The recession may be slowing but many businesses continue to feel the effects of the poor economy. With looming tax increases and uncertainty as to when things will get better, many companies are scaling back operations and looking for ways to lower costs. Employee layoffs or plant closures are becoming commonplace, but these drastic measures can be avoided if a company is willing to consider moving production or a portion of operations to a community that may be a better match for the business and, ultimately, help to improve profitability.
Relocation can lower operating costs by 20 to 30 percent. How? By helping a company to optimize its financial, labor, and productivity investment. Ideally, the new location would also offer lower property costs, a lower tax structure, as well as cash grants and incentives for growing businesses. The right community can help even a struggling company turn around its situation and better position itself for growth.
Some companies may be hesitant to consider a move; however, relocation doesn't mean having to uproot an entire company from its current location. In fact, many companies choose to keep their corporate headquarters in the current location but move production to another location. Executives and personnel often prefer this and, since production is usually the largest expense and easiest portion of the business to move, it makes good business sense.
Too many business owners start their companies in the town where they live for convenience but don't factor in how the business could be more profitable in another part of the country. For example, a manufacturer based in Minnesota for more than 80 years finally had it with the increasing taxes in its state. When the company looked at how it could improve its situation, it found it could shave 25 percent off of its operating costs by making a move to another state.
Another manufacturer located in the Midwest for two generations was facing layoffs because of the economy. It was able to turn its situation around by moving production to a different state, which helped the company to cut operating costs by 30 percent and secure $1 million in operating cash to fund the move and ongoing operating expenses. Instead of laying off employees or taking other drastic measures to cut costs, both companies were able to persevere through tough economic times by making a move and now are poised for growth.
The key to identifying the ideal location that will improve profitability is an analysis of the business's operating model and comparison with key costs in different areas of the country. Some states - such as Florida or Texas - are known to be more pro-business for their relatively low business costs. But that doesn't mean these states are right for every business.
Consider a company that needs to ship product to its customer base in the Northeast. Locating in Florida or Texas doesn't make sense if the firm incurs exorbitant shipping and transportation costs. Companies need to examine several factors, from infrastructure requirements to the need for qualified and affordable labor - all while determining each factor's impact on the operating budget - in order to ensure they don't make a move for the wrong reasons.
Five Telltale Signs
When should a company consider relocating? Here are five signs to look for:
1. Facility upgrade or consolidation: Businesses in the midst of expansion should look beyond their backyard. When a leading medical device company, Cardiovascular Systems Inc. (CSI), needed a new manufacturing facility to support the production of a new product, it found the best location to meet its expansion needs in another state. Through an extensive search process, the company learned it would be best served in a community outside its home state that offered both a qualified labor pool and an attractive economic incentives package. This allowed CSI to build an expanded facility without taking on additional expenses or debt.
Consolidating multiple sites into one location can also help to save a company money and streamline operations. In the case of Apogee Retail, a nonprofit call center, consolidation also helped to save jobs. The company sought to consolidate three call centers into one operation to maximize efficiencies and reduce costs. By finding the ideal community that provided an abundant qualified labor pool and economic incentives, Apogee was able to meet its objective of not having to downsize or eliminate any jobs.
2. Hiring and retention: Work force issues can often be overcome by relocating to a community that better matches a company's specific labor needs. For instance, when a leading medical transcription company was having difficulty hiring and maintaining its employee base, it located a training center near a community college and developed a partnership with the college to train and recruit transcriptionists.
In another example, a manufacturing company that struggled to find skilled sheet metal operators was able to relocate to a community that had recently had a couple of significant plant closures, and, therefore had a ready-to-go work force.
3. High operating costs: For many companies, labor costs are the largest expense. Finding a location with qualified labor, lower payroll taxes, and lower unemployment insurance rates can help a company to realize substantial savings. However, cheap labor should not be the driving force behind a move.
Many U.S. companies are currently moving production back from China and Mexico. Despite lower offshore labor costs, these companies realized that the overall operating costs of doing business offshore were not lower. It is important to evaluate how a move will impact all operating expenses - not just labor costs. In addition, finding the ideal community will not only create a more profitable operating model, but can also fund some of the ongoing operating expenses through cash incentives and grants.
4. Proximity to customers: When gas prices spiked last year, companies scrambled to set up regional distribution centers because the cost to ship products across the United States was so great. If a business is serving a customer base located halfway across the country, it may make sense to move a portion of its operations in order to cut shipping and transportation costs.
5. Taxes, taxes, taxes: Unfortunately, the United States is the second-highest-taxed country for business; however, tax structures vary dramatically from state to state. By moving a company or expanding in a new location, a business can save a substantial amount by considering an area that provides lower taxes, tax breaks, and incentives to businesses. While taxes vary by state, a business that analyzes its tax burden at its current location and compares it to that of businesses in other states can discover the potential for dramatic savings.
Making a Match
Once a company decides that relocating is a consideration, it should start by taking a look at which areas are business-friendly and provide the best-case tax scenario. Next begins a process to determine how those locations match up with the specific needs of the business. The key steps to finding the right place to grow a business and improve profitability are as follows:
• Evaluate operating costs. Since the decision to move or not to move should be a financial one, the first step is to take stock of the company's operating budget in order to compare key costs at the present location against the cost structures of other areas.
• Assess labor needs. An analysis can be done to determine if a company's desired employee skills are available in another community, or if there is an abundant labor pool or the resources available to train potential employees.
• Look before you leap. Those charged with the task of site selection should profile a number of communities that are a good match for the business based on geographic preferences, labor demographics, and infrastructure needs. They can also help to determine the areas that provide the best economic incentives for growing a business.
• Make a site visit. A decision cannot be made based on how a community looks on paper. Company representatives should visit the prospective areas and ask to meet with local officials to talk about how they may help to meet the needs of the company and to determine whether or not they would be good partners for long-term growth.