Tag: investments

High ROI Suburbs

tomkapostasy2 Comments

Many of America’s highest income, politically conservative suburbs have successful pursued high amenity public service strategies.  How is this high spending approach economically and politically justified?

http://en.wikipedia.org/wiki/Tiebout_model

In 1956, economist Charles Tiebout developed a model of competing suburban governments providing different levels and combinations of services to match the varied preferences of groups.  Subsequent research on suburbs and private real estate communities has confirmed that individuals prefer to choose amenity/payment bundles which match their values.

http://www.springerlink.com/content/r1v378785j2588j8/

Why would members of this usually tax and government-averse high income group willingly choose to live in a high amenity suburb?

The sociological observation that individuals prefer to belong to groups of like individuals is a partial explanation.  Exclusive communities are more homogeneous.

Brand name communities also provide some luxury goods type value from their exclusive status as high income, wealth and service communities.

High income, wealth, tax and service communities screen out criminal elements and benefit from low service costs to security services, delivering a safe environment.

High service communities provide signaling benefits in a world of imperfect information.  Transferred corporate executives rely upon education and amenity cues in choosing a residence.  Universities rely upon the reputation of school districts in selecting among applicants. 

Most importantly, a high service strategy delivers a great financial return on investment – especially for the initial group of residents.  High service communities proactively pursue strategies to minimize the cost to existing residents.

They invest in all service dimensions to ensure that the community is recognized as “a” or “the” leader in the metropolitan area and region.  Schools, roads, utilities, zoning, parks, transportation, libraries and cultural institutions achieve recognition.

They increase the tax base through annexation, selective density increases and attracting commercial firms.

They pursue “good government” initiatives, outsourcing services, consolidating services, utilizing volunteers and boards, leveraging regional, state and federal funds, employing specialized consulting firms and retaining highly qualified staff that benefit from the community’s growth and financial stability.

They invest in economic development, using Tax Increment Financing districts, user fees, economic development incentives, balanced zoning and negotiation to take advantage of the economic value of their attractive locations.  Retail, office, distribution, services, logistics and light manufacturing firms are welcome in the right zoned areas.

High service communities make capital investments to provide future economic returns.  Schools, parks, roads, libraries, utilities, cultural services, transportation and recreation assets are created through donations, local and regional government actions.

Suburbs compete with other metropolitan suburbs for residents and with other regional centers for commercial investments.  The right investments provide an atmosphere with low taxes, high services and a high quality of life. 

A Midwestern suburb of 75,000 has invested almost $1 billion in the last 20 years in its schools, roads, utilities, library, parks, infrastructure, cultural institutions and economic development incentives.  In essence, each of the existing 25,000 households has made a $40,000 bet on the future.  There has been some political and journalistic opposition.  A typical residence is valued at $250,000.  There are another 3,000 commercial firms with $250,000 property investments, making the total property value $7 billion. 

The community has annexed the unincorporated areas, increased density, attracted new businesses and continued its build-out towards a 120,000 population.  The number and value of commercial enterprises is expected to grow from .75B to $4B in 20 years.  Through zoning measures, growth and increased demand for a singular resource, the average residence will be valued at $400,000, with the existing residences appreciating from $250,000 to $325,000.  The built out residential market value will be $16B, for a total property value of $20B.

The original 25,000 households will gain a real $75,000 on their housing values.  Because of the community’s economic and population growth, their capital investment will be reduced to less than $20,000.  The early residents will clearly benefit from this high service and investment strategy.  The new residents will benefit from the investments and have the opportunity to “vote with their feet” in determining if the services delivered are worth the property values and taxes required.

High income families demand high quality services and are willing to pay for them.  They also require their municipal governments to take all possible steps to increase the cost effectiveness of these services.

Roar Out of the Great Recession

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It’s time to place some bets on the recovery.  Buy low and sell high.

 The labor market is softer than it has been since 1982.  It’s time to act.

 0. Reset the terms of employment with staff.  Reduce health care, pension and other benefits to a sustainable level.  Increase the share of incentive versus base compensation.  Hire some support staff to avoid burnout.  Offer a nominal pay increase now.  Provide extra time and flexibility to staff to balance.

  1. Hire qualified director/VP level staff to lead “on hold” initiatives.  They are available for lower base compensation and are highly motivated to earn incentives.
  2. Identify the most qualified scientific and technical staff in key R&D and product development areas.  They are unable to obtain venture capital support and would welcome a paycheck or contract.
  3. Complete your quality staffing, training and initiatives.  The market is loaded with very highly qualified individuals who have the business savvy to deliver value.

 Most suppliers are in weak positions, eager to begin to make progress.

 0. Propose long-term agreements with key supplier partners in return for a 5% per year reduction in unit costs.  Negotiate to a win-win position.  The best partners can reduce costs every year.  Focus on professional services firms.  Legal, accounting, insurance, HR and real estate firms face a new reality of lower revenues and profits.  They are ready to negotiate to maintain business.

  1. Take another look at outsourcing areas that are not strategic core competencies.  The third-party providers are more effective than ever and eager to do business.  All of the line and staff areas should be reviewed:  customer service, finance, accounting, HR, marketing, purchasing, logistics, distribution, manufacturing, and R&D.
  2. Engage contingency based cost saving consultants.  They are eager for business and can do their work with limited time from your staff.
  3. Look at domestic suppliers of key products and components.  The dollar is falling.  Transportation and environmental costs are rising.  Inventory and stock out opportunity costs are rising.  The remaining domestic manufacturers have outstanding capabilities.

 Make a few strategic investments.

 0. The real estate market is very weak.  Re-negotiate existing leases.  Look at sale and lease back deals.  Lease or secure options on properties for the future.  Hire or contract for unemployed real estate experts to reduce total costs of facilities and their associated risks and taxes.

  1. Take out those IT investment project lists.   Invest in the high ROI projects.  IT firms are ready to bargain, especially for larger, long-term deals.  Consider applications like Microsoft Sharepoint that knit together web, sales and communications.
  2. Pursue strategic acquisitions to acquire market share, products or talent.  Equity values have recovered.  Debt for solid larger firms is becoming available at low rates.  Smaller and highly leveraged firms are nearing the end of their liquidity options and need to sell.

 Pursue market share.

 0. Strategically evaluate the structure, number and incentives of your sales force.  You’ve maintained market share for the last 2 years.  Remove low performers.  Revise incentive schemes.  Invest in sales training for younger staff.  Make sure that your sales management team is the best possible.  Hire strong performers from the real estate, banking and insurance industries.

  1. Invest in export sales opportunities.  The markets are growing.  The dollar is falling.  The infrastructure is available to get started with a lower initial investment. 

 Great firms make progress at times like these.