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Reducing Risk

BY Rich Arlington

Is your company’s selection process for a service provider exposing you to a higher degree of liability? As an expert witness of risk and liability in exterior maintenance services, I’ve reviewed hundreds of cases whose outcomes would surprise and challenge how many facility managers and property owners review Request for Proposals (RFPs) and select their service provider (SP).

Expert witnesses for exterior maintenance always consider the actual selection process in addition to the contract, scope of work, weather conditions, etc. Let’s apply this to an actual slip-and-fall in a store parking lot, which is being serviced by a snow contractor hired by a store’s facility manager in which the scope of work used in the RFP process puts all the monitoring and service discretionary responsibilities on the contractor. Facility management (FM) would confidently say, “The contractor had full responsibility based on the RFP and contract; not us, we’re not liable.”

Not so fast. The expert witness will ask four important questions when reviewing the case:

• What was the process by the FM or facility owner for selecting this contractor?

• What was FM’s past spend for that exterior maintenance service for the site in question? (As an expert witness, I will go back and review 10 years of history to see if the FM was constantly trying to obtain a lower price during the RFP process and, at some point, was that price for the services realistic given the scope of work, site size and area’s weather conditions.)

• What was the current contractor being paid? The expert witness will want to determine if it is a realistic number based again on scope of the work, site size and weather conditions.

• What references did the snow plowing company submit to the FM? This is to determine if they are similar to what the site in question requires for that service.

If in fact the expert witness can find that there was not a reasonable expectation that the snow plower could perform to the scope of work for the price they were being paid, he or she will find negligence on the selection process during the RFP. They will allow that the buyer (facility management company/facility owner/manager) decided solely on price and not on the ability to perform, leaving some liability on the buyer for choosing a plowing company that was obviously not going to be able to perform properly and according to industry guidelines. It will remove the contract’s indemnity items, as this is a decision the buyer made and the plower cannot be liable for the decision of the buyer.

An expert witness will also find negligence on the plower for not adhering to the scope of work they agreed to perform. However, if it can be shown that the buyer should have known that the pricing was too low for the scope of work they were requesting then negligence is on the buyer. This is the whole “Buyer Beware” theory. If something sounds too good to be true (e.g. too low a price), then it probably is and they should have known this and not hired that particular snow plower.

Years ago when I served in the United States Marine Corps, we had a saying: “A ship without Marines is like a garment without buttons.” The same holds true for a facility. A store without the right service provider is like a garment without buttons. Give your facility a buttoned-down coat against risk and liability this year by selecting a service provider that has the expertise and experience for your site rather than the lowest bid.

Rich Arlington, CSP, LICM of Rich Arlington & Associates, is an expert witness, consultant to the industry and author of the recently published book, “Why Not You?” ([email protected]).

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Focus on: Lighting

BY CSA STAFF

From a virtual basketball court to a projected hologram image, Rookie USA, a new children’s athletic apparel and footwear concept in New York City, deploys the latest in cutting-edge technology to engage customers and gain a competitive edge. The strategy extends to the decision to rely primarily on LED lighting to illuminate the 5,500-sq.-ft. store.

The lighting concept, developed by Phoster Industries and Osram Opto Semiconductors, is expected to provide significant cost savings of up to 85% annually compared with standard incandescent lamps, conserving energy, and reducing maintenance and replacement costs. It also provides a crisp, fresh look for the store.

Sam H. Haddad, principal, Rookie USA, explained what factored into the company’s decision to use LEDs (over more traditional incandescents) for the general lighting.

“We chose LED lighting for the Rookie store for many reasons: long-term cost efficiency, less frequent lamp replacement and less heat emission, which results in less HVAC expenditures,” he said.

The appearance of the LEDs also came into play.

“The aesthetics of a fixture for the general illumination as well as the performance was a major deciding factor, being that the space has an open plenum,” Haddad added.

Additionally, the luminaires had to be functional but also unique.

“The design of the luminaires was very important to us (because the space is an open plan),” Haddad said.

The lighting used at Rookie USA features Phoster’s High-Bay Replacement luminaires and PAR 30 LED lamps.

The luminaire systems are powered by Golden Dragon Plus LEDS from Osram. The Golden Dragon LEDs have a rated life of more than 50,000 hours and a color-rendering index of 85.

In addition to the LED lighting technology, the store also includes linear fluorescent lighting.

“The linear fluorescents are used to illuminate back of the house areas, and LEDs are used for the sales areas,” Haddad said.

In addition to its New York City store, Rookie has thee other locations: Melbourne, Australia; Shanghai; and Beijing. There are plans to roll out 200 stores globally by 2016, according to Haddad.

“And LEDs will be used in all Rookie stores,” he added.

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Capital Investments

BY Jim Hogan

Ever since the financial crisis, consumer confidence has labored to regain strength, and spending has been correspondingly subpar. So it’s not surprising that retailers have been extremely reluctant to make big capital outlays. But now there are signs that consumers are loosening their purse strings and, as they do, momentum is building among retailers to renew capital spending on certain projects. For some, today’s low rates make this an ideal time to secure financing; however, some struggling retailers may need creative financing solutions to access the capital they need.

According to the latest results from the GE Capital U.S. Mid-Market CFO Survey, a bi-annual survey of 500 middle-market CFOs, 39% of retail CFOs surveyed expect to increase capital expenditures in the next 12 months. This is more than any other industry in the survey and almost double the number from the beginning of the year. The survey of finance chiefs also found that retail is the most likely to see increased financing needs in the next 12 months. That bodes well for the overall economy considering that middle market retail finance respondents have, on average, revenues of $150 million and 1,235 employees.

Without question, challenges persist for many retailers. In fact, middle-market retail CFOs in the GE Capital survey were the least positive of all industries about both the global economy and their own industry. A hefty 33% expect profits to decline over the next 12 months, an increase of 17 points from the previous survey. Another area of stress for some retailers is the availability of credit: 12% are having trouble lining up credit. That’s not a huge number, but it’s up substantially from 8% earlier in the year.

Given this muddled picture, why are investment expectations spiking so significantly — from 20% to 39% in a six-month period? It’s always difficult to pin down universal causes in an industry as diverse as retail, but there are some themes that seem to be, at least anecdotally, driving investment spending. For instance, after years of deferred capital outlays, many retailers can simply no longer delay certain projects — such as refreshing stores that have grown worn and out of date. Further delays risk turning off customers in a fierce competitive environment.

IT Integrations: Another big driver of capital spending is linked to online sales. Information technology (IT) integration projects that tie together websites, physical stores, warehouses and distribution have become business critical for many retailers. Today’s consumers expect robust websites where they can research items, check availability and easily place an order. These sites must be integrated on the back end across the enterprise to create maximum flexibility for the consumer and efficiency for the business. If a consumer orders an item online and chooses an in-store pick-up, the company needs sophisticated point-of-sale technology that integrates warehouse distribution with stores.

Smaller Stores: The trend toward online sales is also impacting spending on new stores. With so much purchasing occurring online, some retailers with large-store formats are beginning to experiment with smaller spaces with less inventory; this strategy leverages a trend among consumers to use store visits as part of their research before making their actual purchases online. For retailers, these smaller, leaner stores are a way to quickly and efficiently expand their geographic footprint, while relying on centralized data warehouses to fulfill online purchases.

More companies are also investing in energy-efficiency improvements. Some of these projects are driven by legislation, but more often companies are undertaking them voluntarily as a strategy to lower costs in the medium term. For instance, many lighting upgrades now have a payback in just 18 months, which makes them attractive to corporate leadership.

Financing Solutions: All these projects cost money — sometimes substantial amounts. Many retailers have ample access to credit, but some are not as fortunate. As noted, the survey found that an increasing number of retail CFOs are having trouble lining up financing.

Lenders are aware of these challenges, and some are stepping up with solutions. One creative arrangement that’s proving popular is to finance the estimated liquidation value of new equipment instead of financing an entire purchase. So if a company is buying $10 million worth of service vehicles with a liquidation value of $7 million, it might secure $6 million against that liquidation value; that’s far from 100% financing, but it does offer valuable liquidity.

Given the results of the latest survey of mid-market CFOs — as well as various recent consumer surveys — the retail industry appears to be turning the corner. After years of holding the line on spending, there’s an overwhelming need to invest in an array of capital projects. Some CFOs may delay investments into early 2013 to see how the new Congress resolves the fiscal cliff, with its toxic mix of tax increases and spending cuts. After that, retail investment spending may really begin to gain momentum.

Jim Hogan is senior managing director at GE Capital, Corporate Retail Finance, a leading provider of senior secured loans to retailers in North America, supporting working capital, growth, acquisitions and turnarounds (gecapital.com/americas).

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