Business Q & A

February 2006 » Business
"Don’t ignore outsourcing" and "Liability and retirement"
David M. Wahby

Don't ignore outsourcing

Dear Dave,

Fact or fiction: Are engineering firms today routinely sending work to foreign firms in places such as India and China as a way to lower their labor costs and increase profitability? If so, how prevalent is this and how does it work? We keep hearing that outsourcing is the wave of the future, but we have not seen it ourselves.

K.J., Ohio

Dear K.J., Fact. Unfortunately, I do not have any statistics to quote to you about the current depth and breadth of the practice, but I know first-hand of engineering and architectural companies that are either already actively engaged in subcontracting portions of their work to partner firms in foreign countries, or are in the process of investigating the feasibility.

Professionals are in the knowledge business, and with today's enabling technologies, combined with the rapidly accelerating increase in educational achievement, infrastructure, and standards of living around the globe, the flow of knowledge is no longer restricted (or protected) by distance or borders.

I wish it were otherwise, but it is my belief that to understand the likely trend of professional services in this country, we merely need to study the history of manufacturing during the past two decades. To be sure, there are still plenty of manufacturing jobs in the United States, but the manufacturing segment of the economy has been forever redefined.

Services are next. And it is not just engineering and architecture that are in the cross-hairs of this economic displacement; just about all types of professional services, from law firms to medicine, are beginning to experience it.

In the cases I am personally familiar with, firms continue to do the bulk of the programming, planning, and design work inhouse—as they would on any project—but they are subcontracting some or all of the construction documents overseas. As you might imagine, it can be extremely difficult at first to work in this manner, and outsourcing requires much effort and patience between firms to iron out the initial kinks.

While I'm not advocating that firms rush to embrace outsourcing, I urge them not to ignore it. There is a fundamental realignment slowly beginning to take place, and any prudent firm will want to watch developments closely and plan its response accordingly. To do otherwise would be foolish.

Liability and retirement

Dear Dave,

I am the sole owner of a 15-member civil engineering and survey firm. I have had a good run, but I'm getting up there in age and plan to wind things down within the next couple of years. None of my younger staff seems interested in buying me out and taking over the firm, and the older guys are all about the same age as me and will be ready to retire around the same time I plan to go.

My concern is covering myself for any professional liability exposure in the event a claim comes up in the years after I shutdown the practice. Since professional liability policies only cover claims first made against the policy in place at the time of the claim, what I can do?

C.B.,Wash.

Dear C.B.,

The first thing you must do is to meet with your attorney and professional liability agent to discuss your circumstances in light of the particulars of the statute of limitations in your home state, and the options for coverage offered by your current carrier.

Each insurance company does things a little differently, but most professional liability insurance carriers offer what is commonly referred to as a "tail" insurance policy to extend coverage for a period of time after you shut down the active practice.

Your current policy document usually will have a section describing your insurer's approach to tail coverage.

Generally, you will pay a one-time premium based on a multiple of the final year's active practice premium, depending on the number of years you wish to extend coverage. Tails typically are written for a period of as long as five years. According to insurance specialists, most claims occur within the first couple of years of post-retirement, so many professionals, unaware of any particular potential claims, buy tail coverage for fewer than five years.

The dollar amount of tail coverage is usually no more than the amount of insurance coverage in force in the final year you are actively practicing, and it is one single limit for the entire period of the tail. So, if you experience a loss and use up the policy limit in the early years of your tail, you will have no additional coverage for the remaining years of the policy.

Sometimes, principals who are anticipating closing their firms will increase their policy limits in the final years of their active practice to allow for a larger tail. If you are going to do this to establish a higher tail limit, I have been told that it's a good idea to buy the higher coverage for at least the final three years prior to when you expect to buy your tail to establish the higher base coverage history.

Your name will not be used in connection with published questions. David Wahby is president of Wahby & Associates (www.wahby.com), a management consulting firm serving A/E clients. He can be reached at 1-616-977-9756 or via e-mail at wahby@wahby.com.


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