Beth Plutchak Consulting LLC

…or will it take a huge influx of cash to fund the program?

cross-posted to Reimagine Rural

Mike Knutson of Reimagine Rural recently asked my partner Sue Gleason of SyzyGy50  and me about our experiences with the Sauk County Development Corporation Economic Gardening Pilot Project. Thanks Mike for the opportunity.

In 2008 Alliant Energy Company brought Chris Gibbons, the guru of Economic Gardening to Madison, WI as part of an ongoing series on local Economic Development. At the time I had just left a career in banking to start consulting for businesses and Economic Development Organizations. My partner Sue Gleason, was still working for Thrive, an eight county Economic Development Region located in overwhelmingly rural South Central Wisconsin.

There were a number of things that really rang true for me in that eight hour session:

• the importance of growing local businesses rather than traditional retention and recruitment
• the availability of tools for businesses that had been unavailable in the recent past
• the data showing that even though we all knew jobs were created by small businesses, we now know that net jobs are created by small businesses with certain characteristics
• the importance of supporting local entrepreneurs.

Sue and I were both pretty sold on the approach early on in the session. In the afternoon the inevitable question came up, “Well, this all sounds very good, but how much does it cost?” Gibbons program in Littleton, CO cost approximately $600,000 per year, which puts it well out of the range of rural communities. The major expenses of the program are salaries for trained staff and the cost of databases and tools. The funding mechanism for the Colorado program is unavailable in Wisconsin, except at the state level. Businesses in Littleton pay income taxes to the City. As their revenues grow the city’s tax receipts grow, a nice direct feedback mechanism. Much of the new activity in Economic Gardening has taken place at the state level in Florida and Washington State, for example, where state income tax revenues fund the program.

Fast forward to 2010

Sue was also working as an independent consultant by this time. We continued our conversations on how to bring an Economic Gardening Program into Wisconsin. Agencies were interested, but the issue always came back to the budget. Fond du Lac County and the City of Mauston were able to obtain grants to put programs in place, but the nature of grant funding is to go away once the program has been in existence for a period of time. The then Executive Director of the Sauk County Development Corporation, Karna Hanna, had also attended the Alliant Energy session in 2008. She was interested in putting together a program, but her budget would not support one.

We started taking a harder look at the budget elements. The main costs are staff and databases. Sue and I were already trained in the tools and had some experience using them. We had each attended the Economic Gardening training sessions at the Edward Lowe Foundation. We could contract the work and SCDC would not have to fund additional staff. The costs of databases continued to come down, largely with the help of Chris Gibbons who has been working to convince some of the large providers that there is a market for lower priced tools. Some of the databases were already available to us through the South Central Wisconsin Library System and the University of Wisconsin Business School Library.

We thought, why don’t we do what rural people always do, and make the best use of what we have available, rather than waiting until we can afford more?

What about the costs?

The missing piece was how to pay for Sue and my consulting time, since we would be performing the role of paid staff. One of the issues that Gibbons emphasizes in the Economic Gardening Training is the disastrous consequences for local communities of the so-called race to the bottom. Whenever companies focus on cutting costs in order to lower their prices, they are setting themselves up to be put out of business by someone with the capital to cut price even deeper. Economic Gardening gives companies the tools they need to protect their margins, and to innovate in ways that create barriers to entry for their competition. We didn’t need to provide services for free. We needed to show Return on Investment.

We began our program with a pilot that ran until the end of 2010. The pilot was funded by grants from Alliant Energy, the W. R. and Floy A. Sauey Family Foundation, and in-kind donations of time. The participant companies paid $100 per company to take part. The pilot funding covered services to the companies of $100 per hour in consulting fees, plus extra costs of database passes and tools. These costs will be borne fully by participating companies going forward. The total budget for the pilot program was just under $20,000. We went into the pilot with the following assumptions:

• There is a need and desire for this program in Rural Communities
• Companies will pay for services that directly impact their bottom line
• Consultants who have been through the Lowe Foundation Economic Gardening training are well equipped to provide the technical services the program requires
• The cost of ongoing professional development, both formal (Lowe Training) and informal (learning the new tools) can be borne by the consultants and factored into the costs of services
• Program overhead costs could also be borne by the consultants as the day-to-day costs of running their businesses
• It is important to have SCDC sponsor the program
• SCDC and the consultants would be able to build awareness of the program through press releases and direct contact with companies which could potentially benefit from the program, as well as word of mouth referrals

During the pilot stage we worked with nine separate companies, providing a variety of services. After the pilot we asked the companies to take part in a survey, and the new SCDC Director Gene Dalhoff conducted interviews with the company owners. The companies overwhelmingly wanted SCDC to continue with the project.

What did we learn?

We have a couple of challenges going forward. One is building word of mouth about the program. This is harder than we thought it would be. There were also costs associated with the start-up which we didn’t accurately estimate. Sue and I spent more time on program development, materials development, marketing and training than we expected we would. We are currently in talks with the family foundation that funded the pilot, concerning funding for program start-up costs as we transition to a self-funded program. We are also looking at spreading the costs among EDOs, by inviting other agencies and municipalities to take part in our model. There will likely be some kind of membership cost to establish and maintain a program, but we still expect the majority of the funding to come from fees to the businesses that take part. We intend to keep EDO costs as low as possible. The results of the SCDC pilot study can be found here.

Share: 

Economic Gardening Key Concepts

Innovation is one of the key concepts behind the technical assistance associated with Economic Gardening Programs. Here’s a neat little picture to explain why innovation is so important to small businesses.  

Let’s look at Volume Versus Price one quadrant at a time

• High Volume High Prices – Wouldn’t we all just love to be here? Nobody stays here long because every competitor goes here and drives prices down.
• Low Prices Low Volume – No one can survive here for long.
• High Volume Low Prices – Small businesses can’t survive here for long, either. At some point their prices will be undercut by someone who is better capitalized and can take losses as they convert sales.
• Lower Volume with Higher Prices is the only quadrant that offers long-term stability to small business.

Conventional wisdom is that companies need to cut prices when their competitors do to maintain their sales. The more difficult strategy is to add value that you can charge a premium for.

My local grocery store did an expansion a couple of years ago, when the Super Walmart opened down the highway in Baraboo. Instead of dropping grocery prices they expanded their specialty selections and carried more higher margin items. The area is known for meats and cheeses. They carry a number of local specialty cheeses which have been branded as Opahle’s. They’ve expanded their authentic Mexican foods (we have a growing Mexican population) and their organic foods. They offer items in sizes that appeal to empty nesters that make up a large portion of their demographic, and best of all if there is something they carry you want more of or something you wish they would carry, they will get it in for you. Corporate chain stores just can’t do that.

What does your company do that differentiates you from your competition? Are you able to get the demographic information you need to make these kinds of business decisions?

Share: 

The Sauk County Development Corporation Economic Gardening Pilot study results are now available here.

Share:

For the past two months I have been working with Sauk County Economic Development Corporation and Sue Gleason at SyzyGy50 on an Economic Gardening Pilot Program for businesses in Sauk County. I’ve said it before and I’ll say it again, businesses are in business to make money, not to cut costs. It’s all about the margins. Traditional Economic Gardening Programs have offered free services to member businesses. The cost for these programs has been prohibitive for small agencies and rural communities. Ever since attending a workshop with Chris Gibbons three years ago I’ve been trying to figure out a way to bring an Economic Gardening Program to the communities I work in.

Last summer I had a flash of inspiration. This program could be offered to local EDs, Chambers and Municipalities as a self-funded program, at no cost to the agency. Once we are able to show the benefit of the program to local businesses they would be willing to pay for the services. We actually did find funding to support the pilot stage of the program. Alliant Energy gave us an Economic Development grant. The W. R. and Floy A. Sauey Family Foundation also provided start-up funds. My partner Sue and I have provided the services.

So far, we have met with 7 companies and provided services to 5. Early feedback has been amazing. A small start, for sure, but we are a small, rural Wisconsin county with some great entrepreneurs. Businesses out here tend to manufacturing and construction. Both of these industries have been heavily hit by the current recession. Manufacturing is a mature industry. The entrepreneurs who will survive are the ones who are being innovative and watching out for the margins. One of the managers we met with told a story of being brought in to run a local company with absentee owners. He was told that the owners did not want to spend any money. He replied what they wanted was to make money and he proceeded to take the innovative approach to the business and except for a hiccup in 2007 the business has been growing ever since. Yes. Growing in this economy.

I am in the process of updating my website and will be adding more information about the successes of this program to the sidebars.

Today seems to be the day for the science fiction writers I follow to talk about Economic Development.The writer Tobias Buckell has discovered the walkscore tool. He talks about it in reference to his community here. Read the comments, as well. Commenters are also talking about walkability in their communities.

I love it when my SF and writing world collides with my Economic Development world.

For those new to the idea – the first place is where you live, the second where you work, the third where you choose to spend your time. The writer Deborah Ross does an exceptionally nice job of explaining why third place matters in writing about her small town Boulder Creek, CA at Bookview Cafe.

This is the kind of information that is most meaningful to me in understanding how real people use their communities. No economic development theory here, a working writer describes Boulder Creek, CA as the place she has chosen to make her first, second and third places.

I have become increasingly convinced that the old strategies for economic revitalization simply do not work. Everytime I read a story about how much money is spent per job to lure large companies to a community the practical side of my nature has me wondering if it wouldn’t be a lot more efficient to just give the cash to the same number of unemployed or underemployed people.

The Kaufmann Foundation has just released a new study on job creation. They start out by saying:

“The oft-quoted American sports slogan, “Winning isn’t everything. It’s the only thing!” could well be attributed to the economic importance of firm formation in creating jobs. A relatively new dataset from the U.S. government called Business Dynamics Statistics (BDS) confirms that startups aren’t everything when it comes to job growth. They’re the only thing.”

These last two years have taken a toll on retail establishments. Small retail businesses, particularly those which focus on selling non-essential items, or competing on service and experience rather than price (basically doing all the things we’ve been telling them to do) have been particularly hard hit as consumers tighten their belts and count their pennies. The Labor Dept. reports that an additional 85,000 jobs were lost in December and that national unemployment remains around 10.0%. Not good statistics for anyone hoping consumer spending will bring us out of the recession. Consumer optimism may indeed be improving, Wall Street may be improving; however, people still have to have money to spend money.

As I watch rural communities struggle with how to revitalize downtowns, I become more and more convinced that we need to take another look at the questions we are asking. We need to go all the way back to the original “why”. “Why go downtown?” Not why shop downtown vs Walmart or the strip mall, but simply “why go downtown?” When I do follow-up survey work with local constituents the “because” is the interesting part of the question’s answer.

Fr’instance, when talking to a local trustee at a community I was working in he insisted that a particular building needed to be refurbished and a restaurant tenant needed to be found. When I pointed out that that particular building was far from the vibrant corners of the street and that rents for the building were higher than those in a nearby more populous community, he countered with: “When I was in high school, this is where everything in town happened. People came in from the country to get together and hear the bands. Weddings were held here. It was the spot in town where everyone came together.”

He was describing the community’s third place. [the first place is where you live, the second where you work, the third where you gather] What we need to understand is what functions as third places in this community today and how foster that in the downtown. People may continue to go elsewhere to shop for low prices, parking convenience, whatever, but where and why do they gather?

This is a conversation I will be watching. What about your community? What are third places that work for you?

Part Two – Rethinking Business Types-Marginal or Troubled Businesses

It is common practice when talking about market studies or zoning to think about business categories in a specific way, usually broken down as retail, commercial, and industrial. This categorization is useful in many ways, but there is a better way to think about business when making a determination of which businesses will be financially successful and which will have a long-term positive impact on the communities in which they operate. As a banker, it didn’t take me very long to come up with a totally different classification system based on long-term business viability. I broke businesses down into the following categories:

• marginal or troubled businesses
• static businesses
• growth businesses

As a lender I needed to find and identify the growth businesses. They were my best bets for making loans to customers with the ability to repay.

Marginal businesses are businesses with problems which seem insurmountable without some kind of financial assistance. The problems may be caused by poor management, changes in economic conditions, changes in local conditions, lack of access to capital, etc. The key commonality is that the management seems to be stuck yet unwilling to make significant business changes. This is a fairly harsh assessment, but I think a key one for Economic Development Professionals to make. Applying the old 80/20 rule these types of businesses are likely to be 80% of demand for services, but only 20% of them will be successful in turning their businesses around. Municipalites and Economic Development Professionals need to do a strict cost/benefit analysis when providing services to these types of businesses.

There is a fundamental difference in mindset of the entreprenuer who will turn the business and the entreprenuer who will always be on the edge of disaster. One is forward thinking and one continually second guesses the past. I want to compare two retail owners and their response to the economic downturn of early 2001. Both had multiple retail locations. One took the opportunity to close down her poorest performing location and write off the loss over the next ten years. The other could not make a decision and kept second-guessing her long-term commitment to keeping the business running. She wondered if she should have closed all her locations five years ago, or ten years ago, or fifteen years ago, but could not bring herself to make any current changes to the way she ran her business. In the end, she also lost one of her locations, but at a much greater financial loss. Business at her remaining location is still struggling. The first entreprenuer has been able to expand her business and even though growth is slowed in the current economy she has a stronger capital base to see her through.

It is likely in your community that the second business owner will be the one asking for some form of help, for instance TIF financing. The first business owner may never ask for help. If the first were located in a TIF district, TIF returns could be used to enhance the amenities in the district rather than to shore up the viability of the business owner. This would have a measurably greater positive impact on the downtown district.

Part One – Defining the Process of how businesses function, grow and contribute to the community.

I came at Economic Development sideways. I spent twenty-one years as a commercial banker, doing every job imaginable on the commercial lending, deposit and ops side of a number of regional commercial banks. When I first became a lender I was encouraged to join a community service group as a business development exercise – Chamber, Optimist’s, Kiwanis Club. I joined the local Chamber of Commerce and helped the Chamber organize a local Economic Development Group. At the time there was a great deal of concern in my community about empty storefronts. This was in the late nineties. Stil sound familiar? Personally, I thought this would be a great opportunity for an up and coming new loan officer. Those storefronts needed to be filled. People needed to buy and rent buildings and start and grow businesses. I needed to make new loans.

Soon after I got involved on the committee loan applications did start to come in. I got a chance to look at the cash flows of businesses that were looking for financing to continue to operate in a declining downtown. Most of these businesses did not cash flow unless they had owned their building long enough for it to be paid for. If they were buying an existing business that did cash flow, the cash flow went out the window when their new cost of financing was figured in. In those years I turned down more loans than I made. However, working on that committee I found out about many of the tools and theories that municipalites and communites have in their toolbelts to try to turn some of these things around.

Unfortunately, I discovered that many although not all of the tools, were directly responsive to requests from business owners that had bigger business problems than a community developer or municipality was equipped to deal with. This didn’t mean that the tools didn’t work. It meant something more was at play than how the tools were applied. Municipalities and Agencies typically operate under different constraints than entrepreneurs or developers operate under. They have broad constituenties they must be responsive to. Their budgeting processes are completely different than a private businesses. They are limited by law in the kinds of impact they can make. If they are elected officials a mis-step in one of these areas can result in the loss of a job, where success often seems to go unnoticed. I have seen many municipalites and agencies apply the tools at their disposal in efforts to stop naturally occuring trends. Interactions with their constitutiencies are often in the form of citizen or business owner complaints. Agencies and municipalites are forced into a re-active role.

I believe there is a better way. But, first we need to reframe the entire conversation and re-think how we can use the tools at hand in business terms. Economic development is a process problem. There are ways to reapproach solutions and rely on process analysis rather than product. I’ll go into more detail on process vs product in my next post.