John M. Rhodes, Senior Principal, Moran, Stahl & Boyer, LLC (Apr/May 10)
At the heart of every community are the companies that call it home. Company leaders and their spouses sit on boards, raise funds, and provide the vision to improve local culture, arts, sports venues and events, education, and the community's economic viability. A company's headquarters operation also provides high-paying jobs. It may be the magnet that attracts suppliers and business partners, and it may stimulate company spinoffs that ultimately form an industry cluster in the community.
Some companies grow up in a city and remain there for generations, while others move around as they evolve. There have been legendary examples of positive company-community relationships, such as Coca-Cola and Atlanta; Wal-Mart and Bentonville, Arkansas; Dow Chemical and Midland, Michigan; Corning Incorporated and Corning, New York; and Bank of America and Charlotte. There have also been companies that needed to leave a community to seek a more strategic fit elsewhere, and companies forced to move after being acquired. A move should not be viewed as a failure by the community, but it is often inevitable. The relationship between a company and a community is not a permanent commitment, but an opportunity for mutual benefits for a period of time.
Types of Headquarters
As a company evolves from a small business to a major corporation, its structure, headquarters operations, and strategic location needs change. Companies evolve from having all operations in one location to being global holding companies resulting in these different types of headquarters:
Small to Midsize Company Headquarters - all company functions and operations are located in one city.
Corporate Headquarters - traditional executive and functional operations in one location that can vary widely in the number of employees.
Holding Company Headquarters - typically small organizations with executive and financial operations that have oversight of multiple companies.
Division or Subsidiary Headquarters - may have a full complement of executive and functional senior staff. Back office and shared services operations may be located at the corporate headquarters location. This depends on the level of centralization of a company and life stage of the business.
Regional Headquarters - scenarios include foreign companies requiring U.S. or Americas presence; domestic companies with regional headquarters; and domestic companies that need access to the Caribbean or Latin America via south Florida, or the Pacific Rim via the West Coast.
Why Headquarters Are Relocated
Although many companies may be established and remain in a given location for years, relocation sometimes has advantages.
Ability to radically effect change - Relocation is often effective if a CEO needs to quickly shake up an organization by shedding certain individuals or modifying corporate culture.
Send a message to stockholders and customers - Getting out the message that a company has made a radical restructuring in its organization, a change in product mix, or a shift in markets can be communicated by a headquarters location move.
Better access to an emerging market or business partner - Companies will relocate as markets shift or they need to establish a strong relationship with a particular business partner.
Lower operating costs - As companies mature and margins are reduced, some companies will relocate from larger, higher cost cities to lower cost areas.
Mergers and acquisitions - A merger or acquisition often results in a consolidation of headquarters operations into one location.
Controlled by investors - Investors in emerging companies typically dictate the location of the company to suit their needs.
Enhance ability to attract talent - Companies will relocate their headquarters if they need to be better positioned to attract top internal and external talent.
Gain access to government policymakers - In some circumstances, gaining access to government policymakers was an important location consideration in selecting a state or national capital as a headquarters destination.
Personal preference of senior executives - Although this consideration has become less likely to pass a board of directors in this time of governance scrutiny, particularly with publicly held firms, occasionally a CEO selects a headquarters destination due to personal quality of life preferences.
Risks of Relocation
Corporate headquarters are not frequently relocated, and the process of selecting a destination undergoes intense scrutiny. There is always the concern that relocation may have as many good reasons not to move as there are to proceed. Specific risks include:
Key individuals and intellectual assets may be lost.
Disruption to the overall organization could affect customers and revenues.
The ultimate cost will be significantly more than anticipated.
The location will not deliver the projected attributes or performance.
Cost vs. Benefit
For most corporate projects, there is a well-defined return on the investment. When a company evaluates the financial aspects of headquarters relocation, the cost may be high and the return may not be easily quantifiable. For example, a publicly-held company has a headquarters with 150 employees in a major metropolitan area. It noted three strategic needs to justify relocation:
Lower operating costs
Better access (via non-stop air access) to specific geographic markets
Lower residential real estate cost and other positive quality of life attributes to attract top talent
The company defines a proxy destination, and estimates the operating cost savings at $1.8 million annually, while the one-time relocation cost is approximately $8.2 million. The break-even point to cover the relocation expenses is in excess of four years and is a potential cash-flow problem. If the headquarters moved from a lower- to a higher-cost situation, there would be no cost savings.
Although the relocation has its benefits, it can be difficult to quantify them and justify the relocation to the board of directors. For this reason, many headquarters relocations never move beyond the feasibility phase.
The Site Selection Process
Identifying the optimum location for a headquarters operation focuses on four questions:
What strategic issues must be addressed, and how will relocation achieve solutions?
What are the risks to the organization from relocating?
What are the one-time costs and ongoing incremental costs or savings from relocation?
Which locations provide the best situation for the organization when weighing opportunities versus risks and costs?
The site selection and implementation process must be structured to efficiently arrive at an ideal decision and carefully engage in relocating. In the first phase, the business case is defined, and a risk versus cost feasibility analysis is prepared. If the feasibility is unfavorable, the process may not proceed. However, if it is positive, the process moves to the second phase of screening different locations and identifying top candidates, making trips to the top locations, engaging in final negotiations, and choosing a location. A summary of the entire process is presented to the board of directors, and it will move to implementation if approved.
The third phase includes implementing the relocation, especially specific tasks that must be accomplished to ensure a smooth transition. Key elements of the relocation include shaping an ongoing communications strategy, crafting a well-defined relocation policy, developing a retention policy for non-relocating employees, preparing the office prior to relocation, developing a transition strategy for staffing, transporting files and equipment to the new destination, disposing of the existing headquarters, and constructing or acquiring the new headquarters.
Characteristics of a Headquarters City
Companies and organizations select cities for different reasons to meet their needs. A combination of factors makes a successful headquarters city:
Reputation and overall image - a city's image is derived from perceptions of its growth dynamics, success of its sports teams, major industry presence, weather, amenities, and other factors.
Co-location with other headquarters - when a city reaches a critical mass of headquarters operations, there exist services and functional talent to support headquarters growth.
Specific industry presence -specific industries target certain communities and regions, such as Detroit for U.S. automakers, New York City for financial and fashion firms, Philadelphia for pharmaceuticals, Houston for oil and gas, and south Florida for access to Latin America. In fact, Fort Lauderdale has more than 150 headquarters that take advantage of its Latin American access.
Air access - non-stop flights to selected domestic and international cities.
Professional or collegiate sports and cultural venues - an important consideration for client, internal company, and family entertainment.
University presence - this ranges from access to MBA programs, to research and development activities for technology-based companies.
Reasonable operating cost - for some high-margin businesses, cost is a less important factor. However, for most of the maturing industries, cost of real estate and administrative labor is an issue.
Quality of life for attracting and retaining top talent - this includes cost of living (particularly housing), quality of schools, health care, presence of certain cultures, recreation, cultural activities and venues, weather, and crime rates.
Minimization of risk - derived from the actual and perceived incidence of natural events and potential terrorist activity.
Culture that welcomes and quickly assimilates executives and their families - the time required to be in a community before a person is appointed to high-level volunteer positions is one indication of ease of assimilation. It also corresponds to neighborhood layouts, interactive activities, and the attention new people receive.
Attracting and Retaining Headquarters
A community can focus on different attributes to enhance its position in attracting and retaining headquarters operations:
Know your strengths and weaknesses - every community has assets and liabilities. A headquarters city should take stock of what it can offer a company or organization - both inherently and through investment - and leverage those assets. Focus on:
Air access to key international destinations
Available, ready-to-build Class A offices and developments that offer unique environments
Types of industries and headquarters already present in the community
Quality of schools
Relative cost of housing and lifestyle options
The capabilities of local universities, including academic programs and research and development activities
The process and venues for assimilating executives and their families into the local culture
Continuous improvement - a community that never accepts the status quo and embraces change is one that will stay vibrant and contemporary. Companies want to be in a place that is receptive to evolving needs, adapts to shifting situations, and is always improving.
Get the stakeholders on the same page - successful cities get educators, developers, government officials, service providers, businesspeople, and the greater community to work from the same page. Building a shared vision and a reasonable level of consensus is critical.
Take care of current headquarters - communities tend to view existing employers and headquarters as if they will always be there. Bad idea. Instead, spend time understanding the needs of each company and utilize their feedback to better position the community to not only retain existing companies, but to attract additional headquarters.
Invest in a company's future - a community and its residents must realize that it costs a company significant resources and major organizational risk to relocate. It is not "corporate welfare" to provide a company incentives to come to a community. Incentives should be positioned as investments in the company, just as individuals invest in a company stock.
Let the world know what you have to offer - being the best-kept secret is never the formula for success in any sales situation. Companies have many choices for placing their headquarters. Target your community's message of being a headquarters location to the highest potential audience and reinforce it constantly. There are many innovative ways to reach prospective companies, as well as site selection experts, business consultants, and commercial brokers.