Government Cutbacks Create Small Business Opportunities

Wherever you look, governments are cutting spending to cope with falling revenues. The calls for almost $1 trillion in cuts over 10 years, with another $1.5 trillion to be decided on later this year. And the national cuts are mirrored by cutbacks on the state and local levels. Some 42 states and the District of Columbia were already projecting deficits for fiscal 2012, according to the Center for Budget Policy and Priorities, and the federal cuts will only make that situation worse.

Obviously, for companies dependent on government buyers, these cutbacks spell big trouble. But for companies that can satisfy demands left unfilled by government cutbacks, the crisis can mean equally sizable opportunities. "In the chaotic aspects of this, there are going to be some wins," confirms Bill Gartner, professor of entrepreneurship at Clemson University.

A Learning Experience

Similar outcomes have happened before. FedEx Corp. found a multibillion-dollar opportunity in an overnight delivery niche that the U.S. Postal Service chose not to address. (Now, there could be as the Postal Service contemplates closing thousands of post offices.) Similarly, Kaplan Inc. prospered for decades teaching test-taking skills to students who felt that public school systems hadn't prepared them for college admissions.

The current turmoil may also seem familiar to those who recall the recession a decade ago, when a similar drive to save on governmental outlays led to the privatization of public services such as drinking water, wastewater treatment, and education. Today, education still represents one of the most likely arenas for privatization, according to Gartner. The Chicago public school system alone faces a $720 million shortfall this year, and school districts across the country are facing similar budget gaps. Teachers, teaching aides, librarians, and other employees are getting pink slips as entire programs -- from sports to fine arts -- hit the chopping block.

Gartner expects to see an increasing number of private club leagues spring up to offer athletic opportunities to students whose schools have axed their extracurricular teams. And that's just a start. "Parents who have the money and want their kids to do better will hire tutors," he says. "And I see expansion in private school. This is a great time to be in the private school market." Gartner also expects some schools to outsource services such as building cleaning and printing to private enterprises that can provide them for less money.

For Above Grade Level, a Morganville, New Jersey-based chain of educational tutoring franchises, opportunities resulting from public education cutbacks are part of the business plan. "There's no question about it," says president Dan Herrick. "We talk about it quite a bit."

Tighter school budgets help Above Grade Level in two ways. First, when teachers and teaching aides are laid off, class sizes rise and students get less individual attention. That drives concerned parents to private tutors like Herrick's franchisees. Also, laid-off professional educators add to the pool of potential tutors and franchisees. Says Herrick, "Budget cutbacks certainly influence our industry in very positive ways."

Going Local

Education isn't the only opportunity. These days many cities admit they cannot maintain a wide variety of services without drastic changes. As Federal Reserve Chairman Ben Bernanke has noted, about a third of local revenues come from state aid. The end of federal economic stimulus programs coupled with new federal cutbacks is combining with a years-long slump in state tax revenue to put enormous pressure on local governments. "Indeed, the fiscal 2011 budgets of more than 20 states contained either outright reductions in local aid, changes to revenue-sharing agreements, or cuts in funding for specific programs that are run by local governments -- such as education for grades kindergarten through 12, road maintenance, and property tax relief," Bernanke said.

For businesspeople like Norm Bour, a partner at Newport Beach, California, consulting company Opis Network, that's not necessarily bad news. Among other things, Bour's company advises municipalities on ways to become more efficient in areas from economic development to marketing, and outsourcing to private companies is an increasingly important way to do that. "Privatization is becoming more mainstream than it used to be," Bour says.

The trend is under way in Bour's Southern California region where, he says, the city of Newport Beach recently signed a contract with a private company to maintain its parking meters, including writing parking tickets. "The cities are starting to outsource a lot of low-tech [jobs], like maintenance and street repairs, and they are also starting to outsource IT services," Bour says. "There's a big opportunity here for private enterprise to form collaborations with cities and counties."

A New Way of Doing Business

When seeking business from cash-strapped city governments and school systems forced to make do with less, entrepreneurs need to be prepared for a new learning curve. The paperwork and other requirements of selling to governments make it quite different from selling to private customers. Businesses need to register with potential government customers, watch official notices to learn about opportunities, network with elected officials and government staff, and be prepared to follow the often-rigorous quality control and documentation procedures that governments require.

Reaching these newly created markets requires a few marketing tweaks, Herrick says. Above Grade Level plans to work more on networking with school guidance counselors to get referrals to parents of potentially at-risk students, he says.

All the turmoil often carries risks as well as rewards. Many private education companies, including Above Grade Level, get part of their revenues from government programs, such as the No Child Left Behind initiative, that may be cut.

There's also the possibility that, once government revenues rise again, the nascent privatization trend will reverse and leave entrepreneurs who depended on it without customers. Unfortunately for the larger economy, the economic recovery to date has been slow enough that it's likely to be a while before the funding shortfalls ease.

And while it's too early to tell whether the current trend represents lasting change, it looks as though it just might. "If you look at the history of local government, they were never meant to be more than a governing body," Bernanke said. "They provided more and more, and they became a lot more complicated and expensive than they were designed to be. We're kind of going back a little bit to that older mind-set."