CEOs get creative to combat rising costs in a slowing economy
- August 1, 2008
by Lisa Antonelli Bacon
When the cost of a business-class airline ticket to Australia soared to $22,000, Paul K. Singh faced a challenge. With employees in 14 countries and fuel costs at record highs, the co-founder and CEO of Primus Telecommunications Group followed the same advice he gives his clients.
He added video conferencing capabilities to all his company’s locations around the world, including five in the United States and every major city in Australia. “If you can avoid one coach trip, it pays for one video conferencing installation that you can use over and over,” says Singh, whose McLean-based company provides telecom solutions to corporations worldwide.
The change cut the billion-dollar company’s travel budget in half. And, it has enhanced employee effectiveness. “You can talk to people throughout the company, no matter where they are, and actually see their faces almost life-size on high definition LCD screens,” he says. “You get to know them much better.”
While video conferencing is a fast, smart answer to slash costs, its use alone doesn’t ensure cost-effective productivity. So Singh implemented other technological tools offered by his company that allow him to monitor his telecommuting employees online from wherever they’re working.
Additionally, Primus employees are equipped with high-definition cell phones that can send and receive international phone calls for 10 cents a minute through a service provided by Primus. Ten cents a minute is a drastic saving over other cell phone services that offer spotty reception, if any, from distant parts of our global economy.
As it happens, Primus specializes in providing clients with technological solutions that keep costs down while pushing productivity up. That’s a big advantage in this climate of belt tightening sparked by down markets, rising fuel prices and an economy that needs the financial equivalent of CPR. Most companies have to look beyond the services they offer to balance the money drain while maintaining productivity.
With mines in Virginia, West Virginia, Kentucky and Pennsylvania, Alpha Natural Resources Inc. consumes about 26 million gallons of fuel a year through its heavy equipment fleet alone. (The Abingdon-based company is being sold to Cleveland-Cliffs Inc. for $10 billion in stock and cash. See page 9.) Mike Quillen, the chairman and CEO of Alpha Natural Resources, notes gas costs are 90 percent higher than last year. “Fortunately, we had the good sense to put in a hedging program to reduce the financial risk from rising diesel fuel costs,” he says. Such programs allow companies to buy a specific amount of a commodity at a particular price by purchasing futures contracts.
While hedging diesel costs helps the bottom line, nothing boosts productivity like satisfied employees, a philosophy Alpha took to heart this year. “Our miners have been hit really hard by rising fuel costs,” says Quillen.
Recently, Alpha Natural Resources laid out a generous “employee appreciation” package that included a gift of 25 shares of common stock (then valued at $48 per share), payment of family insurance premiums for health, dental and vision coverage, and monetary bonuses for certain work performance.
Two days before the announcement of the package on May 1, the company threw in a fuel assistance allowance of $30 a month for all its employees. “They tell us it helps,” says Quillen. The multiyear program is expected to cost $13 million in the first year.
Caution on contracts
Meanwhile, developers and construction companies — which rely heavily on contractors and subcontractors — are having to be more judicious when it comes to signing on to big projects. “When we sign a fixed-price contract, we hopefully have allowed for fuel increases,” says John Lawson, president and CEO of W.M. Jordan Co. in Newport News, builder of such projects as Port Warwick in Newport News and Riverwalk Landing at Yorktown. “In some cases,” says Lawson, “we have contracts that are cost-plus, and the job sites can absorb too far away, and fuel cost is a factor,” says Lawson.
Since real estate agents tend to be independent contractors, they bear the cost of fuel individually. “We just grit our teeth and go,” says P. Wesley Foster Jr., chairman and CEO of the Long & Foster Cos. in Chantilly, one of the largest private residential real estate brokerages in the country.
Foster sets an example for his agents by driving a Ford Escape hybrid. It is the second hybrid car he has purchased. “I’ve cut my gas cost in half,” he says.
While rising fuel costs haven’t affected the real estate business nearly as much as the decline in home sales, Foster says that a housing trend is emerging in response to the fuel crisis. “We’re going to find people buying closer to where they work.”
With more than 100 vehicles used to sell and deliver beverages around Richmond and its eight surrounding counties, the family-owned Loveland Distributing Co. in Richmond is straining to balance budgets against the unpredictability of gas prices. Chairman Leon Stepanian Jr. says the company’s fuel costs in May were $45,000; that’s 42 percent higher than at the same time last year.
Typically, distributors like Loveland don’t charge retailers for delivery. Nor do they routinely charge retail clients for merchandising fees or draft line cleaning. But that might have to change as gas prices continue their steady climb.
Eventually, Stepanian says, “We’re going to have to raise our prices, maybe even charge for delivery and services if things don’t even out. I don’t know how to stop it, unless our government takes over and controls the flow of oil and resources in our country.”
Unfortunately, when wholesalers like Loveland pass along cost increases to the retailer, the buck inevitably stops at the consumer’s wallet. And wholesalers are far from the only ones. Businesses from pizza chains to package delivery companies such as UPS and FedEx are tacking on surcharges to help cover the costs of fuel.
“It’s a vicious cycle,” says Stepanian.