Reflecting on the Corporate Survey over the past decade, the responses have been very consistent. Keeping in mind that the past 10 years have seen extreme swings in business conditions, one could ask, "Should there be consistency in the location selection factors in good times and in bad?"
The Current Situation
Customarily, labor costs are a key factor in any location decision - but we are certainly not living in a customary economic climate. According to the U.S. Bureau of Labor Statistics, since the recession began in December 2007, 5.7 million jobs have been lost. U.S. industry has also seen worker concessions to a level never experienced in recent history; there also seems to be a ground swell of interest in relocating offshore employment back to domestic soil. So, with these major corrections in motion, has corporate America changed its viewpoint on the importance of labor costs - as a key selection factor?
The stark truth is that this single factor still provides the most potential cost savings of any single consideration in the selection process - for most, but not all, location decisions. The Corporate Survey respondents are resolute in placing a heavy weight on this factor as they continue to view the site selection decision as a long-term commitment, which will be required to perform equally well in both up and down business cycles.
However, the recent economic climate has indeed caused a change in certain labor markets, which will have a direct impact on labor costs. Although "labor costs" as a key factor in the site selection decision has not changed in the opinion of the respondents, what has changed is the need to evaluate the labor statistics in a re-focused manner. The need to collect "live data" has never been more important to determining a location.
Although some variations exist between even the most seasoned site selection professionals, the fundamental methods utilized in the site selection industry remain fairly common. Typical cost factors analyzed in most studies - which are "location sensitive" - are common to all facility types and include labor, occupancy, utilities, travel, freight, and taxes. Additionally, technology and equipment costs are a critical capital cost component - but typically will not vary by location. As illustrated in the accompanying chart, while labor costs are always important, the labor cost factor is critical to the success of some operations - but not very critical in others. For example, the location selection choices for a manufacturing or call center operation may show a wide range of labor costs (typically up to 35 percent) - and the choices for a headquarters or research and development operation may show only slight (5-10 percent) differences. At the risk of oversimplifying - manufacturing, distribution, warehousing, call centers, and back office operations are primarily cost-driven decisions, while headquarters, research and development, and specialized operations (like data centers) are driven by other more heavily weighted factors, such as labor quality, availability of intellectual capital, and location convenience. Additionally, in order to attract and retain certain skill sets, many organizations will utilize a one-tier wage approach for specialized operations - rather than adjusting the wage to fit the local compensation environment - thereby diluting the opportunity to realize labor cost savings for the entire population of certain specialized operations.
For those location decisions where labor cost savings are a primary driver, the ability to accurately measure the actual wage and benefit dimensions of a labor shed is extremely important. Published data, from even the most respected reporting sources, may be outdated - even on the first day of availability. Most critical location decisions will incorporate several methods of sourcing data - including the four key sources noted below - all with certain advantages and drawbacks.
1. Government reporting sources such as the Bureau of Labor Statistics (BLS), County Business Patterns, union election trends, U.S. Census data, and others provide a highly organized and systematic method of tracking and reporting historical information. This data is categorized into certain skill sets, industry classifications, and sorted by geographical region (state, county, and MSA.)
These reports provide meaningful information during the initial screening portion of a location selection process. From a macro standpoint, they are very useful when comparing one region/location to another. Data is defined, collected, and sorted in a similar fashion - by one objective reporting agency - thereby allowing for an "apples-to-apples" comparison.
2. Private employment agencies collect, sort, and report employment conditions in both industry and geo-specific categories. In most cases, finalized reports - even customized analyses - rely on aged data. Additionally, unless the same private company/agency was responsible for the data evaluations in all communities being evaluated (which would be unusual), it becomes very difficult, if not impossible, to bring about an "apples-to-apples" comparison.
3. Locally conducted surveys typically administered by public/private agencies involved with economic or community development activities are nonobjective and are produced to be utilized in promotional materials. The results of these findings are usually favorable to the specific locations being promoted and may contain significant data gaps in those areas that have not produced positive results for the local community. The time-tested method of using third-party independent analysis - while relying on nonobjective data - produces questionable results.
4. In-person real-time interviews, often referred to as "employer interviews," can provide the most current data regarding wages, benefits, and labor-management relations. Although it is sometimes difficult to arrange a meeting with existing employers (to request confidential information regarding their most recent experiences in recruiting and compensating employees), the initial introduction and resultant meetings can best be arranged through the regional or local economic development agencies. The agencies rely on the cooperation of the existing employers to serve as "community ambassadors" - as part of the effort to bring other employers into the region.
Using the Right Tool
Each reporting source provides benefit to the location and site selection process. Using the right tool for the job becomes as important as the data itself.
Having somewhat dispelled the usefulness of broad, published statistics for final location decision purposes, do they have a use and, if so, what are they telling us?
As most people have come to realize, "site selection" is a misnomer - the professional "eliminates" sites based on every increasing detail of specification. Government published statistics (i.e., BLS, County Business Patterns, work force boards, etc.) are looking in the rearview mirror and documenting the past but may point toward trends in the future.
Take for instance private industry wage increases. For the year 2008, as the slowdown accelerated, the yearly increase was 2.5 percent. But as the unemployment rate increased from 4.9 percent in January 2008 to 7.2 percent in December 2008, the quarterly wage increase diminished from 0.7 percent for the first quarter to 0.5 percent for the last quarter. With the latest reporting from the BLS, private industry wage increases for first quarter 2009 are a mere 0.2 percent. Clearly, the private sector has responded to the current economic conditions and is attempting to control current labor costs through attrition (April 2009 unemployment was 8.9 percent) and diminished wage increases.
Most economists see this trend continuing for 12-18 months, even as the general economy improves. This places the current location decisions in an environment of increased supply and lowered expectations of wage increases. For those facility types which are sensitive to geographically differenced labor cost, it appears that now is the time to utilize specific location attributes to position the organization for the future - prior to supply and demand coming back in alignment.
The results of the Corporate Survey indicate "labor costs" ranked as the second-most-important factor that is considered when rendering a location decision. This is consistent with the survey results from previous years - even during the current economic climate that has clearly seen relaxed pressure on upward wage increases. As a result of the current economy, many reporting sources are inaccurate due to the rapid changes occurring - on even a daily basis. The reliability of even recently published wage data - in our opinion - should not be the sole source of information utilized to make critical decisions. Use published data for high-level evaluations but - by all means - take the time to conduct local employer interviews to finalize any long-term location decision.
Les Cranmer and Art Wegfahrt are location and real estate consultants in the Corporate Services Practice at Studley, Inc. Collectively, they have over 66 years experience in advising corporations on strategy, location selection, and implementation.