Just when economic bullying by big corporations threatened the whole idea of independent small business, company builders nationwide did the last thing anyone expected -- they turned to one another for help.
A new "spirit of independents" is spreading across the nation. And the battle lines have been drawn. Consider that the United States just concluded one of the longest-running consolidation plays ever ($2.8 trillion in mergers and acquisitions in 1999 and 2000 alone). The big got a lot bigger.
In response, independent companies are forming and joining alliances, cooperatives, networks, and coalitions in record numbers. By coming together in groups of 10, 30, or 300, small companies are gaining the benefits of bigness. And it's happening everywhere. From baseball teams to carpet retailers to network-services entrepreneurs, small players are uniting for a common good. The movement has even marched into other countries.
Some groups get started after feeling deserted by their city councils and chambers of commerce. Others go where trade associations fear to tread. Whatever the origins, the new independents movement amounts to a potent underground economy -- groups of companies that buy and sell for one another.
How big is this hidden economy? A partial accounting reveals hundreds of alliances involving thousands of companies. Just 18 of the more prominent small-business alliances have 9,402 members with total sales of about $29 billion. Members of the groups pool their political clout, their purchasing dollars, and their business know-how. They launch national marketing campaigns. They share office space, technology, even employees. The new movement is an antidote to the culture of consolidation. The message is, there's another way to gain economies of scale. Who needs a "parent" when you've got friends?
"Underneath it all, there's a flavor of independence that's absolute," says David Leppert, CEO of Cooperative Solutions, an organization set up to support cooperatives. Leppert has helped start half a dozen small-business co-ops in businesses ranging from bike shops to drywall dealers. Leppert went so far as to draw up a "Declaration of Independents," a portion of which appears in the introduction to this story. If this is war, the battle plan is twofold: defend local ownership positions and attack the enemy with the fortifications of an army. The result is nothing short of revolutionary.
The Revenge of Mom and Pop
The new independents movement is alive and kicking in small towns and in the neighborhoods of big cities, where storefronts are joining the battle. Local retail alliances are rooted in community groups with names like MADSET. (That's short for the Milford Alliance to Defeat Sprawl at Exit Ten, an effort by residents in the small community of Milford, Pa., to stop a Home Depot from going up.) The story of mom-and-pop revenge began publicly when citizens joined hands with local business owners. And now owners are helping other owners.
Meet Lorraine Miller, a leader of the new independents movement. She is a respected businesswoman in Salt Lake City, the longtime owner of a thriving $3.5-million gardening center called Cactus & Tropicals. She doesn't seem like the type to take up arms. A few years ago she was just minding her own business. She dutifully served three years on the Salt Lake City Chamber of Commerce. But the chamber experience turned Miller into a rebel with a cause. "I told them, 'You are not addressing the needs of small business," she recounts. "Local small businesses were under the radar."
Not anymore. Not since Miller jumped into action. In March 1999, she joined three other retailers to form the Salt Lake Vest Pocket Business Coalition. Now 150 companies strong, the coalition helped to defeat a proposed "sprawl mall" and elect a pro-small-business mayor. "Our number one focus," Miller explains, "is to create a level playing field between local ownership and the national chains that get all kinds of tax incentives." That means that whenever one of the coalition's members has a run-in with city hall, the others raise hell. But more than that, the members actively promote one another's businesses, do joint advertising, and cosponsor community marketing events. They also mentor one another. Says Miller, "We want to change the world...one storefront at a time."
"There's been a growing number of communities saying no to big-box stores, but beyond that more communities are doing things proactively," says Jeff Milchen, cofounder of the Boulder Independent Business Alliance, in Boulder, Colo. "What's exciting about this is it's fighting for values we believe in rather than just fighting against the Wal-Marts." BIBA, as Milchen's group is known, started in 1998, which makes it the oldest known alliance promoting local independent businesses across the spectrum. The BIBA Guide lists 150 retail, wholesale, and service businesses.
"You can't miss BIBA when you're in Boulder," says Stacy Mitchell, author of The Hometown Advantage. "The signs, coffee mugs, and bookmarks are everywhere. There's a high level of conversation in stores and on the radio about independent business. It makes people think about how they're spending their money." BIBA slogans that appear in print ads and window decals include "Put Your Money Where Your House Is" and "You're Not a Clone. Why Shop at One?"
There are at least a dozen local retail alliances like BIBA around the country. "It's all very recent," says Mitchell. "It's been amazing." Mitchell believes that local business owners are realizing that when a chain store comes to town, it's not just traditional retailers that get hurt. "There's a secondary impact on services, definitely," says Al Norman, a Wal-Mart watcher who runs a Web site called Sprawl-busters.com. He points out that when the big boys hit town, local accounting firms, business-cleaning services, insurance companies, and wholesalers also take a hit.
"I think new members see BIBA as a good investment more than something altruistic," says Milchen. As word of the alliance's success has spread, people have started calling from other cities and towns. As a result, Milchen is helping to launch the American Independent Business Alliance, an umbrella group designed to seed alliances and provide resources. "The interest is coast-to-coast," Milchen says.
And that's how the movement spreads, from one city to the next across the country. Two years ago it hit Tucson, when a group of competing restaurants agreed to forge a united front to fight the incursion of chains. They called themselves Tucson Originals, and their slogan is "Think Globally...Eat Locally." The restaurateurs agreed to pool their resources for group promotions. Apparently, they sparked something. Soon the statewide Arizona Independent Restaurant Alliance was born to negotiate with food suppliers. Tucson Originals was also the model for the Council of Independent Restaurants of America. The national group has spawned restaurant alliances in Atlanta, Milwaukee, Minneapolis, Providence, and Washington, D.C.
And if it can work for restaurants, why not for the insurance industry? Tim Hyland helped build something called Agents Helping Agents for independent insurance agents. One day Hyland, who owns an agency in Louisville, hopped in his car and started traveling through the bluegrass backwoods of Kentucky. He encountered one discouraged agency owner after another. He encountered plenty of cynicism, too. The owners wanted to know, How are you going to help? Hyland understood their despair. "The independent-insurance-agency business...has been negative, negative, negative," he says. "Insurance companies have been consolidating and pulling out of certain areas. Agents have been dropping like flies, and commissions have been cut. There's a general attitude of 'I can't do this. I can't stay in the game." But Hyland kept going door-to-door. Today membership in his alliance has swelled to 35 agencies in central Kentucky and southern Indiana. The alliance aggregates about $45 million in written premiums. Last March $138,000 was returned to its members in the form of bonuses from the insurance companies.
"A backroom partnership" -- that's what Hyland calls what he and others like him are doing. The members of Agents Helping Agents aren't just getting money back; they're also getting help running their businesses. Hyland is still going door-to-door across the state doing things like technology training. "We think local people want to buy from local agents," he says. "We've created a sense of purpose and a sense of hope that maybe this way we can control our destiny."
The Rise of the Fourth Economy
The movement is grassroots but it's organized. One reason: the rise of cooperatives. In recent times, the National Cooperative Business Association (NCBA), in Washington, D.C., has witnessed an "explosion" in the number of small-business co-ops, according to association CEO Paul Hazen. "Today there are at least 250," he notes. "Five years ago there were maybe 50." And there are many more operating under the NCBA's radar.
Hazen says cooperatives collectively form a "fourth economy" -- a sector that's not like any for-profit, nonprofit, or government agency you've ever seen. "We're operating with different economic values that give us an advantage," he says. "It feels like a homegrown local business, but it gives you more leverage to compete nationally and globally."
At first glance, co-ops appear to be nothing more than an IRS-sanctioned way of pooling resources and distributing the savings among their members. But that feature alone can mean a real competitive advantage for companies in some industries. Leppert's co-op for drywall companies, Amarok, took off when the dealers realized they were competing with the likes of Home Depot and Lowe's -- not for customers, but for suppliers. When drywall was short in supply, guess who got theirs first? To hear the founder of Amarok tell it, in pre-co-op days the little independents got no respect from suppliers. They do now. At first the seven founding members of Amarok each represented less than one-tenth of 1% of the buying power within the industry. Five years later Amarok's 115 companies in 45 states together command 9% of the market and do more than $1.2 billion in sales. They reportedly move more drywall than any retailer, including Home Depot. Together they have the buying clout to source other products from around the world. And they are pursuing an agreement with FedEx for volume discounts in the United States. Last year Amarok returned about $80,000 in savings to each of its members.
The co-op model is suddenly more appealing to entrepreneurs because they are thinking differently about the future and what it will take to compete. Before, many cooperatives were created out of immediate economic necessity -- say, when a supplier went out of business. "Now," says Hazen, "we're hearing, 'We need to do this to be in business 20 years from now.' It's a strategic shift. With a co-op, you now have a brand you can take nationally."
The co-op phenomenon has spread across the country to such niches as cable-TV operators, hotels, electrical distributors, insurance companies, rural electric companies, restaurants, and network-services companies. "Give the independents the tools and buying power, and they can outperform anyone because of the power of local ownership," says Alan Greenberg, cochair of a cooperative known as Carpet One. Greenberg knows whereof he speaks. The largest U.S. retailer of flooring products is not Home Depot. It is Carpet One, whose members operate some 1,100 stores doing a combined $2.8 billion in sales in all 50 states as well as Canada, Australia, New Zealand, and Guam.
Carpet One is an aggressive model that other co-ops are trying to emulate. You could say the members have traded some of their autonomy for greater benefits. A few of the perks: a national brand endorsed by a celebrity in national advertising, exclusive products, a glossy magazine, extensive training, discounted health benefits, an impressive Web site, new computer technology, and access to an individual line of credit as large as $750,000 from the National Cooperative Bank. Informally, Carpet One even offers its members an exit strategy: retiring owners have found buyers for their businesses within the co-op.
To Mark Gordon, CEO of $13-million Synergy Networks, the co-op structure seemed like the ideal way to "acquire" what he needed to compete in the network-services business. So about 18 months ago, Gordon, a three-time entrepreneur from Tysons Corner, Va., launched his most ambitious venture to date: a cooperative called 1Nservice. "We recognized we needed to play bigger than we are," he says. Forget acquisitions. Gordon, who hails from Andersen's consulting division, knows how tough it is to integrate companies. Been there, done with that. With the co-op, he says, "we get the benefit of size instantly, but we don't have to structure financial deals."
Gordon's co-op unites 11 close-knit business compatriots, all owners of companies that provide network services. They help one another win new accounts and reap the rewards of power purchasing. Together the companies employ 318 people and do $140 million in sales. As such, equipment suppliers have been willing to grant the group deeper discounts, as well as offer more training and market-development dollars. Says Gordon, "Why aren't we entitled to the same benefits as the big guys?"
Other co-ops are also thinking strategically. Consider what's happening in the "colony" of New Jersey. Thirty independent funeral homes have agreed to pool their human-resource dollars for the good of the whole. They've joined a new small-business cooperative known as Thanexus, which runs a collective HR department for the funeral homes, which have a combined payroll of $12 million. It's a startling development in an industry that has traditionally been fiercely autonomous. "Talk about herding cats," says Wilson H. Beebe Jr., president of Thanexus. One member, Freeman Funeral Homes, in Freehold, N.J., has been family-owned since 1847. Nevertheless, the owners decided they could do better by handing over the HR reins to Thanexus, which handles all the hiring and firing, trains employees, and provides health and retirement benefits. "We're providing pensions for people who have never had one and other benefits the independents couldn't do on their own," says Beebe, who is also executive director of the New Jersey State Funeral Directors Association. NCBA's Hazen calls Thanexus "an innovation and a surprise" and predicts the model will "spread quickly" to other industries.
In fact, membership in Thanexus doubled within a year of its launch, in January 2000. As Beebe speaks of the changes and consolidation that have beset funeral homes, he could be talking about almost any industry in which small companies compete. "No one has enough creative or financial capital to deal with all this," he says. "It really requires the resources large companies have, so how do you stay independent?"
A More Perfect Union
The spirit of independents means something different to the 24 women and 6 men of the PRConsultants Group, each of whom owns a public-relations firm. They're not fighting sprawl malls or pooling their purchasing dollars. That's not what they need to thrive. What they need is quality people across the country, and now they have them. By pooling their talents and experience, they have won prestigious projects that none could have gotten alone, says Marisa Vallbona-Freeman, the San Diegobased cofounder of the group. While the PR industry has seen its share of megamergers, the group's 30 entrepreneurs seem to be competing just fine.
Still, the birth of the PR union was somewhat serendipitous. Call it the 7-Eleven connection. Almost all the members of the group had represented either 7-Eleven or Blockbuster, which is how they'd come to know one another in an informal network. In July 2000 they decided to take it several steps further. "It's one thing to go into a [client] presentation saying you have a good network and can provide the service required," says Vallbona-Freeman, "and it's an entirely different thing to go into a presentation with a network name, logo, Web site, and concrete examples of successful client work completed by the network. Our names are all there under the network banner. It says that we're all committed to the network and we have staying power."
Vallbona-Freeman and the other group cofounders -- Barb Harris in Phoenix and Solveig Thorsrud in Las Vegas -- handpicked the current members, whose experience in the field ranges from 10 to 25 years. Shortly after making it official, the group was put to the test. Harris got the chance to bid on a large job for Barnes & Noble.com -- a traveling technology exhibit that would cover 25 cities in nine months. The group quickly agreed on a budget, on how to split the workload, and on how each would be paid. On the strength of the network, Harris's company got the job. Did PRConsultants Group deliver? "Even we were amazed by how smoothly everything worked," says Harris.
Since then, members have tapped one another to work on other large accounts. Basically, they take turns being "boss," or project manager, depending on who brings the client to the group. They also attend to their own businesses. (Some are soloists, and the largest has 10 employees.) And it doesn't seem to matter that many of the members have never met face-to-face; they "E-chat" all day long.
Other PR professionals are intrigued by the model. Since last summer PRConsultants Group has been inundated with calls and E-mail messages from small PR firms that want to join. But getting in won't be easy -- the members want to protect the good thing they've got. The group even received a feeler from a potential investor. The members considered the offer, briefly. "We all decided we didn't want anyone breathing down our backs," says Vallbona-Freeman. "We don't want to be accountable to anyone but our clients and our families. Most of us left the stressful environment of a big PR firm and don't ever want to go back."
The Women's Technology Cluster in San Francisco is yet another kind of network. Former Cisco marketing executive Catherine Muther founded the WTC to help female entrepreneurs compete more effectively in high tech. Muther's idea is simple: united we're stronger. WTC members, who occupy a building on the industrial side of the city's Potrero Hill, gain access to capital and expertise that they might never get without the collective connections of the group. Members meet monthly to swap war stories, brainstorm, and perfect their pitches to potential investors and customers.
"There's a lot of collaboration that goes on with so many companies under the same roof," says Kim Fisher, who developed her company, AudioBasket.com, with the help of the WTC and is now its managing director. Recently, one WTC company landed a customer that required immediate turnaround. Another WTC company jumped in and lent its support.
The WTC model is still very much an experiment, but it has attracted widespread attention. After hearing Muther speak about the WTC, Hillary Clinton was so impressed that last year she sat in on one of the group's networking meetings. And some 30 international delegations have visited the WTC to learn from its experience in helping women help themselves. "It's made very clear to people before they come in," says Jim Robbins, an incubator specialist who helped Muther found the WTC. "You can rely on the network for help, and the network will rely on you."
A Federation of Equals
The new independents movement is about friends helping friends. On every level. Locally, nationally, internationally.
Meet Niels Christian Nielsen, another patriot. The Danish businessman lives in London. But word has it he will soon be moving to Silicon Valley. That's where another innovative alliance is fighting the good fight -- this one for embattled professional-services companies. They call themselves Catenas (pronounced Ca-TEN-us), which is Latin for linked chain. In this case, the chain unites 10 small to midsize companies with combined sales of $132 million. Each company is a niche leader in such areas as Web development, relationship marketing, and data mining. None competes directly with the others, but all serve the same marketplace. Members plan on sharing everything from employees to a credit line.
Steven Addis of the Addis Group, a branding agency in Berkeley, Calif., is CEO of one of the 10 companies. "I've been in business 17 years," he says. "I never wanted to sell out. I resisted being bought by a Web company." But then a Danish businessman with a fairy-tale-sounding name came calling, enchanting Addis with an interesting concept for a business network. It turned out to be no fairy tale. Nielsen, also known as Mr. Network, had already created alliances of small manufacturing companies in Northern Europe. But he knew that bringing U.S. service companies together would be different. "Niels came to me for help forming the idea," says Addis. "He wanted people who were saying no to sellouts for very specific reasons."
In a nice twist on the American Revolution theme, the Catenas rebels drafted their constitution in England. One of the truths they hold to be self-evident is this: "Catenas does not roll up its member companies." With Nielsen at the helm, Catenas closed on its first round of financing in January. (Investors include Deutsche Bank and a Hong Kong venture-capital group, among others.) Catenas now owns an equity stake (from 10% to 49%) in each of the member companies, and each of the member companies owns a 5% stake in Catenas. In other words, they all have a stake in one another.
Catenas gave Addis a cash infusion and overseas connections. When Addis was courting European clients, he used the office of a Catenas member in London. He fully expects members to share employees, office space, project-management software, mass procurement, and more. "We're looking for a single banking relationship," Addis reports. The members are already sharing customers. "We create a collaborative culture [when] we do a project for a particular client," he says. But at the end of the day, "we each preserve our own identity and our own brand and our own culture."
While mergers are on the decline, alliances of all kinds are on the rise. Peter Pekar, coauthor of Smart Alliances and a respected authority on the topic, says it won't be long before alliances catch up with mergers as a preferred path for growth. Strategic alliances involving a big company make headlines. Alliances among small companies usually don't, but they're happening far more frequently, behind the scenes. When two or more companies decide to help one another do sales, distribution, or equipment purchasing, for example, Pekar calls the arrangement a "transaction" alliance. He estimates that transaction alliances outnumber strategic alliances (involving an exchange of proprietary knowledge) by nearly three to one. In other words, they're everywhere, though no one officially tracks them all.
Tom Melaragno has built a fast-growing business almost entirely off these low-profile alliances. Melaragno, president of $9.6-million Compri Consulting, based in Denver, competes in the brutal field of information-technology staffing. Compri has more than 400 competitors in the Denver area alone. But some are friendly enemies. For example, Compri is part of a consortium of 30 or so local IT consulting firms that banded together to provide services to the largest employer in Colorado. He also shares technical personnel for hard-to-fill jobs with a number of companies in town. There are five companies in particular that lean on one another. "I can call and say, 'I've got an Oracle database administrator who just came off an assignment. I don't have anything for him. What do you have?" It's like swapping employees, and sometimes the employees come back to Compri later. It's a different way of looking at the competition, an approach that's not always shared by Compri's largest rivals. "The big guys are more like the Survivor mentality," Melaragno says. "They'd be happy voting everybody off the island, but we're not going to let them."
The old strategic alliance is Goliath + David. The new one is David + David + David + David.
The Next Wave
Is forming alliances the wave of the future? Will entrepreneurs increasingly depend on one another to stay independent? The movement keeps growing. In some city somewhere there's a new alliance forming right now. "Everyone's trying to figure out, What's the current version? It keeps evolving," says David Bolduc, owner of the Boulder Book Store, which has sales of $5 million. As cofounder of the Boulder Independent Business Alliance, Bolduc has more experience at working within an alliance than most entrepreneurs do. He is part of a national marketing campaign on behalf of 1,200 independent bookstores that is centered on a recommended-reading list known as the Book Sense 76 -- in honor of 1776. (The tag line: "Independent bookstores for independent minds.")
Five years ago Bolduc helped launch the Independent Booksellers Consortium. It may be his best "start-up" yet. The 25 members operate in every corner of the country. They jointly produce one product together -- blank books for journals -- and help one another with group buys. Getting independents to agree on anything isn't easy, Bolduc says. But what he gets back is invaluable. It's the creative capital he values most. Three times a year the 25 bookstore owners travel to a different store, spending three days together. The company owners are intensely proud, self-critical, and generous with their ideas and time. In a very real sense, their future as independents depends on how well they can work together. Says Bolduc, "We're looking in a very intimate way at what works in this industry."
Directory of Organizations Promoting Independent Businesses (Contains contact information for many of the organizations mentioned in this story)
Independent Business Alliances: The Basics
Independent Business Alliances: Reports from the Field
Susan Greco is a senior writer at Inc. Additional research was provided by reporter Kate O'Sullivan and senior staff writer Emily Barker.
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