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Escaping the Valley of Death
In our latest podcast, another owner acknowledges that he, too, is stuck in that no man’s land where he lacks the resources to do what he knows needs to be done.
Here are today’s highlights:
Will the labor shortage delay the manufacturing boom?
Why more businesses will no longer offer health insurance.
Is “white-fonting” a smart strategy or cheating?
Even Austin is increasingly going work-from-home.
THE 21 HATS PODCAST
This week, Shawn Busse tells Jay Goltz and Jennifer Kerhin that he’s realized that his business, too—like Jennifer’s—is stuck in the valley of death that we first discussed a couple of episodes ago. Shawn’s realization prompts a discussion of what it takes to cross the desert and get out of the valley. We also have a surprisingly entertaining and enlightening conversation about insurance that makes clear why you should occasionally review what policies you have and why you have them. “I have something called directors insurance,” says Jennifer, “and I don't really even know what that is.” Shawn notes that he found a company that helped him reassess several of his insurance lines. “What I like about that,” he told us, “is that while insurance brokers are incentivized to oversell you, because they make commissions,” this company sells its expertise and not policies.
Plus: we start the episode with Jay explaining why binge-watching HBO’s Succession brought back all of his worst nightmares about owning a family business.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
This soap maker has figured out how to make soap in America: “A $7.95 bottle of Bath & Body Works foaming hand soap used to take three months to put together. The pieces had to travel more than 13,000 miles from China, Canada, and Virginia to the company’s Ohio distribution center. Bath & Body Works decided it needed to get new products to market more quickly. The result was a production initiative with little parallel in corporate America. Now every step of production occurs at plants just feet from each other on the company’s dedicated ‘beauty park’ on the outskirts of Columbus. One factory makes the foaming pump and mechanism. Another makes the bottle itself, a third makes the label, a fourth makes the soap, fills the bottle, attaches the label and screws on the top. A fifth packages it. Getting a bottle to distribution is down to 21 days and a few miles. A majority of Bath & Body Works products, which are sold in its own stores, are made on site.”
“The effort, which started in 2008, required a lot of negotiation with sometimes skeptical suppliers. The campus includes 10 manufacturers and millions of square feet of production and warehouse spaces, with 5,000 employees working there during peak production.”
“One challenge to replicating BBW’s model is that factories don’t operate in bubbles, but rely on networks of suppliers, parts and expertise—and moving those networks is costly. Once such a network has been established, it tends to get stuck there. Land, labor, and compliance with environmental and zoning laws also generally cost more in the U.S. than in China and developing countries.” READ MORE
The manufacturing boom may be delayed by the labor shortage: “Taiwan Semiconductor Manufacturing is pushing back the production start date at its Arizona computer chip factory by a year, citing a shortage of skilled labor, the company said on its second quarter earnings call Thursday. TSMC was anticipating that it would begin its N4 semiconductor processing at its first Arizona fab by 2024, but it's lacking the workers to install equipment at the site, which is currently under construction in north Phoenix.”
“TSMC is working to improve the situation, including ‘sending experienced technicians from Taiwan to train local skilled workers for a short period of time,’ Liu said.” READ MORE
The House has passed a package of bills that could lower health insurance costs by rolling back Affordable Care Act protections: “The House-passed CHOICE Arrangement Act would allow more self-employed people and businesses to band together to buy Association Health Plans, which are essentially large group plans purchased by multiple employers. These can be less expensive because they don't have to meet all ACA requirements, such as covering a specified set of benefits that includes hospitalization, prescription drugs, and mental health care. Historically, some also have had solvency issues and state regulators have investigated claims of false advertising by some association plans. Another piece of the legislation would help more small employers self-insure, which also allows them to bypass many ACA requirements and most state insurance rules.”
“‘The big picture of what these bills do is allow [employers and] insurance companies to get out from under the ACA standards and protections and offer cheaper insurance to younger and healthier employee groups,’ says Sabrina Corlette, a researcher and the co-director of the Center on Health Insurance Reforms at Georgetown University.”
“But attorney Christopher Condeluci, who worked with GOP lawmakers in drafting the legislation, takes a different view. The entire GOP package, he says, represents ‘improvements to the status quo’ that are needed because small businesses and individuals are confronting ‘health costs continuing to rise’ and ‘out-of-pocket costs continuing to increase.’” READ MORE
Gene Marks says more businesses are dropping health insurance and offering Health Reimbursement Accounts instead: “And it’s not just the cost of premiums. There’s also the cost of administrative and lost opportunity time. There’s the seemingly fruitless search for better prices in what is clearly an oligarchic market made up of just a very few large providers. It’s the awkwardness — and potential privacy concerns — of knowing your employees’ health histories which often times figures into the premiums we pay. And it’s the time we spend trying to find alternative ways to make healthcare more affordable through add-on schemes like Health Savings and Flexible Spending Accounts. The good news is that there’s an alternative and a growing number of my clients are learning about it. It’s called Individual Health Reimbursement Accounts — or ICHRAs.”
“Why so popular? ICHRAs not only cut healthcare costs, but they help employers get out of the health care business altogether. With an ICHRA, you’re likely going to pay the same premiums (it’s up to you), but this time by a contribution to an employee’s account that’s setup under the plan. But that’s it — the rest is up to the employee.”
“Your employee gets reimbursed by you — pretax like any other health plan and you get a tax deduction for your contribution. But now it’s on them to get their own healthcare insurance either through their state or federal healthcare exchange or through an independent insurance broker (some of my clients provide their employees with recommended firms that do this).”
“Why am I so bullish on these plans? Because they allow even the smallest of businesses to provide some type of healthcare coverage for their existing and prospective employees instead of just throwing up their hands and saying, ‘we can’t afford this.’” READ MORE
Remote workers are definitely more productive on their breaks: “What do workers do all day? Work, sure. They also take runs, unload the dishwasher, and pop out to the drugstore—if they’re remote. Recent data from Stanford University and other researchers finds that those at home are more likely to exercise, complete chores and personal errands, and care for their kids during the workday. Employees in the office, meanwhile, are more likely to kill time scrolling the internet or playing a game on their phones, according to the survey of more than 4,500 people. When we’re working remotely, our breaks become more precious, ready to be filled with stuff we actually want and need to do. In the office, it’s more about finding that brief mental distraction before plunging into the next task.”
“Workers at home have the option of making more rational choices, [Nick Bloom, an economist and one of the researchers] told me. After all, why wait until it’s dark out and places are closed to tackle the rest of your life? Instead, they tap the leisure economy during the day, spreading out the peak load at hair salons and golf courses.”
“‘It’s, like, serene and blissful,’ he said of rituals like hitting the gym at 11 a.m. They’ll make up the work tonight—or tomorrow, when they head into the office.”
“On-site workers clock 12 more minutes of productivity a day on average, according to an analysis of 91,000 employees by ActivTrak, a maker of workforce analytics software. They do take breaks—two more a week than remote workers, according to ActivTrak. Those breaks are shorter than their counterparts’ at home, who often contend with distractions from partners, kids, even leaf blowers.” READ MORE
Job applicants are “white-fonting” to try to beat tracking systems. Is it smart, or is it cheating? “White-fonting in recent years has garnered renewed interest across social media like TikTok with influencers suggesting that it will make a big difference for job hunters. It’s also ruffled the feathers of many recruiters who have publicly denounced it. The concept is simple: Copy a list of relevant keywords or the job description itself, paste it in a résumé and change the font color to white. The hope is that AI bots or digital filters in applicant tracking systems read the white text and surface the résumé for human review. Because keywords are in white, the résumé will look normal to human reviewers.”
“But employment experts say the shortcut is risky. ‘The question is what sits behind’ choosing to white-font, said Andreea Macoveschi, senior director of the recruitment process outsourcing practice for global consulting firm Korn Ferry. ‘Is it lack of integrity or being savvy with tech?’”
“A large majority of recruiters use applicant tracking systems, or software platforms that help manage job openings and candidates, according to market research firm Gartner. And up to half of employers are using AI in some part of the hiring process, Gartner estimates.”
“The result? Technology is speeding up the hiring process but also making it harder for candidates to break through.” READ MORE
New rules target discrimination against overweight employees and job candidates: “Weight stigma is rarely talked about at work, but it pervades workplaces everywhere, employees and hiring managers say. Study after study shows heavier people are paid and promoted less than thinner colleagues and are often stereotyped as lazy or undisciplined. In a spring survey of more than 1,000 human-resources executives, 11 percent said an applicant’s weight had factored into hiring decisions. Half of managers surveyed in a separate poll said they preferred interacting with ‘healthy-weight’ employees, according to SHRM, the human resources professional network that conducted the surveys.”
“Now, as New York City and some states move to outlaw weight discrimination at work, companies are beginning to focus on the experience of overweight workers. Many managers are unprepared for the wave of complaints the legislation could bring, advocates for the laws say.”
“Signed into law in May, the New York City ban adds weight and height to the list of characteristics protected from discrimination, alongside race, gender, age, religion, and sexual orientation. Several states, including New Jersey and Massachusetts, have introduced similar bills. (Michigan is currently the only state to prohibit employment discrimination on the basis of weight.)” READ MORE
Even Austin is increasingly going work-from-home: “The Texas capital, where technology giants Google, IBM, and Apple have ambitious expansion plans, has seen its office-occupancy rate fall from 68 percent in early March to 57 percent last week — the biggest drop by far among the 10 major U.S. cities tracked by security firm Kastle Systems. The decline comes as Austin's office-vacancy rate rose to 25 percent in the second quarter, according to Cushman & Wakefield, while space available for sublease has risen faster than any other metro area over the past year, CoStar Group found. Record heat, summer school holidays, and resilient remote-work habits have contributed to keeping workers at home, experts said.”
“The falloff is notable as Austin, home of PC maker Dell Technologies and software giant Oracle, boasted the highest return-to-office rate among big U.S. cities tracked by Kastle for much of last year, bucking the typical trend of remote-friendly work arrangements witnessed in other tech hubs like San Francisco and San Jose.”
“There's currently 6.2 million square feet of office space under construction citywide, according to Cushman & Wakefield, including the new Waterline high-rise downtown, whose 74 floors — featuring 700,000 square feet of office space — will make it the state's tallest building upon completion in 2026.” READ MORE
Converting offices to residences is harder than it looks: “Diners have returned to restaurants, stadiums and nightclubs are packed, and unemployment is lower than it was in 2019. Housing prices, however, are stubbornly high, while hybrid work is shrinking the demand for office space. A second quarter report from real estate services company JLL shows a 17.3 percent vacancy rate in Philadelphia and 20.6 percent in the suburbs. So when can we expect to start seeing obsolete office buildings being transformed into much needed apartments? Don’t hold your breath.”
“Converting an office building into apartments isn’t necessarily radically cheaper than building a new multifamily structure. At a Center City District event in April, co-head of JLL’s Philadelphia office division, Ryan Ade, estimated that converting an old building could cost 75 percent of building a new one.”
“A Brookings Institute report on myths about office-to-housing conversions highlighted an analysis of San Francisco that found such projects could cost between $472,000 to $633,000 per unit and ‘given current economic conditions and development costs, most conversions of underperforming office buildings to housing are not financially feasible.’”
“The cost to acquire office buildings is high, too, although that may change as under-occupied buildings struggle financially. But for now, the costs of acquisition add a further barrier to those who dream of conversion.”
“Office leases are quite lengthy. Ten years, if not longer, was the pre-pandemic norm, and most buildings bristle with leases that sport a hodgepodge of ending dates. That means it’s rare to find a building completely empty. Instead, many of the struggling Philadelphia area buildings are shambling along with 50 percent or less occupancy.” READ MORE
THE 21 HATS PODCAST: DASHBOARD
A Tsunami of Regulation: This week, Gene Marks says it’s hard enough trying to run a small business in 2023, but just try running one in a blue state, where he says businesses have been subjected to a tsunami of regulation mandating things like paid time off and safe working conditions. Gene also talks about what’s going to happen to all of that unused commercial office space and whether there’s any reason for businesses to try out the new Twitter clone, Threads.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren