Cashing In On The Corridor Growing Spokane Firms Tap Puget Sound Market With High Hopes

Harold Gilkey figures he’s got the best of both worlds.

The co-founder and chief executive officer of Sterling Savings Association lives in Spokane. His company’s new headquarters building is in downtown Spokane. Almost two-thirds of the people his company employs live and work in Spokane.

But 60 percent of Sterling’s deposits and 70 percent of its loans are generated on the west side of the Cascades, along the Interstate 5 corridor between Portland and Seattle.

For almost a decade now, a principal theme of Spokane’s economic growth has been the expansion or relocation of companies from highcost business climates, like California or Puget Sound, to Spokane.

Those companies come here fleeing congestion, diminishing quality of life, burdensome regulation and taxation, and high labor costs.

But in the meantime a handful of Spokane companies, like Sterling, have quietly been expanding the other way, seeking the benefits of a much larger and more diversified market, while reaping all the advantages of a Spokane operations base.

The formula has taken Sterling from the state’s 53rd-largest savings and loan institution when it was founded in 1983, to Washington’s thirdlargest thrift today with assets of $1.5 billion, and deposits of almost $900 million.

This trend also has created a two-way flow of capital in a state where the “Cascade Curtain” traditionally has restricted cross-state commerce.

Sterling’s first expansion, only two years after the company was formed, was into Centralia and Chehalis. In the banking business, Gilkey explains if you aren’t big enough to match your competitors’ services, you can’t compete. So Sterling’s initial challenge was growth, and the easiest and quickest way for Sterling to grow was to acquire existing operations in the huge Puget Sound market.

The company’s most recent expansion there was the opening of a half dozen new branches on the West Side 18 months ago.

Gilkey sits in his new offices on the fourth floor of the elegantly remodeled Crescent building in downtown Spokane, and points out, “Our cost of this building runs us in the neighborhood of $11 per square foot. My major competitors are paying between $24 and $32 per square foot for their headquarters buildings.”

The productivity levels of the employees in those expensive downtown Seattle buildings is lower than those in Spokane, and turnover levels are higher, Gilkey adds.

But administrative and accounting functions can be performed anywhere nowadays.

“On the other hand,” Gilkey says, “(the West side) is where your volume is, where your production is.”

“My philosophical bent,” he adds, “is that you keep your administration where you can keep it at its lowest costs, and you have your production where your volume is.”

Or to put it a little more bluntly, Puget Sound folks pay most of the freight, and Spokane folks reap most of the benefits.

Market realities require expansion

The reason all those companies looking for better business climates were in places like the I-5 corridor in the first place is that’s where all the people are.

Doing business in Spokane may be a less costly and more pleasant allaround experience, but the Spokane market has its limitations. And sooner or later, local companies that do well seek to grow beyond levels that the local market can sustain.

“Our volume of work continues to increase on the coast, while it is fairly static here,” explains Gene McKay, president of Bovay Northwest.

Bovay is one of Spokane’s largest engineering-architectural firms. It specializes in roads, bridges and industrial structures. Originally part of a Houston-based company, Bovay’s local employees bought the Northwest operations in 1986.

The company had always done some of its work west of the Cascades, but in the mid-1980s the Inland Northwest economy was grim.

“We could see that the market for our kind of engineering services was diminishing in this region,” recalls McKay.

The forest products industry, the mining industry and the aluminum industry - all staples of Bovay’s business - were suffering at the same time. So Bovay decided it needed to cultivate the larger Puget Sound market. The company opened an office in Bremerton in 1988. That office now employs 12 and accounts for an ever-growing volume of Bovay’s sales.

Twenty years ago, the rule was simple. You located your base of operations where you did the most business. But computers and modern communications changed all that.

“Our kind of company is made up of people, not machinery,” McKay says, “so you need to be where people like to be. And there’s a lot of key people that joined this company because they like to be in Spokane.”

But companies like Bovay have to provide the kinds of opportunities that keep their best people professionally challenged.

“You have to grow if you are going to truly provide the opportunities that bright people aspire to,” McKay says. “And to grow, you can either get a bigger piece of the pie in the market you are in, or you can go out and get into a much bigger pie.”

Bovay has also employed another strategy that may become more and more popular in the attempt to capture the best combination of the inland and coastal market shares. In 1993, Bovay became a wholly-owned subsidiary of Dames & Moore, a big Seattle-based firm that specializes in geoscience and environmental engineering. Dames & Moore was looking for some of the advantages of geographical diversification, and because the two companies did not compete for the same customers, McKay says the match was perfect.

The right connections help

Having some kind of Puget Sound alliance can help a Spokane company ease into Seattle.

“The only way we could really properly penetrate that market,” says Dick Phenneger, president of Phenneger & Morgan Inc., “was to bring a person on board who was well known in that area.”

“When you go over to the West Side,” says Don Barbieri, president of Goodale & Barbieri Cos., “you’re going to be judged, and as unfair as that is, you are probably going to be judged relatively quickly.”

In other words, for all its international flavor, the Puget Sound business community is marked by the same provincialism that rules smaller markets, and is still completely capable of viewing Spokane companies as country cousins.

Both Phenneger & Morgan and Goodale & Barbieri are examples of highly successful Spokane companies that need the challenge of a larger market to develop their potentials.

Phenneger & Morgan specializes in guiding employee purchases of companies through employee stock ownership plans (ESOPs). In this sophisticated and highly specialized field, Dick Phenneger is recognized nationally as a leading authority.

“We’ve done a lot of ESOPs over there, but whenever we do one in the Puget Sound area,” Phenneger says, “the owners of the companies always would have preferred to do business with someone local.

“You’d think that Seattle would not be that provincial, but it is.”

After two years of study, Phenneger decided he would open a Puget Sound office if he could find the right Seattle insider to run it.

The man he found was Jerry Keppler, who had been president of a Seattle firm that specialized in buying and selling companies.

“The Puget Sound market will probably double our volume of ESOP transactions,” Phenneger adds. “And it could go substantially higher than that.”

But, he added, “the bulk of the work related to those deals can be done in Spokane. And this is the best place to be. Most of our employees wouldn’t want to move to Seattle.”

Barbieri is among the most successful real estate developers in the Inland Northwest. And he, too, is being driven by growth into the Puget Sound market.

A major part of Barbieri’s business is the development of hotel properties like his flagship, Cavanaugh’s Inn at the Park in Spokane. The Cavanaugh’s properties dot the Inland Northwest, and earlier this year, the company bought the former U.S. Bank headquarters in downtown Seattle.

The 330,000 square-foot building will be renovated to include 280 hotel rooms and suites, 38,000 square feet of business and conference space, 60,000 square feet for retail and office use, and two levels of underground parking.

It’s a given, Barbieri says, that his company’s hotel business has to move into the West Side market if it is to continue its growth.

Alliances formed between airline companies and hotel chains are becoming common in the hospitality industry and, “We have to be in a market with 10 million people in it if we expect those airlines or other potential travel partners to react favorably to a Spokane-based hotel chain,” Barbieri says.

The company has planned this move for several years. It backed off acquiring the U.S. Bank building in 1992, when development of the Spokane Crescent Court project demanded the company’s full attention. Later, Barbieri says, the company had attractive opportunities to develop projects in either Olympia or Bellevue.

Picking how you’re typecast

Barbieri backed away from those opportunities, he says, because the company’s first West Side project would “typecast” it in that market. So the initial development had to firmly establish the Cavanaugh’s image as first class. And a project in the heart of Seattle’s retail-financial-hotel district was the only way to do that.

And ironically, all the things that the Seattle business community has identified as wrong with doing business in downtown Seattle will work in Cavanaugh’s favor, Barbieri said.

“Those are the things that are keeping most of the national (hotel) players out of that market,” he says.

Putting up a new building - as most major chains prefer - in downtown Seattle is prohibitive because of property values and regulations. Height limits on new buildings make duplicating the views of existing hotels impossible.

“So right away, we come in with a great competitive advantage,” Barbieri says.

“While there are some headaches in existing-building conversion, that’s not something that’s foreign to us,” he adds.

While the movement of Spokane companies into Puget Sound is still relatively rare, Barbieri and others think in time cross-market alliances will be more common.

Cheap air fares that encourage travel will create more familiarity between the markets. As more Seattle companies look to the east for expansion, their willingness to do business with Spokane firms will increase.

And as the Spokane economy grows, more and more companies will find that their prosperity means they need to look to a bigger market in order to step up to another level.

, DataTimes ILLUSTRATION: Staff illustration by A. Heitner: Local businesses go west

MEMO: This sidebar appeared with the story: KEY TO SUCCESS Administrative and accounting functions can be performed anywhere nowadays, but production needs to be where the volume is.