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How Small Business Owners Make Decisions

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2002 was not a great year for the Phillies.

The team finished with a record of 80-81 and 21 1/2 games behind the first place Atlanta Braves. Their renaissance was still 5 years away. They were not a team to be counted on. Except for one guy. In one situation. That was lefty specialist Dan Plesac. And the situation? That was when Mo Vaughn, the Mets slugger, came to the plate. Whenever this situation came up, as it did often that summer, Phillies Manager Larry Bowa would bring in Plesac to face Vaughn and only Vaughn. And almost every single time Plesac would get him out. Mostly by strikeout too. Bowa had his facts. Plesac's stats showed that he owned Vaughn. And he proved it every time they faced each other.

Wouldn't it be great if small business owners had these kinds of facts whenever we needed to make a critical investment decision? Wouldn't it be great if every decision came down to a mathematical exercise, a simple calculation of return on investment without any other factors needing to be considered?

Unfortunately, such is not the case in my hometown of Philadelphia, where environmentalists, politicians and the business community have been fighting over whether or not to go forward with a project to deepen the Delaware River. The environmentalists lost the latest round on Monday when the President unveiled his budget proposal, which included $31 million to help fund the project.

To be sure, this is a $300+ million project that will take approximately four years to complete. Funding is also coming from other sources. The aim of the project is to deepen the shipping channel from 40 to 45 feet. 23 million cubic yards of sludge would have to be removed over a distance of 100 miles covering the Delaware Bay to the Port of Philadelphia.

Business leaders and politicians here are thrilled. "This project will have a significant, positive economic impact on Delaware and the region," Delaware Senator Tom Carper said. "Investments like this one are critical to the long-term development of the Port of Wilmington and Delaware, as well as the other states along the Delaware River, to help us continue our economic recovery and to stay competitive. As we move forward with this important economic investment, we need to be good stewards of our environment and protect that resource as well."

Not surprisingly, environmentalists are upset. Delaware Riverkeeper Maya van Rossum said recently that "...facts, law and good policy have been thrown out the window in favor of political whims.The project is an embarrassment and waste of money, and we will continue to work to stop it."

Like most of the business owners I know, these are smart people and dedicated to their cause. But do any of these people really have a clue? I doubt it. No one really knows the impact of their decisions. The data is never complete. The facts are never entirely reliable. No one can really gauge what will happen in the future. The politicians and environmentalists arguing over the Delaware River deepening project are getting a taste of what it's like to be a small business owner.

Because being a small business owner means never believing the data. Why? Because most of the data we get is unreliable. Just this week it was reported that many economists still...after all these years of research...don't have a clue about what they're supposed to have a clue about: the economy. Bill McBride, who writes the respected Calculated Risk blog, questions some of the assumptions used by the government in last week's mortgage $25 billion debt settlement. And one recent (and very critical I'm sure) study found that a third of tweets received are useless. A third? Seems more like 90% to me.

Advocates of the Delaware River Deepening claim that the project will provide a huge boost to the regional economy. They contend that bigger and larger container ships could enter the area, bringing more goods and jobs. Philadelphia could become a much bigger player in the movement of oil. Rather than contaminate the river (as many environmentalists contend), the U.S. Army Corps of Engineers believes that the material dredged in the effort will serve to nourish beaches in need of more sand, concluding that "...when complete, the project will provide for more efficient transportation of containerized, dry bulk (steel and slag) and liquid bulk (crude oil and petroleum products) cargo to and from the Delaware River ports. The current estimated benefit-to-cost ratio is approximately 1.64, with net annualized benefits of more than $13 million to the U.S. economy."

Environmentalists aren't buying it. They say the project will cause significant problems. It will affect the freshwater aquifers that supply drinking water to southern New Jersey, not to mention the wintering grounds of the blue crab and other fish and aquatic life. They're concerned that mercury, PCBs and other pesticides buried in the sludge could contaminate the water if dredged. They're concerned that the ocean's salt line will move much further up the river. Van Rossum gives a passionate case against the project saying: "... deepening the Delaware violates our obligation as good stewards of the earth, and threatens the health of our communities. (It) will cost taxpayers $277 million, and according to a nationally recognized expert, will likely lose taxpayer money." Me? I'm worried that the dredging will unleash vicious, pre-historic piranhas which will force Jerry O'Connell to come to town to save us.

Both sides will argue that their numbers are the right numbers. So who's right? What's the answer? Is it a good thing or a bad thing? Will it cost us a ton of money or make us a ton of money? Do we trust these numbers? Is there anything else we should be considering? Will my son get a D in Science?
These are questions that business owners like me face every day. I wish we had it as easy as Larry Bowa did every time Mo Vaughn came to the plate after the seventh inning. But we don't. So let me tell you how a business owner would evaluate this problem.

For starters we'd never trust the numbers. We see that there's a cost of the project of around $300 million. But we make sure to increase that by...oh...about 50%. Because there are always hidden costs. Contractors, employees, builders, technology guys....they never reveal all the costs. Sometimes it's because they genuinely don't know. Other times it's because they're hoping for the best case scenario (otherwise, they'd lose the job). And this is a government project too...so get the red flags ready.

Ask any business owner and I bet they'd estimate the real cost of this project to be at least $450 million...and quite a few of my friends would argue the number should be even higher. I have one client who always doubles any estimate given to him....and he's usually right. That's because he has three daughters and paid for three weddings. He knows all about estimating costs. If we're going to question the government's estimates we should be questioning the environmentalists too. Remember, these are environmentalists, which means most of them more than likely graduated with a liberal arts degree from Bryn Mawr, and not an MBA in mathematics from Wharton. Business owners, before spending their hard earned dollars, would quadruple check these numbers before doing anything.

And then the tricky part: we'd try to figure out the return on this investment over the next five years. Not seven years. Not ten years. Look, I don't even know what I'm having for lunch today, so it's a stretch to go out five. But most business owners I know would accept this approach. Has anyone really proven that shipping will increase to the region? Are there commitments from shipping companies or are these just assumptions made by a bureaucrat in a cubicle wearing a short sleeve shirt and a pocket protector? Where are all these new jobs going to come from? Business owners are lied to twenty times a day. Is someone stretching the truth here too? This is what we're thinking. We don't invest on promises. We invest on facts.

And finally, we take all that analysis, all that research, all that data....and make a guess. Yes, a guess. What, you think we know what we're doing any more than the pocket protector bureaucrat that brilliant expert on the evening news? We're all clueless. The expert just looks better than me in a suit.

Ask any Philly business owner and I'm sure he or she would support this project. And why not? Anything to bring more commerce to the area positively affects us all. And any move by the government to promote demand (rather than tax break gimmicks) is the right thing to do. We respect the environmentalists' concerns and hope very much that they're being addressed as part of the project.

But if we were asked to invest our own money in this project we'd be asking a lot of questions. And then taking a guess. Let's hope that our government representatives are really doing their best due diligence too. But let's also realize that they're just guessing as well. Because this issue, like any business decision, is not like Plesac vs. Vaughn.

Another version of this post appears on The Philly Post.