With New Year’s resolutions in place, it’s always tempting to contemplate how the coming year will play out. In Business Magazine has no crystal ball to make predictions, but we dare to offer some perspective into 2017 as we turn to our past Guest Editors — recognized leaders in our community — to share their insight into their industry and our economy.
Power for Business
“Banking in Arizona (and everywhere) is so integral to a healthy economy — if banking is healthy, then the overall economy can be healthy. And the converse also is true,” says Jim Lundy, founding CEO of Alliance Bank of Arizona. To illustrate the significance of the banking system being caught up in an economic downturn, he points out that, while Arizona has had a number of economic downturns over the last 25 years, the one in 1988/’90 and most recent one were more severe than the other times of economic slowness, and they involved the financial services and banking system directly.
But at least for the foreseeable future, Lundy believes the future of banking in Arizona is good. “We have a number of healthy banks,” he says. Not just the “big 3” — Wells Fargo, Chase and Bank of America — but more than 60 in all. “There’s enough variety and assortment of smaller and midsized regional banks so businesspeople, consumers and real estate developers have a good array of alternatives for financing. As I look ahead, I see no reason capital should not be available.”
Capital is key for banks themselves. As Lundy points out, “The capital conserve is an important buffer to banks’ health when we do have another economic downturn.” So where does that stand now? “We have more significant capital levels as pre-crisis — one-and-a-half to three times more capital,” says Lundy. “The enhanced capital position of the banking industry is a good thing for the stable economic future of the state.”
In the realm of making capital available to consumers, banks have suffered some erosion of their market. For instance, auto lending from banks has gone to auto companies getting in the financial business themselves. And for unsecured personal loans, credit cards commonly take the place of personalized short-term loans. The current challenge is financial technology services, which are harnessing technology to get investors and going directly to consumers and businesses through a technology platform intermediary. But Lundy notes, “Lending to business is time-consuming. You need to understand the business. So, it will be a long time before the fintech industry takes a huge chunk of regular local business lending away from banks.”
Cyber security is another challenge, although admittedly not unique to banks. But Lundy explains, “Because banks’ job is to keep our customers’ financial information safe and secure, we have an extra layer of responsibility in that regard. This may be an area where fintech and bitcoin, etc., innovators will find it’s not that easy to have the rigorous infrastructure you need. It’s not easy to duplicate what banks have. So, banks are well-positioned to maintain their critical space in the economy.”
Additionally, the government expects banks to take an active role in helping it monitor illegal funds flow, for criminal activity or tax avoidance. After all, all of those activities that aren’t legal have to have a money source. “It’s difficult, and it puts a burden on banks,” says Lundy, “but it gives banks a natural advantage because the government expects that kind of commitment.”
Dodd Frank has placed higher capital and more intense regulatory requirements on banks since the financial crisis, and Lundy notes the stock market has indicated that a more business-friendly president and congress may scale back some of those regulations, but, he says, “I don’t look for wholesale significant changes in the responsibility of banks to keep higher capital levels and be very active participants in the cyber security and customer privacy and anti-money-laundering efforts.”
This also helps explain why Lundy does not foresee a proliferation of startup banks in Arizona’s future. “It takes more capital and more expertise and more effort to run a successful bank today, so investors have been taking a wait-and-see attitude before they weigh in and invest in a large number of startup banks,” says Lundy, adding, “It’ll be interesting to watch to see if there’s enough regulatory relief to attract new money to support new banks.”
“Keeping the lights on” is a common metaphor for “staying in business.” But energy is another fundamental requirement for commerce to exist. Mark Bonsall, general manager and CEO of Salt River Project, noting that technology has had enormous impacts on the utility industry and will continue to drive change in the future, shares, “Our customers tell us they want products delivered to them quickly and reliably to meet their particular wants and needs and they want it using the latest technology. That’s why we are researching how to further differentiate, on a retail basis, the basic electricity commodity by reliability, fuel mix, or other variables.” He notes that this involves building a generation mix with variable costs driven by customer preferences, rather than a one-size-fits-all, least-cost generation mix, and says, “We are also looking at developing new customer segmentation approaches, built around customer preferences, not consumption patterns, which will drive product and service development.”
Bonsall observes that providing the energy that has enabled Valley businesses to succeed and commerce to thrive is vital and will continue to be in the future. Looking ahead, he says, “The emphasis in the utility industry will continue to focus on developing resource plans that increasingly rely on new and different forms of energy and technologies that will meet the needs of the economy and our customers. Amidst all these changes, the mission remains to provide reliable and affordable power, improve energy efficiency and meet the environmental responsibilities that lie ahead.”
Health — Caring down to the Bottom Line
The advice from Paul Johnson, CEO of Redirect Health, is, “Count on healthcare changing … again!”
Healthcare coverage for employees continues to be a critical issue for businesses in their war for talent. And Johnson notes that, while disruptive companies have been setting out to solve today’s healthcare problems, a controversial election, an uncertain future with Obamacare and Trumpcare, and fickle insurers have yet again changed the playing field for small businesses. “Among the latest challenges: Their employees have been shut out of individual health insurance options.”
Johnson expects solutions to be driven by less by additional government, regulations and restrictions, but rather a free market. Noting that today’s businesses are, more and more, slamming the status quo and taking their future into their own hands, he says in the healthcare sector, “we’re seeing this with the increased adoption of self-funded and partially self-funded health plans as a means to lower premiums, limit liability and increase the value for employees.”
He has three suggestions for small and midsized businesses to transform healthcare from a stressful and overwhelming burden to a competitive advantage. One is to buy common healthcare services directly, bypassing big insurance, and purchase traditional insurance only for catastrophic illnesses and accidents. Another is to try to control where a procedure is performed or prescription is filled, as prices can vary dramatically from one location to another. The third is to invest in technology and/or a trusted third-party partner that helps employees navigate the system, increases access to doctors, and helps manage the 10 percent of employees who spend 90 percent of the healthcare dollars.
Physical well-being is one of a multitude of responsibilities employers face, observes R. Allan Allford, president and CEO of Delta Dental of Arizona. Another is the more subjective psychological well-being — much of which derives from the workplace environment created by company culture.
“It’s a bottom-line issue as well,” he says, pointing out studies have proven that a healthy employee is more productive, and citing, as example, the study referenced in former U.S. Surgeon General Dr. David Satcher’s report Oral Health in America, which found that employed adults lose more than 164 million hours of work each year due to dental disease or dental visits. Although that’s no small number, he notes that the significance of one’s oral health on overall health is often a secondary consideration in the discussion of corporate-sponsored health and wellness benefits.
In fact, Allford says, dentists can detect the signs and symptoms of more than 120 diseases in one’s mouth, including cancer, diabetes and heart disease. Helping increase awareness that good dental health is an important part of our well-being, Delta Dental created its Healthentic tool to help employers better understand dental benefits utilization and introduce wellness programs that guide employees to better oral and overall health. Says Allford, “Looking ahead, the demand for solutions like these will be even greater, as employers look to achieve a balance between benefits cost and employee well-being and satisfaction.”
Developing Workforce & Education
Donald Budinger, chairman and founding director of both the Rodel Foundations and Science Foundation Arizona, noted in 2012 that changes we were experiencing in our economy were due only partly to the recession but also because of advances in technology that resulted in business needing a workforce with new skill sets, in particular in areas of science, technology, engineering and mathematics. “These skills,” he said, “are in demand and beginning to shape the economy in ways that demonstrate a need to heighten the basics among students.
“As a business owner and one of the founders of a garage start-up that grew to become the world’s largest manufacturer of the surface finishing chemicals used to make computer chips, rigid memory disks and specialty optics, I found our need for well-educated and highly skilled employees was worldwide. In the 1990s, we started noticing a change in available candidates when hiring people for our U.S. facilities. More and more we were interviewing and hiring people who had been educated in other countries because their skill sets matched our needs better than those educated in the U.S. It is for this reason that we invested the majority of the proceeds we received upon the sale of our business into starting the Rodel Foundations, whose mission is to improve Arizona’s K-12 public education system so that it is widely recognized as one of the best in the nation by the year 2020. Science Foundation Arizona is also investing public/private dollars into a more robust science, technology, engineering and math curriculum in our state.”
Emphasizing the need for academic standards that, in addition to academic knowledge, focus on teaching critical thinking, problem solving and effective communication skills, Budinger notes the importance of empowering students with the knowledge and skills they need to be successful in the future. This remains as important now as ever, he says, pointing out that technology and globalization have been drivers of the global economy since the beginning of the recovery in 2009. “Smart devices have enabled every human being on the planet to communicate with one another, which creates huge demand for those products, and corporations can and do build their factories, research centers and distribution facilities anywhere in the world they choose. The result is that we have different winners and losers. Those left behind are not happy and are part of the current political populism that we saw in the UK’s decision to leave the EU last summer and the election in the U.S. of a man who appealed to those who feel left behind and not represented in the new economic reality.
“But globalization and technology — including all their explosive economic dynamics — are here to stay, so each and every one of us needs to adjust.”
Amy Hillman, Ph.D., dean and Rusty Lyon Chair of Strategy at ASU’s W. P. Carey School of Business, speaks to the need for soft skills as well, in today’s business environment. “As educators of the business leaders of today and tomorrow, we know that whether our students start their own businesses or make their careers in others’, technical skills are essential to success. But the technical skills will change over time, necessitating life-long learning, and, in the end, it’s the soft skills like leadership, teamwork, motivating others and being a strong communicator that will make your career.
“Technological enhancements in business and society have accelerated faster than expected the past two years. But the need for insights and sensitivities to how technology impacts strategy and the human elements of an organizations — its impact on products, customer service, employees, teams and processes — still requires leadership with strong capabilities in human capital management and motivation.”
The Best Practices
Addressing the areas of finance and professional services, Matthew Feeney, chairman of the law firm of Snell & Wilmer, notes that Arizona’s continuing economic vitality in entrepreneurship and business startups needs those small businesses to scale and grow. While there are resources available to assist companies in reaching that higher level, he believes businesses can look inward to leverage their resources and invest in themselves to grow business, opportunity and profits.
“In the early stages of any entrepreneurial venture, the natural focus is on attracting talent, acquiring customers and generating revenue,” Feeney says. With limited resources to confront a seemingly endless stream of competitive threats, business owners often take a reactive approach where it comes to professional services, for instance engaging counsel only when something goes wrong. However, he notes, it’s almost always more expensive and time-consuming to address an issue after the fact — plus there’s the reality that, in certain situations, what’s broken can’t be fixed. “Since a little knowledge can go a long way in avoiding costly, and potentially fatal, mistakes, business owners should also invest in their own continuing education.” His firm, for instance, offers a monthly Emerging Business Seminar Series™ to help clients understand and proactively address the challenges that may confront their businesses. “Through continuous education and strategic consultation, entrepreneurs can construct a solid (but cost-effective) legal foundation upon which to build their next great company.”
Wealth management is another area of critical importance. In fact, Deborah Bateman, vice chairman with National Bank of Arizona and director of its Premier Wealth Management, believes it’s more important now than perhaps ever before that business owners proactively manage their wealth in ways that help ensure security while positioning them to take advantage of opportunities in both the near and long term. “Whether they are growing their businesses or simply preparing themselves and their employees for the future, the current environment requires that wealth management be as much a part of business as profitability,” she says.
“By working closely with an experienced and trusted financial advisor, to determine and plan for their financial needs and goals, business owners can develop effective strategies while continuing to focus on their real interests: their families and their businesses.” She suggests business owners — responsible both for family and business finances — create time in their schedule to develop, implement and monitor a comprehensive, well-crafted plan to help achieve their personal goals as well as maintain and attract talented employees while operating their companies efficiently.
Incorporating philanthropy into a business’s operations is accepted as good practice. Steven Seleznow, Ed.D., president and CEO of the Arizona Community Foundation, reports that Arizona is home to a wide range of highly effective and even nationally recognized charitable organizations — and this offers businesses a variety of ways to support the community through philanthropic investments and activities. “Successful companies — whether family-owned businesses or large corporations — recognize the value of aligning their charitable giving with strategic business goals,” says Seleznow. “This alignment can boost employee morale, enhance a company’s reputation and raise awareness of corporate values.”
However, Seleznow notes that, while it may be relatively easy to identify causes that merit a company’s commitment, the more significant step is choosing nonprofit organizations that will do the most good with the support they receive. In this regard, he says the Arizona Community Foundation, through its Pakis Center for Business Philanthropy, is seeing an exciting evolution in the way companies direct their resources toward the goal of developing strong, vibrant communities. “Businesses are stepping up to the challenge of being good corporate citizens in the communities where they do business,” he says. Among the options are corporate grantmaking, employee scholarship programs and staff volunteer activities.
We’ve taken the pulse of a few of our key industries.
Elliott Pollack, CEO of Elliott D. Pollack and Company, says the real estate market now has significantly improved since three years ago. “The outlook for virtually all forms of residential and commercial construction is much better today. And given the pro-business policies the Trump administration is likely to follow, the outlook will improve even more.” He notes that excess inventory in the residential market in terms of houses and lots is gone; the demographics and the potential for a faster growing economy overall under Trump suggest that single-family housing will do much better over the next few years; and the demographics for apartments have never been better in the history of man. On the commercial side, vacancy rates in office have declined to levels that suggest a 2018 boom in construction, and industrial is also underbuilt relative to new demand. “In addition,” he says, “if Arizona has a sufficient number of shovel-ready projects that will allow it to get its share of the new infrastructure program that Trump campaigned on, our biggest problem will be finding enough labor to fill all the jobs.”
Chuck Vermillion, who built a name for himself as CEO of OneNeck IT Services and recently launched AccountabilIT, observes that technology is sometimes portrayed in the media for its man-vs-machine role in workplace job losses. “But it is also touted as an economic growth sector,” he says. “In fact, it is one of the areas Arizona’s leaders have identified as key to the state’s development of a sustainable, strong, high-wage-based economy.
“A number of organizations, including the Arizona Technology Council, are focusing on developing the State of Arizona into a Technology Titan. And we’ve seen great results.” Vermillion points to Raytheon announcing its Southern Arizona expansion — which will add nearly 2,000 jobs over the next five years — as well as Vector Space, Lucid and Galvanize announcing the opening of new locations in Arizona in 2017. “Efforts to develop innovative and impactful homegrown companies resulted in our entrepreneurial ecosystem having its strongest year ever,” he says. “Serial entrepreneur and co-founder of AOL Steve Case brought his Rise of the Rest startup competition to Phoenix after we were identified by his organization as a growing startup market. Having complete faith in the local market myself, I recently launched my latest startup in Scottsdale, AccountabilIT, focused on enterprise resource planning applications management and cloud IT services. The outlook for 2017 is encouraging and it may be Arizona’s most robust year since the recession.”
Offering his perspective on sports special events, Mike Kennedy, shareholder with Gallagher & Kennedy, whose practice includes working with Arizona sports teams, and who chaired the Arizona Super Bowl Host Committee through the successful staging of the Super Bowl here in 2008 and 2011, says, “Here in Arizona, we have the year-round privilege of being able to root for our home-town teams, as the Valley is home to professional teams for football, baseball, basketball, hockey and soccer with its new management and name, Phoenix Rising F.C.”
And the result of our three-year run in hosting Super Bowl XLIX in February 2015, the College Football Playoff National Championship Game in January 2016 and the NCAA Basketball Final Four in March 2017 is impressive. “In fact,” he says, “‘off the charts’ would be an understatement.” The economic impact realized by Super Bowl XLIX was $719.4 million and the College Football Playoff National Championship generated another $274 million. The upcoming NCAA Final Four will easily drive the total economic impact for these three events well over one billion dollars. “Perhaps even more importantly, CEO Forums held during Super Bowl XLIX and the College Football Playoff National Championship resulted in 14 companies relocating to Arizona, representing 3,614 jobs with an average salary of $71,196 and $207 million in capital investment.”
Kennedy also points to Valley mainstays Waste Management Phoenix Open hosted by The Thunderbirds and Cactus League baseball, which in 2016 generated economic impacts of $222 million and $809 million, respectively. “Far beyond just entertainment, the business of professional sports and hosting mega-sporting events has an enormous, tangible impact on our Valley economy,” Kennedy states.
The Valley has seen a proliferation of restaurants, and one of the leaders in that industry is Sam Fox, founder and CEO of Fox Restaurant Concepts. As he shared with us when he introduced the “restaurant” issue of In Business Magazine a few months ago, local Phoenicians have known the Valley has been a dining destination for some time. “Now, the rest of the country is taking note. We’re finally being recognized as a city that’s driving dining trends by way of some incredible culinary talent. Truth is, we’re tired of not being seen as the food-centric market we’ve become. Phoenix has earned its seat at the table and I’m more excited than ever about the innovation and creativity emerging from Arizona. The talent here is impressive, and, while the list of veteran restaurateurs in the Valley is long, so too is the list of fresh, homegrown talent.”
Fox sees the Valley’s restaurant growth — with guests exploring new neighborhoods and tapping into the local food scene — as proof that locals and visitors alike are seeking experiential dining in Arizona. “Today, there’s a great range of successful restaurateurs in Arizona. Whether it’s a James Beard Award-winning restaurant, a cool local dive bar, or a place that serves family favorites in a creative atmosphere, there’s quality in the kitchen, hospitality on the floor, creativity in design, and a million reasons out there to love our growing restaurant scene. Arizona is a dining scene, and we are only going to get better.”
While there is a business sector that has grown up around sustainability, it is also a trend in business overall. “Businesses, cities and universities in Arizona are leading the way toward a sustainable, inclusive, resourceful economy,” says Patricia Reiter, director of Rob and Melani Walton Sustainability Solutions Initiatives. “This is even more obvious now than it was when I wrote my editorial in 2013. International business leaders were on the forefront of climate negotiations in Paris last December, and local enterprises are key players in a circular economy that keeps consumer dollars in our state, provides jobs, and reduces the financial and air quality costs of transportation.
“Going green is no longer just a marketing meme or employee engagement strategy. Businesses see opportunity in creating products and services that have a triple bottom line — people, planet and profit. Forward-looking industry leaders are not waiting for regulation, they are creating science-based targets for their operations and products because it’s good for business. Many have begun to measure their social impact through the United Nations’ Sustainable Development Goals. In addition, investor reporting frameworks are integrating sustainability factors which can have a material influence on the financial performance of a company’s stock.”
Reiter notes that ASU works with business and civic leaders locally and globally to create sustainable solutions for an ethical circular economy — 76 projects since 2012, in nine countries with 194 partners, including businesses with combined market value of $365 billion. The Walton Sustainability Solutions Services initiative is currently working with the City of Phoenix and several emerging businesses to create the Resource Innovation and Solutions Network, which will create jobs while developing uses for problematic waste that would otherwise go to the landfill. Reiter says business leaders at the RISN hub in Lagos, Nigeria, have adopted this same strategy.
“To ensure inclusive, intergenerational well-being and economic prosperity, we all need to work together. Businesses are investing in this future now,” Reiter says. Next month, her organization will present its Sustainability Solutions Festival, which will include hosting international business leaders at partner event GreenBiz 17 as well as inviting the public to be engaged in sustainability solutions activities throughout the month of February.
Where We’re Going with Economic Development
“Business in Arizona is still in growth mode, from startups creating their space in the marketplace to established companies expanding their operations,” says Robert Blaney, director of the U.S. Small Business Administration’s Arizona District. “It is also interesting to see new methodologies develop for raising capital to either start or grow a business,” he adds, noting “crowdfunding” was not part of the business lexicon a few years ago. “The world of business, especially small business, changes quickly and it is important to keep your business and yourself agile.”
The U.S. Small Business Administration’s loan program activity further confirms that small business is on the right track here in Arizona. The federal fiscal year begins on October 1 and ends September 30. From October 1, 2015, to September 30, 2016, SBA guaranteed 1,387 loans, or 26 more loans and about 35 million more dollars than in FY2015. Perhaps the better part of the story, Blaney says, is that over the last two fiscal years the dollar amount increased 33 percent compared to FY2014. On September 30, 2016, the loan dollar total was $681 million versus $646 million for the same period last year and $516 million the prior year. And, citing this as another good sign, he shares that more than 36 percent of the loans went to new business applicants, attesting to the appetite for entrepreneurship that characterizes our state.
Noting geography being another important aspect for Arizona business, Blaney cites the more than $240 billion in U.S. products and services that Mexico imported last year. Says Blaney, “Exporting products or services will help grow your business because 95 percent of all consumers live outside the United States.”
But there is also a very important local movement, as Kimber Lanning, founder and executive director of Local First Arizona, explains. “As technology continues to transform the shape of many industries, we’re living more and more in a global economy and local companies have opportunities to expand and grow by connecting outward to new markets. But there is economic strength derived by encouraging business-to-business interaction within the local community, as well.”
Lanning notes the “buy local” movement has definitely taken hold in Arizona, with consumers consciously seeking out independent businesses and understanding that when they support the locally owned businesses in their communities, up to four times more dollars stay and circulate in the local economy versus money spent with national corporations or global online retailers. “They know the money they spend goes toward creating more local jobs, and that the dollars re-circulate to create additional revenue that strengthens local schools and helps protect unique and vibrant communities,” she says.
“Through the ‘buy local’ strategy, we’re building community wealth, and an economy that works for everyone, no matter their socio-economic status or background,” Lanning says. “Businesses and consumers alike are working together to support Arizona-owned businesses of all kinds, and are creating prosperity not only for themselves but for their neighbors and communities overall.”
Courtney Klein, founder and CEO of business incubator SEED SPOT, affirms the entrepreneurial fever is alive and well in Arizona. Reiterating her observations from last month’s “startup” issue of In Business Magazine, she notes that entrepreneurs represent the foundation of a growing economy, and that those which have experienced exponential growth have demonstrated the ability to listen to customer needs, iterate quickly through change and execute relentlessly on their vision. What’s required is not only strong leadership and dynamic teams to bring new ideas to life, but also a community of people who are willing to take early risks, place big bets, and roll up their sleeves to lend expertise and energy to help startups go from idea to scale. To these points, she says, “Traveling across the country as we expand SEED SPOT to new markets, I can attest that Phoenix has a unique asset in being a big small town. The ease of access to quality mentors, the openness of this community to take meetings with early-stage startups, and the collective desire to put Phoenix on the map nationally is not something every community can claim.”
Making Arizona the best place for business, strengthening the economy through high-value job creation and building a vibrant innovation ecosystem are primary focus areas for the Arizona Commerce Authority, the state’s top economic development agency, of which ACA President and CEO Sandra Watson says it “is led by a dynamic public-private sector board, chaired by Governor Ducey and guided by his pro-business policies.”
Observing that Arizona is experiencing incredible economic development success with new and existing Arizona businesses, Watson cites recently announced large-scale expansion projects with global leaders such as Lucid Motors, Caterpillar, Raytheon, Orbital ATK, ADP, McKesson, Rogers Corporation, Kudelski Group and Carlisle Corporation.
“Adding to this recent wave has been the growth of our innovation ecosystem, which is being recognized across the country as a place to test new business models, such those in the sharing economy, automotive technology and information technology,” Watson says. For example, in November, Arizona was selected over 12 other states and nearly 60 sites across the country as the future home of Lucid Motors, an electric-car manufacturer that plans to invest $700 million in Casa Grande and create 2,000 new jobs by 2022. “And tech-based companies like Uber, Google and Airbnb all have a significant presence in the state and are testing bold ideas that will help create a sustainable future for the state.” These companies also have something in common: California. Says Watson, “Arizona has been incredibly successful in attracting California companies seeking fewer regulations, low taxes and a welcoming environment.”
The ACA reports that, over just the past 18 months, it has worked collaboratively with companies that have committed to creating 28,629 projected new Arizona jobs and making $2.77 billion in capital investments in our economy.
“Arizona provides all businesses, small and large, the perfect platform for growth and success. The ACA, under Governor Ducey’s leadership and with the support of our Legislature, will continue to drive the message home that Arizona is indeed the best place to live, work, do business and thrive,” Watson says. “I’m confident that in 2017, we will see this strong momentum continue in our economy.”