Here’s the Biggest Risk Management Lesson From the Failed Amazon-New York Deal

By: | March 6, 2019

John (Jack) Hampton is a Professor of Business at St. Peter’s University, a core faculty member at the International School of Management (Paris), and a Risk Insider at Risk and Insurance magazine where he was named a 2018 All Star. He was Executive Director of the Risk and Insurance Management Society (RIMS), dean of the schools of business at Seton Hall and Connecticut State universities, and provost of the College of Insurance and SUNY Maritime College in New York City.

A parable from ancient India tells the story of a group of blind men who never previously came across an elephant. Each blind man feels a different part of the body and then describes the elephant based on his limited experience. Because their descriptions are different, they suspect the others are dishonest and they come to blows.

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We may have just witnessed a similar situation. In 2017, Amazon’s national headquarters was in Seattle. For some reason, the company felt it needed a second headquarters. It solicited bids from governments and economic development organizations hoping to bring some 50,000 jobs to their areas.

Amazon’s request had mandatory requirements. These included: the location must be in an area with a large population, and it must have interstate highway access, extensive mass transit, major universities, and an international airport with direct flights to Seattle, New York City, San Francisco, and Washington, D.C.

Governments in 42 states, Canada and Mexico submitted 238 bids. Based on specifications, it’s likely that submitters like Anchorage, Alaska; Brunswick, Maine; Edmonton, Canada; Santa Teresa, New Mexico; and Hidalgo, Mexico were eliminated early.

Bidding grew intense.

Georgia held out the opportunity to create a new city named Amazon. Tucson sent Amazon the compelling gift of a 21-foot saguaro cactus. New York offered to light up its major landmarks in orange. Primanti’s, a chain of sandwich shops in Pittsburgh, offered free sandwiches to Amazon employees.

After receiving the initial bids, Amazon narrowed the field to 20 finalists that offered incentives such as tax breaks, infrastructure improvements, speeding up of construction approvals and elimination of red tape.

After intense negotiations, the company decided that three national headquarters would be better than two. They awarded a second headquarters to metropolitan Washington, D.C., and a third to an area of Queens, a borough of New York City.

Then, it really got interesting.

Local activists objected to the project and began a fight against it. Politicians objected to the generous tax packages that might deprive New York City of funds needed for other projects. Unions objected to Amazon’s reluctance to allow its workers to unionize. Citizen’s groups disliked the “gentrification” of the areas that might accompany the headquarters.

Three months after announcing the selection, Amazon abruptly cancelled its plans to set up in New York City.

Now that the deal has been killed (or at least paralyzed, as Barron’s points out), a discussion about the importance of at least trying to assess opportunity costs in making any decision is in order.

Both supporters and opponents of the Amazon project had viewpoints that deserved consideration during the process of selection:

  • Tax Impact. Loss to the city of some $3 billion in property taxes, while the gain from other tax benefits could be as high as $30 billion in the first 10 years.
  • Unionizing Impact. 30,000 Amazon employees who might not unionize with an offset of new union jobs for thousands of others in construction and support of the new facilities.
  • Gentrification Impact. The section of Queens selected is not exactly “blighted,” as was claimed by New York state as a reason to exclude the New York City Council from oversight. It is not exactly Manhattan either. The facility, to be located on land being discussed as suitable for 1,500 affordable housing units, had pluses and minuses to be considered.

Who was right? Was it the supporters or the opponents? An ancillary question.

Who was wrong? Does it really matter?

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From a risk management perspective, a different question arises. How do we resolve differing viewpoints if all parties are blind to the big picture? The question takes on additional impact in the framework of social media and a national atmosphere of confrontation.

New York’s Governor Andrew Cuomo wants to reopen the discussion. He should remember the limited vision of blind men describing an elephant as he encourages feuding parties to talk to each other.

What did you feel? This is what I felt.

What is the big picture?

These are questions that need to be on the table if opportunity costs are going to be analyzed adequately.

If the adversaries realize that the elephant is bigger than a tusk or tail, the beneficiary may be a slightly blighted section of New York City.

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The R&I Editorial Team can be reached at [email protected]