Untapped Potential: Business Retention in Portfolio Management
Eric P. Canada
YOUR COMMUNITY’S BEST COMPANIES are your competitors best prospects. Competitors regularly invite even small companies to consider leaving the community they are in and locating or expanding in the competitor’s community. Business retention programs have emerged in an attempt to slow business defections and the negative impacts those defections have on a community's economy. Today, these programs have increased in importance as communities recognize that real job growth over time comes from the expansion of businesses already in the community.
BUSINESS RETENTION PROGRAMS
Formal business retention programs were developed to provide a systematic approach to working with existing employers to:
- Identify problems that could cause employers to leave a community;
- Identify opportunities to help companies expand their presence in the community; and
- Build relationships with individual employers.
Historically, the typical business retention program involves a process of executive interviews or an employer survey. The process has been around for years with little significant change. In communities where the economic development organization has tried to use the business retention program as the centrepiece of the economic development strategy, there has been little success. Why?
Business retention as the primary economic development strategy is a strategy lacking energy or enthusiasm.
Standing alone as the primary economic development strategy, a traditional retention/expansion program is a strategy with no call to action. Alone, retention is a strategy of weakness and ultimately failure.
Business retention is an important goal, but it is not the reason for an existing business program.
The approach recommended here views business retention as an element of a comprehensive existing business program. It encourages community leaders to not only engage in business retention but also use the opportunity executive contact creates to build a meaningful existing business program around business development.
Some of the benefits to be derived from this approach include:
- Help existing companies draw new sales dollars from outside the area.
- Build the economic base, adding new jobs and cash flow to support other business.
- Support the resource needs of existing businesses, rather than competing with their needs as business attraction can.
- Create a positive self-sufficient attitude within the community or region.
BEGIN WITH THE END IN MIND
Most economic development professionals begin with the process in mind. Focused on the visit/survey process, the steps fall into place, action unfolds, interview/survey forms roll in, results are tabulated, a report filled with pie charts, graphs, and quotable quotes is prepared.
Only at the end of the process, does it become painfully clear that there probably will be no great saves (no companies on the verge of pulling out of the community are found).
After all of the effort of the contacts, not much new information is gained from the predominantly superficial interview questions. Pie charts and bar graphs do not help leadership understand what will drive the community’s economy forward. The reports do not help leadership anticipate which companies will be the center of the community’s economy in the future.
If there are no companies to save, if our help is of limited value to expanding companies, and if there is no new understanding, where do we go from here? There is there more to consider than just the process.
PORTFOLIO MANAGEMENT
Movement away from the process-driven style of retention and expansion program begins with understanding the premise behind portfolio management:
- New clients are hard (read, expensive) to get.
- Increasing the value of current clients is where it is at (read, less expensive).
- New clients are drawn to communities that provide good service to existing clients.
In economic development, the lifetime value (the economic impact generated over the life of the business) of even a small employer can be substantial.
For example, a small employer with 15 employees (average wage $13.75/hr) will put an annual payroll of $430,000 into the community every year. That same employer will pay property taxes and contribute to various charitable and community initiatives. The direct annual financial impact of that single employer is $490,000.
If that business is in the community for ten years, it will pump a total of over $4.9 million directly into the community. In 20 years, that business will pump in excess of $9.8 million dollars. Give that same company modest growth (5%) that allows for pay increases, and their direct contribution to the community balloons to over $16.2 million dollars in 20 years.
Yet, an existing business is easily taken for granted.
Most business retention programs are built on the business service model. In this approach, the economic development organization is there to respond to the needs of a specific company as it relates to doing business in the community.
However, the most advanced existing business programs are built on what is referred to as a portfolio management model.
In the portfolio management model, the first objective is to gain a deeper understanding of each company to determine how it will fit in the community’s economic future. Individual needs are not ignored, but the top priority is to prepare to actively manage the community’s economic portfolio.
To do this requires information the type of information an investor would use to evaluate the investment potential of a company’s stock. In economic development, every company needs to be evaluated on five critical factors:
- Value to the community.
- Growth potential.
- Technological adaptation and leadership.
- Risk of downsizing and/or leaving.
- Satisfaction with the community.
This information goes well beyond the typical investigation of community problems and business concerns needed to provide direct services.
EXECUTIVE CONTACT
The days of being paid to wait for the phone to ring from an executive asking for help are long past. Boards and political leadership want to see action. This is one reason business attraction is viewed positively. It is proactive. It is a symbol of the organization taking charge of the community’s economic destiny.
To win real respect, existing business programs must foster the same action orientation.
An essential step in building an executive contact program is to decide what will be discussed with area executives during the interview/survey. Most economic development organizations prepare a set of questions to help organize the interview and explore important issues.
In 1996, we gathered about 75 business retention survey forms from organizations around the country. Each organization had a proactive business retention program. Our findings were startling.
The vast majority of the time (53.2%) was being devoted to confirming easily obtained information (e.g. company address, parent company, product, employment, facility size). This means for an average 30 question survey, 16 questions were devoted to gathering information of absolutely no strategic value.
Just asking these questions demonstrates to the company executive that no one in the organization did their homework. This is not the image any organization wants to project.
The other focus of the traditional survey instrument has been to identify problems. In our analysis, the typical survey instrument devoted 25% of the interview to identifying and/or documenting problems limiting business growth or thwarting the attraction of new companies. How many questions are required to identify problems? Unbelievably, one survey we analyzed posed 95 problem-related questions.
Knowing community-related problems is important, but in an environment of global competition these issues do not drive corporate location decision-making. Investing 88.4% of our information collection time on these issues (confirming company info, identifying problems, and offering assistance) is highly inappropriate. This line of questioning provides little leverage to manage a portfolio with limited community resources.
A NEW CONCEPTUAL FRAMEWORK
To address the weaknesses in the typical business retention survey instrument, there is a need for a new conceptual framework for increasing the strategic value of information gathered through the business retention process.
Strategic information is comprised of two types of information: predictive and market intelligence.
Predictive information provides value by helping the development executive anticipate changes impacting a community’s economic base. Predictive information is focused on a company’s decision-making process.
Market intelligence seeks to document or quantify competitive advantages and weaknesses affecting retention and attraction.
The key to strategic information becomes asking the right questions. Business retention surveys should investigate:
- Product/product development
- Market trends
- Industry trends
- Management practices
- Workforce satisfaction
- Community relationships.
Exploring these issues provides insight into each company’s growth potential, value to the community, risk of leaving/downsizing, as well as overall satisfaction in the community.
Understanding each company’s growth potential, value, risk, and satisfaction provides essential information for the allocation of economic development resources and the creation of new programs.
For example, workforce challenges can be a problem for any company.
In response, many organizations have created workforce programs. Company-specific strategic information allows the development organization to design workforce programs to help the most valuable companies first. Or, program designers can concentrate on the needs of companies with the greatest growth potential first. In either case, by working with executives from these two important groups, the resulting program is likely to be very different from one designed for generic employers.
This ability to distinguish between companies is central to portfolio management. Resources are directed first to the areas of greatest opportunity.
In portfolio management, the greatest opportunity is not for a successful program, but rather, the greatest opportunity to yield the highest economic return on the time and money invested by the community.
In the past, programs were designed around program measures, not return on investment (ROI). An ROI focus changes everything. Information becomes critical.
Strategic information gathered through the business retention process is an essential building block because development organizations must:
- Seek out and acquire information relevant to the decision-making process of companies.
- Build company-specific knowledge base.
- Create a process to transform unconnected pieces of information into relevant, accurate and useable strategic knowledge.
- Focus information resources on helping identify marketing opportunities and predicting companies at risk.
BUSINESS DEVELOPMENT
How can an economic development organization adopt a growth-oriented strategy without total reliance on business attraction?
The best approach to economic development for many communities can be characterized as Business Development. Under this proven economic development strategy, the economic development organization becomes a hub connecting companies and business support programs to stimulate and/or accelerate the growth of companies in the community.
Business Development is:
- Proactive management of the local economy (portfolio management);
- A proven economic development strategy;
- Focus on existing employers to help them grow sales outside the community.
Government procurement programs and international export development programs were early economic development services targeted at business development. Each of these programs was aimed squarely at growing existing companies. The following are some contemporary examples:
Green Bay -- Some years ago, Advance Green Bay Area Development (WI) found that small manufacturers were having difficulty achieving ISO 9000 certification. Since ISO certification was becoming a supplier requirement, these small companies were at risk of losing current business and being frozen out of future opportunities.
These small companies could not afford the cost of an expensive consultant to help achieve ISO certification.
In response, Advance formed an ad hoc group of eight firms. Each participant put up a portion of the funding to cover a consultants fee. Each participant shared in the services provided.
Ultimately, each company achieved ISO certification. This action by Advance Green Bay preserved jobs and created an opportunity for eight area companies to grow their businesses.
North Dakota -- In North Dakota, the Manufacturing Extension Partnership program provides services to improve manufacturing operations. The first step in the development of the program was to assess the capabilities and growth potential of existing companies, identify services needed to improve manufacturing processes, and direct client companies to public and private sector services for assistance.
Individualized services are provided to qualifying candidates. Many services are provided by independent providers using a combination of state and federal funds to reduce the company’s direct cost.
Thunder Bay -- In 1997, Development Thunder Bay helped create Forestry Thunder Bay, a public-private partnership. The Partnership has since created an e-business buyer/supplier tool on its website atwww.northernsupplier.com. Today, over 300 of the largest regional buyers are now registered and over $1,000,000 worth of business has already been tendered. The site guarantees a buyer supplying basic information at least three quotes from regional suppliers within 48 hours.
As shown in these examples, services may simply constitute referrals to existing public and or private service provider elsewhere in the community or region.
In other cases where no service is available, an existing organization may help the company find a private consultant. For example, aging business owners nearing retirement frequently face the prospect of closing their business for lack of a successor.
If this is a significant issue, the business development program may form a business brokerage network to help business owners sell, avoiding abandonment of the business.
The bottom line in business development is finding ways to help existing companies survive and thrive.
CREATING A PROGRAM
The fatal characteristic of government procurement and export development programs was that they a one-size-fits-all approach.
The assumption was that any company could sell to the government or overseas. Unfortunately, if a company did not have a suitable product, the program was of no use.
Consequently, these programs were inappropriate for most communities.
The better model for a business development program is the Manufacturing Extension Programs (MEP) of the U.S. Department of Commerce’s National Institute of Standards and Technology.
The MEP program makes it possible for even the smallest firms to tap into the expertise of knowledgeable manufacturing and business specialists. MEP Centers have the ability to assess a company’s capabilities, to direct technical and business solutions in a wide range of areas to help build the companies capabilities.
The MEP program is market driven. The services offered are dependent on the situation and needs of the individual company. While the focus is manufacturing, it is not a specific type of manufacturing. This gives the MEP Center latitude to focus on producing results.
NETWORK HUB
In most communities, business owners and managers are not well connected. They do not have many meaningful networking opportunities. The networking events hosted by chambers and civic organizations are heavily attended by vendors with something to sell.
Under a business development model, the economic development organization serves as the network hub conducting assessments, exploring needs, and directing public and private services to area companies, helping them grow their business.
Maintaining an open structure without a specific industry provides the most benefit. Creating cross industry linkages and coalitions allows development organization to play a valuable role.
Furthermore, understanding the needs of growth companies helps a community prepare for the future instead of the all too common practice of building for the past.
Business development is not entrepreneurship. Entrepreneurship programs focus on helping an individual start a business.
In a business development program the primary focus is working with companies that already have proven business models. Target companies have employees, a client base outside the area, and sales. Most importantly, they have the potential for more sales.
Business development is about identifying the economic potential of existing companies, and helping these companies reach that economic potential. Growing revenue streams create opportunities for expansion and new employment.
In addition to the economic and employment value, by helping local companies grow, a community is building future business/civic leaders.
The size of the target company is not a factor.
Randolph County (IL) has a population of 35,000. The largest community is about 8,000. In Randolph County, economic developer Ed Crow, an avid reader, scans dozens of newspapers and business periodicals watching for and clipping articles and notices with leads useful to area business executives, e.g. area school plans to purchase 25 computers; telephone system bid notice. Articles are collected in envelopes bearing the businesses name.
In 2001, 30 businesses received 257 opportunity packets, mostly hand delivered, containing 1,317 leads. Because of the effort on one economic developer, dozens of businesses have bid and won sales they would never have known about. One implement dealer sold a tractor 50 miles away. A telephone service company sold and installed a dozen phone systems and expanded several times.
The sales growth can be documented. The goodwill has been bountiful and the total cost, negligible.
ECONOMIC GARDENING
Economic gardening is a movement with growing support in the U.S. It is a form of business development and can serve as another model for creating a business development program.
The premier economic gardening program is Littleton, Colorado’s New Economy Program. Widely modeled, Littleton’s economic gardening program is sponsored by the City. It consists of a very sophisticated business resource center and a skilled staff with research, business, and management backgrounds.
Area companies are invited to events to learn about the research and assistance that can be provided. Staff can conduct market feasibility studies to help companies identify and/or prove potential new markets for their products.
Once a prospective market is identified, resource center staff will help develop a custom mailing list for a promotional campaign. Executives can make use of a resource centre. Littleton provides services and support to any company or entrepreneur on request.
TWO APPROACHES
The approach recommended for business development begins with a strategic information and understanding of area companies.
Understanding the needs of growth companies provides insight into how existing service providers or available government programs can be the most valuable. A revitalized business retention and expansion program can form the cornerstone of the assessment process by focusing on identifying growth companies.
Business development services may be directed toward companies fitting established criteria, to push services to the companies most capable of generating new jobs in the community. The criteria for a business development program could include:
- Profitable business with 25-75 employees (lower in rural areas);
- Solid growth potential;
- Growth-oriented management;
- Majority of product/services sold outside the region.
- The alternative is to take all applicants on a first-come, first-served basis.
A NEW STRATEGY
The ultimate model for economic development was once considered to be a blend business retention/expansion, business attraction and a third element, perhaps tourism or entrepreneurship. The model can be strengthened by upgrading business retention and expansion to a more comprehensive portfolio management strategy.
If the goal is quality jobs, increased wages, and new corporate investment, the single most powerful economic development strategy is to maximize the value of existing companies.
Business development can be an alternative to traditional attraction strategies or it can be implemented in parallel with a business attraction strategy.
In all cases, a complete economic development strategy should be a combination of elements led by business development.
ABOUT THE AUTHOR
ERIC P. CANADA is a recognized authority on business retention and a principal with Blane, Canada Ltd. (www.blanecanada.com). He is the creator of Synchronist Business Information System, business retention software currently in use in over 127 communities. He is the author of Economic Development: Marketing for Results! He can be reached by e-mail at ecanada@blanecanada.com.