DEALS TO BRING IN JOBS CAN MAKE CONSULTANTS RICH
08/07/05
Amy Martinez
Two years ago, North Carolina offered R.H. Donnelley Corp. $4.3 million to move its headquarters to Cary. But the telephone book publisher didn't hold onto all of that money. A good chunk of it -- as much as 20 percent -- went to KPMG, the major accounting firm, and a former consultant, Angela Lockman.

Lockman is part of a growing group of site-selection consultants that businesses hire to evaluate cities and states for a move or expansion. These consultants often determine which state is chosen and how much the state pays to get businesses here.

Consultants say they make $50,000 to $100,000 on a typical six-month project if they charge a fixed fee. Compensation can reach into the hundreds of thousands of dollars for those whose fee is based on the value of incentives they negotiate along the way.

Lockman declined to say how much money she received from Donnelley. But she confirmed that KPMG charges a contingency fee equal to 20 percent of the discretionary incentives it negotiates. Donnelley would say only that it was satisfied with the way things worked out.

Consultants' pay is stirring debate among North Carolina's economic developers. Critics of contingency fees argue that they encourage consultants to drive up the cost of incentives beyond what's necessary to get businesses here. What's more, critics think, consultants working on contingency fees are less likely to steer businesses toward places with few or no incentives, even if those places have plenty else to offer, such as a qualified work force and low tax burden.

"I don't begrudge anyone for making money," said Mac Williams, who heads the Alamance County Chamber of Commerce and is the past president of the N.C. Economic Developers Association.

"Whether or not we're lining the pocket of consultants during the incentives process, we just don't know," he said. "You'd expect consultants to be aggressive whether or not they're getting a cut, but it certainly makes them more motivated, doesn't it?"

Luring Donnelley

The N.C. Department of Commerce, eager to return people to work after the 2001 recession, initially offered $3.3 million for Donnelley's headquarters and the 275 jobs that went with it.

That was enough to qualify the state as a finalist with Kansas City, where business recruiters promised $2.5 million. But Lockman went back to the Department of Commerce and, with Donnelley's chief financial officer, Steven M. Blondy, persuaded the state to give even more: $4.3 million.

Shortly thereafter, Donnelley announced it would move its headquarters from Purchase, N.Y., to North Carolina. Eventually, it settled on Cary's Weston business park, thanks to an additional $50,000 in local handouts.

"Businesses don't just want a deal. They want a great deal," said Lockman, who now works for Net Profit, a South Carolina-based consulting company.

The Department of Commerce counts more than 350 site-selection consultants, up from about 50 a decade ago. Many are lawyers, accountants and commercial real estate brokers interested in applying their deal-making skills in the realm of economic development.

The number of consultants is growing even as state and local governments face legal challenges over their use of tax breaks and cash grants for new businesses. Former N.C. Supreme Court Justice Bob Orr has filed a challenge in Wake County Superior Court, seeking to block Dell, the computer company, from receiving a record $279 million package of state and local incentives.

Orr, who leads the N.C. Institute for Constitutional Law, a Raleigh nonprofit, believes incentives violate the state and federal constitutions by lining the pockets of a select few businesses at the expense of taxpayers, who must accept reduced government services or bigger tax bills to make up for the loss of revenue. Lawsuits against incentives have been filed in four other states.

"We're in a race to the bottom," state Sen. John Kerr, a Goldsboro Democrat, said of North Carolina's increasing use of incentives. "It's gotten more sophisticated, and it's become the norm." Even so, Kerr has been a strong supporter of the Department of Commerce and its efforts to attract new businesses. As for the debate over consultants' pay, he said, it's off the General Assembly's "radar screen."

"It's just free enterprise," he said. "This is America, and it's a way to make money."

Incentives increase

Consultants remain in demand as more state and local governments come up with new incentives programs. The programs can be complex, making consultants who understand them valuable. And some programs leave plenty room for negotiation.

Of North Carolina's three major incentives programs, two are up to the discretion of Gov. Mike Easley or his Department of Commerce:

* The One North Carolina fund is intended to help Easley close deals with new and expanding businesses.

* And the Job Development Investment Grant, approved by the General Assembly in 2002, allows the commerce department to reimburse businesses for a significant portion of the personal income taxes generated by the jobs they create.

It was the grant program that financed Donnelley's $4.3 million in incentives, which will come in the form of a grant spread out over 10 years.

Some suggest that contingency fees are one reason state and local governments are shelling out more money for new businesses.

"We've all suspected it," said Dan Lynch, senior vice president of the Greensboro Economic Development Partnership, which recruits businesses to the Triad.

"The consultants are so tenacious," he said. "They don't leave any nickel on the table."

In North Carolina, businesses received $85.5 million from the state's two discretionary incentives programs last year. That was up from $33.7 million the year before.

Consultants who charge contingency fees "have a financial interest in running up the tab," said Greg LeRoy, executive director of Good Jobs First, a Washington nonprofit concerned about the increasing use of incentives. LeRoy has just written a book titled "The Great American Jobs Scam."

"The consultants I think are the best" don't work on contingency, said Mac Holladay, founder of Market Street Services, an Atlanta consulting firm: "It puts some in the position of beating a community to death, and that really ought not happen."

Market Street Services helps state and local governments develop new business strategies. Holladay was previously a business recruiter for several Southeastern states.

Potential problems

Even some consultants who charge contingency fees concede that they could lead to problems.

"There are some consultants who work almost exclusively on a contingency fee basis, and I think that does push some past the point of what's reasonable," said Ernest Pearson, who manages a five-person consulting group for the Sanford Holshouser law firm in Raleigh. Pearson said he'll work for a fee equal to between 6 percent and 10 percent of the incentives he negotiates, though businesses tend to prefer other pay arrangements.

"When I ask for something, it's within the range of reasonableness," Pearson said, referring to his negotiations with state and local governments. "I'm not asking for things off the chart."

The Womble Carlyle law firm has about 40 employees focused on economic development in the Carolinas, Georgia, Virginia and Washington. Former Gov. Jim Hunt, a strong proponent of economic development during 16 years as the state's top business recruiter, built up the practice after joining the firm full-time in 2000.

Womble Carlyle accepts several pay arrangements from businesses when negotiating incentives on their behalf, including contingency fees. Donald Donadio, a lawyer with Womble Carlyle in Raleigh, declined to discuss the firm's billing practices, but he said contingency fees generally are on the "lower range" of 15 percent to 20 percent.

Robert Leak, a Raleigh site-selection consultant for nearly 20 years, said contingency fees threaten to sully the reputation of his profession. Consultants working on contingency are more likely to encourage businesses to expand in a place with the biggest incentives package, he said, rather than the place that makes the most sense.

Leak said he and his partner, Bob Goforth, work for a fixed fee, which allows them to put incentives in their appropriate place as one of many dozen considerations.

"If you're getting a fee based on the value of the incentives package, that's going to sway you in favor of the place with the biggest package," Leak said.

Donadio countered that Womble Carlyle is interested in establishing relationships with businesses. That makes it unlikely to steer businesses to a less-than-suitable site, just for a bigger contingency fee. "We're not interested in spot work," Donadio said.

Tony Copeland, assistant secretary for the N.C. Department of Commerce, said the state doesn't regulate site selection consultants or their fees and has no interest in doing so. He noted that the biggest incentives packages don't necessarily involve consultants; Dell, for example, did its own incentives negotiation.

Even so, Dennis Donovan believes the law and accounting firms are changing the way he and others do their job. Donovan, a site-selection consultant with the Wadley-Donovan Group in Edison, N.J., shuns contingency fees.

"It's a lose-lose proposition for everyone, except for the person doing the incentives negotiation," Donovan said. "A lot of companies wind up getting hosed."