students have gone back to the organization outside of the project to volunteer because they see a need and know they can fill it.”

And then there’s the process itself, which has value as a teaching tool. “The environments the students work in for these projects are ambiguous ones, where it’s not as important for them to know the right answers as it is to ask the right questions,” says Jackson. “It’s very valuable for them to interact with an organization in a way that allows them to exercise their critical-thinking skills and their professionalism. To have success in today’s business landscape and in accounting, this is more and more important. Students have to learn more than just the ‘rules’ because those are constantly changing.

They need to know how to think critically, how to navigate ambiguity, and what it means to be a professional and a contributor to society. The ILLINOIS accounting curriculum is unique in that we focus on providing opportunities for our students to expand their skill set in those ways.” • Cathy Lockman

Collaboration at The I.D.E.A. Store. From left to right: Gail Rost, executive director of the Champaign-Urbana Schools Foundation; Kevin Jackson, associate professor of accountancy; and Patricia Guerra, senior in accountancy

Pe r s p e c t i ve s S U M M E R 2 0 1 3

W

hen Kevin Jackson began teaching Accountancy 301, he had an idea.

His class would not only introduce students to measurement and reporting, it would provide a servicelearning component.

“My goal is to have students serve as consultants with non-profits as a way to learn how to navigate ambiguous settings and also to develop an appreciation for being a contributor to one’s community,” says Jackson, an associate professor and PricewaterhouseCoopers LLP faculty fellow. He explains that the idea was an outgrowth of the College’s emphasis on teaching students about professional and corporate responsibility.

“There are two sides to this concept of responsibility—the actions you shouldn’t take, like giving false information or taking advantage of a client or a situation, and the actions you should take. In this class, we make the case for those good actions that are at the heart of a strong corporate responsibility philosophy.”

Working with organizations like The I.D.E.A. Store in Champaign makes that case. An initiative of the Champaign-Urbana Schools Foundation, The I.D.E.A. Store is a retail shop that collects and resells items destined for the landfill, such as fabric, paper, office supplies, jewelry, magnets, corks, even prescription bottles, so they can be practically and creatively reused. The I.D.E.A. Store serves the community by supporting

15

[ 60-SECOND PROFILE ]

100,000

1,500

5,000,000

The number of students he’s worked with during his association with the University

The number of projects completed for companies across the country and around the world

by Illinois Business Consulting, a program he founded in 1996 in the College of Business

The monetary value of the grant he helped secure from the Kauffman Foundation to establish the Academy for Entrepreneurial Leadership in 2004

51 How many times he’s visited China since 1978; Paul began working as an assistant director of the Midwest Universities Consortium for International Activities project in China in 1967

15,300 The number of steps he took every day for 9 days climbing Mount Kilimanjaro in 2011; he is the oldest American to accomplish this feat and is preparing for two additional climbs as part of a Mayo Clinic study on hypoxia

11

The number of times he’s seen Billy Elliot; he has a fondness for the musical because Karolyn, his wife of 54 years, was a ballet dancer, his father was a coal miner, and his grandson, Paul III, auditioned for the show

105,000 How many miles he’s logged since he began running more than 35 years ago

20,855 The number of days he’s been a proud Illini; Paul enrolled in the University in 1956 and earned his bachelor’s, master’s, and Ph.D. in economics from ILLINOIS

16

FOR

E NTREPRENEURIAL L EADERSHIP

In 2012, 492 guests attended his 80th birthday party in Italy; the celebration included 9,000 gelato cones and a Chicago-based orchestra that played the ILLINOIS fight song

Pe r s p e c t i ve s S U M M E R 2 0 1 3

Paul Magelli

S ENIOR D IRECTOR , A CADEMY

492 & 9,000

17

HISTORy LESSON

SIGN OF THE TIMES

v

irtual bulletin boards, like these in BIF, are a sign of the times, a new

and engaging way to keep students up to date on what’s going on in the College.

But there have always been lots of ways to post information around

campus. Announcements of upcoming events have been written in chalk on the Quad sidewalks for decades. Handwritten fliers with detachable phone numbers have been taped to bulletin boards in every University building for years. Sign, sign, everywhere a sign. Sometimes there were even rooms of them, like you see here, waiting to be posted.

This collection of official and handmade placards was used during class registration in the Armory in the 1980s. Those were the days, as were the decades before, when you got in line, not online, to sign up for each class, each semester. And while you navigated the fences and tables set up in the Armory, sional Frisbee flying by could be entertaining. Sometimes the wait ended before you got to the front of the line, when another sign reading “course closed” was posted. That’s when you had to flip open the large course timetable you were carrying to find a new class that fit your schedule. Then the scramble was on to find a new line.

In the late 1970s, registration by mail reduced some of the chaos in the Armory, and in 1982 the use of personal computers by staff members cut down on time in line as well as the volume of paperwork. Online registration began in 1995, and the Armory signs were retired for good.

18

Perspectives SUMMER 2013

you had no smartphone technology to help pass the time, although the occa-

19

[INFORMATION TECHNOLOGy]

Wild Ride

Imagine this: You enter the gates at Disney World with a wave of your wrist, and with

This idea is far from imaginary.

In fact, the Disney MagicBand bracelet, complete with built-in radio frequency identification (RFID) technology, is a technological initiative that was announced earlier this year, with rollout expected in the coming months.

Though not yet a reality, this same RFID technology could also allow you to walk into a grocery store, place several items in your coat pockets, and casually walk out of the store, not stopping by a checkout lane to pay. And the security guard won’t stop you either.

That’s because you wouldn’t be shoplifting. You would have paid for your groceries through an RFID reader that, when you walked past it, read every item in your possession, read your credit card, and charged your card.

“That might seem like science fiction right now,” says Fataneh Taghaboni-Dutta, “but that future is not so far away. I think in five or six years we’ll see this.”

Taghaboni-Dutta, a clinical professor of business administration, has a keen interest in RFID and its impact on the supply chain. Simply put, RFID uses radio waves to identify people and objects carrying encoded microchips, and its uses and applications are nearly endless.

For example, RFID is used in passports to track travel and cut down on people gaining access to countries by fraudulent means; in

hospitals to track patients and medicines and improve the accuracy of care; in vehicles using E-Z Pass programs for toll roads; in warehouses and refrigerated trucks to alert employees when temperatures are too high or too low; in pets to find them when they are lost; and in retail stores to track inventory.

And that, Taghaboni-Dutta assures, is just the tip of the iceberg.

“RFID is everywhere,” she says. “It has exploded.”

And the market for RFID transporters, readers, software, and services is expected to continue its healthy growth. From 2012 to 2017 forecasters predict it will generate

$70.5 billion, reflecting an annual growth rate of 17 percent.

THE BLOSSOMING OF RFID RFID was first used in the 1960s by the military to track vehicles and shipments, but it came into widespread use after two events: 9/11, when the Department of Defense wanted to improve the tracking of shipments that came into the country, and in 2003, when Walmart demanded that its top 100 suppliers tag their boxes. “This greatly reduced Walmart’s cost of their supply chain,” Taghaboni-Dutta says.

“RFID allows you to know exactly what you have in your store at all

times,” she continues. “One of the biggest costs is managing your inventory to have the right amount of the right item at the right time.” RFID is one technology that could help companies achieve that, she says.

And it can both save you money and help you sell more products.

“If I come to your store three days before Christmas and you don’t have an item, I might leave,” she explains. “But if you can tell me it’s in the truck and you know exactly where the truck is and when it will get here, then I might come back.”

The rest of the savings, she adds, is logistics. “How does it come to me, how do I order, how much do I order, when do I order, all of that inventory information is much better made if I have real, timely data. RFID enables that. And the savings are huge.”

How huge? Some have predicted that Walmart can save more than $8 billion per year by using RFID technology in its supply chain.

CONCERNS ABOUT RFID USAGE

“RFID is here to stay. And we’re only bound by our imagination in how we can use it.”

Fataneh Taghaboni-Dutta

But not everyone is happy that RFID is in such widespread use.

Many are uncomfortable with the Big Brother–type of surveillance and control that RFID can be used for.

For example, some states require “enhanced driver’s licenses” that use RFID chips in them. One use of the chips is to allow officers to scan an entire vehicle from up to 30 feet away to identify the occupants—

particularly useful in border situations. But because of the privacy issues this raises, many states have shied away from such a law.

In fact, many citizens have raised concerns about RFID privacy issues, both personal and commercial.

“Businesses are concerned about industrial espionage,” TaghaboniDutta says. “They are worried a competitor will hack into their RFID and glean proprietary information.”

To that end, she says, researchers are “constantly working on programming tags so the tags can only respond to interrogating in a certain way. In lay terms, they are building firewalls to determine what is a legitimate reader and what is not a legitimate reader.”

Because the technology is ever evolving, some people will find exposed areas of weakness, TaghaboniDutta says, prompting others to provide innovations to overcome those weaknesses.

In the meantime, discussions about the concerns surrounding RFID come and go, TaghaboniDutta says. “People get used to the idea and the conveniences it brings and they forget about the privacy issues,” she says.

“But one thing is for sure: RFID is here to stay. And we’re only bound by our imagination in how we can use it.”

RFID BASICS • •

•

Tom Hanlon • •

20

An RFID tag can be as small as a grain of sand. They can be embedded in paper, sewn in the seams of clothing, or placed just about anywhere else. They can be washed.

RFID tags store a unique serial number and other data that can be read by readers anywhere from a few to a hundred meters away. Tags can be passive, meaning they must be activated by a transceiver signal; or they can be active, meaning they are battery-powered and have both reading and writing capabilities.

Passive tags are cheaper and smaller. Such tags are used in pets and in retail items. Active tags are used for E-Z Pass systems, for truck refrigeration systems, and warehouses.

Tags can be read whether they are covered or not, and hundreds of tags can be read at once.

Perspectives SUMMER 2013

that same wave you can book guaranteed ride times for your favorite attractions and shows, reserve parade and fireworks viewing spots, purchase food and merchandise, and even unlock the door to your hotel room. All that convenience without the wait—and also without keys, money, or credit cards ever changing hands.

21

[ THE MAIN EvENT ]

A THOUSAND WAyS TO NETWORK

For Viswanathan, it’s a way to begin to develop global citizens? and to fulfill what he considers his “larger purpose with teaching at ILLINOIS by creating early and later integrative experiences at both graduate and undergraduate levels on the

I

ulty, and staff of the College of

Charles E. Finn & Associates, was

He praised the College for its con-

Business gathered to celebrate

presented with the Alumni Appreci-

tinued commitment to excellence

their Illini pride at the College of

ation Award, and Larry Field ‘61,

and encouraged the attendees to

from keynote speaker Pamela

Business Alumni Association Annual

chief executive officer of Field

share their Illini pride by supporting

Strobel ‘74, ‘77, a member of the

n April, nearly 1,000 alumni, fac-

Charles Finn ‘55, the owner of

chair of the Dean’s Business Council.

rich experiences he had at the

Plan to attend the 54th annual Spring Luncheon next year, and in the meantime

University.

mark your calendars for these upcoming alumni events:

In addition, attendees heard

August 22, 2013 – New Alumni Welcome Happy Hour September 9, 2013 – Fall Finale Golf Outing co-sponsored by the Dean’s Business Council and College of Business Alumni Association

Spring Luncheon in Chicago. The

Holdings, was the recipient of the

the College’s efforts. Field attributed

University of Illinois Board of

September 12, 2013 – MBA Speed Networking in Chicago

event, held at the Hyatt Regency,

Distinguished Alumnus Award.

his success in business to his educa-

Trustees and retired executive vice

October 26, 2013 – Homecoming on campus

provided alumni with opportunities

Finn acknowledged the faculty who

tion at ILLINOIS and the work ethic

president of Exelon, and Dean Larry

to network, to share College stories

guided him during his time as a mar-

he inherited from his father. He

DeBrock.

and experiences, and to honor

keting student and those he worked

expressed gratitude for the prepara-

distinguished faculty and alumni.

with more recently in his service as

tion the College provided and the

For more information on upcoming College events, visit www.business.illinois.edu/alumni.

From top to bottom: Barbara Banks-Pryor, '85; Charles Finn '55, (left) and Warren Stippich '90 (right); Larry Field '61 (left) and Jeff Golman '77 (right); Pam Strobel and family 22

23

[ MANUFACTURING ]

Quality Measures “What we found was that quality almost seemed to depend on surprise inspections.

If you had another surprise inspection relatively quickly after the first, then there was no deterioration in quality.”

W

hen you buy a prescription drug, you assume that what you see on the label is what you’ll get in the bottle.

But if the manufacturer doesn’t have strong quality control measures, your assumption could be faulty. Even more importantly, the repercussions could be very serious.

Quality control in any manufacturing process is important, but in the drug business it’s vital. If a drug is made or packaged incorrectly, the consequences can range from ineffectiveness to actual harm. That’s why having solid procedures in place and a commitment to quality control is essential in this environment, says Gopesh Anand, assistant professor of business administration.

According to a study co-authored

by Anand, there are certain circumstances beyond the manufacturing process that impact quality control in the drug business. And one of those is the incidence of inspections by the Federal Food and Drug Administration.

“Drug manufacturers tend to adhere to the strict production routines

24

needed for consistent quality immediately after their factories are inspected by the Food and Drug Administration,” says Anand. “But then things often begin to slide.”

The tendency to let routines deteriorate is widespread, he says, and the deterioration tends to continue until the next inspection.

“We had expected the drug companies to behave very responsibly,” says Anand. “What we found was that

quality almost seemed to depend on surprise inspections. If you had another surprise inspection relatively quickly after the first, then there was no deterioration in quality.”

However, there is variance in how well companies stick to routines. “While some companies depend on FDA inspections to get them back in line, others adhere to routines and don’t allow quality control to slip between inspections,”

says Anand. “This suggests that companies in the latter group had internal controls that kept quality lapses from happening.”

The study, which covered 13 years, was based on inspection reports of U.S. and foreign plants that fall under the Food and Drug Administration’s jurisdiction. The reports were obtained through the federal Freedom of Information Act. John Gray of the Ohio State University and Enno Siemsen of the University of Minnesota joined Anand in conducting the study “Decay, Shock, and Renewal: Operational Routines and Process Entropy in the Pharmaceutical Industry,” which was published in the journal Organization Science.

GETTING PRODUCTS RIGHT ON THE FIRST TRY Anand learned firsthand the value of routines during the nine years he owned a manufacturing plant in Mumbai, India. The company made steel and leather watchbands for the replacement market.

Although the product was relatively

simple to make, strict adherence to routines was nonetheless necessary: (1) to ensure quality and (2) to protect the bottom line.

“Failure to meet timelines throws off delivery schedules further down the supply chain,” says Anand.

While this may be more of an issue for manufacturers who make parts for other products than for drug manufacturers, it’s a quality issue that definitely impacts the bottom line. “This is becoming more and more important as we outsource even small parts all over the world and then bring them together,” he says. “If a part is late or defective, it throws off the final assembly.”

Anand explains that companies can’t afford the luxury of maintaining large inventories because of the interest cost of financing them. “So it’s important for routines to be kept absolutely tight so you can get good products on the first try,” he says.

“When there is no extra inventory, defective product leads to shortfalls and delays that get passed on.”

The stakes are particularly high in the prescription drug business.

“As a customer, you have no idea whether the product is good or bad,” says Anand. “Even the doctor doesn’t know. You absolutely depend on what’s written on the bottle being inside.” When it’s not, the consequences for patients can be dire.

For example, improperly made drugs from a compounding pharmacy in Massachusetts caused a meningitis outbreak in October 2012 that left 50 people dead and more than 700 ill. In another case, the Food and Drug Administration fined GlaxoSmithKline $750 million in 2010 for quality control problems that may have impacted the efficacy of some of its drugs. The fine stemmed from the faulty manufacturing of anti-depressant, antibiotic, and diabetes drugs. In some cases, anti-depressant pills split in two, leaving one-half without any medicine and the other without a buffering agent, The New York Times reported. In addition, it was also reported that the company could not guarantee the potency of one component of its diabetes drug.

DO NOT DISTURB Mergers represent a particular problem for the industry, the study found. Mergers join two companies that are roughly equals. Once the merger takes place, managers of the merged companies begin jostling for power. “That adds a lot more chaos,” says Anand. “And that’s why there’s deterioration in manufacturing routines immediately after the merger.”

Acquisitions often provide different results, the study found. Unlike mergers, quality control actually tends to improve when one drug company buys another. That’s because “the stronger company is able to force its way of working on its acquisition,” says Anand. “So there doesn’t seem to be much upheaval from the change in ownership.

Therefore, there is less disruption in routines.”

INSPECTION PROTECTION Anand says there are additional ways to ensure product quality in manufacturing. The first is to spend money on prevention in order to get

the product properly made in the first place. “You spend a lot up front but save a lot later,” says Anand.

Internal process and product inspections come next. “If you cannot catch problems with flawless routines, then maybe you can catch them with inspections,” he says.

When inspections are less than 100 percent effective, companies can recheck the product just before it leaves the factory.

The alternative is to let poorly made drugs reach the market. The price of that may be steep indeed— coming in the form of lawsuits, fines, and product recalls, for instance.

“This can severely damage the reputation of the company, which can have significant implications for the financial side of the business, including impacting the stock price,” says Anand. “These are all strong incentives to make quality control a top priority.”

Doug McInnis

•

Perspectives SUMMER 2013

Gopesh Anand

25

[ REALITy CHECK ]

The Reality

E

arlier this year, yahoo! CEO Marissa Mayer sparked a debate across the country when she announced an end to telecommuting for company employees. With yahoo! struggling to be competitive, Mayer says she issued this directive as a way to bring all hands on deck. But many, inside the company and out, saw it as a blow for workplace flexibility.

According to Fortune magazine, the telecommuting ban at yahoo! impacts only about 200 of the company’s 12,000 employees. But across the country, the number of telecommuters is significant.

The 2010 World at Work Telework Survey estimated that more than 17 million Americans work from home at least one day per month.

Why do companies offer this arrangement and what do employees gain from it? Research conducted by Ravi Gajendran, assistant professor of business administration, suggests that the benefits for the employee include improved autonomy, job satisfaction and performance, and reduced stress and work-family conflict. “Employees who have a little more autonomy are more likely to be satisfied with the balance between their work life and family life, and that translates into modest benefits for the organization,” says Gajendran.

“Plus, there is no major downside to the arrangement.”

S

o does a ban on telecommuting from a company like yahoo! signify the end of this flexible arrangement for the millions of Americans who work this way?

Gajendran believes that’s not likely.

“I don’t see telecommuting being eliminated by companies across the board,” he says. “The benefits of this arrangement are modest, but they are numerous.”

A ban on telecommuting may be more of a strategy for companies in a crisis, Gajendran explains. “The benefits of urgency and solidarity symbolized by people showing up to work possibly outweigh the costs of potential turnover among the likely minority of employees who telecommute. In a crisis, bits and bytes transmitted over wires are unlikely to create the sense of urgency and strong organizational identity required to pull together. Showing up to work is a test of employee commitment for an organization like yahoo!, which is in the midst of a do-or-die struggle.”

Fortunately, for workers and employers, most companies are not in this urgent position, which is why Gajendran believes telecommuting is here to stay. But, he explains, working from home part-time rather than full-time may be the most beneficial for everyone.

“There is evidence that low-intensity telecommuting, which we consider less than 2.5 days per week, may be a more effective strategy overall than high-intensity telecommuting. When employees telecommute only one or two days a week, they still have ample opportunities for rich, face-to-face interactions with their in-office colleagues during the rest of the week. This allows them to create strong relationships with their teammates based on trust and friendship. Research suggests that effective electronic communication depends on a solid foundation of rich face-toface interaction.”

Despite Mayer’s edict on telecommuting, she may actually agree with Gajendran.

In explaining her decision, she told Fortune magazine: “People are more productive when they’re alone, but they’re more collaborative and innovative when they’re together. Some of the best ideas come from pulling two different ideas together.”

•

Cathy Lockman

Assistant Professor Ravi Gajendran has conducted extensive research on virtual work arrangements, including telecommuting, virtual teams, distributed teams, and computer-mediated communication. The reality, he says, is that telecommuting is here to stay.

26

Pe r s p e c t i ve s S U M M E R 2 0 1 3

The Future of Telecommuting

The Reality Check

27

[ FINANCIAL FACTS ]

Since 2000, the national debt has nearly tripled, a consequence of tax cuts, the expense of two wars, and the costly impact of the Great Recession. For the first time since World War II, the debt exceeds the Gross Domestic Product, putting the United States in the company of debtor nations such as Greece. All sides agree something needs to be done, but efforts to find the common ground needed for a long-term solution have floundered.

28

B

arring a political miracle, partisan debate will flare this summer over efforts to lift the ceiling on the national debt, nearly $17 trillion and growing fast.

“The Republican view is that we have to stop increasing the debt,” says George Pennacchi, professor of finance. “Otherwise, you could have a train wreck—maybe not immediately, but fairly soon.”

The Democratic view, he says, “is that if you don’t raise the debt ceiling, it’s going to be an immediate catastrophe. Those are the two competing views, both of which have some merit.”

If the debt ceiling isn’t raised, the only certainty is that the government will not have enough money to pay its bills and to continue providing current services. The Obama administration would have to decide who not to pay. If the government elected not to pay interest on the national debt, it would trigger a debt default that might spur an international financial crisis, says Pennacchi. For that reason, the Obama administration would probably cut elsewhere.

“What I see as more likely is that they would continue to pay interest on Treasuries, but there would be domestic expenditures that would not be covered. Then there would be a public outcry so that Congress would raise the debt ceiling, perhaps in return for spending cuts or tax reform.”

DEBT REGRET Only in recent years has debt emerged as a front-burner concern.

Debt has been a government fixture since the Revolutionary War, when the new nation ran up a considerable tab evicting the British. In 2000, the nation’s debt totaled a still manageable $5.7 trillion and the government ran the largest budget surplus in U.S. history. There was talk of paying down the debt or perhaps paying it off altogether. Then things went haywire.

Since 2000, the national debt has nearly tripled, a consequence of tax cuts, the expense of two wars, and the costly impact of the Great Recession. For the first time since World War II, the debt exceeds the Gross Domestic Product, putting the United States in the company of debtor nations such as Greece. All sides agree something needs to be done, but efforts to find the common ground needed for a long-term solution have floundered.

So the debt continues to mount, and it may already be having a negative influence on the economy. For instance, the debt may be inhibiting business investment because business foresees the day when it will be taxed heavily to deal with the debt, Pennacchi says.

“Taxes, even though they may occur in the future, can have a depressive effect on investment,” he says. “There would certainly be ben-

“It’s quite possible that government spending on interest could crowd out spending on federal programs or the government might have to borrow still more money to pay the rising interest on the debt.”

George Pennacchi

eficial effects if business could see the government put its fiscal house in order.”

If the debt gets bad enough, people and business could flee the country as they have in Greece, which is now subject to high taxes and fiscal austerity. Pennacchi says this syndrome has already hit some debt-ridden states such as Illinois and California.

PIECE-BY-PIECE REFORM For the moment, the United States has gotten a reprieve because it’s in better shape than a lot of other nations. U.S. Treasuries are still a hot commodity on the world market, says Pennacchi, “but you could imagine a different situation a few years from now if Europe rebounds and investors in our bonds go elsewhere.”

That could force Treasury prices down and interest rates up, he says.

Rising interest rates would only compound the debt problems. Federal Reserve policies are currently holding interest rates at rock-bottom levels. But what if interest rates on the debt rise?

“It’s quite possible that government spending on interest could crowd out spending on federal programs,” says Pennacchi, “or the government might have to borrow still more money to pay the rising interest on the debt.”

So disaster may strike if the debt ceiling isn’t raised—and it may strike if it is. In the latter case, “We may just keep going down the same path and have a bigger disaster later,” says Pennacchi.

Most economists think the United States needs to make plans for long-term debt reduction along the lines of the Simpson-Bowles plan, which calls for a mix of spending cuts and revenue-raising measures, says Pennacchi. “But at best there has been a nip here and a tuck there—tax hikes on the rich and the cuts imposed by the ongoing mandatory federal sequester. Fundamentally, we have a pretty divided country, or at least a divided political system,” says Pennacchi. “We have one camp that doesn’t see the great need for fiscal reform, at least not in the near future, and the other camp that does. So we may just continue to have this messy process of piecemeal reforms.”

Doug McInnis

•

Pe r s p e c t i ve s S U M M E R 2 0 1 3

The Red, White and Debt Blues

29

100 WORDS OR LESS

of obvious characteristics needed “forAacouple CFO are intellectual curiosity and agility.

There will be many times that you will be presented with an opportunity outside of your comfort zone, and these two characteristics will help you adapt and thrive. Being able to summarize complex issues is another soughtafter skill. Boards appreciate a succinct, wellthought-out analysis. Lastly, I’d suggest a sense of humor. What you’re doing is most likely not life and death, so don’t get too intense about it. Clients and employees want to work for, and with, people they like.

”

Kristie P. Paskvan, ’80 ACCY Chief Financial Officer, Mesirow Financial

“

The most important characteristics would be honesty and integrity as these are cornerstones of building trust to lead a company.

In addition, the ability to communicate effectively both verbally and in writing with all employees and financial stakeholders is crucial.

Regarding skills, a CFO must have a broad set of knowledge—from corporate finance, accounting, legal, and insurance to employee benefits. He or she must be able to proactively identify and solve problems across the company in order to serve as a strategic advisor to the management team and help provide financial insight during the decisionmaking process.

”

Jeff Wilhelm, ’01 ACCY Chief Financial Officer, Oberweis Dairy, Inc.

Honesty. Integrity. Competence. Confi“dence.

Courage. Creativity. The best CFOs are ones that act as teachers, not watchdogs, developing a working knowledge of every aspect of the business. They transcend the ‘finance’ label and are integrated with the operations and strategies. They connect all the dots, see the big picture, and exude confidence without cockiness. The best CFOs are straightforward, down-to-earth people who engender trust amongst colleagues and the board. Organizations with great CFOs rarely get into trouble, and if they do, the CFO knows how to manage her way out of it. Their work includes effective risk management and compliance while delivering strategic growth and value.

”

Janet C. Gibbs, ’10 EMBA Chief Financial Officer, Feeding America

ANNE GOECKNER

MARK HUSSEY

DAN DECANNIERE

JANET GIBBS

KRISTIE PASKVAN

JEFF WILHELM

WHAT SKILLS AND CHARACTERISTICS ARE MOST IMPORTANT TO A CFO’S SUCCESS?

“

Communication skills, integrity, and expectations management are three of the critical characteristics that CFOs need to survive.

First, they must be able to master both verbal and written communications in a clear and concise manner. CEOs and Boards have very full agendas and limited time, so CFOs must be able to simplify complex issues to allow everyone to grasp the basics relatively quickly.

Second, a CFO must be transparent, consistent in principles and actions, and beyond reproach. Third, it’s important that the CFO be on the same page as the CEO and senior management and be persuasive enough to help build consensus when challenging issues arise. Of course, there are also important foundational competencies, such as finance and accounting, that are needed to attain the role and achieve success.

“

CFOs need an incredibly broad range of critical skills to be successful—from finance expert to great communicator. In addition to relevant industry experience, characteristics like leadership style, approach to decisionmaking, and a keen ability to hire and develop talent all strongly influence their success.

Most importantly, all successful CFOs will be a perfect fit with the firm’s culture and values and will complement the strengths of the rest of the executive leadership team, while compensating for any gaps that may exist.

”

Mark Hussey, ’84 ACCY Chief Financial Officer, Huron Consulting Group

“

A successful CFO needs strong technical accounting skills but will also have strength in the management of time, staff, and company resources. The characteristics of a successful CFO include the ability to quickly and correctly assess business opportunities and present strategies that will result in appropriate business decisions. It is also very important to provide timely and meaningful information to your management team. In the past several years of economic downturn, the ability to understand and forecast the impact on the organization and suggest a course of action has been key to success.

”

Anne Goeckner, ’85 ACCY Chief Financial Officer, Missouri Humane Society

”

Perspectives SUMMER 2013

Dan DeCanniere, ’75 ACCY Chief Financial Officer, A.T. Kearney, Inc.

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[ THE REASON WHy ]

THE ENvELOPE, PLEASE

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members who may nominate, and a high percentage of them do, says Oltmanns, so there can be a lot of counting going on. Even though online voting is now available for members, all of the ballots are still tabulated by hand, just as they’ve been for 79 years.

Nominations are announced in early January, and voting takes place in early February, usually until the Tuesday before the Academy Awards are presented. That’s when the PwC team takes on both the leading and supporting roles, counting and recounting the votes over the next three days.

“We arrange the work in such a way that the four members of the team only count a percentage of ballots in a category,” explains Oltmanns.

“So even the team doesn’t know the final outcome of the voting.” For the past nine years, only Oltmanns and Rick Rosas, the other lead engagement partner, have been privy to the results before the show airs. They are among just 12 PwC partners who have led the balloting team since 1935.

become so famous for carrying. On Saturday, they go over to the theater to talk with the stage managers about the order of the awards, who will be presenting them, and which side of the stage the presenters will enter from. Accuracy and preparation are in an accountants’ blood, after all.

But the red carpet? Not so much.

“For an accountant to interface that much with the media is really unusual,” says Oltmanns, who explains that he and Rosas spend a couple of hours on the red carpet giving interviews about the process before the show. “It’s a different experience for someone in my profession, but it is a really fun start to an amazing day.”

When the show begins, Oltmanns is on one side of the stage and Rosas is on the other. They each have a complete set of envelopes in case there are any presentation snafus, which certainly can happen with a live show. “The best way to avert a problem is to give the presenter the envelope at the very last second,” says Oltmanns.

OUR LIPS ARE SEALED NIGHT OF A THOUSAND STARS Two days before the Oscars, the ballots have all been counted and the results determined. Oltmanns and Rosas memorize each winner and prepare a set of envelopes that they pack into the black briefcases they’ve

This year’s show had a new wrinkle, with the Oscar for Best Picture being announced by a surprise presenter, Michelle Obama. So with Oltmanns and Rosas behind the stage in Beverly Hills, what did PwC do to maintain the confidentiality of both the winner and the surprise presenter?

“Our CEO Bob Moritz went to the White House for that presentation,” says Oltmanns. “But he had to be there for a rehearsal on Saturday and we didn’t finish counting until Friday afternoon, so a week in advance I sent Bob the envelope and one card for each potential winner. I called him on Saturday and told him which card to use to prepare the envelope and how to dispose of the others. These were special circumstances, and it was the first time a third person knew one of the results.”

The 2013 Oscars was also the first time in Oltmanns’ tenure that there was a tie. The Academy Award for Sound Editing was a dead heat, which has only happened six times in 85 years. “We count and recount every result, but because there was a tie, we counted a few more times to be confident that we had the right result,” says Oltmanns.

Each year after all the envelopes have been opened and the statuettes handed out, the accountants can lay down their briefcases and really let their hair down at the Governors Ball.

“Personally, I am a movie fan and I make it a point to see all the nominated films. So it’s really a thrill to be a part of the celebration. Next year, I’ll be watching it on television, but I take a lot of great memories with me from the experience.”

Cathy Lockman

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WHO Bradley Oltmanns, chairman of the board of PricewaterhouseCoopers International Limited and lead engagement partner with the Academy of Motion Picture Arts & Sciences WHAT For the last nine years, he has been one of only two people who have known the results of the Academy Awards balloting prior to the telecast WHERE Beverly Hills, California WHEN The 2013 Oscars presentation was Oltmanns’ last as a balloting leader, as he retired from PwC in June WHY Integrity; PwC has been the official accounting firm for the Academy since 1935 Bradley Oltmanns arrives at the 2013 Academy Award Ceremony. Photo: Richard Harbaugh / ©A.M.P.A.S.

Perspectives SUMMER 2013

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hen Bradley Oltmanns graduated from ILLINOIS with his accounting degree in 1979 and began working at PricewaterhouseCoopers, he could never have predicted that it would land him on the red carpet. But, for the last nine years, that’s exactly where he’s been every February for Oscar night.

Since 2004, Oltmanns has been one of PwC’s lead engagement partners with the Academy of Motion Picture Arts & Sciences. That makes him one of two people responsible for overseeing the results, the integrity, and the confidentiality of the balloting process for the Academy Awards. With his retirement in June 2013, he took his final bow at this year’s 85th annual event.

“The Academy of Motion Picture Arts & Sciences has been a client for 79 years,” says Oltmanns. “It is one of PwC’s longest standing relationships, and one we value tremendously. It’s a great honor and responsibility to oversee the balloting process and maintain PwC’s tradition of ensuring trust, confidentiality, and integrity to the show and to the voting process.”

Just how does the process work?

Oltmanns explains that in addition to the two lead engagement partners there is a small PwC team of four seasoned professionals who assist in the work. Some tabulation begins as early as October, with the preliminary nominating rounds. There are 5,800

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[ PARTING SHOT ]

The Class of 2013 Departs. In May, nearly 1,700 Business students received their degrees from the University of Illinois.

While their days in BIF classrooms may have come to an end, their days as Business alumni are just beginning.

See how ILLINOIS Business alumni celebrated spring inside this issue of Perspectives.