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Titanic, or A Moral Deliberation

March 4, 2022   Insurance Definition

Titanic, or A Moral Deliberation

The film “Titanic” is riddled with moral dilemmas. In one of the scenes, the owner of Star Line, the shipping company that owned the now-sinking Unsinkable, leaps into a lowered life-boat. The tortured expression on his face demonstrates that even he experiences more than unease at his own conduct: prior to the disaster, he instructed the captain to break the trans-Atlantic speed record. His hubris proves fatal to the vessel. Moreover, only women and children were allowed by the officers in charge into the lifeboats.

But the ship’s owner was not the only one to breach common decency and ethics.

The boats could accommodate only to half the number of those on board and the First Class, High Society passengers were preferred to low-life immigrants under deck and other Third Class passengers.

Why do we all feel that the owner should have remained aboard and faced his inevitable death? Because we judge him responsible for the demise of the ship. His disastrous interference – motivated by greed and the pursuit of celebrity – was a crucial contributing factor. The owner should be punished for what he had done, we feel. This closure intuitively appeals to our sense of natural justice.

Would we have rendered the same judgment had the Titanic’s fate been the outcome of accident alone? If the owner of the ship had had no contribution to the circumstances of its horrible end – would we have still condemned him for saving his life? Less severely, perhaps. So, the fact that a moral entity had acted (or omitted, or refrained from acting) is essential in determining its future rewards or punishments and in dispensing them.

The “product liability” approach also fits here. The owner (and his “long arms”: manufacturer, engineers, builders, etc.) of the Titanic were deemed responsible because they implicitly contracted with their passengers. They made a representation (which was explicit in their case but is implicit in most others): “This ship was constructed with knowledge and forethought. The best design was employed to avoid danger. The best materials to increase pleasure.”

That the Titanic sank was an irreversible breach of this contract. In a way, it was an abrogation of duties and obligations. The owner/manufacturer of a product must compensate those consumers whose product harms in any manner that they were not explicitly, clearly, visibly and repeatedly warned against. Moreover, he should even make amends if the product fails to meet the reasonable and justified expectations of consumers, based on such warrants and representations.

Compensation can be either in kind (as in more ancient justice systems) or in cash (as in modern Western civilization). The product called the “Titanic” took away the lives of its end-users. Our “gut instinct” tells us that the owner should have paid in kind. Faulty engineering, insufficient number of lifeboats, over-capacity, hubris, passengers and crew not drilled to face emergencies, extravagant claims regarding the ship’s resilience, contravening the captain’s professional judgment – all these seem to be sufficient grounds to sentence the owner to death on his own sinking product.

But shouldn’t the hapless owner have availed his precious place to women and children? Should not he have obeyed the captain’s orders (the marine law)? Should he willingly have succumbed to rules of conduct that put his life at risk?

The reason that the lives of women and children are preferred to men in salvage situations is because they represent the future. They are either capable of bringing life to the world (women) – or of living longer (children). Societal etiquette reflects the arithmetic of the species, in this (and in many another) case.

But if this were entirely and exclusively so, then young girls and female infants would have been preferred to all other groups of passengers. Old women would have been left with the men to die. That the actual (and declared) selection processes on the Titanic differed from our theoretical considerations says a lot about the vigorousness and applicability of our theories – and even more about the real world.

The owner’s behavior may have been deplorable – but it, definitely, was natural. He put his interests (his survival) above the concerns of his society and his species. Most of us would have done the same under the same circumstances.

The owner of the ship – though “Newly Rich” – undoubtedly belonged to the First Class, Upper Crust, Cream of Society passengers. These were treated to the lifeboats before the passengers of the lower classes and decks. Was this a morally right decision?

For sure, it was not politically correct, in today’s terms. Class and money distinctions were formally abolished three decades ago in the enlightened West. Discrimination in now allowed only on the basis of merit (on the basis of one’s natural endowments).

But, why should we think one basis for discrimination (merit) preferable to another (money or property)? Can we eliminate discrimination completely and if it were possible, would it have been desirable?

The answer, in my view, is that no basis for discrimination can hold the moral high ground. They are all morally problematic because they are deterministic and assign independent, objective, exogenous values to human lives. On the other hand, we are not born equal, nor do we proceed to develop equally, or live under the same circumstances and conditions. It is impossible to equate the unequal.

Discrimination is not imposed by humans on an otherwise egalitarian world. It is introduced by the world into human society. And the elimination of discrimination would constitute a grave error. Inequalities among humans and the ensuing conflicts are the fuel that feeds the engines of human development. Hopes, desires, aspirations and inspiration are all the derivatives of discrimination or the wish to be favored, or preferred to others.

Disparities of means create markets, labour, property, planning, wealth and capital. Mental inequalities lead to innovation and theory. Knowledge differentials are at the heart of educational institutions, professionalism, government and so on. Osmotic and diffusive forces in human society are all the results of incongruence, asymmetries, disparities, differences, inequalities and the negative and positive emotions attached to them.

The Titanic’s First Class passengers were preferred because they paid more for their tickets. Inevitably, a tacit portion of the price went to amortize the costs of “class insurance”: should anything bad happen to this boat, persons who paid a higher price will be entitled to receive superior treatment. There is nothing morally wrong about this. Some people get to sit in the front rows of a theatre, or to travel in luxury, or to receive better medical treatment (or any medical treatment) precisely because they can afford it.

There is no practical or philosophical difference between an expensive liver transplant and a place in a life boat. Both are lifesavers. A natural disaster is no Great Equalizer. Nothing is. Even the argument that money is “external” or “accidental” to the rich individual is weak. With the exception of pampered heirs and scions of old families – a minority – most rich people work hard for their wealth.

Often, people who marry money are judged to be insincere or worse (cunning, conspiring, evil). “He married her for her money”, we say, as though the owner and her money were two separate things. The equivalent sentences: “He married her for her youth or for her beauty or for her intelligence or for her erudition” sounds “wrong” by comparison. These are legitimate reasons to get married. Money isn’t.

But youth and beauty are more transient than money. As opposed to hard cash, these qualities are really accidental because the beneficiary is not responsible for “generating” them and can do nothing to preserve them.

Money, on the other hand, is generated or preserved (or both) owing to the personality of its owner. Owning, increasing, and preserving one’s wealth reflects more profoundly on one’s personality than youth, beauty and many other (transient or situation-dependent) “character” traits. Money is an integral part of its owner and a reliable indicator of his mental disposition. It is, therefore, a valid criterion for discrimination and for choice.

The other argument in favor of favoring the first class passengers is their contribution to society. A rich person contributes more to his society in the short and medium term than a poor person. Vincent Van Gogh may have been a million times more valuable to humanity, as a whole, than his brother Theo – in the long run. But in the intermediate term, Theo made it possible for Vincent and many others (family, employees, suppliers, their dependants, and his country) to survive by virtue of his wealth. Rich people feed and clothe poor people directly (through employment or charity) and indirectly (through taxation). The opposite, alas, is not the case.

Admittedly, this argument is somewhat flawed because it does not take time into account. We have no way to predict the future with any certainty. Each person carries the Marshall’s baton in his bag, the painter’s brush, the author’s fables. It is one’s potential that should count – not one’s standing in life. A selection process, which preferred Theo to Vincent would be flawed. In the long run, Vincent proved more beneficial to human society and in more ways – including financially – than Theo could have ever been.

But, in the absence of omniscience and precognition, all we can do is to prefer those who have proven themselves (the rich) to those who haven’t (the poor) – and those who can create life or live it (women and children) to those who can’t or have (men and the elderly).

Appendix – On Causation and Causality

And yet, the real question is this : why should anyone pay for his actions?

First, we must confront some thorny issues, such as determinism. If there is no free will, there can be no personal responsibility. Another problem is the preservation of personal identity: are the person who committed the act and the person who is made to pay for it – one and the same? If the answer is in the affirmative, in which sense are they the same, the physical, or the mental? Is the “overlap” between the two only limited and probabilistic?

We can assume, for this discussion’s sake, that personal identity is undeniably and absolutely preserved and that there is free will and, therefore, that people can predict the outcomes of their actions, to a reasonable degree of accuracy and that they elect to accept these outcomes prior to the commission of their acts or to their omission.

This does not answer the question, though. Even if there were a contract signed between the agent (acting person) and the world, in which the person willingly, consciously and intelligently (without diminished responsibility or capacity) accepted the future outcomes of his actions, the question would still remain: why should it be so? Why cannot we conceive of a world in which acts and outcomes are divorced? It is because we cannot believe in a world devoid of causality.

Causality is a relationship between two things, or, rather, events, the cause and the effect, one generating or produces the other. The first is the latter’s efficient cause and it acts upon it (it acts to bring it about) through the mechanism of efficient causation.

A cause can be direct (mediated by a physical mechanism or process) or merely explanatory (historical cause in a narrative). Of Aristotle’s Four Causes (Formal, Material, Efficient and Final), only the efficient cause creates something distinct from itself.

The causal discourse, therefore, is problematic (how can a cause lead to an effect, indistinguishable from itself?). Singular Paradigmatic Causal Statements (Event A caused Event B) differ from General ones (Event A causes Event B). Both are inadequate in dealing with mundane, routine, causal statements because they do not reveal an overt relation between the two events discussed.

Moreover, in daily usage we treat facts (as well as events) as causes. Not all the philosophers are in agreement regarding factual causation. Davidson, for instance, admits that facts can be relevant to causal explanations but refuses to accept them as proper reasons. Acts may be distinct from facts, philosophically, but not in day-to-day regular usage. Laymen (the vast majority of humanity, that is) perceive them to be the same things.

Pairs of events that are each other’s cause and effect are accorded a special status. But, that one event follows the other (even if invariably) is insufficient grounds to label them “cause and effect”. This is the famous “Post hoc, ergo propter hoc” fallacy. Other possible relations between the two events must be weighed and the possibility of common causation must be seriously contemplated.

Such sequencing is, conceptually, not even necessary: simultaneous causation and backwards causation are part of modern physics, for instance. Time seems to be irrelevant to the status of events as cause or effect, though both time and causation share an asymmetric structure (A causes B but B does not cause A).

Still, the direction (the asymmetry) of the causal chain is not of the same type as the direction (asymmetry) of time. The former is formal, the latter, presumably, physical, or mental. A more serious problem, to my mind, is the converse: what sets apart causal (cause and effect) pairs of events from other pairs in which both member-events are the outcomes of a common cause?

Event B can invariably follow Event A and still not be its effect. Both events can be the effects a common cause. A cause either necessitates the effect, or is a sufficient condition for its occurrence. The sequence is either inevitable, or possible. In short, we know little that is certain about causality.

Here, philosophers diverge. Some say (following Hume’s reasoning and his constant conjunction relation between events) that a necessary causal relation exists between events when one is the inevitable outcome (inevitably follows) the other. Others propound a weaker version: the necessity of the effect is hypothetical or conditional, given the laws of nature.

Put differently: to say that A necessitates (causes) B is no more than to say that it is a result of the laws of nature that when A happens, so does B. Hempel generalized this approach. He said that a statement of fact (whether a private or a general fact) is explained only if deduced from other statements, at least one of which is a statement of a general scientific law. This is the “Covering Law Model” and it implies a symmetry between explaining and predicting (at least where private facts are concerned). If an event can be explained, it can be predicted and vice versa. Needless to say that Hempel’s approach did not get us nearer to solving the problems of causal priority and of indeterministic causation.

The Empiricists went a step further. They stipulated that the laws of nature are contingencies and not necessary truths. Other chains of events are possible where the laws of nature are different. This is the same tired regularity theory in a more exotic guise. The Empiricist treatment of causality is a descendant of Hume’s definition of causality: “An object followed by another and where all the objects that resemble the first are followed by objects that resemble the second.”

According to Hume, nothing in the world is a causal necessity, events are only constantly conjoined. Regularities in our experience condition us to form the idea of causal necessity and to deduce that causes must generate events. Kant called this latter deduction “A bastard of the imagination, impregnated by experience” with no legitimate application in the world.

This bastard also constituted a theological impediment. God is considered to be “Causa Sui”, His own cause. But any application of a causal chain or force, already assumes the existence of a cause. This existence cannot, therefore, be the outcome of the use made of it. God had to be recast as the uncaused cause of the existence of all things contingent and His existence necessitated no cause because He, himself, is necessary.

This is flimsy stuff and it gets even flimsier when the issue of causal deviance is debated. A causal deviance is an abnormal, though causal, relation between events or states of the world. It mainly arises when we introduce intentional action and perception into the theory of causation.

Let us revert to the much-maligned owner of the sinking Titanic. He intended to do one thing and another happened. Granted, if he intended to do something and his intention was the cause of his doing so – then we could have said that he intentionally committed an act. But what if he intended to do one thing and out came another? And what if he intended to do something, mistakenly did something else and, still, accidentally, achieved what he set out to do?

The popular example is if someone intends to do something and gets so nervous that it happens even without an act being committed (intends to refuse an invitation by his boss, gets so nervous that he falls asleep and misses the party). Are these actions and intentions in their classical senses? There is room for doubt.

Davidson narrows down the demands. To him, “thinking causes” (causally efficient propositional attitudes) are nothing but causal relations between events with the right application of mental predicates which ascribe propositional attitudes supervening the right application of physical predicates. This approach omits intention altogether, not to mention the ascription of desire and belief.

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Leveraging Six Sigma in IT

February 20, 2022   Insurance Definition

Leveraging Six Sigma in IT

INTRODUCTION
CHANGING BUSINESS PARADIGM
The International Data Corporation (IDC) predicted that the worldwide outsourcing market would grow from 0 billion in 1998 to 1 billion in 2003, with a compound annual growth rate (CAGR) of 12.2 percent.
The 1990s witnessed a massive spurt in service outsourcing, particularly in the IT services sector.
Over 60% of the Fortune 500 companies, located in Europe and America are outsourcing their IT operations offshore to developing economies like Asia, Africa, the Carribean and Latin America with a view to achieve cost reduction. The primary contributor to cost reduction was the wage disparity between outsourcing companies and the service providers. This first phase of outsourcing leveraging wage arbitrage is towards completion –with a large chunk of cost reduction potential being realized.
Today, outsourcing companies, have identified quality and productivity as the key differentiators in evaluating service providers. These parameters are of prime importance since most software solutions have relatively small payback periods. Service providers also bring complementary knowledge, ideas, and business methodologies, and enable outsourcing companies to concentrate on core competencies. These benefits in addition to cost reduction are turning the tide in favour of outsourcing.
It is difficult to leverage these benefits in the absence of a defined set of tools and techniques. Application of process improvement techniques like Six Sigma can help realize these benefits. This paper examines the application of Six Sigma to the IT services industry holistically.

SIX SIGMA – AN OVERVIEW
“Contrary to what some believe, the goal of Six Sigma is not to achieve six sigma levels of quality.
Six Sigma is about improving profitability, although improved quality and efficiency are immediate by-products of Six Sigma.” – Mikel Harry
KEY SIX SIGMA CONCEPTS
Bill Smith, a senior engineer and scientist at Motorola introduced the Six Sigma concept in 1986, to standardize the way defects are counted. Motorola extended the benefit of its Six Sigma expertise to other organizations via the Motorola University. At its core, Six Sigma revolves around the following key concepts.

  • Critical To Quality (CTQ) – Attributes most important to the customer
  • Outside In approach – Looking at internal processes from the customer’s perspective and changing them accordingly
  • Defect – Any event that does not meet the specifications of a Critical to Quality (CTQ) attribute
  • Defect Opportunity– Any event, that provides a chance of not meeting customer requirements and which can be measured
  • Defective – A unit of product containing one or more defects
  • Transfer Function – Y = f (X1, X2, X3….Xn), where Y is the dependent or response variable and Xs are independent or predictor variable that control the performance of Ys. Focus of Six Sigma is to control Xs and not Ys.

Before moving on to the application of Six Sigma to IT services, let us first understand the Six Sigma methodology.
The evolution of the Six Sigma methodology can be explained with a brief description of sigma.
· “s” is a Greek alphabet that denotes standard deviation. Standard deviation is a measure of dispersion in a given data set. The values (of the data set) are equally distributed on either side of the mean i.e. above and below. We delineate some data points within that timeline. The sigma value is measured against this. As we move farther away from the mean on the timeline, the sigma value goes on increasing.
· Process Sigma (Z) – Measure of process capability. Process capability is process’ ability to meet customer requirements.
· The Six Sigma methodology focuses on reducing the variation in any process and aligning the process mean with customer specified target. A process can be said to be at Six Sigma level if the nearest Customer Specification limit is six standard deviations away from mean of the process.
Six Sigma is a business strategy that results into achieving a near zero defect level. The sigma levels and their corresponding defects per million opportunities (DPMO) give an idea of the quantum of improvement in yield with Six Sigma.
The fundamental objective of the Six Sigma methodology i.e. implementation of a measurement based strategy to propel process improvement and reduce process variation is accomplished by means of two strategies – DMAIC (Define, Measure, Analyze, Improve and Control) and DMADV (Define, Measure, Analyze, Design and Verify).
DMAIC is an improvement system for existing products or processes. Fundamentally DMAIC is –

  • Define – Define project goals and customer deliverables based on voice of customer (VOC).
  • Measure – Measure the process to evaluate current performance with respect to customer requirements.
  • Analyze – Analyze and determine root cause(s) of poor performance.
  • Improve – Devise and evaluate multiple solutions to improve performance and eliminate defects; Pilot solution and compare performance.
  • Control – Quantify improvements; Implement control plans to sustain desired performance.
    Design for Six Sigma (DFSS) is used to design or re-design a new product or service. One popular DFSS methodology is called DMADV. Fundamentally DMADV is –

  • Define – Define the scope of the project and initiate the project.
  • Measure – Measure customer needs and specify the CTQ parameters.
  • Analyze – Analyze the concepts that meet customer needs (CTQs).
  • Design – Develop a detailed design with respect to the customer needs and identify control plans.
  • Verify – Test and verify design performance with respect to customer CTQs.

DMAIC focuses on only one or two CTQ (Critical To Quality) parameters at a time whereas DMADV focuses on an entire set of CTQs for a given product / service or process.

SIX SIGMA IN IT
“Eighty-five percent of the reasons for failure to meet customer expectations are related to deficiencies in systems and process rather than the employee. The role of management is to change the process rather than badgering individuals to do better” – Dr. DemingSeveral process improvement methodologies like Six Sigma, Total Quality Management (TQM), Quality Circles, Taguchi, Statistical process control, etc. are being successfully implemented in the manufacturing industries sector. It was perceived that such improvement methodologies are ineffective in the IT services industry. GE, pioneers of Six Sigma implementation in a non-manufacturing set-up, has estimated benefits of the order of billion during the first five years of implementation.
Some commonly made arguments against the effectiveness of Six Sigma in IT services sector were

  • Software processes are difficult to measure.
  • Software development is people intensive work that needs creativity.
  • Software development is not a repeatable process.
  • Six Sigma theories are based on assumption of normal probability distribution and Software processes cannot be included in this category.

Though these factors are true in some sense, the Six Sigma methodology can still be applied to IT processes.
The software processes are definitely difficult to measure but it’s not an impossible task. Industry leaders like IBM and institutions like Software Engineering Institute have designed and published many metrics for software processes for the benefit of the entire industry. Capability Maturity Models prescribe the quantitative management processes as one of the Key Process Areas at level 4. Lot of books and other material is available publicly to choose right metrics from. Six Sigma offers strong tools like Quality Function Deployment (QFD), CTQ flow-down and other templates to convert high-level VOC into measurable CTQs.
90% of the processes in a software services company are repeatable and can be improved by the process improvement DMAIC methodology. The DFSS methodology can be applied to the remaining
5-10 % of the processes, which involve creativity.
It is true that Six Sigma concepts evolved with normal distribution. But, Six Sigma tools can be easily adapted to handle processes having non-normal distribution
Having discussed the arguments supporting the applicability of Six Sigma to IT processes, let us make an attempt to understand the applicability of Six Sigma to the processes that are an integral part of IT services.
CORE DELIVERY PROCESSES
The software development life cycle (SDLC) consists of four phases – Analysis, Design, Coding and
Testing. Along with these core phases, processes like defect prevention, project management,
Software Quality Assurance (SQA), Reviews, etc. are an integral part of the Quality Management System of any IT service provider. The effectiveness of these core processes directly impact the
CTQ parameters. There is a large scope for improvement in these processes in most IT companies. Six Sigma can be deployed to improve these processes.
One of the key factors in deploying Six Sigma is identifying the “Y” metrics (dependants). But for core processes this becomes simpler since historical data for key metrics such as review efficiency, review effectiveness, productivity, defect density, schedule variance and effort variance are already available. After prioritization, critical poor performing metrics can be taken as Six Sigma DMAIC projects.
Six Sigma DFSS methodology can be applied for software development projects. Six Sigma in
SDLC helps in making the software manufacturing process more predictable and ensuring that all
Customer CTQs are met. Some Sigma tools that can be applied in this methodology are –

  • Quality Function Deployment (QFD) helps in converting the high-level customer requirements (VOC) into detailed program specifications. Use of QFD ensures that no requirements are missed and it also helps in prioritizing the software elements.
  • Failure Mode Effect Analysis (FMEA) is a tool that provides effective risk management for the entire SDLC, and identifies the probable failure modes of software at design phase. This initiates corrective action on the design.
  • Pugh matrix enables software developer / analyst to compare different concepts with reference to customer CTQs and create strong alternative concepts from weaker concepts Scorecard is a predictive tool used for:
    1. Predicting final quality (Y metrics) based on process (X) metrics
    2. Quantitative Risk Assessment Identification of High Defect Drivers Linkage from Customer CTQs at lower levels in a flow down
    3. Application of Design of Experiments in software testing is an emerging trend. Software testing based on orthogonal array, detects most possible defects at a fractional testing time.

DELIVERY SUPPORT PROCESSES
The processes that are value enablers are equally important to consistently deliver best quality service to the customers. These processes consist of infrastructure and network services, Resource Management, HR processes, Finance and accounting, Training, Central Quality organization etc.
Efficiency and effectiveness of delivery support processes directly or indirectly contribute to the productivity of core delivery processes. Processes like infrastructure and network maintenance are extremely important for offshore development / BPO models.
Six Sigma DMAIC projects can be forked to improve any or all the processes mentioned above.
Some Y metrics for Delivery support processes are

  • Resource turnaround time
  • Cycle time for recruitment
  • Defects in payroll processing
  • On time invoicing
  • Accuracy of invoicing
  • Network response time
  • Network utilization
  • Training effectiveness

In effect, Six Sigma has a profound impact on the most critical resource in IT industry i.e. human resources.
PRODUCT QUALITY ATTRIBUTES
It is of paramount importance to deliver a high quality software product. The application of Six Sigma to the above two areas – Core Delivery Processes and Delivery Support Processes, directly or indirectly contributes to product quality. Metrics like response time, resource usage (Memory / CPU), and resources availability are critical to the quality of a software application. Six Sigma methodologies can be molded to optimize performance in keeping with the required metrics.
The Six Sigma DFSS methodology enables us to predict product performance in the initial design stage so that adequate control measures are in place. Figure 3 depicts the impact of any error or missed requirement in design phase on the cost in the later phases of the software development lifecycle. It has been proved that time taken to fix a design or requirements defect during testing phase needs about 20 times of rework effort as compared to a defect fixed right at the induction phase. Here, deployment of Six Sigma can play a major role to reduce or control the development costs.
The DFSS methodology as applicable for software processes cannot be directly mapped to DFSS methodology as implemented in manufacturing processes. In manufacturing, a product once designed is produced for years together. Whereas, in case of software development, a software design is manufactured (coded, to be precise) only once. This makes the application of DFSS in software development tougher. In a typical manufacturing setup, the crux of DFSS lies in achieving manufacturability at Six Sigma quality levels. For a manufactured product, the design budget might be flexible but in the case of software solutions, the budget for design is very limited and all the CTQs must be met in the given budget. The DFSS rigor ensures that the software is designed, coded and approved with minimum rework.
The DMAIC methodology can be applied to improve the Product Quality Attributes of existing applications, too. Many a times, as the user base increases or if the application is deployed in a global environment, response time decreases. Round the clock availability of application has also become a critical issue in today’s global work culture and BPO scenario. DMAIC projects can be implemented to tackle such issues and find a cost effective fix. Improving reliability measures like MTBF (Mean time between failures) and MTTR (Mean Time to Repair) can be other focus areas of DMAIC improvement projects.
CUSTOMER’S PROCESSES
Most IT companies provide “End to End” solutions to their clients and therefore enjoy a long-term relationship with their customers. This has benefited the service providers in acquiring significant domain knowledge. The consultants possess fairly good amount of tacit knowledge about the client’s core business processes in addition to IT skills. Six Sigma tools and techniques provide an excellent channel to develop a basis for solution based consulting.
Six Sigma methodologies can help core business processes as well as IT processes. Owing to the consultant’s exposure to customer’s processes through IT support, they are familiar with the best functioning processes, processes which are not operating efficiently and those processes which have reached entitlement. This enables prioritization to tackle the relevant processes and this prioritization of improvements makes implementation of Six Sigma easier.

PATNI’S APPROACH
Patni’s Process Consulting Practice offers customers a complete range of process improvement related solutions that covers the best of process/quality models and applied proven methodology and practices. PCP facilitates IT organizations to move to newer levels of business excellence through incremental process improvements that are either benchmarked against established models
(ISO/CMM) or focused on specific process areas of improvement.
With over 15 years of experience, Patni’s consultants provide the customer the high-quality and cost-effective solutions by offering the following services:

  • Process Diagnostics
  • Model Based Process Improvement Services
  • Focused Approach to Process Consultation
  • Six-Sigma Methodology for Process Improvement consultation
  • Quality Management Practices & Training
  • Customized solutions

SIX SIGMA METHODOLOGY FOR PROCESS IMPROVEMENT
Patni embarked upon its Six Sigma implementation initiative in 1998 in select software project delivery areas. In the year 2000, Six Sigma was implemented in one strategic business unit (SBU).
Eventually, it was implemented at the company level. As of June 2003, Patni has a team of over 30 certified Black belts, over 300 certified Green belts and more than 1100 trained Green Belts.
Patni Green Belts executed over 350 projects spanning across all SDLC processes, which resulted in benefit of more than $ 2mn to customers in addition to productivity gains and quality improvement in all SDLC processes. The projects focused on areas such as reduction in batch cycle time, testing time and time spent in resolving production abends. It also focuses on improving On Time Delivery, automation of customer’s processes and optimizing CPU utilization and so on.
Patni’s Six-Sigma consultation services endeavor to improve customer’s quality management processes and their returns on investment (ROI) by reducing operational expenses.
Certified Six Sigma practitioners transfer critical knowledge and skills to the client organization to lay the foundation for lasting improvements in the dynamic business environment. Patni facilitates optimization of processes using the Six Sigma methodologies (DMAIC/DMADV).
Patni’s portfolio of Six Sigma consultancy services includes:

  • Performance Improvement
  • Process Improvement
  • People Development

Patni has developed its own specific Six Sigma based methodology to execute development projects and maintenance projects respectively.

BUSINESS VALUE
DEPLOYING SIX SIGMA FOR PROCESS IMPROVEMENT
Conseco, Inc., one of America’s leading sources for insurance, investment and lending products offers its customers better products as an exchange to their current policies. The exchange process, involves the following two steps:

  • Field related tasks like approaching the customer, to get his/her acceptance, and complete the necessary paperwork.
  • Back office work in policy administration

The objective of the solution was to process 10,000 applications between August -December 2001 with the existing workforce of 16 people.
Patni implemented the Six Sigma , process improvement DMAIC methodology in the following manner.

  1. One Black Belt resource from Patni was deployed at Consesco site to facilitate process improvement using Six Sigma methodology.
  2. A model was developed to project staffing needs to process the desired number of applications.
  3. Formulate new process definition, Implementation Plan, Documentation/Control Plan.

Patni deployed Six Sigma successfully by reducing the cycle time for processing application forms thereby increasing productivity.
DEPLOYING SIX SIGMA FOR ON TIME DELIVERY (OTD)
Patni has a project based Service Level agreement (SLA) about the task delivery schedule with one of its clients. On Time Delivery (OTD) is the metric used for measuring delivery schedule. Patni undertook the SPAN – Six Sigma DMAIC project to realign service levels for OTD and convert them to the following two parameters:

  • SPAN – A metric used to measure the variation in deliveries beyond the customer stated date
  • Median – A metric which specifies where the project is centered

Patni implemented the SPAN – DMAIC project in the following manner:

  1. High level discussions were held to understand and gather the factors affecting high SPAN.
  2. The Six Sigma- DMAIC methodology was implementd for process improvement.
  3. Span Caluclator and Minitab Tools like Gauge R&R, Normality Test, Segmentation, Pareto,

Regression and control Charts were used to undertake complex calculations.
Patni deployed the SPAN – Six Sigma DMAIC project by reducing SPAN and Median and consistently meeting customer delivery dates. It successfully employed usage of statistical tools to track the causes of high process variation.

CONCLUSION

  • Six Sigma can be successfully applied to the IT services industry where human resources is a critical input
  • Availability of reliable data and metrics is crucial to successful implementation of Six Sigma in IT arena
  • In IT services sector, benefits of Six Sigma can be accrued from
    1. Internal process improvement
    2. Product Quality improvement
    3. Better predictability
    4. Customer satisfaction improvement due to improved cycle time, waste reduction
  • Though some of the processes in IT industry may not fall under normal probability distribution, other quantitative and qualitative tools could be used to improve the process.
  • Focus of DFSS methodology on Analyze and design phase significantly reduces the defects, rework during testing and hence productivity during the rollout phase
  • Six Sigma rigor is a key differentiator in solution based consulting

ABOUT THE AUTHOR
Rajesh Naik
Rajesh Naik has over 12 years of experience, including more than 6 years in the field of quality initiatives like Malcom Baldrige model, Balanced Scorecard, Six Sigma and Quality circles. He assumed Six Sigma black belt role at Patni in 2001 and was part of core Six Sigma team that rolled out Six Sigma in Patni-GE Global Development Center. During this tenure, his key role has been to identify improvement opportunities, coach / mentor the green belts for project completion, training of the consultants that include customizing Six Sigma training material for software professionals, deliver training. He successfully designed and launched the DFSS approach for Software development projects within the SBU. He also, worked on cycle time improvement project for a leading insurance company in US.
Rajesh holds a post graduation in Software technology from NCST, Mumbai after graduation in Industrial Engineering.

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Financing Strategies For Investors

February 14, 2022   Insurance Definition

Financing Strategies For Investors

Real estate investors can be broken down into three categories with the distinctions between them based on the length of time the property is held. On the short end, you’ve got flippers. These guys look for properties on the cheap, maybe put some money into fixing them up and then selling for a profit. For the most part, they have no intention of renting the property out and work as quickly as possible to complete the deal. This category represents a lot of the people chasing foreclosures and probate sales. From the lending perspective, their biggest motivators are low down payments and NO prepayment penalties. They’ll even pay exorbitant Subprime interest rates to put these deals together without penalties.

Next up, you’ve got speculators. These guys look for quickly appreciating markets. The idea is to get in, buy a bunch of properties, keep them for 3 to 5 years and then move on to the next booming market. For that length of time, they have to rent out their properties but are not particularly interested in paying down the principle balance on the mortgage. In fact, if they’re confident in the appreciation potential, they may be willing to accept negative amortization loans in order to keep the cash flow on their properties positive.

The last category is investors. These guys try to accumulate a portfolio of properties and have the rental income pay down the principle balance over time. The idea, obviously, is to own a number of properties outright or with minimal mortgages and enjoy positive cash flow on each. From the lending perspective, these investors are looking for longer term loan products like intermediate ARMs or 30-year fixed mortgages. Clearly, a property with a 30-year fixed mortgage and a sustainable cash flow will eventually be paid off, leaving just the property taxes and insurance behind.

So, let’s talk about each of these a bit more. A lot of flippers do this stuff full time. In terms of underwriting, it makes it a lot easier if they’ve got a real job. But if they don’t, they don’t have a verifiable source of income either. Of course, if they’ve done it for more than two years, we can say they’re self-employed and get the loan done that way. But if they’re new at the game – and many of them are – we almost always have to use a No Doc program. That’s the lowest level of documentation and the pricing reflects the increased risk.

Meanwhile, if we say they’re self-employed, they obviously have an investment property as well as a primary residence – and maybe more than one – all without any rental income. So they’re supporting two houses. That means we’d have to show a VERY high income to fit within debt ratio limitations. The moral to the story is the vast majority of these deals end up in Subprime programs because it’s easier to get approvals, particularly for low or no down payment programs.

Now, the question is: does it matter? Well, not really because you’re only planning to keep the property for a few months anyway, so the monthly payment isn’t that important. Yes, the payment may be big but you only have to make three or four of them (hopefully) before you can get out. It’s just another cost of doing business. By the way, I’m not saying A-paper and Alt-A programs are impossible for these types of deals. They’re just harder to qualify for.

What about the speculators? People buying for 3 to 5 years. Well, the negative amortization Option ARMs are extremely popular. I’m not a big fan of Option ARMs because they’re risky and largely misunderstood by those who get into them. The big attraction the low initial monthly payment but that’s balanced by the resulting negative amortization and an interest rate that’s variable from the very first month.

Anyway, they do have advantages for speculative real estate investors because they make it more possible to have positive cash flow on investment properties. So we should really take a moment or two to fully understand how they work. First and foremost, the initial payment is an artificially low payment. In many cases, it’s based on a 1% interest rate but that definition is based more on marketing than reality. Fact is; the minimum payment is less than the accrued interest so the mortgage balance goes up every single month.

This minimum payment doesn’t stay the same forever. It’s fixed for the first 12 months and after that, it increases by 7.5%. Then it’s fixed for another 12 months and increases by another 7.5%. The minimum payment increases by 7.5% each year for the first seven years OR until the loan balance has reached its ceiling. Depending on the program, these loans can grow to either 110% or 125% of the original loan balance. Actually, the ones that can go as high as 125% are becoming increasingly rare. Most will only allow you to go as high as 110%. Anyway, once you’ve reach that ceiling, the loan starts amortizing right away – and that means a BIG payment shock at that point.

For obvious reasons, these loan programs are only justified if the real estate market is appreciating FASTER than the loan is growing. Although it depends on where interest rates go, most of these loan programs grow by 2% or 3% each year if you only make the minimum payment. So if the real estate market is appreciating faster than that, you’re still building equity. If not, you’re losing money every month. That’s the scary part. If it ever comes to that, you actually SAVE money by selling today – unless you’re okay making the larger interest only payment. And don’t forget the interest rates on these programs are variable so the interest only payment can be different each and every month.

But we also have to keep in mind that these loan programs will only go as high as 95% financing. In fact, on investment properties, some lenders won’t even go that high. Depends on the lender. Also, the 95% financing is generally split into two separate loans. The 1% start rate loan usually only applies to the first 75%. The 20% second mortgage makes up the difference and is usually a fully amortizing loan with a much higher interest rate. Sometimes, you can do an 80/15 but most are 75/20s. So that means you have to come up with at least 5% down payment to qualify for one of these loans. That makes it more difficult to buy more and more, unless you continuously refinance and take cash out of other properties.

The speculative investors who use these programs are trying to keep their properties cash positive, or as close to cash positive as possible. But as we discussed a moment ago, the payments rise by 7.5% each year. After three or four years, the payment will be 24% or 33% higher (respectively) than it was at the beginning. If the market is still appreciating strong at that point, the investor may want to keep the property for another three or four years and refinance into another identical loan product, bringing the payment back down to the initial 1% point again. Doing so would increase the negative amortization but it may also keep the cash flow positive on that property.

You have to understand how underwriters evaluate investment properties. It really doesn’t matter how much equity you have. They only look at the cash flow impact of owning it. And you can show that impact in one of two ways. You can show lease agreements on the properties but the underwriters will always take the monthly rental figure and mark it down by 25% to account for periodic vacancies. It’s called the occupancy factor and most loan programs give you credit for 75% of the rental income listed on lease agreements. Incidentally, many Subprime programs will give you 90% or even 100% of such rental income – another example of easier Subprime guidelines.

The other way to show the cash flow impact is with the Schedule E of your federal tax return. That schedule details the income you make from rental properties but you clearly have an incentive to reduce that income as much as possible to limit your tax liability. Meanwhile, for underwriting, you want to show as much income as possible. So there’s a conflict there. Point is, there are disadvantages with both methods and you should usually look at both options to see which one will calculate the highest.

Each time you have a property that’s got negative cash flow, you have to show more income to squeeze into the same debt-to-income limitations for the next loan. It makes sense. If you’re subsidizing a property with your own income, it represents a monthly expense just like a car payment. So each time you add another property you have to subsidize, you have to show more income to qualify for the next loan. Depending on how much you’re subsidizing, you will quickly be claiming more income than you actually earn and will eventually be considered unreasonable by underwriters.

If a speculator wants to continue accumulating properties in hot markets, one of his or her top priorities is staying cash positive, or as close to it as possible. That priority exists for long-term investors as well but so does the repayment of the mortgage balance. As a result, these investors tend to consider more factors than just annual real estate appreciation. Appreciation is attractive but so is a healthy rental market, and the rental market depends on the types of jobs available in the local area and the health of the local economy.

There are plenty of companies that study this type of information and provide various reports and ratios to help identify healthy markets. I’m sure you could go to Google and find a lot of such offerings. I recently read an article that chose Charleston SC, Jacksonville FL and Austin TX as particularly attractive markets for long-term real estate investments. All three cities have diversified economies, good wages and affordable housing. Anyway, the motivation is clearly different then speculators or flippers. Long-term investors want a stable market where they can cover an amortizing loan payment – that’s principle AND interest – with the rental income from the property.

Now, a well planned real estate investment strategy may involve more than one type of investment. For example, a long-term investor may buy a property in a hot market using a negative amortization loan and keep the property for only three or four years. After realizing some appreciation, the investor may sell the property and use the profits to pay down a mortgage on a different property in a more stable market. Perhaps the reduced mortgage balance will bring that property from a cash negative situation to a cash positive one. For the right investor, this strategy can work well even for flipped properties.

There are plenty of promoters encouraging people to take these profits and leverage them even further into more and more properties. Many of these promoters encourage negative amortization on all their properties. That’s where I have to disagree. That would’ve been fine four years ago but I just don’t believe the real estate market will continue to appreciate the way it has in recent years. Given the current market conditions, I don’t believe it makes sense to expose yourself to that much risk. If real estate goes sideways, these loans erode your equity and add volatility to the market.

There’s always a balance. That balance will definitely be different for a sophisticated investor than it will be for an average homeowner but that doesn’t mean you have to stretch it to the absolute limit. At the end of the day, the ideal situation remains; owning properties free and clear and collecting monthly rent payments on each.

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Sex or Gender

February 8, 2022   Insurance Definition

Sex or Gender

“One is not born, but rather becomes, a woman.”

Simone de Beauvoir, The Second Sex (1949)

In nature, male and female are distinct. She-elephants are gregarious, he-elephants solitary. Male zebra finches are loquacious – the females mute. Female green spoon worms are 200,000 times larger than their male mates. These striking differences are biological – yet they lead to differentiation in social roles and skill acquisition.

Alan Pease, author of a book titled “Why Men Don’t Listen and Women Can’t Read Maps”, believes that women are spatially-challenged compared to men. The British firm, Admiral Insurance, conducted a study of half a million claims. They found that “women were almost twice as likely as men to have a collision in a car park, 23 percent more likely to hit a stationary car, and 15 percent more likely to reverse into another vehicle” (Reuters).

Yet gender “differences” are often the outcomes of bad scholarship. Consider Admiral insurance’s data. As Britain’s Automobile Association (AA) correctly pointed out – women drivers tend to make more short journeys around towns and shopping centers and these involve frequent parking. Hence their ubiquity in certain kinds of claims. Regarding women’s alleged spatial deficiency, in Britain, girls have been outperforming boys in scholastic aptitude tests – including geometry and maths – since 1988.

In an Op-Ed published by the New York Times on January 23, 2005, Olivia Judson cited this example

“Beliefs that men are intrinsically better at this or that have repeatedly led to discrimination and prejudice, and then they’ve been proved to be nonsense. Women were thought not to be world-class musicians. But when American symphony orchestras introduced blind auditions in the 1970’s – the musician plays behind a screen so that his or her gender is invisible to those listening – the number of women offered jobs in professional orchestras increased. Similarly, in science, studies of the ways that grant applications are evaluated have shown that women are more likely to get financing when those reading the applications do not know the sex of the applicant.”

On the other wing of the divide, Anthony Clare, a British psychiatrist and author of “On Men” wrote:

“At the beginning of the 21st century it is difficult to avoid the conclusion that men are in serious trouble. Throughout the world, developed and developing, antisocial behavior is essentially male. Violence, sexual abuse of children, illicit drug use, alcohol misuse, gambling, all are overwhelmingly male activities. The courts and prisons bulge with men. When it comes to aggression, delinquent behavior, risk taking and social mayhem, men win gold.”

Men also mature later, die earlier, are more susceptible to infections and most types of cancer, are more likely to be dyslexic, to suffer from a host of mental health disorders, such as Attention Deficit Hyperactivity Disorder (ADHD), and to commit suicide.

In her book, “Stiffed: The Betrayal of the American Man”, Susan Faludi describes a crisis of masculinity following the breakdown of manhood models and work and family structures in the last five decades. In the film “Boys don’t Cry”, a teenage girl binds her breasts and acts the male in a caricatural relish of stereotypes of virility. Being a man is merely a state of mind, the movie implies.

But what does it really mean to be a “male” or a “female”? Are gender identity and sexual preferences genetically determined? Can they be reduced to one’s sex? Or are they amalgams of biological, social, and psychological factors in constant interaction? Are they immutable lifelong features or dynamically evolving frames of self-reference?

In the aforementioned New York Times Op-Ed, Olivia Judson opines:

“Many sex differences are not, therefore, the result of his having one gene while she has another. Rather, they are attributable to the way particular genes behave when they find themselves in him instead of her. The magnificent difference between male and female green spoon worms, for example, has nothing to do with their having different genes: each green spoon worm larva could go either way. Which sex it becomes depends on whether it meets a female during its first three weeks of life. If it meets a female, it becomes male and prepares to regurgitate; if it doesn’t, it becomes female and settles into a crack on the sea floor.”

Yet, certain traits attributed to one’s sex are surely better accounted for by the demands of one’s environment, by cultural factors, the process of socialization, gender roles, and what George Devereux called “ethnopsychiatry” in “Basic Problems of Ethnopsychiatry” (University of Chicago Press, 1980). He suggested to divide the unconscious into the id (the part that was always instinctual and unconscious) and the “ethnic unconscious” (repressed material that was once conscious). The latter is mostly molded by prevailing cultural mores and includes all our defense mechanisms and most of the superego.

So, how can we tell whether our sexual role is mostly in our blood or in our brains?

The scrutiny of borderline cases of human sexuality – notably the transgendered or intersexed – can yield clues as to the distribution and relative weights of biological, social, and psychological determinants of gender identity formation.

The results of a study conducted by Uwe Hartmann, Hinnerk Becker, and Claudia Rueffer-Hesse in 1997 and titled “Self and Gender: Narcissistic Pathology and Personality Factors in Gender Dysphoric Patients”, published in the “International Journal of Transgenderism”, “indicate significant psychopathological aspects and narcissistic dysregulation in a substantial proportion of patients.” Are these “psychopathological aspects” merely reactions to underlying physiological realities and changes? Could social ostracism and labeling have induced them in the “patients”?

The authors conclude:

“The cumulative evidence of our study … is consistent with the view that gender dysphoria is a disorder of the sense of self as has been proposed by Beitel (1985) or Pfäfflin (1993). The central problem in our patients is about identity and the self in general and the transsexual wish seems to be an attempt at reassuring and stabilizing the self-coherence which in turn can lead to a further destabilization if the self is already too fragile. In this view the body is instrumentalized to create a sense of identity and the splitting symbolized in the hiatus between the rejected body-self and other parts of the self is more between good and bad objects than between masculine and feminine.”

Freud, Kraft-Ebbing, and Fliess suggested that we are all bisexual to a certain degree. As early as 1910, Dr. Magnus Hirschfeld argued, in Berlin, that absolute genders are “abstractions, invented extremes”. The consensus today is that one’s sexuality is, mostly, a psychological construct which reflects gender role orientation.

Joanne Meyerowitz, a professor of history at Indiana University and the editor of The Journal of American History observes, in her recently published tome, “How Sex Changed: A History of Transsexuality in the United States”, that the very meaning of masculinity and femininity is in constant flux.

Transgender activists, says Meyerowitz, insist that gender and sexuality represent “distinct analytical categories”. The New York Times wrote in its review of the book: “Some male-to-female transsexuals have sex with men and call themselves homosexuals. Some female-to-male transsexuals have sex with women and call themselves lesbians. Some transsexuals call themselves asexual.”

So, it is all in the mind, you see.

This would be taking it too far. A large body of scientific evidence points to the genetic and biological underpinnings of sexual behavior and preferences.

The German science magazine, “Geo”, reported recently that the males of the fruit fly “drosophila melanogaster” switched from heterosexuality to homosexuality as the temperature in the lab was increased from 19 to 30 degrees Celsius. They reverted to chasing females as it was lowered.

The brain structures of homosexual sheep are different to those of straight sheep, a study conducted recently by the Oregon Health & Science University and the U.S. Department of Agriculture Sheep Experiment Station in Dubois, Idaho, revealed. Similar differences were found between gay men and straight ones in 1995 in Holland and elsewhere. The preoptic area of the hypothalamus was larger in heterosexual men than in both homosexual men and straight women.

According an article, titled “When Sexual Development Goes Awry”, by Suzanne Miller, published in the September 2000 issue of the “World and I”, various medical conditions give rise to sexual ambiguity. Congenital adrenal hyperplasia (CAH), involving excessive androgen production by the adrenal cortex, results in mixed genitalia. A person with the complete androgen insensitivity syndrome (AIS) has a vagina, external female genitalia and functioning, androgen-producing, testes – but no uterus or fallopian tubes.

People with the rare 5-alpha reductase deficiency syndrome are born with ambiguous genitalia. They appear at first to be girls. At puberty, such a person develops testicles and his clitoris swells and becomes a penis. Hermaphrodites possess both ovaries and testicles (both, in most cases, rather undeveloped). Sometimes the ovaries and testicles are combined into a chimera called ovotestis.

Most of these individuals have the chromosomal composition of a woman together with traces of the Y, male, chromosome. All hermaphrodites have a sizable penis, though rarely generate sperm. Some hermaphrodites develop breasts during puberty and menstruate. Very few even get pregnant and give birth.

Anne Fausto-Sterling, a developmental geneticist, professor of medical science at Brown University, and author of “Sexing the Body”, postulated, in 1993, a continuum of 5 sexes to supplant the current dimorphism: males, merms (male pseudohermaphrodites), herms (true hermaphrodites), ferms (female pseudohermaphrodites), and females.

Intersexuality (hermpahroditism) is a natural human state. We are all conceived with the potential to develop into either sex. The embryonic developmental default is female. A series of triggers during the first weeks of pregnancy places the fetus on the path to maleness.

In rare cases, some women have a male’s genetic makeup (XY chromosomes) and vice versa. But, in the vast majority of cases, one of the sexes is clearly selected. Relics of the stifled sex remain, though. Women have the clitoris as a kind of symbolic penis. Men have breasts (mammary glands) and nipples.

The Encyclopedia Britannica 2003 edition describes the formation of ovaries and testes thus:

“In the young embryo a pair of gonads develop that are indifferent or neutral, showing no indication whether they are destined to develop into testes or ovaries. There are also two different duct systems, one of which can develop into the female system of oviducts and related apparatus and the other into the male sperm duct system. As development of the embryo proceeds, either the male or the female reproductive tissue differentiates in the originally neutral gonad of the mammal.”

Yet, sexual preferences, genitalia and even secondary sex characteristics, such as facial and pubic hair are first order phenomena. Can genetics and biology account for male and female behavior patterns and social interactions (“gender identity”)? Can the multi-tiered complexity and richness of human masculinity and femininity arise from simpler, deterministic, building blocks?

Sociobiologists would have us think so.

For instance: the fact that we are mammals is astonishingly often overlooked. Most mammalian families are composed of mother and offspring. Males are peripatetic absentees. Arguably, high rates of divorce and birth out of wedlock coupled with rising promiscuity merely reinstate this natural “default mode”, observes Lionel Tiger, a professor of anthropology at Rutgers University in New Jersey. That three quarters of all divorces are initiated by women tends to support this view.

Furthermore, gender identity is determined during gestation, claim some scholars.

Milton Diamond of the University of Hawaii and Dr. Keith Sigmundson, a practicing psychiatrist, studied the much-celebrated John/Joan case. An accidentally castrated normal male was surgically modified to look female, and raised as a girl but to no avail. He reverted to being a male at puberty.

His gender identity seems to have been inborn (assuming he was not subjected to conflicting cues from his human environment). The case is extensively described in John Colapinto’s tome “As Nature Made Him: The Boy Who Was Raised as a Girl”.

HealthScoutNews cited a study published in the November 2002 issue of “Child Development”. The researchers, from City University of London, found that the level of maternal testosterone during pregnancy affects the behavior of neonatal girls and renders it more masculine. “High testosterone” girls “enjoy activities typically considered male behavior, like playing with trucks or guns”. Boys’ behavior remains unaltered, according to the study.

Yet, other scholars, like John Money, insist that newborns are a “blank slate” as far as their gender identity is concerned. This is also the prevailing view. Gender and sex-role identities, we are taught, are fully formed in a process of socialization which ends by the third year of life. The Encyclopedia Britannica 2003 edition sums it up thus:

“Like an individual’s concept of his or her sex role, gender identity develops by means of parental example, social reinforcement, and language. Parents teach sex-appropriate behavior to their children from an early age, and this behavior is reinforced as the child grows older and enters a wider social world. As the child acquires language, he also learns very early the distinction between “he” and “she” and understands which pertains to him- or herself.”

So, which is it – nature or nurture? There is no disputing the fact that our sexual physiology and, in all probability, our sexual preferences are determined in the womb. Men and women are different – physiologically and, as a result, also psychologically.

Society, through its agents – foremost amongst which are family, peers, and teachers – represses or encourages these genetic propensities. It does so by propagating “gender roles” – gender-specific lists of alleged traits, permissible behavior patterns, and prescriptive morals and norms. Our “gender identity” or “sex role” is shorthand for the way we make use of our natural genotypic-phenotypic endowments in conformity with social-cultural “gender roles”.

Inevitably as the composition and bias of these lists change, so does the meaning of being “male” or “female”. Gender roles are constantly redefined by tectonic shifts in the definition and functioning of basic social units, such as the nuclear family and the workplace. The cross-fertilization of gender-related cultural memes renders “masculinity” and “femininity” fluid concepts.

One’s sex equals one’s bodily equipment, an objective, finite, and, usually, immutable inventory. But our endowments can be put to many uses, in different cognitive and affective contexts, and subject to varying exegetic frameworks. As opposed to “sex” – “gender” is, therefore, a socio-cultural narrative. Both heterosexual and homosexual men ejaculate. Both straight and lesbian women climax. What distinguishes them from each other are subjective introjects of socio-cultural conventions, not objective, immutable “facts”.

In “The New Gender Wars”, published in the November/December 2000 issue of “Psychology Today”, Sarah Blustain sums up the “bio-social” model proposed by Mice Eagly, a professor of psychology at Northwestern University and a former student of his, Wendy Wood, now a professor at the Texas A&M University:

“Like (the evolutionary psychologists), Eagly and Wood reject social constructionist notions that all gender differences are created by culture. But to the question of where they come from, they answer differently: not our genes but our roles in society. This narrative focuses on how societies respond to the basic biological differences – men’s strength and women’s reproductive capabilities – and how they encourage men and women to follow certain patterns.

‘If you’re spending a lot of time nursing your kid’, explains Wood, ‘then you don’t have the opportunity to devote large amounts of time to developing specialized skills and engaging tasks outside of the home’. And, adds Eagly, ‘if women are charged with caring for infants, what happens is that women are more nurturing. Societies have to make the adult system work [so] socialization of girls is arranged to give them experience in nurturing’.

According to this interpretation, as the environment changes, so will the range and texture of gender differences. At a time in Western countries when female reproduction is extremely low, nursing is totally optional, childcare alternatives are many, and mechanization lessens the importance of male size and strength, women are no longer restricted as much by their smaller size and by child-bearing. That means, argue Eagly and Wood, that role structures for men and women will change and, not surprisingly, the way we socialize people in these new roles will change too. (Indeed, says Wood, ‘sex differences seem to be reduced in societies where men and women have similar status,’ she says. If you’re looking to live in more gender-neutral environment, try Scandinavia.)”

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SMS for the estate agent – Targeted marketing tool, or Legal Minefield?

January 27, 2022   Insurance Definition

SMS for the estate agent – Targeted marketing tool, or Legal Minefield?

Imagine having at your disposal a means to immediately inform house buyers that you have just the property they are looking for. Potential buyers have given their details and their preferences – imagine that you can send them this information no matter where they are or what they are doing, they can read it at a time that’s convenient and can act accordingly in their own time. Imagine that you can do this quickly and easily, in a matter of minutes, regardless of the number of recipients.
Sounds too good to be true? Well it’s not – it’s available now, it’s inexpensive and you can be taking advantage of it within minutes of reading this article. It’s called SMS Text Messaging – and of course you already knew about it didn’t you?
From the homebuyer’s perspective, SMS is a really convenient way to get information. It’s personal and it’s discreet. There’s immediacy about the message, but at the same time it’s not intrusive, and they can handle the response at their convenience.
So you decide that this is a great idea and you want to get your company geared up for the 21st century. How do you get started? Perhaps your first thought is to get your friendly IT Consultant to take a look at the problem, right?
Stop! Don’t pick up that phone until you’ve read the rest of this article. In common with many of these kinds of issues it’s easy to get so bogged down in the technicalities that we fail to consider some of the other issues involved.
First of all, let’s look at the legalities.
By 31st October 2003, all member states of the European Union will be implementing Article 13 of the Directive on Privacy and Electronic Communications (DPEC).A public consultation on how to implement the DPEC in the UK was launched by the DTI on 27 March 2003, and ran for 12 weeks, closing on 19 June 2003. Final implementing Regulations are now being prepared, taking into account the responses received. The DTI intend to publish details of these final measures by mid-September 2003. The new Directive:
Replaces existing definitions for telecommunications services and networks with new definitions for electronic communications and services to ensure technological neutrality and clarify the position of e-mail and use of the internet;
Enables the provision of value added services based on location and traffic data, subject to the consent of subscribers (for example, location based advertising to mobile phone users);
Removes the possibility for a subscriber to be charged for exercising the right not to appear in public directories;
Introduces new information and consent requirements on entries in publicly available directories, including a requirement that subscribers are informed of all the usage possibilities of publicly available directories – e.g. reverse searching from a telephone number in order to obtain a name and address;
Extends controls on unsolicited direct marketing to all forms of electronic communications including unsolicited commercial e-mail (UCE or Spam) and SMS to mobile telephones; UCE and SMS will be subject to a prior consent requirement, so the receiver is required to agree to it in advance, except in the context of an existing customer relationship, where companies may continue to email or SMS on an ‘opt-out’ basis;
Clarifies that the Directive does not prevent Member States from introducing provisions on the retention of traffic and location data for law enforcement purposes;
Introduces controls on the use of cookies on websites. Cookies and similar tracking devices will be subject to a new transparency requirement – anyone that employs these kinds of devices must provide information on them and allow subscribers or users to refuse to accept them if they wish.
So what does that mean to the potential implementation of your SMS service? Well, it seems quite clear, we must obtain the recipient’s permission before sending any SMS messages “unless there is an existing customer relationship”. The exact meaning of “existing customer relationship” is however somewhat of a grey area in the act. For example, if it is interpreted as being someone who has at some time bought a product from the vendor, would that mean that the product being marketed would need to be the same type of product? If this were the case, a supermarket would only be able to send messages about a single line of product to people who have bought that product and would not be able to send messages about other merchandise or services. The DTI’s stance on this is that this particular issue is clearly covered in existing UK legislation under the Data Protection Act 1998:-
“These would restrict a business to direct marketing the kind of products the addressee would have reasonably expected it to market at the time they gave or agreed to use of their contact details i.e. a business could market the products available at the time, but not necessarily those of a business that it took over, or a substantively new product range.”
So, therefore, it would seem that say a large supermarket chain, who got your name and address, phone number and email details whilst you were a customer buying groceries, should not be legally entitled to begin any form of communication with you using information about you gathered in this way if, for example, they were to start selling Insurance services or indeed start up an Estate Agency business? It would seem so.
So, in most cases, it would appear that your existing customers are open to you being able to send them SMS messages, as it would be reasonable to assume that they would expect you to send them property related information.
There are however other grey areas in the document.
The following is an excerpt from the DTI’s document on Article 13:-
“Grey areas under the current rules include the status of systems which send SMS automatically and power dialler-type systems which dial numbers automatically but are designed to establish a voice link with a live operator rather than a pre-recorded message. Lack of certainty about the application of the TDPP (Telecoms Data Protection Directive) Regulations has made it harder to deal with the problems that these kinds of systems can cause. Power diallers, for instance, can cause problems to subscribers where they are used without enough call centre staff available to answer the calls being dialled, resulting in single or repeated silent calls, or calls which cut off after a few rings, in addition to any annoyance caused if they are used to ring subscribers who have registered on the TPS (Telephone Preference Service).
Limiting the definition of automated calling system does not mean that these areas will be unregulated. The sending of unsolicited SMS for advertising purposes is now explicitly covered by the Privacy Directive which treats them in the same way as e-mail messages.”
Anyone receiving SMS messages from you should have a clear indication of where the message came from and a clear method to unsubscribe from your service.
It would seem therefore that apart from any other considerations, there are many potential legal pitfalls to setting up your own e-marketing system.
Looking at this from a slightly different perspective, the solution may well be a lot easier than you might expect. From the consumer’s angle, the approach to receiving SMS or email messages about products and services is something each of us would rather have much more personal control over. In 1998, my company at the time, Geoworks Corporation, did some extensive focus group research into consumer reaction to e-marketing and in particular SMS. This research was conducted both here in the UK and in the US. At that time, SMS messaging had been available to mobile phone users for a number of years, but we had not acheived the massive volumes that were to be reached in the phenomenon which took place some 12-18 months later when Pay As You Go services sparked huge SMS growth. To illustrate the point, all of the UK mobile phone companies at this time probably had only one or two SMS Controllers (a computer which handles the storage and routing of SMS messages) in their infrastructure. When the ramp-up suddenly began, the growth caught most of them completely unawares and meant that they had to try and commission new SMSC’s faster than the boxes could be ordered! What had been a fairly straight and flat line on a graph suddenly went vertical. Our research at Geoworks indicated that consumers were excited about receiving SMS messages about products or services provided that they were not being charged to receive the message and they had some control over what products and services they were going to receive messages about. “Permission Marketing” was the key – what the consumer wants, when they want it and where they want it. Consumers indicated that they would be happy to receive all kinds of information supported by advertising on the same basis – for example, Weather Information sponsored by X or Football Scores sponsored by Y.
It would seem then, that the key to success in this area is not in the hands of the vendor’s innovations or exclusive products, but in giving the consumer control. Without permission, any attempt to sell via this means becomes annoying and intrusive, causing the would-be potential buyer to become alienated against the marketer – a self-defeating exercise if ever there was!
So what should be your way forward? Look at other e-marketing success stories for a clue. Amazon.com is, today, a well known and respected seller of books and much more which started from humble roots in the Seattle area and has grown to be a worldwide $ multi-million success. Amazon’s success was based on giving you, the consumer, control and providing a top-class next-day service. You control from the comfort of your home or office, the parameters that determine what you get from Amazon. It’s easy and convenient, and grew like topsy. Ebay is another example – providing a worldwide auction service. Many other services provide ‘Portal’ access for the consumer to select what information they wish to receive.
So it seems Portal services are the key to gaining the hearts and minds of the consumer. But as an Estate Agent, how does that help?
A Portal could provide a single access point for would-be housebuyers to register their interest in properties by locale, price and number of bedrooms. The consumer controls what they want to get. It is open to all Estate Agents who can register, quickly and easily, any property that is going on the market. Any technical or legal issues are the responsibility of the Portal and not of the individual Estate Agent.
From the consumer perspective, it’s one place to go, they register once, but potentially get messages from many Estate Agencies provided that they match their criteria. It’s free to the consumer, and they have control to change their criteria or unsubscribe should they wish.

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Due Diligence 101 Or What You Do Not Know Can Kill You!

January 21, 2022   Insurance Definition

Due Diligence 101 Or What You Do Not Know Can Kill You!

Introduction:
This article is written as a general discussion on the subject of “Due Diligence”. It is for informational purposes and not intended to be a definitive guideline for your exact situation. You should consult the appropriate professionals with regard to your specific transaction or situation. Further, this article is in no way advocating, suggesting or implying that anyone engages in any type fraudulent activities whatsoever. These are simply the things a buyer should be aware of when doing due diligence in buyer a business.
You spent months finding the right business. The seller says that you cannot go by what the tax return shows but the business is making a lot of money, and he can prove it. Your inspection of the profit and loss statement shows that sales have been increasing slightly in the last few years. Most important, and the best news of all is; the price is right! Does it sound too good to be true? I am sorry to tell you this, it probably is.
I think it was Benjamin Franklin who said, “A fool and his money are soon parted.” Mr. Franklin must have known a lot of business buyers. When buying appliances that break in a month, it costs you a few dollars. When you go to a swap meet and are cheated because the solid gold watch is really gold plated, it costs you a few hundred bucks. When a used car salesman cheats you, by selling you a lemon, where the speedometer has been turned back 100,000 miles, it costs you a few thousand dollars. Getting cheated buying a business can cost you many thousands to hundreds of thousands of dollars. The only investment or purchase that I know of where you can be cheated out of more money is in the area of real estate. Real Estate fraud can runs into the hundreds of millions of dollars and does. You would be shocked at all the people between 1875 and 1950 who saw ads for prime real estate in Florida and bought swamp land. What about prime Louisiana beach front with Alligators living outside your front door? I have written a series of articles on fraud and it keeps getting bigger and bigger.
I hope that the point is made. Never buy a business on someone’s word. Actually, you should never buy anything on someone’s word. Confirm everything, believe nothing and understand that you are still going to find out things, after the close of escrow, which is going to surprise you. A similar example is one known by every employer. A staff worked for a company for 4 months and complained to the personal officer that the job was just too difficult. He kept complaining that he needed more training and lower quotas. You feel sorry for him. You talk to him and talk to him about it. You listen and believe all the excuses he gives you for poor production. Finally he quit, blaming you for something that you did, this just before you were going to give up and fire him. Then you started to take over the work of finishing his incomplete projects. You are shocked, as you always re, at what he did wrong and what he had covered up, that he was not doing. This is what happens when you buy a business. You find out all the actions that the seller, not his staff, had stopped doing, from the day that he decided to sell the company.
Many businesses are doing well. Sometimes the owners have personal things going on in their home life. Sometimes they have medical problems. Many times the business is not doing well and the seller is frustrated. It is very common for a seller to work hard to build his business, but because of many reasons, it doesn’t produce what the seller wants. He gets frustrated and one day he gives up. That is usually the day he calls that business broker he met and asks the big question. How long will it take you to get me out of this place? In his mind, he is gone. He just counts the days until he physically walks out.
Have I scared you? Good. There is a plus side. It is worth all the grief that you go through to buy a business when you get in to the drivers seat, put all the marketing actions into place and start driving your own business.
In 2000 I had a client buy a car wash soap manufacturing business for Million dollars. The seller swore it was making 0,000 profit per year. Due Diligence showed it was only making 0,000. When presented with the auditors report, the seller claimed the audit was wrong. The buyer bought the company, knowing he was overpaying for the business. Why? He had done his research on the production department and sales department. He went out on the deliveries with the drivers, and met customers. He determined that he could double the sales and profit within one year. After he bought the business he found two things to be true. The profit was 0,000, as my audit found. He could double the sales and profit within 12 months, and did. The seller tried to screw the buyer, but in the end, justice was served. The seller screwed himself more than he screwed the buyer by not running his business correctly. If he had he could of sold it for a lot more than Million dollars.
Ok, enough with the fun stories for now. Lets get down to the details of what to look for when doing “Due Diligence.”
Due Diligence Defined:
The phrase is composed of two words. “Due” which the dictionary defines as “Proper or Adequate” and Diligence, which is defined as “Degree of care or caution expected of a person. Especially as a party to an agreement.” Caution: is the watchword in this definition.
Financial Statements – What to look for:
Add Backs:
If you bought the business through a business broker you should have received the business financial statement with a separate worksheet showing adjustments to those statements. These adjustments show the owner’s benefits received from the business besides the profit and salary he receives. These can also be defined as personal expenses that need to be added back to the profit. Depreciation, incomes taxes, interest expense are add backs that are not personal. Personal includes such things as family auto expenses, owner life insurance, owner health insurance, business entertainment that was not really spent on clients, business trips not really for business, home office expenses, family cellular phones and much much more.
Make the seller show you the details on some or all of these expenses to verify that they are really personal and not actually business expenses that shouldn’t be added back to profit. Spend time asking detailed questions with the general ledger in front of you. Go through individual charges and what they mean, until you fully understand what is being added back and why.
Inventory:
Inventory of resale merchandise must be checked for two reasons. One is you have to pay for it. Be careful, you do not want to buy merchandise that is old, worthless and not saleable anymore. Only pay for current marketable product. The price you are suppose to te pay for the inventory is the seller’s cost. The price for old slow inventory is negotiable. Always spot check the price and count the merchandise listed on the inventory list. Do people put down that there is three of an item when there are only two? Of course, especially when they think no one is going to be checking them out. Comparing prices from purchase invoices is how you check prices. You cannot check every item against the actual cost but you can do 5% of the items. Pick at random, not by any suggestion made by the seller or others. If you do not understand how marketable the inventory is that you are buying, hire an expert, from that industry. Your broker should be able to help you in finding someone. Do not be cheap, and think you do not need to spend the money on an expert adviser. I will take a lunch bet that they will pay for them selves many times over.
The second reason for checking inventory is that if a seller doesn’t take inventory at least yearly and adjust his inventory value in his accounting records, accurately, the profit figure you are receiving will not be accurate. As a rule, the higher cost of goods sold, the lower the profit. Some business owners reduce the inventory value on the books, intentionally, to a lower value so as to make the business show a higher cost of goods sold, which then creates a smaller taxable profit. If they do this year after year, the profit may or may not be accurate for the current year. It might take a CPA to figure this one out for you, if you do not have a background in retail.
Equipment value:
Next thing to check on the financials is the real, current value of the equipment you are buying with the business. The balance sheet might, if it shows all the equipment the company owns, give you the cost of the equipment when it was purchased. If you are buying assets rather than cash flow, the equipment valuation becomes more important. No one wants to overpay for used equipment. Also check that the equipment works and is actually being used rather than sitting behind the building with other junk.
Cash Sales:
If all income is being reported, check sales volume activities that you have observed against the daily records during your “Due Diligence” to see if the volume corresponds to what was reported last year in the same month. If you see income of 0 per day but the seller shows sales of ,000 per day, you need to find out why. Some smart buyers sit in the business all day, watch the sales and observe the activities of the staff. This works if the seller is not putting on a full fledge production fraud for you the buyer.
Fraud:
How does a seller defraud a buyer on current sales activity levels? Sellers who keep poor records or no records, many times, suggest the buyer doing a 15-day visual inspection. This helps but it is very dangerous to rely solely on physical inspections alone because the seller can still defraud the buyer. Here is the most famous of the stories I have heard over the years.
Seller owns a dry cleaner. The buyer and seller have opened escrow and the deal is subject to a 15-day physical observation period. The seller doesn’t want the buyer to find out that business volume is very slow. The seller tells all his friends to bring their dry
cleaning in to the shop for a two-week period, at no charge. They bring in the clothing, get it cleaned, pick it up and pay for it. Later the business owner meets the customers and reimburses all of them for the cost of their dry cleaning. The day after escrow closes all that business traffic stops. Think it never happens? The same is true of restaurants. Seller tells all his friends to bring all of their friends in for a free meal. Customers pay the bill and some time later or at home, the business owner reimburses all the customers for the cost of their meals.
Actual time sellers spends working:
Determine how many hours the seller really works. You are buying an income stream based on a known number of hours of work. Make sure the seller isn’t working 80 hours and telling you he is only working 40 hours, per week. I had an absentee fast food owner tell the buyers and me that he worked part time – 5 hours per week. Closer inspection showed he was working 25 hours per week. One auto repair seller, we’ll call him Bob, said he never was at the business, because he had a second full time job. Inspection found he was working 30 hours a week (4 plus hours every night, and 8 hours on Saturdays).
Find out what job functions the seller does:
Get a list of functions that the seller does. Is one of them bookkeeping? Sometimes the wife does the books part time and this is never said. Again you may find the owner does the bookkeeping, at home, every night, for an extra hour. In an auto repair shop, you may find the owner is doing auto body repair work, personally, on Saturdays, which is work that you, as a buyer, will never be able to duplicate. You need to be sure you know how to do every job function that the seller does or learn them. The time to find out what technical knowledge you need to have to take over the business is when you are doing your investigation, not the day after escrow closes.
Verification of things that are not on the Financial Statements:
It is a common occurrence that businesses do not record all of their income on their financial statements. Yes, this is true. Many people do not, in fact, report the truth on their tax returns. In fact, when I am talking about small retail or service businesses that deal with the public directly, I find it is over 90%. “Will the people with an honest set of books, please leave the auditorium. There are two golf carts outside waiting to chauffer you home. You do not need to hear this.”
The balance of this article will discuss how a buyer might do their “Due Diligence” for different types of businesses. These types of businesses include Restaurants, auto repair shops; real estate services contractors, non-real estate repair/ services, and retail stores.
Restaurants- Non-Franchise:
Restaurants compose over 25% of all businesses for sale. This is not because they all go broke, as the SBA reports. It is because 28% of all retail businesses are food service or food sales. It is the largest segment of the consumer market. Because it is a retail consumer business, it deals in 33% cash. Every independent-non-franchise food service business I have been into shows zero profit on the books. Some even go overboard and show a tax loss. It is because they do simple tax planning that does not require an MBA degree to figure out. If the business doesn’t show all of its cash, or any of its cash, the expenses will equal the reported income. This alone makes it attractive to many buyers. We will not discuss the moral issues of this attitude; it is what it is. What we have to discuss is how do you, the buyer, can prove that the business is making a profit? And if it is, how much?
Restaurants come in two categories. 1. Fast food-counter sales. 2. Sit down. Fast food restaurants have computerized cash registers that record the sales into its computer, which has a memory. This memory has daily totals going back to the beginning of the computer’s history. Most owners close out their cash registers at the end of the day and print out the tape of each day’s activities. This does not automatically wipe out the information for the day. The computer does, I am told, have a delete button on it allowing the owner to wipe out the full memory in the computer, in the event of an audit. I have also been told, but do not believe, that an electrical blackout can wipe out the memory in the computer and that is why one seller said he couldn’t give me access to this information.
If we are talking about a sit down restaurant sales information, you can use the daily order ticket, which are then imputed into the computer. This gives 3 sources: tickets, computer and daily tape totals.
When this information is not available, for any reason, an experienced restaurant consultant can tell you the sales activities just by inspecting the restaurant and counting the number of customers eating at 4 key times in a day, and on several key days per week. Then the consultant can figures out what the average sales ticket amount is. With this information like magic the consultant knows the gross sales figure, for the year.
A double check procedure for restaurant consultants is to then look at the food purchases and its costs and can confirm that it matches the actual sales figures. One consultant that was hired to review a Johnny Rocket restaurant for ,000 did the audit and put together a marketing program for the buyer. The marketing program included delivery and catering. Both of which do not normally show up on the computerized cash register.
Restaurants – Franchise:
You would imagine that franchise restaurants records would be very accurate because the franchise company gets a percentage of the gross income. The bigger ones connect up to the individual franchise and know what is happening faster then the owner. As stated above, the only sales that can be made and not declared to the computer are catering or delivery orders, which could be done without ringing them up.
Some franchises do not hook up to the individual franchise computers and do not do audits regularly. This allows the franchise to report reduced income to the company and the IRS. In case either comes to audit, they press the delete button on the computer. If you as a buyer can get access to the computer you know the numbers are correct even if they are not complete. It is impossible for the staff or the owner to change the computer records. The information can only be deleted. Again catering and take out may not be on the computer. Theft from employees can only be in the form of 1. Employees that give free food to friends. 2. Employees not ringing up an order, which is difficult when businesses put up signs saying, “If you do not get a receipt, your order is free.”
Some sellers are so paranoid of the IRS, they are not willing to show anyone their private records or computer tapes for fear that the buyer could be an IRS agent. My personal opinion, and what I advice sellers to do, is to get their books legal and honest and hire themselves a top notch CPA, like Donald Trump, and use every legal trick in the book. Martha Stewart didn’t go to jail for inside trading. They got her on lying. There are legal ways to avoid taxes so that fraud is not necessary. If you cannot find a good accountant, I will recommend one.
If you ask someone “Are you a government employee or IRS agent?” and they lie to you; that might be considered entrapment and a good possible defense in court. But, I ask you. Is it worth the grief?
The normal action of sellers, in this situation, is to require that the buyer take the business based on the recorded records and guess as to how profitable the place really is. This is a very difficult situation for the brokers and buyers, since sellers do not price their business based on these reported numbers but base their price on the real numbers.
I hope this is of some help to you in doing due diligence on a restaurant you might be interested in buying.
Auto Repair Shops:
Auto repair shops are almost as bad as restaurants when it comes to under-declaring cash. The normal procedure for most, I have run across, is to declare only the checks and credit card charges. The cash they put into their pocket. The good thing, in doing audits is that almost every one of these owners keeps their work orders-invoices. These are kept in monthly manila folders and put into a drawer or file cabinet. They never tell you that they keep these records, but they do. They even tell me, as the broker, that all backup documents have been destroyed, but they are not. When I insist that they cannot sell their business without providing these invoices, they tell me of their existence. With the sales invoices an audit of income becomes simple. Since the sellers keep them in a manila folder by months, you only have to pick monthly folders at random and total the actual invoices. Then compare them to what the “State Board of Equalization” report says and calculate what percentage of the total was declared. If you do this for a few months, a pattern will develop. Some sellers have even run a calculator tape of the month’s activities and/or written it in a private ledger. You can check the actual invoice tapes against the private ledger records to confirm the private ledger information is correct.
Real Estate Services/Repairs Contractors:
Real estate service contractors include new construction general contractors and sub-contractors, contractors that come to your house to offer repairs on your house (plumbers, heating and air-conditioning contractors, gardeners, landscapers, termite companies, roofers, carpet cleaners, cabinet re-modelers, carpet/drapery stores, tile stores, pool service providers, pool installation contractors, landscapers, etc.) These contractors, if the owner does the work himself, do not keep their job tickets-invoices after they are paid for their services, in cash. If the company has service men, then the owner is usually the dispatcher or other administrative person. In this situation seller, most likely, will have kept all of his invoices, so as to be able to look up prior history records of their customers. They might not have recorded the income on their records but they will have the basic records. Theses records may in a total mess, but the records do exist. If they do not, then buy the business based on what the seller can prove to you, or what you can reasonably estimate based on what percentage of the business you think is cash. What they are only going to prove to you is the total of checks and credit card charges, which is what the seller has declared on the tax return.
Non Real Estate Repair/ Services:
Non real estate repair/service companies include such things as large and small appliance repairs, barbershops/hair salons, nail shops, massage parlors, health clubs, pet grooming, wedding photographers, and movie theaters. These businesses usually do not even write up a ticket so unless a central cash register is used for recording income there will be no record at all. Again this is like a restaurant with cash register tapes. If the work is done at the customer’s location, then you study the serviceman’s truck schedule. If you only have some work records, from some work done in the field, you can determine what the average repair dollar volume is and then if you calculate how many calls are made on an average day, you only have to multiply the two numbers.
If we are talking about hair salons, nail shops or barber shops we can gather information about how many chairs there are, how many chairs are rented on a weekly bases and what rent the owner is collecting. If the technician is not paying rent then they are on a commission split. If you know the rental income and the income split you are well on your way to determining the real profit of this kind of business. Remember to ignore the income of the owner since you as a hairdresser or non-hairdresser owner would not get the income of the old owner. The old owner will probably rent space from you so you only add another rented chair to the income.
Retail Stores:
A retail store is a store that carries an inventory of products that they resale. Sometimes they offer installation, which then might put them into the service company instead of a retail store. The main distinction is that they sell a product instead of a service. This includes everything from Home Depot, pet stores, clothing stores, gift shops, supermarkets, vitamin stores, and sign shops. Retail stores have cash registers and daily tapes of their sales. This is handled similarly to a restaurant and should be audited in the same manner. (See Restaurant Section Above) In addition to the cash register information, you also have purchase records, which can be studied to determine the cost of the merchandise as a percentage of the selling price. With this relationship-percentage of cost to sale price known you can calculate either the cost of goods sold or gross sales if you have either to start with. A few smart owners buy some merchandise for cash in order to prevent a tax auditor from catching them by using this same manner. If the seller does this, he will admit it to you, if you ask.
When All Else Fails With a Retail Business:
The only way to protect yourself is disclosure so that you have grounds to sue for fraud. Make the seller put the real sales numbers, cost of goods percentage and any other information you are given and can not document down on a piece of paper and then have the seller sign and date the paper. If after the close of escrow you find the seller lied to you, the document will give you grounds to sue for fraud or misrepresentation. The important thing is be able to show a judge in writing what the buyer told you and to be able to show that he did this in writing. If the seller told you but never did it in writing you cannot prove it. “If it isn’t written, it isn’t so”
Medical Professions and Non Medical Professionals:
Professionals are a form of service business; except they charge a higher hourly rate and they have to keep patient/client files. Most people pay their professionals by credit card or check, because these expenses are usually tax deductible as medical or financial advice. If the seller doesn’t declare all the income, ask what back up records there are. Clients always get receipts for services and payments. There are records, find them and you will have all the income.
When all else fails in Figuring Cash Income:
If you have followed all of the earlier advice on documenting cash income and they in truth do not have documentation, you are in big trouble. You may have reached the end of your rope. You now have Two option left. 1. Walk away. 2. If you still want to buy this business I only have one last suggestion. It is not fool proof but it is a method. Cash appears to be approximately 30%-35% of total sales. You could make this assumption to come up with a real total. Add 50% to the sales showing on the books, this amount is from credit cards and check sales. This is not an exact science; it is only a close estimate. Cash sales could actually be anywhere between 25% or 35%. I never figured it that close.
Cash Expenses Verification:
When you think of unrecorded cash transactions we usually think of undeclared income. Undeclared income is the biggest category, but not the only one. The other is cash expense not deducted on the books. The biggest expense item in this category is cash payroll.
Unrecorded Cash Payroll:
In an attempt to reduce the payroll expense, business owners will pay some of their staff’s payroll in cash. Why would they do this? Workman’s Compensation Insurance, FICA Taxes-Employer and Employee portion – Federal and State Income Taxes. Any accountant would scream at his client “You are missing out on a legal tax deduction.” Let me explain why someone would forego the tax write off by paying cash expenses.
When you pay an employee 0.00 per day, on the books, the employee gets about .00 net on his check. If you give him .00 in cash, he is happy. He doesn’t have to worry about going into a higher tax bracket.
The employer has to pay approx 10% to cover the employers FICA and other Federal employment taxes. You, as employer also have the workman’s compensation insurance premium. If we are talking auto repair mechanics compensation insurance alone costs 15%. If we are talking new real estate construction workers we can be talking a cost rate between 25% up to 120%. A roofer’s compensation premium is greater than his gross salary. Lets look what payroll taxes cost for a normal worker. The auto mechanic insurance rate of 25% is added to the 10% Federal costs plus the wages give us an expense that equals 135% of the wages. This comes out with the employer paying 5.00 and the employee receiving .00. There is a loss of .00 per day per employee. Some employers would rather save the .00 and not get the income tax deduction for the expense. Also with all the unrecorded cash the business shows, it isn’t important to have a loss on the books, since there is no need for more deductions to lower taxes. The business is already not paying any taxes.
Because there is a danger that an employee might be injured and file a claim under workman’s compensation insurance, it is common among small businesses to show part of the wages on the books and the balance in cash. This means that an employee earning ,000 per year might have ,000 recorded on a W-2 form, creating a very low federal tax rate or no tax due at all. Since the employee is being paid part of his wages on the books if he is injured on the job he is fully insured for accidents with State Workman’s Compensation Fund, State Disability Funds, State unemployment insurance and all Social Security benefits. A win-win for employer and employee, even if not for the government. As a buyer you must figure all this out, and adjust the expenses accordingly.
Unrecorded Operating Expenses:
Because owners are collecting so much cash, they need a place to spend it. If you make a major purchase, you cannot just walk in and pay cash for a car. The IRS will be notified of this cash transaction. Owners with a lot of cash will pay for all repairs, gardeners and everything for the home that costs less than ,000, in cash. Why ,000? That is the recording cut off that a vendor or bank is required to report when receiving funds in cash. If a business owner still has too much cash, sellers will start paying for business expenses. They start with the expenses where a service man gives a discount for cash. I found two restaurants that were paying for the hood cleaning service in cash, partly because they got a discount for paying in cash. By asking the correct questions, you can discover what is being paid in cash.
Unrecorded Labor:
Because we are talking small businesses, the wife comes in to the business full or part time. One of the children may come in to work part time. You must be aware of these employees who may or may not be paid. This is another form of cash payroll. If you have to replace these people with paid employees, these expenses need to be calculated in to the adjusted profit and loss calculation. .
Sometimes the family member is being paid some wages but not full market value. The adjustment is still needed but in this case only by the difference between actual payroll and the fair market payroll amount.
Conclusion:
It is a hard life when you own your own business; you work long hours. Many people feel that is better than the alternative, which is to work for someone else, pay high taxes, never know if you will be laid off and after years of hard work, never have anything to show for it all.
If you are going to buy a business with your hard earned money, you want to make sure you get what you paid for. Many people believe it is all right to cheat the taxman but otherwise are very honest citizens. Others feel it is all right to cheap any poor sucker that comes along. Don’t be a sucker, do your due diligence and get what you paid for.
Then build your new business into something you can be proud of and enjoy. While building your new business make a point to study everything you can about Tax planning, tax avoidance and reducing taxes legally. I started in College learning about the tax codes, and there are so many ways to save taxes legally, you would never believe it. You will sleep better at night, I promise you. Then 10-20 years from now when you want to sell your business, you can ask top dollar and get it. This because a buyer can do a simple due diligence and know that your business is doing exactly what your books say you are doing.
DO YOUR DUE DILIGENCE and buying your own business can be a pleasant and rewarding experience!

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