03/18/2010 05:12 am ET | Updated May 25, 2011

Can The Free Market Save Small Businesses and Nonprofits?

The fantasy of conservatives and progressives alike is that the free market will solve the increasingly desperate woes of small businesses and nonprofits. It's not entirely impossible, but it does require an entirely new way of thinking about the problems of these struggling entities.

Earlier this week, we announced a new service, The Cost Savings Guy. For the past six months, I have been leading the development of this initiative, which I passionately believe has the potential to change the fortunes of the millions of small businesses and nonprofits that are struggling to stay afloat.

This article is a discussion of what I learned over the past six months and its broader implications for how the nation approaches job creation. In the first part of this article I discuss what we did. In the second half, I discuss the broader implications of our efforts to ensure the survival of millions of these entities. I apologize for the self-promotion that's inherently a part of this piece. But, without discussing these details it's impossible for me to discuss their broader implications.

About six months ago I realized that all of my conversations with small business owners and struggling nonprofits were following a similar course. Business owners and nonprofit leaders would talk to me about their need to cut costs in the face of declining revenues. In all of these conversations, the business owner or nonprofit leader would stress that he or she had already cut costs to the bone: fat plus muscle were now gone.

In some cases, these businesses and nonprofits were facing imminent extinction. In other cases, these leaders were anxiously searching for alternatives to lay-offs. By and large, I also found the leaders of smaller businesses and nonprofits tend to be far less callous about lay-offs than the chiefs of large corporations. They still regard lay-offs as a sign of failure, not of foresight.

In each case, I would respond by asking: Have you tried any of the lower cost, often higher quality, Internet based alternatives to traditional suppliers? With the right provider and equipment, Internet based phones (VOIP), are absolutely ready for prime time in business. Have you looked at these? Who handles your payroll? Where do you get your ink supplies? How do you handle invoicing and bill payment? How you used a low-cost service to automate your membership management? And, so forth.

In 80% of these conversations, the answers to my questions were blank stares. This happened over and over again. I discovered that the most fragile entities in the economy were, in many cases, using the traditional, now highest cost, solutions to running their operations. In a few cases, I was also told that "the promises of huge savings don't ever seem to apply to us, so I have stopped listening." The information gap between the problems these entities were facing and the availability of solutions that could make a difference was extraordinary.

In response, I led the creation of The Cost Savings Guy which does three things. First, we recommend high quality, low cost Web-based alternatives to traditional suppliers. To do this, we spent months analyzing Web-based alternatives across the range of services used by most small businesses and nonprofits, such as phones and payroll.

Next, Mountain View database technology company, Caspio, created an innovative calculating engine for our service, so that visitors to our Web site can anonymously answer a few simple questions, and then instantly receive a personalized, exact estimates of the monthly and annual cost savings they receive by switching to our recommended solutions. (Examples are: How much do you spend per month on phone services? How many phone extensions do you need?).

Finally, we created packages of groups of services that we recommended for specific types of entities. In effect, these packages are the specific services we believe are the most valuable for these uses and entities. They include, among others: "small businesses," "nonprofits," "home offices," "new businesses," "eco-friendly offices," "virtual business."

In pre-launch tests, we found that businesses and nonprofits were able to use The Cost Savings Guy to cut their soft operating costs by as much as 50% without layoffs. For many, these savings were the difference between life and extinction.

The Cost Savings Guy service is free to use and anonymous. Yes, we hope to profit by receiving a commission on the sale of the services we recommend, but we are 100% open about it. In addition, we specifically sought services that could be canceled without any charges by unhappy customers. It's even possible for offices to set up an Internet based phone system, and have it up and running before they cancel their existing, traditional phone service.

Yes, there is a potential conflict here - as there is with any old-fashioned trusted, commissioned agent. Ultimately, users will need to trust our advice knowing how we profit, but we are open about everything we are doing. As I have said in other contexts, "most seemingly unbiased Internet comparison services are paid for sales generated by their results, users just don't know it--and it's 'amazing' how the top result is almost always the provider paying the highest fee. There is no free lunch, and Internet shoppers should be far more concerned when they don't know how a service is making money than when they do."

So what does this all have to do with empowering small businesses, and nonprofits to survive, and hopefully start to thrive? Here's what I see:

First, in the cacophony of noise in our too-busy, too-stressed society, it has become impossible for anyone who is not an expert to sort out the din of the wheat from the chafe. In addition, really useful knowledge is hard to come by. Our team spent months unraveling the issues involved in Internet -based telephony (VOIP), with anonymous calls to customer service, hypothetical installation issues, and using the actual service to see what entities could really match their claims of quality, reliability, customer service and easy installation. We need new, trusted sources of information, not unlike Consumer Reports for small business services. The existing business and technology press don't adequately meets this need (online or in print).

At the same time, while the Small Business Administration (SBA) is involved in education, it is by and large ineffective. It's principally focused on financing not operations. Moreover what it can do is limited. In 2004, the head of education at the SBA told me he really liked my book, Go It Alone!, which discussed how Internet-based services could empower individuals and small businesses, but the SBA could not actively promote a private, for profit publication. We subsequently put the entire book online for free, and the SBA acted. The online version of the book became (as far as I know) the only non-SBA information source ever promoted on the SBA's learning home page. But, this free effort was part of an experiment with the publisher, HarperCollins, not something we can expect on an ongoing basis.

There may be better ways to close the knowledge and trust gap, but I would suggest the government fund an independent entity or nonprofit, not unlike the NIH, with the sole purpose of evaluating and publicizing services and ideas for small businesses, along a Consumer Reports model. This needs to be a single purpose entity designed for the new digital age, with the sole goal of accelerating and publicizing unbiased evaluations of what's available to empower small businesses.

Established businesses will, I suspect, object to this proposal. By increasing the information easily available to prospective buyers, trusted comparison services force service providers to demonstrate why their offerings merit a possibly higher price, as compared to the offerings of competitors.
For example, in the same way the pharmaceutical companies initially objected to the wide availability of generic drugs, the printer manufacturers are now fighting the growing use of low-cost generic ink that uses remanufactured (i.e. recycled) cartridges by releasing sometimes questionable information. A trusted third party would provide consumers with a greater ability to assess the importance, or lack thereof, of these manufacturer claims.

Second, as Paul Krugman recently wrote, we need to start initiating different approaches to our problems. The conventional wisdom is that small businesses, and their attendant job creation, will thrive with adequate access to borrowing. This is by no means clear. I would suggest, in any case, that we need a more talented people in a focused effort, from the private sector and academia, thinking about how to effectively educate small businesses owners and nonprofits leaders about the tools that are available today to enhance their activities and reduce their costs.

Finally, a great deal has been written about issues associated with the economics profession and the current crisis. We must similarly ask whether there are also deficiencies in academia's seeming lack of concern for the operating dynamics of small businesses. I have often been surprised to find that (to Yale's credit) I am one of the few people associated with any major business school focused on the problems of small businesses, that are unrelated to financing. The typical small business economist looks at macro issues, and the nation's business schools typically focus on the activities of large companies. Yes, entrepreneurship is a hot area. But, there is a very real difference between today's study of entrepreneurship and the majority of the entities that are classified as small businesses, and generate 50% of our economy's GDP. I don't know the answer to creating more focus on small businesses in academia, but I do know that a few million dollars invested in more brainpower and useful research would inevitably yield far more value than the same money invested in SBA financing.

In the best tradition of American business, we launched The Cost Savings Guy with a passion to make a difference and make a profit. The process that has led us to this point has also made me wonder if there are not 100 other free market opportunities that can have a significant impact on this important sector of the economy. Whether our initiative or specific others succeed, is less important than finding a way to get these innovations off the ground. A hallmark of the New Deal was President Roosevelt's constant focus on experimentation. To FDR, "action and action now" was more important than anything else. We must adopt the same attitude today.