Payments Push: As a new era of real-time payments dawns, companies must weigh the benefits against arguments for early caution.

By Russ Banham

CFO

Today’s gotta-have-it-now mindset often seems more ingrained in the United States than anywhere else. It’s odd, then, that the country has lagged behind many others in building the infrastructure to make near-instantaneous electronic payments.

Finally, though, change is underway, in the form of a new inter-bank payments system dubbed RTP, for “real-time payments.” Lightning-fast settlements — versus next-day automated clearinghouse (ACH) transactions, wire transfers (which can take days to clear), or, worst of all, checks — could provide a host of benefits for businesses.

The advantages range from freeing up working capital sooner for strategic investment to accelerating supply-chain operations.

It’s not all about speed, though. In fact, other aspects of RTP, including the provision of standardized data relating to payments and transaction confirmations that payments are final and certain, may hold greater appeal.

At the same time, don’t expect to see hordes of companies rushing to update their internal systems to accommodate the new payments technology. Reasons for caution abound, at least in these early days.

Unceasing Movement

The new payments era launched on Nov. 13, 2017, when BNY Mellon initiated the first-ever real-time payment in the United States. Faster than you can say “show me the money,” $3.50 was successfully transferred from an account at BNY Mellon to one at U.S. Bank.

Those two banks and four others — Citibank, JPMorgan Chase, PNC Financial Services Group, and SunTrust — now have the capability to execute inter-bank payments within three seconds. Nineteen additional large commercial banks are working toward joining the party by 2020.

RTP is the first new core payments structure in the United States in more than 40 years. In developing it, the 25 banks are partnering with The Clearing House (TCH), a banking association and payments company. TCH wrote the code for RTP and is the system operator.

RTP exemplifies the unceasing movement toward real-time execution in business. Many activities are in that mode now, from the gathering of customer transactional data for gauging buying preferences, to the second-by-second analyzing of social media imprints, to the continuous accounting (in some companies) that automatically reconciles millions of transactions each day.

Speeding up electronic payments is particularly ripe for this environment, given the “just-in-time” supply chain pressures that companies sometimes face. If a company buys a product from a supplier with which it doesn’t have a credit relationship, but the buyer needs the product to ship right away, RTP can ease the concerns of a seller worried about the timeframe in which it will get paid.

Payment speed is especially attractive to midsize and small companies, which generally aren’t very adept at cash-flow forecasting.

“The instant availability of funds and the fact that payments are final and irrevocable are great things,” says Andrew Kirk, CFO of Trion Solutions, a provider of HR outsourcing services. “You’re getting immediate liquidity, as opposed to waiting for funds with crossed fingers. It gives you the opportunity to invest the dollars sooner to grow the business.”

The near-simultaneous transfers can occur 24 hours a day, every day of the year, as opposed to banks’ current Monday-through-Friday systems.

Need for Speed?

A business technically can receive RTP payments without doing anything, as the money will be in its bank account. But as a practical matter, it must update its accounts receivable system to automatically apply the payments.

Speed usually ranks third among the factors that may drive a company to adopt RTP, says Steve Ledford, senior vice president of product and strategy for TCH. He polls groups of corporate officials on that question when he makes presentations on the new technology.

Better handling of data and certainty of payment typically come out on top, Leford says. Indeed, he notes, TCH named the new system RTP rather than Real-Time Payments because “we’re trying to inch away from the focus on speed.”

With RTP, a standard set of data is guaranteed to arrive simultaneously with the payment. That eliminates confusion and creates efficiency.

“Some wires lack the necessary details explaining what the payment is for, creating accounting delays for the recipient company as it researches days of transactions,” says Patrick Villanova, controller and principal accounting officer at software provider BlackLine.

Notes Jennifer Lucas, executive director of financial services advisory for the payments practice at Ernst & Young, “The beauty of RTP is that the amount paid, what it was for, who paid it, and confirmation of payment are all transmitted without any manual processing.”

The information associated with a payment can be as simple as an account number, but it can also be specialized and complex. For example, automotive manufacturers buy a variety of parts from multiple suppliers, and they often claim allowances for parts damaged in transit or for other reasons.

RTP’s standard message format, ISO 20022, is based on the way data is handled in web and mobile applications. Every piece of information is tagged to facilitate automating much of the back-office payment-processing work. That “saves labor costs, reduces errors, and accelerates the entire purchase-to-pay cycle,” says Ledford.

A set of real-time messaging functions related to payments is also part of the value proposition for finance. In addition to “Payment Confirmation,” these include “Request for Additional Information,” “Request for Payment,” and “Remittance Detail.”

“The notifications create frictionless customer-facing interactions, replacing today’s frustrating and costly back-and-forth interactions between payers and recipients,” says Villanova.

For example, a payment confirmation can free the accounts payable department from the familiar exercise of paying a bill and then contacting the recipient to make sure it received the payment.

“Such operational hassles eat up money and time and adversely affect customer and trading-partner engagement,” says Ledford. “The bane of cash management is inherent uncertainty. Neither side knows exactly when the cash will be there.”

Taking It Easy

Here’s what the new payments model is not: a wholesale replacement for ACH transactions, wire transfers, checks, credit cards, and good old cash.

Rather, RTP is an option.

“CFOs now have more tools at their disposal insofar as how they want money to settle,” explains Carl Slabicki, director of immediate payments at BNY Mellon. “If they want a payment to clear within seconds or on a weekend or at night, they now have the opportunity.”

But while it’s likely that RTP will be used increasingly, there are good reasons why business adoption will occur at a gradual pace.

First, there’s currently a $25,000 limit for RTP payments. That might make the technology a big yawn for CFOs of large companies, notes Art Brieske, head of faster payments at JPMorgan.

The ceiling eventually will be lifted, however. “That makes now a good time to do what’s needed internally to get ready for opportunities, like improved cash forecasting, that RTP provides,” Brieske says.

Second, while RTP has features that make it well suited for a variety of applications, businesses may prefer other, existing payment methods for certain kinds of transactions, similar to how consumers particularly like using credit cards for travel and dining.

Third, RTP is new. A company may want to try it on a small scale before committing to it as a primary payment method.

But the biggest limiting factor of all is resource constraints. “If an existing process is working well with established payment options, it may not make sense to divert budget and IT staff to convert the accounts receivable function to accommodate RTP,” says Ledford. “ACH is cheap and effective, especially for recurring, low-risk payments.”

Frank D’Amadeo, director of treasury operations at electric utility Consolidated Edison Company of New York, acknowledges that RTP could improve the utility’s cash flow. “But,” he says, “and this is a big ‘but,’ it would require us to customize our ERP system.”

An alternative solution would be for the major ERP vendors like SAP and Oracle to modify their systems. But D’Amadeo isn’t high on that either.

“Unless they could provide a cookie-cutter, out-of-the-box customization, we’d have to pay them to modify our internal systems, which would be costly and chaotic,” D’Amadeo says. “We need standardization in the ERP industry without the vendors looking to nickel and dime us for customization. Until that happens, we’re going to do nothing [to move to RTP].”

Aware of the issue, TCH is addressing ERP integration in several ways.

For one, it’s reaching out to ERP vendors through its member banks to reinforce the importance of RTP to the payments industry, notes Jim Colassano, the organization’s vice president of product development and strategy.

TCH is also educating some vendors about the opportunities RTP offers them and their corporate clients.

Further, it’s teaming with several partnering banks to test the concept of an industry utility for B2B payments. The utility would support integration of RTP across vendors’ platforms, obviating the need for customization.

SAP and Oracle are huge, influential organizations, but the sheer clout of TCH’s member banks may well force the vendors’ hands. “It will come. It’s just a matter of time,” says EY’s Lucas.

Risk Avoidance

Another stumbling block to widespread adoption of RTP is the need to link it to a directory of databases for purposes of verifying user identities. Without that capability, banks may run afoul of strict Know Your Customer (KYC) regulations.

“Without a business directory maintained by an independent third party that verifies the authenticity of customers, RTP is just a dream,” says D’Amadeo.

TCH is tackling the issue on two fronts. At the retail end of the banking spectrum, it’s working to integrate its platforms with an existing directory operated by Zelle, a digital payments network owned by seven large banks.

On the wholesale banking side, TCH is looking to develop a secure model that would allow banks to reliably access one another’s business credentials.

Yet another perceived hurdle to RTP relates to cybersecurity. For RTP, security must be embedded in a company’s operational processes at the item-based level rather than at merely the batch-based level.

A related issue is fraud. “One benefit of today’s somewhat antiquated system is that we have traditional checks and balances to detect fraud in funds withdrawals and transfers,” says Villanova. “Banks have at least a full day to make that assessment.”

If those hurdles are overcome, RTP may have a lasting effect, moving organizations closer to real-time accounting.

“If everyone migrates to RTP and uses a cloud-based finance and accounting solution that provides real-time transaction matching — identifying cash in and out and then linking it to the corresponding invoices and payables — a business could theoretically do a virtual close of the books at the end of each day,” says Villanova. “A company would know every single day exactly where it stood from a financial standpoint.”

Armed with this data, organizations could make better, more strategic expense-control and resource-allocation decisions and adjustments. In fact, if enough U.S. businesses combine RTP and continuous accounting, they could arguably have a positive influence on the entire economy.

“A country’s economy is heavily dependent on the velocity of money—the speed at which the same dollar bill turns over,” Villanova points out.

Similarly, notes Ledford, “Every company deals with the problem of stranded cash that can’t be used. Making working capital more accessible instead of idle will have a big impact.”

And it’s not just the U.S. economy that may benefit. Many nations are looking to support platforms that enable real-time payments across all accounts globally.

That vision may come to pass—eventually. In the meantime, cautious though CFOs may be, RTP offers plenty of potential for achieving a less-glamorous but just-as-important goal: saving finance departments time, money, and endless headaches.

Russ Banham is a Los Angeles-based freelance business journalist and author

sidebar: Better Now Than Never

U.S. banks were in no rush to develop and adopt the RTP system.

U.S. companies have long awaited real-time payments. Early RTP-like systems were in place in Japan in the 1970s and Switzerland in the 1980s.

The United Kingdom has been out in front technologically since 2008 when it introduced its Faster Payments Scheme Limited, or FPSL. Today, 400-plus U.K. financial institutions offer the service to more than 52 million accountholders.

Within the past few years, India, Sweden, Singapore, and Thailand are among at least a couple of dozen countries that have adopted real-time payments, according to Steve Ledford of The Clearing House, operator of the new U.S. RTP system.

The U.S. system, launched last November, is part of a new wave that includes the European Union’s SEPA Instant, introduced a week later, and NPP, initiated in Australia and New Zealand early this year.

It wasn’t until 2015 that the U.S. Federal Reserve Bank created its Faster Payments Task Force, to identify and evaluate different approaches to speeding up payments.

Why so late to the party? The need in other countries was more urgent. They lacked ACH-type capabilities and were coping with three-day settlements. In the United States, in addition, the vast number of financial institutions—more than 100,000 entities in all—was an impediment.

“We wanted to learn what we could from other countries’ experiences with real-time payments to create a model that suited all U.S. financial institutions,” says Ledford.” | R.B.

hinking like a turnaround CFO: When a company is in crisis, turnaround specialists can save the day.

By Russ Banham

FM magazine

Money is everything in business, particularly when it is running out. A liquidity crisis caused by a crimp in cash flow is the beginning of the end for most companies. To turn around the dire situation before it’s too late, board directors, CEOs, and investors typically turn to the CFO.

But the CFO may be part of the problem. And even the most competent CFO may not have the requisite skillsets to assist with a turnaround.

Here, a different type of CFO is needed. Such individuals must have the fortitude and grace to make tough decisions regarding layoffs, lenders, and suppliers that the incumbent CFO may be disinclined to make, given the emotional considerations. Sharp negotiating and workforce management skills also are needed to keep cash flowing. In addition to extending accounts payable cycles, shortening accounts receivable cycles, finding new sources of external and internal capital, and reducing the timing of debt obligations, it may be necessary to decrease the size of the workforce.

It’s a tall order for anyone, particularly an incumbent CFO. “The person whose job it is to keep the train on the tracks does not often have the same skills to get the train back on the tracks,” explained Michael Epstein, global managing principal for restructuring services at consultancy Deloitte.

IN THE NICK OF TIME

Many distressed companies reach out to CFO turnaround specialists. Amongst those specialists is James O’Connor Jr., founder and president of turnaround consultancy The O’Connor Group in Bedford, Massachusetts.

“By the time I arrive on the scene, most clients are concerned about hitting the payroll — the precipitator to a bankruptcy,” O’Connor said. “They’re about a week away from serious trouble and need someone like me with crisis management capabilities to identify the problems and priorities and execute a plan to keep the business afloat.”

While the incumbent CFO is aware of the perilous circumstances, the person often struggles to react, said Christopher Pizzo, senior vice president of Deloitte’s corporate restructuring group. “They freeze, panic, and shut down,” said Pizzo, who has served as an interim CFO on multiple occasions.

Russ Blain, a Seattle-based turnaround consultant, believes CFOs at companies that get into trouble share some common characteristics: They don’t understand the cost structure, have people issues they haven’t dealt with, and aren’t properly addressing the difficult situation with management, investors, and suppliers. “They think they will weather the storm, but they’re wrong,” he said.

Even the best CFOs may not be cut out for the thorny tasks ahead. “Basically, there are three types of CFOs — the deal-making CFO who is good at balance sheet restructuring and putting together M&A transactions, the accounting CFO who is good at closing the books and reporting, and the operating CFO, someone who really understands the purpose and mechanics of the business,” said Doug Yakola, a senior partner and leader of McKinsey & Company’s North American RTS practice, which works with companies on transformations and restructurings. “To regain financial health, a distressed company needs a CFO with all three skillsets.”

Rather than deal with what lies ahead, some CFOs make a peaceful exit and find a more secure situation. “Typically, the CFO is gone by the time I arrive on the scene or is soon to be shown the door,” O’Connor said. “By then, the company has stretched and borrowed and is in late decline. Alternatives are in mind.”

“We’re like an emergency room surgeon looking at a person who has come in after a bad car crash,” he added. “To save them requires a rapid assessment of the condition followed by decisive actions.”

FIRST STEPS

Entrusted with turning around a troubled company’s financial condition, those who have served as interim CFOs said that the first priority is to develop internal sources of cash by more efficiently managing the working capital. “This is not about long-term strategy; this is about correcting the company’s near-term situation by regaining control over the cash flow pipeline, laying the groundwork for the long term,” O’Connor said.

Yakola, who has been an interim CFO, agreed. “The most immediate task is to look at the organisation’s cash levels and whether or not its cash forecasting estimates are accurate,” he said. (See the sidebar at the bottom of the page, “4 Steps for Rescuing a Capsizing Company,” for Yakola’s tips on immediate actions to take once it is apparent the organisation is amidst a cash flow crisis.)

If this is not the case, cash conservation and generation are in order. “You have to open the lines of communication,” Pizzo said. “You have to create a vendor relations strategy, letting the vendors know what is happening, why they’re not getting paid, and when they can expect payment. Obviously, you need to be diplomatic so they continue shipping to you, but you also have to be empathetic as they have a business to run, too.”

Nevertheless, tough actions are called for. “I’ll do things like look through the list of vendors to determine which ones can really hurt the organisation on an ongoing basis, and then shut off payments to the rest,” Blain said. “Obviously, this results in a lot of nasty calls. I then make sure to overcommunicate with these companies, pledging that we’ll do our best to make a payment by a particular date. Fortunately, some suppliers don’t even realise we’ve cut them off until six months later, which buys us time.”

Yakola said that interim CFOs often must perform triage. “Almost always there are multiple things that need to be put back on the rails to help the business survive the short term,” he explained. “These include whether or not the company is accurately closing the books, and its budget matches the going-forward business plan.”

Pizzo pointed out that when companies are confronting distressed conditions, evidence sometimes indicates that the former CFO had provided late, inaccurate, and/or misleading financial reporting to lenders and investors. “Consequently, the interim CFO has to re-establish lines of communication to regain their trust,” he said. “We explain that things will get worse before they get better, but we point out that we have a plan to restore cash flow.

“Now is the time for more communication, not less,” Pizzo said. “They want facts, and it’s our job to provide them.”

Often the first question from the debt funds is, “Why not simply liquidate the business?” said Blain. “In some cases, they may be right. But if I believe the business still has legs, I tell them I have a plan, re-emphasising the company’s intrinsic value and what it will take to get it back on its feet. If I tell them we have to reduce headcount 45%, I also point out how we will go about it — determining which job functions are critical to the organisation’s long-term growth and which aren’t. I’m a mercenary there to do a job, with confidence in the outcome.”

TO THE RESCUE

Generally, it takes several months to restore a company’s financial condition, although O’Connor once spent five years as the interim CFO of a midsize manufacturing business on the brink of bankruptcy.

“The company had completely tapped out its credit lines, vendors had stopped shipping it goods, and its main bank had just pulled funding,” he recalled. “The lenders were putting pressure on the CEO to quickly recover the debt, fearing the organisation’s assets were losing value daily.”

He negotiated first with the vendors, which agreed to resume shipping. He subsequently persuaded the bank to forgo interest and restore funding for a three-month trial period. In both cases, he underlined the fact that the company was the second-largest employer in the town and its demise would generate devastating economic outcomes, like lost employment and tax revenue.

He then turned his attention to the underlying problems that had resulted in the company’s dire straits. “It was an old guard manufacturer that had designed and built its own machines for years, with this vision of being vertically integrated,” O’Connor said. “It had all this inventory and hardware that was choking it to death, and didn’t comprehend that its real value was in satisfying customers.”

As the interim CFO, he sold off several equipment lines to generate immediate cash and outsourced this production to suppliers on a less-capital-intensive basis. That was three years ago. Today, the company remains in business and has a more traditional CFO.

Asked for the toughest turnaround situation he has confronted, Blain was quick to answer. “I was once brought in as an interim CFO at a company owned by four separate venture capital firms,” said Blain, who added that the firms were having trouble getting along with one another in such a difficult situation. “On top of that, there was a common shareholder who kept making noise, and an employee management team fighting to preserve their [stock] options. Worst of all, both the VC firms and the debt fund could veto any deal.”

Balancing these competing interests while plotting a comeback strategy required Solomon-like perspicacity. “If you’re financing a company that is growing, it’s relatively easy to reach consensus since the valuations are going up and everyone wants in,” said Blain. “Forcing someone to write off part of their investment is never an easy call, nor is trying to raise money from existing investors.”

Nevertheless, he pulled off a delicate balancing act. “It took six months of showmanship and listening to each person’s needs to devise a plan that was suitable to all the parties, even though no one got everything they wanted,” he said. “Ultimately, we reduced the labour force.”

Blain promised employees that the workforce reduction would be deep enough to constitute a once-and-done exercise, which provided a measure of relief. “You need to shoot straight, whether you’re dealing with investors, management, or the debt funds,” he said.

The company made a small profit in 2017. “Either you get everyone to commit to the restructuring plan and you ride herd on it for many months,” Blain said, “or you liquidate or sell the company and are out of there in no time.”

THE ROAD AHEAD

Interim CFOs need to plan for the future as much as they focus on the urgent needs of the present, Yakola said. “I see myself as truly interim, and people inside and outside the company know I’m not permanent,” he explained. “I’m putting in stopgap measures to move the organisation forward. In fact, one of my most important conversations with the CEO and the board is the plan to hire a new and more permanent CFO.”


4 steps for rescuing a capsizing company

No company is immune to trouble. Typically, the first sign of distress is liquidity — not enough money in the till to pay the bills.

If this appears to be the case at your company or business, here are some ideas on what to do next from Doug Yakola, a senior partner and leader of McKinsey & Company’s North American RTS practice, which works with companies on transformations and restructurings:

  • Be honest. It’s tough for C-level executives to face the truth of a sinking company, given that their pride and reputation are at stake. But that’s exactly what they must do — pull back, take a frank look at the success of the business plan, and criticise its shortcomings.
  • Cash is king. The basics of business are pretty clear — you look at anticipated expenses and revenue and make sure the former aren’t bigger than the latter. If this looks not to be the case next quarter (or next week), now is the time to get back to the basics. Forget for the moment the alphabet soup of performance metrics such as NPV, EBIT, ROI, and EVA, and focus instead on cash — how to get it and how to conserve it.
  • Craft a narrative. When ships start to sink, people jump off and swim for the nearest shore. The same situation confronts a business sending up a distress signal. To retain their top talent, companies need to create an urgent and compelling “change story” that explains the organisation’s current troubles and all the smart things being done to correct course. Craft this in plain language, in just a few words, so everyone gets the gist.
  • Focus on quick wins. Certainly, a company in a turnaround situation needs an overarching strategy to win the day, but that takes time and a full team effort. Quick wins can be cost-focused, cutting off demand for some external service that’s not really needed, or policy-focused, such as introducing more stringent travel expense policies.

Russ Banham is a freelance journalist and author based in the US. 

If You Think Your Small Business Is Too Small For A Network, Think Again

By Russ Banham

Forbes.com

Setting up a network is a good way for a small business to get more use out of its computers and peripherals, helping users share files and other software resources more easily. The challenge is putting these plans in motion.

Many small businesses are reluctant to implement new technologies, despite the efficiencies and profitability they provide. The foot-dragging is evident in the 45 percent of small businesses that still don’t have a website (of those that do, only 36 percent use the website to reach out to customers and potential customers).

This apprehension is misplaced. Not only is the process of setting up a network relatively straightforward, but also the cost is minimal when compared with the returns: greater efficiency and productivity.

“There is no more efficient way for people to interact with each other or to share resources,” said Michael Fauscette, chief research officer at G2 Crowd, an online review platform focused on business technology solutions.

Networks, Explained

A computer network basically comprises hardware and protocols that enable connectivity and communications. Hardware includes equipment like routers, switches, bridges and hubs using cables or Wi-Fi technologies. The protocols determine how two or more devices in the network communicate. If the network is a highway, the protocols are the traffic signs.

Among the many benefits of a network are the ability for employees to work anywhere and still be able to access critical data at all times of the day.

“A network makes it simple for people to share data, find documents they need and communicate with each other via electronic mail on an intranet,” said Destiny Bertucci, who has the title of head geek at SolarWinds, a provider of IT management software to small businesses. “Best of all, since files are stored on the network server, it doesn’t matter which computer is used to do work.”

For small businesses, use of a network slashes software costs because the company does not have to buy separate licenses for each computer. And instead of purchasing a single printer, fax and scanner for each employee, companies can have employees share these devices.

“Does a small business really need six separate printers for six people when all six can share a single printer on the network?” Fauscette asked.

Without a network, Millennials, who represent the bulk of the American workforce, will resort to using their smartphones for business purposes, Fauscette said.

“If you don’t offer them a way to work that they are used to working, they’ll take matters into their own hands, sending important documents to colleagues and third parties on their phones,” he explained. “This information is now at risk of interception, as the company has no control over its security.”

Setting up a network isn’t a once-and-done exercise, according to Bertucci.

“Several vendors produce different hardware devices and software applications, and without coordinating these parties, there can be chaos,” she said.

Fauscette agreed, noting the array of different moving parts like business-grade routers, hubs and switches.

“Although these are not hugely complex technologies, if you don’t have someone on staff with expertise in their implementation, you need to bring in an outside expert,” he said. “Seemingly simple things like making sure the Wi-Fi is secured to protect your data, or whether you need four or six switches throughout the building, are better left to the experts.”

Steps Toward Success

Companies like Cox Business can help small-business owners take the steps needed to implement a cost-effective network.

The first step is network standardization, which will allow the computers to communicate with each other on the network.

“Adopting network standardization is a key aspect of setting up a network, as identifying a device’s location and importance to the system is a key part of managing and preventing network issues and outages,” Bertucci said.

Other considerations include embedding security and monitoring. Without a solid security posture, an organization is low-hanging fruit for cyberattacks and data breaches. Monitoring tools, on the other hand, provide visibility into the network for security and performance purposes.

“By monitoring the devices, companies can identify and address anomalies within the network infrastructure before they become bigger headaches,” Bertucci said. “You want to learn from these experiences to bounce back quickly.”

Lastly, she advised small companies to invest in a network that can grow, in case the company wants to add features like video surveillance, Voice over Internet Protocol (VoIP), or any new piece of technology that has yet to emerge.

Russ Banham is a Los Angeles-based freelance writer.

Robo-Accountants Are An Accountant’s Best Friend

By Russ Banham

Perspectives

he manual nature of accountants’ work is evident in the unflattering phrases used to describe their job—“numbers crunchers” and “bean counters.”

“Many of us accountants spend so much of our time today doing routine manual work—punching in the same journal entry, the same reconciliation, every month,” said Tammy Coley CPA, chief strategy officer at Los Angeles-based BlackLine, a publicly traded provider of financial and accounting automation software. “The instructions are laid out for us—go find this number, put it there, and do the calculations—careers have been spent doing this.”

Yet now, much of this crunching and counting is performed by robotics processing automation (RPA), software with artificial intelligence (AI) and machine learning capabilities to handle high-volume, repeatable tasks previously performed by humans. In the case of accountants, RPA has liberated them to do more of what they were trained to do: analyze the financial and operational results of the business to drive better strategic and tactical decisions.

A Game-Changing Partnership

According to an analysis by Accenture, nearly 40 percent of transactional accounting work will be automated by 2020, allowing accountants to spend more than three-quarters of their time analyzing performance.

“We’re now able to spend our time doing important things—like evaluating the best way to account for a new big contract the company has just signed,” Coley said. “CPAs are trained for just these sorts of activities and events that require our professional analysis and judgment.”

The arrival of RPA is just in time, given the profession’s mounting workload. “The volume of data that accountants have to work with today is enormous and growing,” said David Perlmutter, executive director at global consulting firm EY. “Accountants are being asked to do more and more. If they’re still using paper-based processes and spreadsheets to do this work, the burden is tremendous.”

Automation has been game-changing not just for accountants, but also for their employers, Perlmutter said. “In the mad rush at the end of the accounting period, the finance organization often must retain additional accountants on a temporary basis to close the books on time,” he explained. “Balances must be validated, records need to be consolidated, journal entries have to be adjusted, and financial statements must be prepared. Relying on the current staff alone may not get the job done.”

With robo-accountants, employers can shoulder some of this workload, reducing corporate spend on additional live accountants.

“Robots can be programmed to perform the repetitive period-end accounting tasks typically performed by accountants, such as account reconciliations, journal entries, and transaction matching,” Coley. “The bots can do this work faster, better and more accurately than a human being can because they’re programmed to do routine things the same way every time.”

Robo-accountants also work on a 24/7/365 basis, never need coffee breaks, don’t use the facilities, and are never sick. “To be fair, they do need to take time off for routine maintenance now and then,” Coley said.

Extracting Maximum Value

It’s a small wonder why businesses are inviting a veritable army of robots into the workspace. According to a 2018 survey by Deloitte, more than 1,700 finance and accounting professionals marked increasing efficiency and internal controls in the coming year—through the use of robots for transaction processing—as their top priority.

“Well-honed RPA programs can help organizations improve the quality of their governance, risk mediation, predictive insights, working capital management, and financial reporting,” explained Dave Stahler, Deloitte risk and financial advisory partner.

Yet, robo-accountants are just part of the efficiency play now underway in finance and accounting organizations. Companies already use financial and accounting software for account reconciliations, transaction matching, inter-company transactions, and resolving variances. (It’s the backbone of finance and accounting.) RPA, then, is a tool used to perform repetitive processes against these other tools.

Humans still need to use financial and accounting automation software to look into the details of transactions and other financial data. This software resides on top of the corporate Enterprise Resource Planning system to perform accounting tasks.

“To extract full value from automation, companies need to be able to validate the accuracy of information,” said Perlmutter. “To do that, you need financial and accounting automation software.”

Down the line, technologies like machine learning and artificial intelligence will enhance the software’s efficiency. “We’re at the beginning of partnering machine learning with RPA,” said Coley. “Once AI becomes more mainstream, there’s a whole new world of possibilities out there, where the software begins to think and make judgments based on the data.”

Making Room for Humans

These days, it’s impossible to think about automation without also considering what this means for the workforce. According to McKinsey & Co., over the next 13 years, as many as 70 million workers in the U.S. will be displaced by robots to find others ways to make a living. This isn’t, however, the end of the story.

In-depth analysis by London’s Center for Economic Research shows that, in the long run, automation helps businesses run more efficiently and cost-effectively. The study of robot use across 14 industries in 17 settings indicated an annual growth in labor productivity and GDP by 0.26 percent and 0.37 percent respectively.

For many companies, that growth will likely translate into the potential to hire more people, who are better supported, down the line. “I don’t see robots replacing accountants,” said Coley. “Rather, I see them evolving our role and augmenting our effectiveness to provide the most value we can to the finance and accounting organization.”

There’s no going back to counting beans by hand, anyway. “Today’s younger generations expect things to work with fewer clicks, where they can quickly access and consume information and then move onto the next thing,” said Perlmutter.

Like most technology solutions, RPA will eventually vanish into the process itself, becoming a routine part of performing a work task. As Permutter sees it, “Automation will be so deeply embedded into finance and accounting that no one will refer to `robo-accountants’ doing the mundane work in the background.”

It will just be human nature.

Russ Banham is a Pulitzer-nominated financial journalist and author.

Trust It’s Verified: Blockchain Takes the Insurance Industry By Storm

By Russ Banham

Leader’s Edge

Anyone who has ever been in an automobile accident is familiar with the back-and-forth interactions with the insurance agent and carrier. It’s a worrisome, frustrating and time-consuming process. olicyholders aren’t the only people aware of these miseries—so are brokers, carriers, reinsurers and other parties to an insurance contract.

In a world where transactions occur instantaneously, the business of insurance—sales, underwriting, distribution, claims and so on—remains unduly sluggish. That’s about to change for industry players and their customers, thanks to the convergence of three technologies: blockchain, artificial intelligence and predictive data analytics.

Four consortia have been created to leverage blockchain technology for the purpose of sharing policyholder data and other insurance-specific information. When people think of blockchain technology, they typically consider its use in the development of crypto-currencies such as bitcoin. While true, this is only a small piece of the value the underlying blockchain and distributed-ledger technologies will provide for the insurance industry.

Blockchain is a live network of distributed ledgers used to record and verify transactions. A ledger is distributed to participants or members in a transaction network, each having the ability to store a copy of the ledger on a computer called a node. The members don’t need to trust each other to know that the ledger is accurate. That is because transactions are validated prior to inclusion on the blockchain, are unable to be changed after they are posted, and are highly secure because the distributed, immutable nature of the network makes it very difficult to attack.

Among the most promising blockchain consortia in the insurance industry is RiskBlock Alliance, a not-for-profit consortium of 27 insurers, brokerages, reinsurers and third-party industry participants collaborating to make the repetitive, manual process of insurance more efficient. Its goal is to develop a blockchain-enabled platform in the cloud to gather, store and automatically exchange a wide variety of information from insurance brokerages, carriers and third parties to create an insurance ecosystem, allowing for more cost-effective insurance processes to the ultimate benefit of policyholders.

The alliance is the brainchild of The Institutes, the insurance industry’s venerable professional education organization. It is owned by alliance members and administered by The Institutes, with assistance from a roster of well known partners like Accenture and Deloitte.

“This is an industry-driven effort—our members decide what is being built,” says Peter Miller, president and CEO of The Institutes. “For several years running, we’ve seen AI, blockchain and other technologies come on-stream, all of them proclaimed as the industry’s savior. Separately, they provided some value, but now we are at an inflection point where their convergence puts us at a watershed moment. What we’re doing has the potential to transform the industry.”

Serious Business

The Institutes is seizing the moment, retaining a veritable “Who’s Who” of consulting and technology partners—Deloitte, Accenture, IBM, EY, Amazon Web Services and Capgemini—to create the RiskBlock technology platform called Canopy. With help from these partners, the 27 (and counting) members of the alliance are collaborating on more than two dozen use cases involving different aspects of the insurance transaction.

“If you think about the various processes that occur in insurance, they are all part of a supply chain,” says Bennett Neale, an enterprise architecture consultant at Farmers Insurance, an alliance member. “Each use case, like proof of insurance and first notice of loss, represents a link in this supply chain. Proof of insurance, for instance, leads into the first notice of loss, which leads into subrogation (another use case). The data related to these processes is not shared at present. Each carrier does their own thing, resulting in tremendous inefficiencies and costs.”

Other alliance members agree. “All too often, we in the insurance industry go off and do our own thing,” says Mike Annison, head of global operations for Marsh’s claims practice. “As a result, we’re plagued with multiple processes that don’t align with a common agenda. You’ve got all this data that sits with the broker and all this data that sits with the carriers, but none of it syncs up on behalf of the client.”

Synchronizing the disparate data is the blockchain. As a secure, decentralized way to register and store digital data online, the technology presents a way for industry participants, as well as third parties like state motor vehicle departments, weather stations, auto repair shops, utilities and the ever-expanding array of internet-connected sensors in the internet of things, to automatically process insurance payments and transactions through prearranged “smart contracts.”

Miller provided the following example. “Suppose I have a water sensor in my basement,” he says. “On the blockchain is a rule that says if the internet-enabled sensor measuring moisture reaches a certain threshold, all the water will be shut off in my house. Otherwise, a pipe may burst. The sensor instantly sends this information to Canopy. A smart contract is automatically executed to signal the utility to turn off the water, since I may not be home to do it myself. Another smart contract automatically contacts a plumber to check the situation.”

What might have resulted in a substantial property loss for the policyholder and its insurer has now been avoided. “In my example, no longer is insurance purely a risk-financing activity for brokers and insurers,” Miller says. “It’s risk mitigation at its best.”

Under the Canopy

Three other industry-driven blockchain initiatives also are simultaneously under way—B3i, R3/ACORD, and Hashed Health, the latter involving health insurance. Each are engaged in proofs of concept. Taken as a whole, these efforts indicate that the outmoded processes inherent in insurance transactions will change dramatically in the years ahead.

This is certainly the expectation of Christopher McDaniel, the former lead of Deloitte’s insurance blockchain practice whom Miller recruited as RiskBlock’s president. “I’m the one driving this crazy bus,” McDaniel says. “Originally, I got involved with The Institutes in doing the strategy engagement on the platform. The value proposition was so good I threw my hat in the ring. It’s much better to be a driver than a consultant.”

McDaniel brings a varied career to the task, including stints as a chief information officer and chief operating officer in both the insurance and insurance technology industries. He believes what The Institutes is piloting will result in an insurance ecosystem—a holistic community of interacting parties—as opposed to today’s disconnected processes and dissimilar data.

“From the beginning, The Institutes wanted to build the world’s first true enterprise blockchain framework,” McDaniel says. “The goal was to create a reusable insurance ecosystem that could support multiple applications, such as proof of insurance, first notice of loss, subrogation, and so on,” he says. “We think the Canopy framework will become the ubiquitous source of insurance information over the next few years. And we can see even more creative use cases emerging in the future that are not possible in today’s disparate data environment.”

The first use case to commence, conclude and go into production is proof of insurance. (See Sidebar: Proof of Value.) Alliance members collaborating in building out a digital application to verify evidence of policyholder insurance include Nationwide, Chubb, Marsh and Farmers Insurance. Although the app is now available for use by members, these businesses continue to meet and discuss other possibilities to enhance the process.

Nationwide was one of the first insurers to join the alliance. “Early on, it was decided that proof of insurance would be the initial use case, as it involves the relatively straightforward exchange of insurer data by two policyholders in an automobile accident,” says Seth Flory, Nationwide’s vice president of IT strategy and technology innovation.

This process is paper-based today. The objective was to create a digital application on Canopy that member insurers would provide to their respective policyholders.

“Using their respective Canopy applications on their smart phones, each party to a vehicle accident would generate a QR code that the other party would scan for insurance verification purposes,” Flory explains. “This information is simultaneously captured in the blockchain, triggering the next link in the insurance value chain—first notice of loss. We wanted to make this as digital and frictionless as we could.”

Alliance members and their automobile insurance policyholders can now use the proof of insurance application, which recently became available in Version 1.0 of Canopy. Carriers are expected to rebrand the application with the names of their respective claims systems.

Three additional digital applications will be provided to members once Version 2.0 of Canopy becomes available in the third quarter of this year. The apps address first notice of loss, parametric insurance (the use of weather-related data in establishing coverage and loss) and subrogation (the financial adjustment of the net payment of a claim between two insurers). (See Sidebar: Three for the Money)

Nearly 20 other use cases are in the works and will be part of Version 3.0. All the use cases (and future ones) are predicated upon enhancing the efficiency of processes for alliance members, thereby lowering their transaction costs for the benefit of policyholders.

Down the line, McDaniel sees Canopy as a trusted platform for insurers and brokerages to develop new insurance coverages and bespoke products. “Right now, 80% of the use-case work is focused on efficiency and 20% on new-product development,” he says. “In the next several years, as more data enters the platform from the industry, third parties and especially the IoT, this percentage ratio will reverse.”

There is also a level of data ownership that still exists in Canopy. “Only the members will be able to use the applications that eventually reside on Canopy, which is a private-permission blockchain,” Miller notes.

And if member Marsh were to want to look at specific data owned by member CNA Insurance for a particular purpose and period of time, the brokerage would request permission, which CNA could allow or disallow. “Each member would receive a notification to accept or deny another member’s request for information,” Miller explains.

Laying Down Arms

What’s interesting (if not revolutionary) about this industry-driven effort is that the alliance members compete against each other in the real world but are putting that aside in this collaboration.

During World War II, Boeing, Grumman, McDonnell and other competing aircraft manufacturers put aside their competition and joined forces to make planes for the war effort. While this initiative doesn’t carry the same historical heft, there is a sense of that sort of collaboration for the mutual benefit of alliance members and that of policyholders. For example, Farmers Insurance and USAA, two personal lines insurers in intense competition, are collaborating to develop a digital application in the first notice of loss use case.

Most alliance members are involved in more than one use case. Marsh, for example, is engaged in four: first notice of loss, proof of insurance, parametric insurance and subrogation. Many members were already working on internal blockchain initiatives when The Institutes knocked on the door.

“We’d been discussing blockchain opportunities and had the technological capabilities to build something on our own,” says Flory, from Nationwide. “We were investigating the various insurance consortia formed to leverage blockchain technology and discovered a lot of alignment in the industry around what The Institutes was looking to do.”

This alignment, he says, is needed for a blockchain platform to succeed. “The nature of the technology requires developing a network of participants that trust each other,” Flory explains. “The Institutes’ reputation made the decision very straightforward. Ultimately, we felt the alliance was the fastest path to market to deliver the value the industry was after.”

Ted Epps, leader of Deloitte Consulting’s insurance blockchain practice, agrees that the strategic value of RiskBlock is its creation of a network connecting diverse insurance industry stakeholders and third parties. “This is a fairly universal consortium of members launching a broad range of use cases that will culminate in actual production applications,” he says.

In good part, the speed of development of applications is attributable to the sophisticated expertise of The Institutes’ partners. Deloitte is the primary strategic partner and Accenture the primary technology partner, with other partners engaged in mainly security and applications development. Nevertheless, all the partnering firms are working together to develop the Canopy platform, the various use cases and the digital applications. “It’s an all-hands-on-deck approach to partnership,” Miller says.

In making the decision to partner with The Institutes, Deloitte and Accenture pointed to its sterling reputation. “If we were going to collaborate with one of the consortia developing an insurance blockchain, it had to be at the center of things,” says Deloitte’s Epps. “Since blockchain technology is all about trust—different entities sharing data in a network—it was critical for us to have major industry players involved. The Institutes’ reputation guaranteed that would happen. That said, I don’t see the other blockchain initiatives as competitors but as complements.”

Only the Beginning

RiskBlock began its work in earnest in 2017, creating the strategy and business model for the Canopy platform. An early goal was to make the platform “blockchain agnostic,” meaning it could run on all three available blockchain technologies—Ethereum, Corda and Hyperledger Fabric, as well as newer distributed-ledger technologies coming down the pike.

Another goal was to create an indeterminate number of digital applications addressing all insurance-related processes. Consequently, the use cases extend beyond personal lines and commercial lines property and casualty insurance to include life insurance, annuities and reinsurance. “Unlike other consortia, we’re not involved in proofs of concept or science experiments,” McDaniel says. “We’re developing real production applications that members can use as soon as they’re up and running.”

Yet another objective was for Canopy to be global, ultimately used by the insurance industries within Asia Pacific, Europe and Canada. A year or two from now, McDaniel predicts as many as 50 applications will be ready for alliance members’ use on the Canopy platform.

“Through our partnerships with Deloitte, Accenture, IBM and Capgemini, we’ve set up a virtual software factory to build as many as 20 apps per year both offshore and onshore,” he says. “As soon as a use case is completed, we’re able to scale very quickly.”

Not surprisingly, RiskBlock Alliance will be a growing, living ecosystem for some time. Matt Lehman, a managing director in Accenture’s insurance practice, says the firm’s involvement is expected to be long term. “Chris McDaniel is doing an unbelievable job generating interest in the industry in developing a wide-ranging set of use cases,” Lehman says. “The Institutes has a comprehensive vision and an endless amount of insurance processes to improve.”

Ultimately, the platform will be “all things insurtech” for the global insurance industry, McDaniel says, with data flowing into Canopy from countless sources outside the insurance industry, such as the IoT. “The combination of the IoT and blockchain technology, in addition to the use of predictive analytics and AI, will transform the insurance industry, creating new business models and revenue streams,” he projects. “Canopy will be all that is needed in the future for carriers and brokers to do what is best for their customers.”

If McDaniel is right, this future cannot come too soon for insurance-buying businesses and consumers and the industry as a whole. Time will tell.

Russ Banham is a Pulitzer Prize-nominated business journalist and author of 26 books. He writes frequently about insurance and technology. russ@russbanham.com

Spy on Spy: Hacking into the Darknet

In the murky underground forums of the darknet, thousands of hackers trade secrets, discuss new forms of malware, and boast about recent attacks. Back when those logging in to the forums were primarily a bunch of computer geeks, it probably had the feel of a harmless secret society. Then came the bad guys.

Criminal enterprises, terrorist organizations, and nation-states with malicious aims changed the nature of these underground forums, turning the “Gotcha!” game of hacking into a serious enterprise with devastating consequences. Listening in on what is now known as the darknet’s hacker chatter is now the life or death stuff of governments and businesses.

The problem is getting an invite. Not just anyone can log on to the darknet—an encrypted network built on top of the existing internet—and participate in hacker forums like a typical webinar. Only vetted hackers can apply to learn the latest about hacking tactics, techniques and procedures (TTPs), as well as emerging and growing threats. Yet there are white hat hackers—the good guys—who have been able to find their way into these forums.

Among these white hat hackers are cyber security experts Shawn Cozzolino and Alex Heid. Each is a cyber spy with a made-up persona that opens doors across the darknet.

Cozzolino is the surveillance and human intelligence team lead in the Counter Threat Unit™ (CTU) team of Secureworks, which protects customer networks and information assets from cybercrime. Heid is the Chief Security Officer at SecurityScorecard, a company that provides cyber security ratings.

Both spies have colorful backgrounds. Cozzolino’s resume, for instance, includes a stint as a counter-terrorism expert at U.S. Homeland Security and another assisting intelligence collection at the U.S. Special Operations Command in Tampa.

“Our team here at Secureworks is all former military and intelligence professionals,” Cozzolino said. “We’ve created personas that we’ve built up over many years to gain a reputation as legitimate black hat hackers in the underground community. This way, we can engage in discussions with threat actors in forums in Russia, Europe, and the Middle East. Over time, we build up a rapport.”

Learning the Ropes

Like Cozzolino, Heid took years to create his darknet façade. “Any time I had access to a computer in my software coding class as a high school kid in the 1990s, I hacked it to leverage information to help me do better in class,” he said. “I had no intention of doing anything malicious. Back then hacker culture wasn’t about theft or destruction. That came later on when criminal groups began using hacking methodologies to steal data and shut down networks.”

Heid attended Barbara Goleman High, a Miami Lakes, Florida-based technology-focused school that had one of the few high-speed broadband lines connected to the internet at that time. “Every other school in the area had dialup,” he recalled. “Given my tinkering, my teacher eventually made me the unofficial systems administrator in the lab. I guess you could say I’ve always been a white hat hacker.”

In 2008, Heid and a friend, James Ball, created HackMiami as a physical hacker space. Ball had become famous in hacking circles for infiltrating an online Al Qaeda forum, and Heid, who had become proficient at analyzing banking botnets while working in the financial sector, had earned significant cred for hacking the stealthy Zeus botnet in Russia.

Today, HackMiami is the premier annual conference bringing together hundreds of the sharpest minds in the digital underground and information security industry, an eclectic mix of white hat hackers, black hat hackers, spammers, law enforcement, military and threat intelligence analysts, and the security recruiting firms that want to hire them.

Both Heid and Cozzolino describe the work they do as intelligence gathering. “It’s like `catfishing’ on a dating app, where a person creates a fake profile using a photo of someone else who is a lot better looking,” said Cozzolino, with a laugh. “You start slowly, laying your bait by pretending you’re just another threat actor. In earning credibility with the cybercriminals, patience is key. Gradually you gain the trust of the real threat actors.”

When asked how he gets the ball rolling, Cozzolino hesitated. “All I can say is that there are a variety of trade-craft methods we use to build a reputation, which I can’t disclose,” he explained. “The best way to describe what we do is like being an undercover detective. You’re in the field acting like a low-level drug dealer, talking with real drug dealers with the ultimate goal of finding the kingpin.”

Heid also won’t divulge specifics of his persona-building approach, other than commenting that it took years to cement his credibility. He started out in the early 1990s by attending text-based hacker forums in internet relay chat (IRC) rooms, and then graduated to underground web forums on the darknet.

“I’m now circling around spaces like jabbers, which are encrypted chat rooms on the darknet,” he said. “They’re tougher to penetrate, requiring a bigger effort to hide one’s true identity.”

Wearing the Mask

Like traditional forums on the internet, each Darknet forum typically has an administrator, a moderator, longstanding verified attendees, and newer unverified people signing up for a visit. Some forums have high levels of security and restrict attendance to only active members of that group. Others are a bit more relaxed, willing to allow participants with a referral from someone they trust.

And most forums have an attendance limit, just like in the real world. “Sometimes you try to register, but you’re too late,” Heid said.

Once registered in a forum, the other participants are an odd lot, ranging from people cruising the scene for fun to criminal groups to hactivists like Anonymous who are there for political and financial reasons. “Depending on the culture of the group you’re dealing with, you can sometimes be completely transparent and let them know you’re a researcher or a journalist looking to learn about emerging threats,” Heid said. “They may let you in, or they may kick you out.”

Threat actors in different countries host forums through different platforms. “In the Middle East, hackers use a messaging tool called Telegram, whereas in China they use something called QQ,” Cozzolino explained. “Very few people use IRC anymore. We have been able to routinely access hundreds of forums, burnishing our personas as we go along.”

In creating and enriching his persona, Heid said building trust is a critical process. “It all boils down to social engineering; at the end of the day you’re dealing with people,” he said. “The more forums you attend, the greater your trustworthiness. There’s a running joke among white hat hackers that for every chat room with 100 people, only ten are real hackers and the rest are spectators.”

The cyber criminals are well aware such spies exist. Hackers even have a phrase describing an online identity used for the purpose of deception—a “sock-puppet.” “They know we exist, but they don’t know who we are,” Heid said.

Hackers also expect to be hacked by fellow hackers. In fact, it’s a bit of a sport. “Rival hackers are at each other’s throats,” Heid added. “There are long-standing rivalries between certain hackers who hack each other’s websites and release data from each other’s databases. There’s no honor among thieves. This makes threat actors paranoid and wily—all the more reason to gradually build your credibility.”

Taking Stock of the Spoils

According to Cozzolino, his team’s cyber spying has paid off for Secureworks’ clients. “We’ve picked up vital intelligence about new variants of malware and ransomware early on, and found exploits well before they were published,” he said. “Last year, for instance, we discovered three exploits before they were disclosed publicly.” (An exploit is the use of software, data, or commands to take advantage of a weakness in a computer system to carry out some form of malicious intent, such as a denial-of-service attack.)

But just like a fake lead in a physical criminal investigation, cyber spies must be careful to ascertain the validity of intelligence culled from a darknet forum. “There’s a fair amount of counterintelligence going on, with the actual threat actors leaking false information to muddy the waters,” Heid said.

Cozzolino agreed. “Some threat actors have horrible reputations for leading people astray,” he explained. “Each time we find something, we label it with high confidence, medium confidence, or low confidence.”

So, has he ever blown his cover? “We take very good precautions so there is no way the threat actors can link us back to anything real,” he said. “Everything we do is on a separate system with multiple layers of security.”

Cyber risk professionals say the white hats are making a big difference in the war on cybercrime. “They’re providing a valuable resource by being preemptive, spying on potential threats before they become full-blown disasters,” said Vance Brown, CEO of the National Cybersecurity Center, a cybersecurity think tank that provides cyber risk management training to business executives. “The intelligence they provide is an extremely important piece of the overall puzzle.”

As more light is shed on hackers’ brewing inventions and attack strategies, everyone benefits, Cozzolino said. “To guide better decisions on cyber preparedness and response, you need to collect, analyze and authenticate each piece of threat data,” he explained. “The intelligence we’ve vetted and provide to our business clients helps them better manage their cyber risks. That’s of value to them, the economy, and all of us.”

Russ Banham is a Pulitzer-nominated financial journalist and author who writes frequently about the intersection of business and technology

Think About It: Converting Brain Waves to Operate a Prosthetic Device

Following an electrical accident as a teenager, Les Baugh lost both arms to amputation. When he heard about a revolutionary surgery that would give him the ability to operate a prosthetic device using his thoughts, Baugh stepped forward as a volunteer.

Developed by The Johns Hopkins University Applied Physicals Laboratory, the pioneering surgical technique is called targeted muscle reinnervation or TMR. TMR is an innovative surgical procedure providing easier and more intuitive control of prosthetic arms.

In 2013, surgeons performed TMR on Baugh to access nerves in his upper torso. These nerves, when connected to the limbs, also developed by the laboratory, would control their movement. With training, Baugh learned to control the prosthetic simply by thinking about an action he wanted to perform. His thoughts engaged the nerves in his upper torso, which activated the prosthetic. For instance, he would think about lifting an empty cup from a counter-shelf height to a higher shelf and the prosthetic arm obeyed.

“We take the brain’s customary electrical impulses to control a human arm and use those impulses to control something else, in this case a prosthetic arm,” Michael McLoughlin, chief engineer for research and exploration development at the Johns Hopkins laboratory, explained.

While the nerve-controlled technology is an extraordinary breakthrough, McLoughlin is quick to warn that the technology is still in its early stages.

“We’re the Wright Brothers right now in all of this brain-computer interface technology, flying from one end of Kitty Hawk to the other,” he said. “But, the benefits for people with paralysis are real. The missing link between brain and limb will be replaced.”

From Battlefield to Laboratory

The Johns Hopkins’ Revolutionizing Prosthetics team—comprised of neural scientists, clinicians, technology developers, and academic and commercial partners across the U.S., Canada, and Europe—have been researching the potential in the design and natural performance of prosthetic limbs for a dozen years.

The Defense Advanced Research Projects Agency (DARPA) first funded this research because large numbers of soldiers in the wars in Iraq and Afghanistan were losing their limbs to an improvised explosive device or IED. Of the more than 50,000 U.S. troops wounded in action, approximately 2.6 percent suffered a major limb amputation, most because of an IED.

The initial research focused on making a better prosthetic. The team created a prototype that allowed for eight degrees of freedom (such as up, down, to the left or right) in its natural movements, compared to the 27 degrees of freedom in the human arm. This was a marked increase beyond the existing prosthetic arms.

Tests with patients recorded and configured artificial limb movements, as well as the electrical signals used to control it. Ultimately, the Johns Hopkins team created an artificial Modular Prosthetic Limb (MPL) with 180 sensors embedded, providing 26 degrees of freedom. The MPL also had more natural control—individual finger movements—that mirrored those of a biological human hand.

Developing Dexterity

After achieving major strides in physical dexterity, the next phase of development was to control the prosthetic limb through brain commands.

The Johns Hopkins team developed a small wireless device with 100 electrodes, each capable of measuring signals from individual neurons in the brain. The device was then implanted into the cranium of a monkey to access the animal’s cortical signals. Scientists decoded the signals to determine the corresponding action and then translated them into directions that could operate the robotic arm.

When the monkey thought about moving its own arm, the robotic arm moved in the way its mind had suggested. The tests proved the ability of the device to decode motor control signals from the brain and recreate natural sensations in external devices.

Wanting to assist the lab in the next stage of its research and development, Jan Scheuermann, a Pittsburgh mother of two, volunteered to have surgery to implant the neural transmitter into her brain. Scheuermann had a genetic disease that had paralyzed her from the neck down, disrupting the neural connection between her mind and limbs. The implanted electrodes allowed her brain’s messages to maneuver a robotic arm and even conduct a flight simulation.

Another research volunteer, Nathan Copeland, also stepped forward. Copeland was paralyzed from the chest down in a car accident.

“We wired the robotic arm to Nathan’s brain, providing him with two-way electrical feedback,” McLoughlin said. “He not only could operate the device by thinking, he also received signals coming from the robotic arm, such as the feeling that his fingers had been touched. It was a real `Star Wars’ moment.”

The next goal was to attach the prosthetic limb to a person to receive information directly from the brain. A single arm amputee, Johnny Matheny, volunteered to have the prosthetic connected to remaining bone in his arm. Again, the experiment was a rousing success. Matheny’s natural-like use of the prosthetic arm drew the attention of 60 Minutes, which featured him in a segment.

A Final Round of Applause

To honor the volunteers and the Revolutionizing Prosthetics team, The Johns Hopkins University board of trustees held a meeting whereby they brought Baugh to the podium to award him with a special coin. As the board members broke into applause, he dropped the coin.

The room became uncomfortably silent for a few seconds, until Baugh explained: “I thought about clapping myself.” Simply thinking about applauding caused his hand to open and drop the coin as it moved toward a clap.

Additional research and development is underway involving both invasive and non-invasive thought-controlled devices. The latter might be embedded into a hat that would, as one would imagine in a Hollywood sci-fi movie, receive wireless messages from the brain.

“We’re in a pilot program with Facebook at the moment exploring the idea of thought-to-text,” said McLoughlin. How “Star Wars” is that, he joked. “Use the force, Luke, to text your sister.”

Russ Banham is a Pulitzer-nominated journalist and author of the book, `Defining Innovations: A History of The Johns Hopkins University Applied Physics Laboratory.’

How Small Businesses Can Use Televisions To Enhance The Buying Experience

By Russ Banham

Forbes.com

Big-screen televisions are a pittance of what they cost just a few years ago, making them a potentially worthwhile investment for small businesses — not so they can catch customers up on reality television but to help with marketing.

Televisions strategically installed throughout a store can play programs that educate, interest and inform customers, spurring sales and cross-selling — a pair of shoes to go with that dress, perhaps? The challenge is to provide high-quality content that is entertaining, useful and not distracting.

“We’ve all seen great TV commercials and terrible ones,” said Anindya Ghose, Heinz Riehl chair professor at the New York University Stern School of Business, where he oversees the business analytics program. “If the music is too loud, the information doesn’t address my needs, and the program repeats every five seconds, it could be very off-putting.”

When done right, however, an implementation of television screens may allow small businesses to generate additional sales to offset the initial investment.

Inspire, Inform And Engage

While retailers have long used television screens to market in-store products, the investment value was difficult to quantify. Most programming provided basic information or simply repeated commercials seen at home. Now retailers know that content is, indeed, king.

What kind of content?

“It depends on a retailer and its customers, but generally it can be boiled down to programming that either inspires, informs or engages customers,” said Lokesh Ohri, a partner at Deloitte Consulting, where he leads the advertising, marketing and commerce practice.

Ohri provided examples of programming that inspires a consumer to buy something.

“Say you’re planning a vacation and you walk by a clothing store and see a large screen inside with a video of a man strolling on a beach in a Hawaiian shirt with relaxing ukulele music playing in the background. Or, you’re in a supermarket and there’s a video of a great-looking dish being prepared,” he said. “In both cases, the consumer wants to trade places.”

With informational content, the objective is to inform a consumer about the differentiating features of a product in an entertaining fashion. With regard to programming that engages people, the intent is to present content that matches consumers’ interests or needs, Ohri explained.

For instance, a small home renovation company can engage its customers by featuring remodeling shows next to model kitchens. And a deli or small food market can feature any of the dozens of cooking shows populating numerous networks.

A patient in a hospital likely will want more relaxing television content than patrons at a pub, whereas someone in a gym may want programming focused on exercise and nutrition.

Small and midsize businesses can provide video that benefits their customers simply by choosing cable television networks whose programs align with their marketing strategies.

As a first step, businesses should review what’s offered by local cable providers to see which package makes the most sense in terms of available content and cost.

Although the best deals on TVs happen on Black Friday, retailers offer sales throughout the year. With a wave of deals expected in the runup to the World Cup, businesses that are on the verge of investing in video may want to take advantage of May and June discounts.

Russ Banham is a Pulitzer-nominated business journalist and author of 24 books.

Leadership and Legacy: When Enough Is Enough at the Top

By Russ Banham

Carrier Management magazine

When to retire is one of the toughest decisions for any executive to make. For a CEO at the top of the pyramid, the decision is rife with complexities. Not only must the CEO relinquish day-to-day control, he or she must cope with the possibility of not having completed the strategic objectives developed at the outset of their tenure.

Like the song goes, “Should I stay or should I go?”

Hanging in there too long can tarnish the CEO’s legacy, while leaving too early may founder the ship. For a graceful exit, a capable successor needs to be in the wings, but this is not always the case. And captivating post-retirement activities must be considered, as it is psychologically damaging to jump off a fast-speeding train onto, well, the couch.

It’s also not easy to give up power. This may explain why many CEOs are getting older. From 2006 to 2018, the number of Fortune 500 CEOs age 65 to 69 more than doubled from 20 to 44, according to research by Korn Ferry provided to Carrier Management. The average age of a Fortune 500 CEO has gone up from 55.4 in 2007 to 57.4 in 2017, according to Spenser Stuart research. (2017 Spenser Stuart U.S. Board Index)

No CEO wants to be accused of overstaying his or her welcome. Sure, lots of people maintain their vigor and intellectual chops well into their 80s. But very few people are old and au courant at the same time, Berkshire Hathaway’s Warren Buffett excluded.

“Many CEOs have a hard time letting go,” said Cecile Alpers-Leroux, an economic anthropologist focused on workplace transformation as Ultimate Software’s vice president of human capital management innovation. “It requires deep reflection to make the leap—a verification of their values, what’s important to them and their aspirations going forward. But leap they must.”

Carrier Management reached out to four insurance company CEOs who have made their leaps, giving the decision the care and attention it deserves. Although their stories are different, they share similar values about life and work. In their reflections on retirement, they sought the counsel of spouses, friends and business colleagues.

“The most successful CEOs are the ones who put aside time to reflect on what they’ve accomplished and what they want in the future,” said New York-based executive coach Alisa Cohn, who works with C-suite leaders and board directors. “Not all CEOs fit this mold. Leadership can be intoxicating; you’re almost in a trance-like state. Your identity gets wrapped up in being the one in charge. But if you overstay your usefulness, it will come back and bite you.”

Company First

Well before he became the CEO of Penn National Mutual Insurance Company in 2010, Ken Shutts knew from personal experience that he didn’t want to work well into his 60s.

“My father, who had worked for Ohio Casualty Insurance Company for 42 years, retired when he was almost 69 years of age,” Shutts recalled. “He and my mother had great plans to do a lot of traveling. Twenty-nine days after he retired, he suffered a massive heart attack and passed away. He never got the chance to enjoy his retirement. It just stuck with me.”

Shutts did not want to encounter the same fate. A sports enthusiast, he divides life into quarters like a football game. With the average life expectancy for American males at nearly 79 years, each quarter consumes about 20 years.

“I’ve been working since I was 13, when my sister got me a job as a busboy at a restaurant where she was a waitress,” said Shutts. “That was the first quarter. Once you hit 60, whether you want to admit it or not, you are entering the fourth quarter of life. I’d been at the company for 35 years, starting out in the legal department. I’d been president of the company for seven years. The time had come to do something else, and I had made preparations here at the company to do it.”

He had a strong desire and commitment to mentoring the senior executives who would move a rung up the ladder following his retirement, including Penn National’s current CEO Christine Sears, the company’s former president and previously CFO. “You want to hand the baton over to someone who is ready to take it and help grow the company further,” he explained. “I took this responsibility very seriously and feel quite secure the organization is in great hands today.”

During his leadership tenure, Shutts guided an important affiliation with Waukesha, Wis.-based Partners Mutual Insurance Company, which is now a part of Penn National. Partners Mutual had a history, culture and mutual insurance structure that deftly aligned with Penn National’s history, culture and structure. It also relied exclusively on independent agents to sell its policies and served customers in Wisconsin and Iowa, two growth markets for Penn National.

In making the decision of when to retire, Shutts reached out to his wife, children and friends for their input. The determining factor was his response to a question he always asked his senior executives when they approached him with a difficult decision: “What’s in the best interests of the company?”

“That was my guidepost; it takes your emotions out of the equation,” he said.

Shutts is a firm believer that organizations must continually turn to new leadership to remain relevant and healthy. “A company needs new ideas, new energy and new oxygen to thrive,” he explained. “CEOs who stay on too long tend to become regimented in how they view things. We all know stories about sports figures that stay in the game past their prime. I’ve always believed it’s better to quit at the top while you still have the passion, vim and vigor to do other things.”

His “other things” include membership on Penn National’s board of directors. “My love for the company has never diminished,” Shutts said. “What I miss most about being a CEO is working with our employees and agents, interacting and seeing many of them daily. But I truthfully feel no voids in my life. When I get up in the morning, I look forward to the rest of the day.”

Purposeful Preparations

Terry Cavanaugh gave himself a 10-year tenure when he became CEO of Erie Indemnity Company in 2008, following a 33-year career with Chubb Group of Insurance Companies. Cavanaugh was 55 years old at the time and planned to work until he was 65. His projection was off by one year—he retired a few months shy of his 64th birthday. Close enough. “In my mind, there’s a half-life to being in any job, and as you go up the food chain to become the CEO, it becomes more acute,” he said.

In making the decision to retire, Cavanaugh felt good about his tenure. Under his leadership, Erie Insurance had increased its property/casualty direct written premiums by more than 45 percent and grew policyholder surplus by 60 percent. He was the first senior executive to be hired from outside the company. “The board was frustrated by not having a solid internal candidate to assume the post,” he explained.

Not surprisingly, his initial challenge was to build the organization’s operational and financial skillsets. “Human capital drives success,” he said. “I was acutely aware of the need to recruit and develop talent. Most importantly, I wanted to have a good successor in place when it was time for me to go.”

As he got closer in age to 65, the year he had established for his retirement, Cavanaugh reflected on whether or not his timing was right. “Some CEOs don’t have good self-awareness; others get to the point where the job becomes so much a part of their identity they can’t walk away comfortably,” he said. “I took inventory of how I felt intellectually, emotionally and physically about the company’s state and my own future.”

Eight and a half years had passed since he became CEO, and he realized another year and a half wouldn’t make much of a difference to the company and his legacy. “But it might extend the length of my lifespan not having to deal with all the stress and eat restaurant food on the fly anymore,” he added.

In his talks with former CEOs who had confronted the prospect of retirement, they often mentioned the pressure they felt from board directors requesting they stay on longer. “I feel the longer the CEO stays on, even if they’re successful and energetic, it adversely affects the succession management plan,” he said. “It doesn’t send a good message to the executive team and can create organizational apathy.”

A more personal reason to move on with life is the realities of aging. “When you hit 64 and look in the mirror, you realize it’s harder to be courageous—to take innovative risks,” he confided. “Fortunately, I had groomed people to take over. It was their time now.”

Cavanaugh lives half the year today in Naples, Fla., where he often runs across other former CEOs. “I met this one fellow who said, ‘Terry, you and I are PIPs. I asked what he meant and he replied—’Previously Important People.’ Made me laugh.”

Nowadays, he puts his considerable business acumen to work as a member of two boards and is an executive coach to C-suite leaders. “My advice to them is to retire while they’re still champions,” he said.

Knowing the End Game

Jim Kennedy retired as the CEO of Ohio Mutual Insurance Group when he turned 63 years old in 2015, having served in the post since 2003. Like Shutts, Kennedy had made the decision to retire in his 60s for personal reasons. When he was 57, his older brother, an executive at another insurance company, passed away at the age of 64 from a sudden heart attack.

“Coming to grips with the fragility of life made me consciously think about my own retirement,” said Kennedy. “None of us know how long we have left on this planet. And there were other things I wanted to do with my life than just work.”

His family lineage was close in mind throughout his retirement deliberations. “My father was a car salesman working on commission who never earned a dime of salary; he didn’t have the money to retire early and do the things he’d wanted to do,” he said. “Fortunately, I was in a financial position that I could retire. After I hit 60, my wife and I had these long conversations about what we wanted our future together to look like. She was supportive of whatever I wanted, she said.”

He realized that running a large insurance company had consumed much of his time and energy, entailing quite a bit of travel. “I didn’t want to die in the chair,” said Kennedy. “But I also wanted to be sure when I left that the financials and operations were solid to pass on to someone else to take the company further.”

They were. During Kennedy’s tenure, Ohio Mutual’s premium revenue increased by 78 percent, surplus nearly tripled, and assets expanded by 140 percent. The company had grown from one state market to seven. He had done his best and let go of the reins in 2015.

“I’ve got no regrets retiring when I did, although I do miss the interactions with people and the collegial effort of everyone coming together and putting their minds around a problem and solving it,” he said. “But I planned my retirement well before I saw the finish line.”

Today, he sits on the board of Harford Mutual Insurance Company in Bel Air, Md., and the board of a local college. He provides operational consulting services to insurance companies and is actively engaged at the National Association of Mutual Insurance Companies. “I’m teaching people how to become a successful board director,” he said. “There’s a need for it.”

Hanging On Because You Have To

Warren Heck was 64 years old when he became CEO of GNY Insurance Companies and 78 when he retired. In between, he twice tried to retire, but the executives in line to succeed him either didn’t stand up to further scrutiny or decided to leave the company.

“I knew at the age I was when I became CEO that I didn’t have much time to find a successor to carry on, but it was much harder than I had imagined,” said Heck, who prior to becoming GNY’s CEO had been its president and chief operating officer for a lengthy 18 years.

Heck, who retired in 2014, was hale and hearty at the time of his decision and remains physically and intellectually sharp today at 82.

“Looking back, I honestly never cared if I became CEO or not; I was interested in running the company,” he said. “All I wanted was to be in charge of some objective and couldn’t care less about the title. My predecessor was different; he held onto the job like it was his lifeline. But as long as he let me run the company, I didn’t care if he remained CEO.”

With regard to his own long tenure, Heck shares Shutts’ philosophy that the company’s interests always come ahead of the CEO’s needs. “If you’re deeply and emotionally connected to the company, you want it to succeed after you leave,” he said. “To do that, you have to find someone who will put the interests of the business ahead of their own. It took more time than I’d imagined to find that person.”

Lengthy CEO tenures are common at GNY. Heck is only the fifth CEO in the company’s 104-year-old history.

“I love insurance, so it wasn’t a burden to lead the company in my 70s at all,” he said. “People have always told me I don’t look my age. But I knew I was getting older and running out of time. Every now and then a board director would point out that I was getting a little long in the tooth, but nobody was aggressive about it and I appreciate the fact that they did point it out. Still, I had to find a successor.”

He finally did. Heck’s daughter Elizabeth, GNY’s former president and chief operating officer, is the company’s CEO today. “The board asked for the names of three people as my successor, and Elizabeth was one of them,” he said. “I suggested her because she’s a financial person who has a CPA and worked for one of the big accounting firms, as well as at other insurance companies. I told the board to treat her as one of the candidates. Elizabeth impressed them with her knowledge and expertise. They gave her the job and she’s doing great work today.”

Heck, who remains on GNY’s board as its non-executive chairman, left the company in terrific shape. In 2014, it tallied $315 million in direct written premium, a $430 million surplus and close to $1 billion in assets.

Does he miss the thrill of running a big insurance business? “Not at all,” said Heck. “I retired not because I didn’t have the energy to continue or the company was becoming unsuccessful—far from it. I would have retired years before if we’d had the right leadership in place to take over.”

Humility, Not Hubris

Each of the former CEOs feels a tremendous sense of accomplishment at leaving the organization in better shape than when they took the top post. None fell prey to the addictive charms of being in charge, putting the company’s best interests first. They loved the job and the small intimacies that occur in all business dealings, but they had other fish to fry and new lives to create.

Best of all, they did not want to squander the knowledge and expertise they had accumulated through decades of hard work. “The best CEOs take all the business lessons they’ve learned over a lifetime and contribute them to boards, small businesses and students,” said Cohn. “They’re used to making a positive difference.”

As for the “right age” for a CEO to retire, Cohn said it’s irrelevant. “The decision has to do with the individual’s values, not the number of years they’ve lived,” she said.

Still, every CEO has an expiration date. Appreciating this fact is crucial to ensuring the next leader will grow the business further. As the former CEOs’ stories indicate, successful succession management is not a breezy walk in the park.

“It’s vital that a CEO choose someone to succeed them who will honor their legacy and yet also take the organization in the direction it needs to go,” said Alpers-Leroux. “But if you stay on too long and don’t let that person lead, you’re doing a disservice to them and the company.”

As always, timing is everything.

Playing Favorites

THE DISMANTLING OF NET NEUTRALITY COULD UNDERMINE TELEHEALTH

By Russ Banham

Chief Executive magazine

The dismantling of so-called Net Neutrality rules regulating service providers that connect consumers to the internet may have unintended consequences for the rapidly growing telehealth industry.

Telehealth, or telemedicine as it is also called, refers to virtual healthcare provided remotely by a doctor, nurse practitioner, registered nurse or other medical specialist. Employers that provide telehealth services to employees are able to reduce absenteeism caused by the need to visit a doctor physically, enhancing employee productivity while reducing overall healthcare expenditures.

In 2017, 71% of employers with 500 or more employees offered telehealth services, up sharply from the 59% that offered it the prior year, according to a study by Mercer. These numbers may go down in the aftermath of the Net Neutrality ruling, which is perceived to have a disproportionate impact on consumers in low-income and rural areas.

Companies in these regions are a key target market of telehealth providers, given the significant distance an injured or ill employee must travel to obtain adequate healthcare. “Reliable broadband connectivity is needed for telehealth services to thrive for all patients and healthcare facilities,” says Mary Kay O’Neill, M.D., senior clinical advisor at Mercer Health and Benefits.

The repeal of the Net Neutrality law effectively allows giant internet service providers (ISPs) to slow down broadband connections for low-income content customers to provide greater bandwidth to more financially valuable forms of content, such as streaming television. “The ISPs can play favorites among different entities that deliver content,” says O’Neill. “Large healthcare systems in primarily urban areas will have an unfair advantage over smaller, rural ones.”

This disparity can have a dire impact on telehealth services like behavioral health. “Employees receiving smoking cessation, weight management, psychological counseling and other forms of behavioral assistance need these telehealth services to be readily available, due to the coaching and frequent back-and-forth texting and FaceTime that occurs to help the person through the day,” says O’Neill. “If this is interrupted, no one benefits.”

The ruling introduces other broadband access concerns. For instance, high-speed internet connections are needed to link personal medical devices and wearable sensor technologies to remote telehealth providers. A case in point is the use of a personal glucometer for diabetes management.

“When the reading exceeds a certain threshold, the information automatically uploads to a database in a cloud, where a nurse can access it remotely,” says O’Neill. “If the data doesn’t upload in time, not only is this dangerous from a patient safety perspective, it is a wasteful use of a healthcare facility’s money.”

She adds, “This is one of the hottest things in healthcare software right now, but it depends on connectivity.”

Forced to negotiate for bandwidth, small rural hospitals may decide to curtail their telehealth programs and invest their financial resources in other areas—to the detriment of companies and people that truly benefit from the service.

What’s the solution? “Really this is a tough one to solve,” O’Neill says. “I would urge rural citizens to urge their legislators to take actions to ensure we don’t have a two-tier system in which lower-income people in rural regions get the short end of the stick.”