Christopher D. Lloyd, Senior Vice President and Director, Infrastructure and Economic Development, McGuireWoods Consulting (Winter 2011)
In this uncertain economic climate, efforts by corporations to control cost and maximize revenue are becoming more important than ever. One of the distinguishing characteristics of the current economic downturn was how quickly companies shed jobs and how slow they have been to add new positions, even as signs of recovery have emerged.
Along with these downsizing efforts, companies are continuing to look to squeeze costs out of their operations in other ways - notably through their real estate functions. As a result, the role of the chief financial officer (CFO) in corporate site selection and incentives negotiation, and particularly incentives implementation and realization, has increased over the past five years.
Wooing the CFO
Traditional economic development efforts have rarely attempted to woo the CFO during the site selection process. While there was always the recognition that the CFO was part of the process, he/she was rarely a visible member of the negotiating team. The CFO played more of a support role, or was limited to assisting with realizing incentive commitments after the public announcement.
Increasingly, however, the CFO is emerging from the shadows and, in many cases, is the lead on the site selection team. As one of the most senior corporate executives, the CFO is often deferred to by others in the company, and his/her opinions about why or why not to select a certain location carry great weight.
"Finding new sites - whether for manufacturing, distribution, administrative, or marketing operations - is a complex process with multiple variables that require a detailed comparative evaluation," notes Doug Townsend, CFO for Home Meridian International, an international home furnishings company headquartered in High Point, North Carolina. Within the past two years, Townsend has been involved in the relocation of both the company's corporate headquarters and its West Coast distribution center.
"Such projects are usually the major capital investment item for the year for most companies, so they are carefully scrutinized by executive leadership, the board of directors, and outside investors," Townsend adds. "New sites are often used to enhance a company's financial, operational, and strategic and brand image goals, so CFOs are uniquely positioned to lead the site selection process because they work across organizational boundaries and are ultimately responsible for many aspects of the enterprise's success."
Factors Adding to
the CFO's Role
But corporate cost-cutting is not the sole factor behind this trend. Instead, there are a variety of factors at play, both financial and relating to public policy, that have reinforced the increasing role of the chief financial officer in real estate decisions. Among them are the following:
Outsourced corporate real estate functions - As the economy began to falter in 2007, and even before that time to some degree, many corporations were starting to outsource their corporate real estate functions to their brokers or wholly eliminating the real estate function internally. Instead, they began relying more heavily on personnel with human resources, production and manufacturing, and financial backgrounds to assist in site selection activities. In such cases where there is no corporate real estate director, the CFO often emerged as the leader of these ad hoc teams and has started to play a larger role in the decision-making process about future corporate locations.
Increasing complexity of incentives - Increasing competition among communities for new jobs and investments has spawned an even wider array of economic development incentives. However, these incentives are increasingly complex; it is often necessary to collect significant corporate financial information merely to determine eligibility for such incentives. Even if a company is eligible for an incentive, it is generally the role of the CFO to determine whether the incentive holds any real value to the company. In fact, many now totally discount corporate income tax credits in favor of cash grants.
Yet securing a suitable incentive package is only part of the job. It often falls to the CFO to oversee the incentives compliance effort - one that requires the filing of additional tax forms, annual certifications of job and investment totals, or other reports to demonstrate that the company is living up to the commitments made to secure the incentive offer in the first place. Thus, having the CFO involved at the front end of the transaction can help ensure that the company receives all it was promised.
Reducing the cost of the real estate portfolio - Most companies look at corporate real estate and property holdings as costs that do not contribute directly to the bottom line despite their absolutely essential nature in housing vital functions. As part of this effort, the CFO often works closely with outside consultants to help re-characterize property to lower cost classifications, or to assist in securing additional tax abatements or exemptions.
CFOs Leverage Their New Role
These trends taking hold across corporate America present interesting challenges for the economic development profession, which has long been used to interfacing with corporate real estate executives as a pipeline for future deals. That is not to say that networking with these executives is not important, but they are often no longer the sole, key decision-makers in the site selection process. They are now sharing that role with the CFO. That shift is starting to influence how states and localities market themselves. Instead of talking about the availability of land, emphasizing the low, long-term cost of operating in a jurisdiction is becoming more important. Communities are stressing that they are the right choice for financial reasons, not just for logistical or quality-of-life ones.
As this shift occurs, it is important for the CFO to understand how to be best positioned to leverage the heightened focus on the financial side of a site selection transaction in order to accomplish corporate goals. Smart economic development professionals, seeing these trends, are making adjustments to how they market themselves to the CFO. Smart CFOs then must recognize these trends and realize how to use them to their advantage. These changes include:
Enhancing internal financial expertise - Some economic development departments are starting to bring on board financial experts with backgrounds in tax and corporate accounting who can act as ambassadors to the CFO, speak the CFO's language, and complement other marketing efforts by emphasizing the financial benefits of a community. Those locations that are unable to add personnel are enhancing their marketing materials to emphasize cost-related issues, or forging alliances with accountants, lobbyists, and attorneys to assist with the sales job from a financial perspective.
As a result, the CFO is likely to get not only a more sophisticated negotiator across the table, but one who is going to ask for more information about a company than ever before. When localities make incentive commitments, they are really making an investment of taxpayer funds in a community. Therefore, the CFO should not be surprised when asked to provide detailed financial statements about the company, similar to what any investment banker would require.
Jurisdictions want to be assured that they are dealing with credible and creditworthy entities that will be around for the long haul. The localities also understand that if a major corporate employer fails, it could adversely impact the creditworthiness of that community. Thus, they are increasing their due diligence on the company itself before moving forward. The CFO should not be averse to providing reasonable amounts of information, so long as steps are taken to protect proprietary and confidential data under state Freedom of Information Act requirements.
CFO outreach and marketing - In addition to attending the traditional conferences for real estate executives, some communities are starting to look at attending conferences for corporate financial executives. Their message at such events is all about cost. Instead of listening to the usual sales pitch about land, quality of life, and infrastructure, the CFO will hear about taxes, fees, utility charges, and wage costs. While all this information can be incredibly helpful to the CFO, remember that economic developers are in the sales business, so it is important for the CFO to verify the data provided and see how it stacks up against real world experience. As part of the site selection process, the CFO should request to talk to other CFOs at companies with existing facilities in the community in order to compare notes.
Emphasis on consistency and
predictability - A strong incentive offering is always welcome; however, the CFO should also ask questions about consistency and predictability of government policies. For example, when was the last time the corporate income tax rate increased? What has been the trend on property and other local taxes? What is the credit rating of the host community and is the rating improving or declining? Is there a history of special tax assessments that can unexpectedly increase costs in the future? Knowing the answers to these and similar questions is essential to ensuring that the underlying business climate provides a foundation for success.