Image Aside, Service Jobs Pay Dividends
Spokane has had some difficulty coming to grips with its conversion, over the past 15 years, to a services-based economy. The past is powerful here.
Spokane and the Inland Northwest were built, after all, on fortunes hewn from forests, extracted from mines, harvested from the Palouse, and more recently, poured from whitehot pots at Kaiser.
Looking first at ourselves, then to Boeing’s assembly lines along the Puget Sound, we learned that you make money by making things.
But for well over a decade, the resource base that sustained our economy has been in decline. Trees, silver, wheat and aluminum were something you could see. And their replacement is far less tangible.
We sell services instead of things now. And though we appear to be prospering in this endeavor as never before, our inherent suspicions are hard to overcome. As we enter the second half of the decade, Spokane’s inferiority complex regarding its economic identity seems to persist.
Our skepticism views a service-based economy as some elaborate pyramid scheme being foisted on us by a few manipulators at the top who will take their money and run when the whole thing collapses.
Or, as John Mitchell, one of the region’s leading economists says, “Some observers have asked how long an economy can continue to grow by taking in each other’s laundry.”
But that view is beginning to change.
Mitchell says a services-based economy is destined to grow longer and more vigorously than the alternative.
“In the aggregate,” Mitchell says, “manufacturing employment nationally is not expected to grow. The growth is going to be elsewhere.”
In fact, Spokane and North Idaho’s “decline” to a servicesbased economy may have better positioned the region to take advantage of the new worldwide economic realities than economies that have remained tied to resources manufacturing.
One convert to that view is K. Philip Kelly, who ran Boeing’s manufacturing operation in Spokane from its inception in 1988 to his promotion within Boeing late last year. Kelly says his initial diagnosis was that Spokane’s economic health was perilous.
“I thought, ‘All they’ve got here is a bunch of services,”’ Kelly recalled in an interview before leaving Spokane last November.
More Boeing-type manufacturing jobs were the hope for the future, he thought.
“But I think I’ve changed my mind on that,” Kelly said as he considered the emergence of high-value service jobs as a force in the global economy.
“In that regard,” Kelly said, “even five years ago, Spokane was ahead of the game.”
Manufacturing is necessary to the healthy economic mix, Kelly says. And Mitchell adds, “Nobody is saying that manufacturing is not important.”
But rapid productivity increases have become necessary to survive in manufacturing, and that means fewer jobs. So in the future, Mitchell adds, “the increments in employment will be elsewhere.”
Spokane’s largest local manufacturing employer offers evidence of Mitchell’s assertion.
More than a decade ago, Kaiser Aluminum Corp.’s labor force gave significant contract concessions to the company at a time when Kaiser’s future was tenuous. Although the company’s fortunes have swung from prosperity to poverty and back in the meantime, many Steelworkers still don’t feel they have recovered the ground they surrendered more than a decade ago.
“In the early ‘80s Mead was on the verge of shutting down,” says Dave Kjos, Kaiser’s Mead Works manager. “(The Steelworkers) made sacrifices. They combined jobs. The plant survived. But when it all got down to it, there were about 500 fewer jobs than when Mead got back (to full operations in 1987) than there were in the early 1980s.
“The reality is, we’re never going to get back to the way we were in the early ‘80s. We can’t build in the kind of wage structures and cost structures we had back then and continue to be competitive.
“We would just cease to exist.”
The Northwest Portrait for 1995, an annual regional economic review and outlook Mitchell publishes as chief economist for U.S. Bank, points out that while employment in goodsproducing industries has generally declined, many companies in the non-industrial sectors have grown rapidly.
For example, 11 Fortune 500 industrial companies and 20 Fortune 500 non-industrial companies are headquartered in the Northwest. Employment by the 20 non-industrial companies - which include Albertson’s, Morrison-Knudson, West One Bancorp, Fred Meyer, Nike, U.S. Bancorp, Costco Wholesale, McCaw Cellular, Microsoft, Nordstrom, Safeco and Washington Mutual Savings Bank - is almost identical to the number of people employed by the industrial companies - which include Boise Cascade, Micron Technology, Louisiana Pacific, Boeing and Weyerhaeuser.
But, Mitchell says, the large nonindustrial companies have 2.3 times the assets, 1.2 times the sales and 1.5 times the profits of the industrial companies.
Mitchell draws the conclusion that “the region’s future seems to lie in the movement of ideas and goods as much as in the production of hard goods.”
That trend bodes well for Spokane.
More to service burgers
Most of us make our livings in what Mitchell broadly defines as the services sector of the economy. And that has been true of life in the Northwest for decades. So where did this skepticism of a service-based economy come from?
“One of the unfortunate legacies of the 1988 presidential campaign was the McJobs notion that service jobs don’t measure up, that we’re talking about burger flippers,” Mitchell says.
Well, fast food restaurant employees work in the service sector, but so do health care professionals, teachers, accountants, and, Mitchell adds, economists.
The traditional service sector category, as defined by the Standard Industrial Classification codes by which state and national employment statistics are tracked, includes business services, health services, social services, engineers and accountants.
But Mitchell broadens the definition to include the categories of retail trade; finance, insurance and real estate; transportation, communication and utilities; and even government. Under that broad umbrella, 75 percent of the Spokane work force earns its living in services.
The non-industrial category is even broader.
Mitchell lists Portland-based Nike, the world’s largest shoe manufacturer, as non-industrial rather than industrial because, “Nike doesn’t do any manufacturing here. All the manufacturing is overseas. Nike’s Oregon operation is design and distribution.”
Under that definition, Olivetti North America Inc. - among Spokane’s most significant manufacturing companies - is actually a nonindustrial company.
In 1982, Olivetti, then known as ISC Systems Corp., employed between 500 and 600 people in basic manufacturing jobs making computer hardware for the banking industry. Today, according to Mike Chard, the company’s director of business planning, maybe 40 of the company’s 500-plus employes do any traditional manufacturing work.
At the height of its true manufacturing operation in the early ‘80s, the company produced about $64 million in revenues. In each of the last three years, Chard says, Olivetti’s servicesoriented operations have produced between $175 million and $200 million in revenues.
They now fall into the “producer services” category. Mitchell defines producer services as those whose output is sold mainly to other businesses rather than to individuals.
Many financial firms, engineering firms, management service firms, law firms and business services like advertising, mailing, reproduction, building maintenance, equipment rental, temporary agencies, computer programmers and guard services fall into the category.
Olivetti makes customized software for the banking and fast-food industries and assembles systems to run them, but the company’s principal product is its expertise in enhancing productivity in those industries.
“We get half of our revenues from the service portion of our activities,” Chard says. “But I would say 60 to 65 percent of our profit margins come from the services we sell.”
The difficulty in grasping that concept comes, Chard adds, because they are selling something that’s not tangible.
“All of us, I think, tend at first blush to put value on things we can see and touch,” Chard says. “We provide the service of keeping our customers’ machines running and their software current. Even though it’s not tangible, like a piece of hardware, there’s a lot of value in that to the market.”
Luke Williams, one of Spokane’s pioneer manufacturers, explains the concept this way: “There’s no limit to what people will pay for the performance assurance of something, whether it’s a computer or a sign.
“Because you buy things to use them.”
AS&I legacy: Service pays
Williams old company, American Sign and Indicator Corp., offers a case study in the value a manufacturer can find in selling services as well, and how quickly such a company can decline when it attempts to return to a pure manufacturing operation.
Following World War II, Luke Williams and his brother Charles invented the alternating time and temperature sign and built a fortune. They were founders not just of a company, but of the worldwide electronic sign advertising industry. Spokane-based American Sign and Indicator dominated that industry into the 1980s.
At the same time, American Sign became among the first companies to capitalize on the value of the services that supported their basic product.
It happened, Williams says, because in the fledgling days of the company, many potential customers were unwilling to take a chance on buying a brand new product concept from a couple of guys in Spokane.
“We were just a small company,” Williams says. “Why would a banker in Waco, Texas, buy a sign from us? Where would he be if it didn’t work.”
So rather than sell the signs, Williams leased them to customers with the provision that if they didn’t work, the customer didn’t have to pay the lease. That meant American Sign had to come up with a maintenance network that could respond quickly to customer problems.
As American Sign became more established, Williams found that the maintenance guarantee was something customers were willing to buy. The company developed a lease portfolio and maintenance organization that by 1980 was producing an income stream of $26 million a year.
When Williams sold the company in the early 1980s, its new owners sought a quick cash bonus by selling those operations. The purchasers of the lease portfolio then spun off the maintenance operation and sold it.
The owners of American Sign soon discovered that without the income from the lease portfolio, the manufacturing operation could not sustain the company.
American Sign left Spokane early in this decade and now exists as a small subsidiary of a Georgia-based sign manufacturer. Meanwhile, the maintenance company remains a thriving national operation.
Wismer Martin pioneers new era
Companies that blur the line between manufacturing and services in the emerging “producer services” category now dot Spokane’s economic landscape.
Wismer Martin is a fast-rising software manufacturer that specializes in management systems for the health care industry.
“The product Wismer Martin builds is a vehicle we use to deliver a service,” says Stan Hatch, the president of Wismer Martin. “The product is not an end in itself. But the manufacture of the product is the means to an end.”
The actual sale of a software system, whether to an individual physician’s practice or to a huge health care network, represents “way less than 50 percent” of the revenue Wismer Martin will derive from that contract.
Most of the revenue will come from customization, education, training and ongoing support and modification of the system.
Even Kaiser, the most basic bit of manufacturing bedrock in the Spokane economic base, is delving into Mitchell’s producer services arena.
Kjos emphasizes that the principal thrust of Kaiser’s smelting business will always to be the manufacture of raw aluminum. But circumstances have presented the company with other opportunities.
In order to remain competitive in the world market with World War IIera plants like Mead, Kaiser has developed an expertise in upgrading the efficiency of older plants and bringing old plants up to modern environmental standards. For several years, Kaiser has been marketing that technology in other parts of the world.
More valuable to Kaiser than the income these technology sales produce is the access they offer Kaiser to important emerging markets.
“Strategically,” Kjos explains, “we’re trying to build long-term relationships in Russia, China and India so as the need for primary aluminum increases and those markets develop, we’ve got a foothold and we can start to get some equity positions in those countries.”
The company has been working at various smelter sites in Russia for more than five years, Kjos says, and while the income produced by those efforts is negligible, the “relationships with their technology institutes and the infrastructures that are starting to develop” will prove invaluable to Kaiser’s future growth and profitability.
On the flat-rolled products side of Kaiser’s business, of which its Trentwood rolling mill is the flagship, Raymond Milchovich says the company couldn’t stay in business if it didn’t offer something beyond its basic product.
“We got to the point four or five years ago where everybody is supplying good products,” says Milchovich, Kaiser’s vice president of flat-rolled products. “So if everybody can provide zero defects in can sheet, how can we differentiate ourselves from our competitors?”
The answer is in providing the additional service of custom tailoring the raw product to match unique characteristics of each customer’s plant so the customer can realize greater efficiencies.
“So we’re not just selling aluminum sheet and plate anymore,” Milchovich says. “We’re selling a product that, together with the technical service we offer, increases value for the customer.”
Service sector growth expected
The producer services sector is where Mitchell sees significant growth ahead in the region’s economy, and Spokane is positioned well to take advantage of that.
“Producer service industries are desirable from an economic point of view,” Mitchell writes in the 1995 Northwest Portrait. “They are growing rapidly and exporting a substantial portion of their product to outof-state customers, which generates income that comes back into the state.”
They account for almost 14 percent of the employment in Washington, and more than 11 percent in Spokane. That percentage goes much higher if you factor in the manufacturing companies here that derive a majority or at least a significant portion of their revenues from the service aspect of their sales.
“Long-term forecasts suggest that this sector will continue to enjoy extraordinary growth,” Mitchell writes.
“Yes, there are good jobs in manufacturing,” the economist adds, “but there are good jobs in the service sector, too.”
And in Spokane’s future, it’s the services sector that will continue to represent the most dynamic aspect of our growth.