Secretary Moret’s 90% Rule
- May 21st, 2009 /
Louisiana Economic Development Secretary Stephen Moret gets it.
In one fell swoop, after hours of wrangling on Monday at the Louisiana State Legistature, Moret was patched in on a crackling cell phone connection. After listening to all sides, he said that the most important thing to him for a company to qualify for the Digital Media Tax Credit is that 80%-90% of it’s revenue come from out of state.
It’s interesting and revealing to note, this has nothing to do with who does the work, where the work is done, or what the work is. Now, I’m not saying he doesn’t hold opinions about these things, and they will be codified in the bill, but his primary focus was that this work is export work.
Why?
Because, building websites and applications by Louisiana businesses for Louisiana business is going to happen anyway. It’s already happening now, people need this stuff, but it doesn’t expand the fiscal pie. So why incentivize it? On the flip side, if we can build businesses here that have clients in New York, San Francisco, London, LA then it gets interesting. Sound familiar?
Let me submit what I recognize is a controversial argument, but is in line with Moret’s 90% rule: My company, Flatsourcing, is good for the state of Louisiana.
Now, many readers know, but for those who don’t, Flatsourcing is a software development firm, based here in New Orleans, with production offices in Kazan, Russia. I just returned from a trip there last week with Peter Bodenheimer and two clients. We have a team of 21 people over there, and the business is growing.
I talked about Flatsourcing when I testified before committee at the State Senate this week. Of the six or seven of us, I was the only one asked a question, and it was clear that “shipping jobs to Russia” went over like a lead balloon. I was asked whether Flatsourcing would qualify for the Digital Media Tax Credit and I said no. I know the company would have more of an economic development impact if those 21 jobs were here in New Orleans, but for a variety of factors (too many for this post), they are not.
The economy of the 21st century is based on knowledge work, the creation of stuff that can be broken down to 1’s and 0’s and therefore done anywhere. Because of this, borders are pourus and its close to impossible to understand, much less regulate, where the work is done. The value chain is long and distributed, often globally. The most important factor of who wins this race is where the value is captured. Value capture = wealth creation = profit. If a company is based in Louisiana, and those profits are captured here, they will be taxed here and spent here. This is certainly the case in terms of Flatsourcing.
The fact that more than 90% of our revenue comes from outside Louisiana, flows into a company that is based here, is distributed here as profit, and gets spent locally very clearly economic development for the state.
When I speak to people about the stigma of outsourcing, I often bring up what the rest of the world calls it: competing. While I certainly agree that in an ideal world, all the people we employ would work in the same office here in New Orleans, this simply isn’t the way the world works anymore.
When I work with entrepreneurs who are starting businesses, one of the first questions I ask is: are you locally or globally focused? I believe you must be looking worldwide for customers.
It was refreshing to hear Moret focus on this idea of expanding the economic pie with the simple metric: does 90% of your revenue flow from out of state. We see it happening right now, right here.
Benjamin Reece with Deltree has national level clients through Deltree, has a partnership in New York that drives this business to him, and yet bases his company in New Orleans. Kyle Berner may manufacture his flip flops in Thailand, but he markets them all over the country, not simply in a local New Orleans boutique. Naked Pizza may be a local pizza shop right now, but the vision is much grander, and I know Jeff Leach won’t rest until they’ve got franchises all over the country. I am confident that all of these businesses will soon meet Secretary Moret’s 90% rule if they don’t already. These are the businesses that will expand the economic pie for Louisiana.
Turning back to Digital Media, it is unlikely that this 90% rule can be codified in the law, and that’s probably a good thing. We don’t want the state having to audit accounting statements. But it was great to see this understanding at the State level.
We’ll see how the Digital Media tax incentive works out, but I am very enthusiastic to see this high level understanding of what economic development is all about from Secretary Moret.
- categories: All, New Orleans /
May 21, 2009 at 9:11 pm
What are the benefits of the Digital Media Tax Incentive?
May 23, 2009 at 11:45 am
Agree completely. I was just having this conversation this week with members of GNO, Inc and also with Econ Dev people at a reception Thursday night at the Governor’s Mansion.
Careside, medical device company in Los Angeles where I served as VP for Sales, was built on a “virtural company” model. That is, we designed the product (a $18,000 unit price blood analyzer sold to hospitals with IT packages bringing the total average purchase order to around $250,000 per sale) in Los Angeles, had our prototypes made there, our VC financing came from Portland, Minneapolis, New York, our component parts were made in Japan by Fuji, and the units were contract manufactured by UMM in Indianapolis and by Peak Mfg. in Colorado. Our sales people were in over 16 states and 8 countries, and I, as VP Sales, lived full time in Chicago with a corporate apartment in Los Angeles.
Confusing? Maybe, but this is how busineses work today. With this business model we raised over $74 million in Venture Capital, had an IPO in 1999 on the American Exchange, sold systems to over 500 hospitals and clinics in the U.S. and many more through our international distributors in 8 countries.
Does it mean we were not a Los Angeles based company? No way. I personally paid income taxes to both the states of California and Illinois. We were also welcomed into the Southern CA Biomedical Association, LARTA, and OCTANE as a “local” company.
So, with reference to the Digital Media Tax Credits, I completely agree that the Voodoo Ventures model does not “export jobs to Russia” but actually creates jobs in Louisiana, jobs that quite possibly not otherwise exist.
As to the “90%” idea for income being derived from out of Louisiana, I happen to like that idea. I don’t know if I want it codified, or even in the regulatory or administrative rules. But for too long, when I would attend meetings with the Louisiana Tech Council or other local tech or entrepreneur groups, the cry from the audience would be that they aren’t getting enough local contracts (and usually about government contracts), but very little attention was being paid to obtaining business from outside the local market.
I spent the first 12 years of my career working with startups who had one mission in mind: grow a national or international business in 3 years (the time most VC’s will give you, at least in the ’90’s, for them to achieve an “exit” or “liquidity event” so they can recoup thier investments. My mission, first as a sales rep, manager, and then eventually VP for Sales, Marketing, and Business Development, was to ramp sales up from coast to coast beginning in the first 6 months of the product or business launch. That’s how we need to begin thinking in New Orleans and in Louisiana.
If we truly want to be the next Austin, Tx, or to be truly aspirational, the next Silicon Valley, we need to have a market focus, as I hear VC’s saying, THAT CAN SCALE.
There are very innovative and very exciting changes taking place in New Orleans right now, but if we only focus on doing services for local businesses we will continue to be passed over as a tech or entrepreneurial center. Therefore, even if we do not codify the 90% rule, we should all internalize and live it in executing our plans everyday. We, the city, and the state, can only benefit from it.
David Crais
May 23, 2009 at 12:03 pm
@dcrais – your energy is boundless. If this is a quick and dirty response on a busy Saturday morning, I can’t wait to read your next treatise.
Thanks for your comment, I really agree, internalizing this rule is probably the best thing for everyone (I don’t think we want it codified). Local companies should think about what they can be doing to bring business in from out of state.
I know you have great experience in this regard with Careside. Companies are virtual, supply chains global. This is no longer the exception, it is the norm in today’s economy.
Thanks, and look forward to continuing the discussion.
@william – read more about the current tax credit (currently in the legislature so likely to undergo some changes July 1st) http://wiki.voodooventures.com/Louisiana+Tax+Credit+Info
May 23, 2009 at 3:19 pm
Hey Chris,
Great post. I’m really happy to see you put this down.
As you we are a lot alike in the way our companies work. Instead of Russia, our production team is in India.
Our product requires a little more cultural context and “touch” so we have all of our customer facing elements here in the US, most in the GNO region.
We absolutely would not have been able to scale as we have (1 -> 20 emp. 3 yrs of 3X annual growth) if we had only sought local customers. Our company is international and our customer base is national and we can scale.
I would love to think that a marketing service firm could be eligible for the DMTC because I’d love the support and cost-savings, but I don’t think we are and it’s a shame. We employ as many locally as distant, we work for companies all over the country and I’m happy to do what we do internationally as well.
We don’t need the money to be profitable, but it would definitely be an incentive to focus on hiring in LA.
Incentives or not, we’re going to run our business here and help customers wherever they may be. We will likely always meet the 90% rule.
Cost savings, lifestyle and other quality of life issues make this a great place to live and work. All those flatteners we know make the distance between producer and patron irrelevant.
I’d love to see Louisiana more broadly define “Export Product” so that we too could benefit.
I’m very glad I know you Chris.
Will
May 23, 2009 at 7:38 pm
Those who would attempt to encourage in state retention of this or that type of “good tech job like coder or QA” are in fact discouraging the creation of new wealth and ideas. Once something becomes commoditized, then the growth potential lies in efficient and effective delivery and utilization of the commodity. How many processors are manufactured in Silicon Valley? A decade ago a good example would be wanting to make TV shows rather than TVs, software rather than computers.
We are in the position to leapfrog and grow creative jobs and dynamic businesses here by becoming thought and process leaders in leveraging social media and web 2.0 in new and wide open areas. Low cost outsourcing of some work is the difference between starting and growing a company or not. As Chris no doubt understands, outsourcing is not low cost without effective requirement writing which comes from thorough understanding of client needs. Those jobs usually exist in the home office and it is the quality of those folks and their processes that differentiates them from competitors.
Encouraging or at least not discouraging nascent (that’s for you DC) LA businesses from using the best tools available for success makes this place more attractive for start ups and increases network effect.
Thanks for the update.
May 28, 2009 at 10:59 am
What are the benefits of the Digital Media Tax Incentive?