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.
