The Well Worn Path from Penny-Wise to Pound-Foolish

Recent headlines in my local newspaper reminded me of how ironic one of the challenges was during the four-decade career I concluded more than five years ago.

The way the headline writers convey it, our City Council is divided about whether to endorse health insurance from a locally based corporation or send tax dollars off to a company in Connecticut.

Reading more closely, it is nothing more than jawboning to get a better deal, but whatever the reason, it is sending an unfortunate message to local businesses as well as universities here sure to undermine economic development.

Part of my job in visitor-centric economic and cultural development was one where mission accomplished was ever elusive.

it was challenging enough to remind both public and private sector players that a primary outcome for community destination marketing, a demand-side form of economic development, is to fuel the local business climate and the local tax base.

A corollary often lost even on economic developers on the “supply-side” is that it can be optimized only when local businesses and organizations strategically give preference to using or making purchases from other local businesses.

This has always been economic development 101.

But the reason so many in every sector don’t get it is because of a notion called siloed thinking which structurally permeates even the smallest of organizations.

I’ll use local government as an example but it is applicable to organizations as large as Duke University here, one of the state’s largest employers and even businesses that owe tax credits to their success.

Siloing especially infects the way organizations are structured.

This condition results in revenue streams being severed from how an organization conducts purchasing.

During my career, we trained in how to do economic impact analysis, in part, to help local festivals make a case to local government officials for funding but also to help deflect some in the private sector who always seem bent on “big game hunting” to bring in outside mainstream events instead, diluting sense of place.

But rarely if ever do local government officials or organizations anywhere tie their own procurement to local economic impact.

For example, any decision to ditch a locally based insurer for an out of state competitor should factor in the local property taxes paid by the local corporation, along with induced impact from its locally based payroll.

Also included should be the work-side spending of its commuter payroll, spending with local vendors and of course, the company’s local philanthropy.  Any decision to penny pinch should be informed by an economic impact analysis.

During the near decade I was in Anchorage during the 1980s, both the municipality (merged city and county) and State government would give a percentage preference to local vendors during bids, even if it meant a broker until local capacity could evolve.

During the 1990s, the ImPlan input-output model was made accessible with metrics calibrated for each county in the country.  It is the one we deployed in Durham during my former life, both through consultants and for local stakeholders through trained staff.

Rather than a percentage preference such as Anchorage had long used, it makes it possible to run an economic impact analysis to inform decisions including direct, indirect and induced effects as well as “leakage.”

Still, many organization continue to make “penny-wise and pound-foolish” decisions because siloing prevents them from being strategic when it comes to the local economy.

Unfortunately, it is endemic today across all sector.

It is why I still find myself explaining the importance of “buy local” to economic developers, sense of place to boomer developers and recently the importance of using Tar Heel artists to a state arts official.

Especially ironic is when I have to defend selective and sustainably tree cutting over clear cutting to consulting foresters, because the most accurate economic impact models in use today were first developed for the United States Forest Service.

So how did I get so smart? (smile)

I learned my former craft in the early 1970s from a generation of community destination marketing mentors who reached back before WWII.

I then watched as peers came unmoored from how economic development works, to the point that some even humorously tried to justifying imperial over-reach by arguing that it didn’t matter if the visitor spending they drew occurred in the business climate and tax base they were paid to promote.

Really?

I also saw peers over on the “supply-side” of economic development (recruiting relocating businesses) such as chamber of commerce types forgo the importance of using local vendors and local employees as metrics, to rationalize being able to poach members from other communities.

Siloing makes all of us appear stupid.

In the late 1970s, as the organizations I led as startups grew into adolescence and beyond, I began to study a new discipline of organizational structure designed to overcome the tendency of organizations and teams of individuals to silo.

If they haven’t been thrown out, there will be books I devoured on the topic of organizing like a matrix rather than a hierarchy still on the library shelves of the three DMOs I led over the decades since then until retiring at the end of 2009.

It was a theory put into practice by GE when it developed a new type of plant in Durham to assemble jet engines, just as I arrived here, structured around “teams” rather than the customary assembly line which opened in 1993.

But it was a much more difficult concept to execute in a community destination marketing organization, let alone a city, county or other large employer.  Inertia continued to rule

However, a new book I just read may be a breakthrough.

In Team of Teams, retired four-star general Stanley McChrystal and Chris Fussell, a former Navy Seal who also teamed up to form CrossLead, made the idea of a matrix much more practical and achievable for any type or size of organization.

They also provide a history of how organizations, on purpose, came to be siloed and examples of organizations who have overcome it only to have a new generation of leaders take them back to be siloed.

Team of Teams reminds us that on May 25, 1961, when President John F. Kennedy, less than four months after inauguration, announced to Congress that Americans would land on the moon before the end of the decade, our space program was a disaster.

That all turned around and this was successfully achieved less than eight years later on July 20, 1969  because George Mueller reorganized NASA into a matrix.  But during the 1970s and 1980s, NASA re-siloed, resulting in the Space Shuttle Challenger disaster in 1986.

Despite being well managed and contributing to community accolades, local governments in Durham are and have been heavily siloed for a long time.

An example other than procurement decisions being detached from from revenue streams is the sad state of urban forests.

The strategic approach to urban canopy in planning is undermined by cuts to code enforcement and isolation from urban foresters in general services where they are purposely made non-strategic.

Each of these functions is estranged from public works where trees are as more of a nuisance.

Thus Durham places little priority on green infrastructure and still has no strategic urban forest assessment or management plan of any kind, let alone one that is community-wide like the ones other leading cities began to create and implement nearly three decades ago.

In the meantime, Durham has been losing a net 18,000 trees a year not counting tens of thousands more lost to wasteful clear cutting.  All of this is estranged from local government sustainability and storm water treatment objective elsewhere.

Frustrated?  Eye-rolling?  Overly sensitive?  You aren’t alone as are many who work in local government including some of the brightest and most dedicated people I know.

Problems similar to this are endemic across the county in every sector of the economy.

But local governments can and should set an example because they are in the best place to do so strategically.  There is no better place to begin than by reading Team of Teams: New Rules of Engagement For A Complex World.

How Impact Gets Exaggerated

When early during the last stop in my four-decade career in community marketing, we began to use input-output analysis to benchmark the impact of visitor-centered economic and cultural development, our organization was quickly asked for more.

The request was from Duke University asking us for visitation inputs to what has become a similar periodic computation of its impact on Durham, North Carolina, where I still live in retirement.

I remember initially having to go back and forth to explain why the University couldn’t just add up attendance at its various venues for sports, performing arts, museums and nature areas and trumpet it as generated by the University.

Airports similarly make mistakes on economic impact studies if they are not careful to net out the impact from residents and visitors not drawn just for the purpose of being at the airport such as people there to do business with the airport itself.

I explained that while the University did generate some of that activity, a good portion was from visitors here for other purposes who happened to also take in an event or feature at Duke.

Many are also the same visitors taking in more than one event or site and to merely tally them would be duplication.

This portion qualifies as “participation” in economic activity but not economic “value added.”  At the time, we settled on terming it “generated and participated in.”

But the same clarifications had to be made each year and possibly still do.

The same is true of destinations that might try to leverage more respect by aggregating attendance of all features.  Without an input-output analysis of spending, even if they remember that resident spending never qualifies as visitor impact, the gross numbers do not equal value added to the economy. 

Many of the attendees are the same visitors taking in different events while here for other purposes.  To lump them together may create a short term wow factor but it will also backfire and lesson credibility.

Research in Durham, for example, measures not only participation levels by visitors in various activities but the percentage of visitors for whom that was the main purpose versus the percentage taking in the activity on a trip for another purposes.

For example, the latter represents a third of performing arts attendance, 40% of shoppers, 20% attending sports events and 60% of those attending festivals overall.  This is even true of those attending conventions and meetings.

Organizations are under a lot of pressure from governing boards and sponsors to justify their efforts.  But rather than gloss over these distinctions, it is better to educate these overseers on the following:

• Drawing visitation is in part a collective effort.
• A part of that effort is the community’s overarching marketing both to lower barriers to visitation, get on the list for future consideration and generate circulation.
• It is smart to cross promote and also go after low-hanging fruit, such as visitors here for other purposes including visiting friends and relatives.
• When non-residents are hired or sponsors and vendors from out of town used, it subtracts from economic impact as leakage.   It also undermines organizations that provide underwriting from taxpayers.

For example, local officials are often perplexed when they see cars from out of town dealers displayed in front of city-owned facilities because they know the sales tax on vehicles sold here represents a significant amount of sales tax revenue used to provide local services.

I’ve tried to smooth this over by explaining that this is one of the results when 75% of attendance at these facilities are visitors, which is a good thing.

It is natural for out of town dealers to buy up sponsorships because they are trying to reach the visitors attending the event.

Local dealers aren’t interested because only 25% are residents.  They aren’t interested in the visitors because contrary to what purveyors of advertising on or in news outlets want us to believe, people rarely commute to by cars.

Still, officials also have a point.  It signals to resident taxpayers that the facilities and events that do this aren’t very loyal.  It undermines support for future facilities, even the so-called “back end” incentives to spur developments.

Those negotiating the latter often fail to stipulate behaviors that will leverage more economic bang for the buck, such as using local vendors or jawboning the importance of hiring locally or making sure new hires relocate here.

Durham’s marketing agency is considered a best practice now by accreditation standards, in part because it not only employs input-output metrics but it has learned to do them for local facilities and events.

In reports such as the one recently published and shown in the image above, the agency gives examples of leakage as well as creates a chart that breaks down why communities that fail to take this factor into account are also guilty of grossing up impact.

For example, Durham visitation creates nearly a billion dollars in spending but only $766 million is spent here in Durham.  But because of leakage such as using out of town vendors, employing non-residents and visitors misdirected while they are here only $560 million is “value-added” to the Durham economy.

In other words, local business practices, if tweaked, could result in another $200 million for the local business climate and a percentage increase in local tax revenues generated from visitors alone.

Policy makers in Durham are taking heed, although they may need to talk to American Tobacco a little bit.  Even just a little jawboning can be very rewarding.