Corporate Research E-Letter No. 22, March 2002
BIDDING FOR ECONOMIC DEVELOPMENT:
THE ROLE OF SITE LOCATION CONSULTANTS
by Mafruza Khan
In 1919, a man named Felix Fantus moved his furniture business from Chicago to Indiana. While selecting a new location for his business, Fantus became so fascinated by the process that he decided to set up a new business venture – site selection or site location consulting. The new firm, which he named after himself, was devoted to identifying the factors and methodology necessary to assist companies in selecting the best geographic location for new facilities. Since its accidental birth, site location consulting has grown into a powerful behind-the-scenes business in the corporate relocation and expansion game, impacting and determining economic development in profound ways. Following our last two issues on accountability in the post-Enron climate, this E-letter discusses the main issues surrounding the site location business, which tends to operate in secrecy. It also points out the less known role of the Big Five accounting firms in the site location business.
Selecting the “best” site has become a much higher stake battle since the time of Felix Fantus. Fantus Consulting, now a unit of Deloitte and Touche Tohmatsu, was a small firm which focused on negotiating financial incentives for manufacturers and was instrumental in the mass relocation of manufacturing businesses from the North to the South. Fantus was involved in fashioning the nation’s first industrial revenue bonds for the state of Mississippi, which permitted businesses to use the tax-exempt borrowing power of government for development projects.
As the gatekeepers to new businesses and jobs, site location consultants have become very powerful players in the business of economic development, courted and wooed by state and local economic development officials. As one state economic development official said in a November 2001 Governing Magazine article, “Having a good relationship with one site location consultant is like having a good relationship with 50 or 100 companies. It’s more cost effective to target consultants than to target individual companies.”
According to the same article, in the past 10 to 15 years, the primary reason for corporate America’s surging demand for site selection services is that many corporations that once employed real estate staff have downsized or eliminated that function. By some estimates, consultants now handle as much as 60 percent of the business.
Along with the increasing prevalence of consultants, the industry has changed in both distinct and subtle ways. Many companies often have a clear idea of what they want from a location, but are unsure about where they want to locate. This is especially true, as companies have become more global. The entry of management consultancies in the business has also changed the scope of the business. For their part, many clients no longer request simple site studies. In such cases, site location may be part of a bigger package of services provided by management consulting and accounting firms that try to market themselves as one-sTop shops.
THE RISE AND FALL OF GRANT THORNTON
One of the most controversial site location consultants of all times is the Chicago-based firm, Grant Thornton, which rose to prominence in the early and mid eighties with his Annual Study of General Manufacturing Climates of the Forty-eight Contiguous States of America. First published in 1979, these reports became the primary authority for assessing a state’s business climate. Its fundamental conclusions were that lax workplace and environmental regulations, low taxes and low levels of unionization were conducive to a good business climate.
In 1986, the Corporation for Enterprise Development, a non-profit group working on economic development issues, issued a report titled, “Taken for Granted: How Grant Thornton’s Business Climate Index Leads States Astray.” The report was issued to debunk Thornton’s definition of a good business climate vis-à-vis the index, which had at the time become a powerful tool for lobbying policymakers. The report detailed Thornton’s flawed methodology and omissions and probably contributed to the firm’s decision to discontinue the reports. The firm of Grant Thornton continues as a major accounting company.
Most site location consultants adhere to a strict code of confidentiality. Communities may deal with site consultants for months before they know the name of the client the consultant is working for. Companies do not want the media or their competitors to know what they are looking for. In addition, most site consultants work for public sector clients as well. Cities and states may hire site consultants to assess their “business climate.” Critics argue that working for both private companies and the government agencies that court them creates a conflict of interest.
The site selection process usually starts with the client ranking what it wants from a location: skilled labor, cheap labor, a good transportation hub, or/and low taxes, for example. Most site consultants will then run those preferences against databases that include information such as wages, education, and taxes. The database queries tighten and grow more restrictive until about 12 to 15 potential sites that meet all the criteria are narrowed down. It is usually at this point, that the consultant will start working his contacts in the cities that qualify as potential sites. The consultant’s strict code of confidentiality is still maintained at this point, and the secrecy continues even when the list is down three or four finalists. The consultant will then visit the final contenders and interview local leaders to assess the “business climate,” particularly the willingness of each community to pony up tax breaks for a company whose identity is still unknown.
As the consultant reports back to his/her corporate clients, some companies may press for more incentives, which is when the bidding wars begin. Some consultants deal with this aspect of the business also, while others may defer this to law firms that specialize in incentives. Dennis Donovan, of the Wadley-Donovan Group, the largest and best known firm in the business, advises in a 1999 special issue of Expansion Management magazine dedicated to incentives, “Generally speaking, spend the most time negotiating in the preferred location. Use offers from the alternate areas for leverage.”
For a long time, Fantus Consulting was the only major player in the site location business. Boutique firms, such as the Wadley-Donovan Group, Corporate Affairs International and Location Consultants International have been around for over 25 years now. Then came the specialist units within multinational corporations. The management consultancy arms of the big accounting firms entered the market more or less at the same time, the nineties, via two different routes. In some cases, location strategy arms developed in-house as part of a business expansion strategy. Arthur Andersen Business Location Services whose clients have included AT&T, IBM, Lockheed, and Columbia/HCA Healthcare, Ernst & Young International Location Advisory Services, and KPMG Strategic Relocation and Expansion Services are such examples. In other cases location business arms were acquired, as in the case of Deloitte and Touche Fantus Location Services whose clients have included QVC, a national TV shopping channel, the State of Michigan, and Porsche Cars North America and PricewaterhouseCoopers Plant Location International.
Arthur Andersen and the Boeing Deal
When Seattle-based Boeing Company announced last year that it was looking for a new headquarters, it touched off a bidding war between Chicago, Dallas and Denver. State and local officials put the full-court press on Boeing with a party at the Art Institute of Chicago and a doled out an estimated $61 million in incentives.
Andersen’s Business Location Services unit played a key role in helping Chicago win the competition launched when Boeing decided to move its headquarters from Seattle. Andersen accomplished this, in part, by producing a report to Illinois officials that made highly questionable projections about the economic impact of Boeing’s new head office.
While the Boeing deal was unusually high profile, many other deals involving massive transfer of taxpayer monies to corporations through subsidies go unnoticed and unscrutinized. In the game of economic development, the rules are loose and the costs are high: one author estimates that as of 1996, states, counties and cities were already spending $49 billion a year on economic development. As many site location consultants will admit, the quality and cost of labor, access to transportation and other such factors are more important than incentives for generating sustainable economic development. Communities would be better served by focusing their energies on improving schools than showering companies with tax breaks.