Andrew H. Shapiro, Managing Director, Biggins Lacy Shapiro & Company (Spring 2011)
Every location decision, large or small, affects an organization's strategy and operations. Redeploying resources and positioning the company to compete can create great value. But the failure to do so may result in the irrevocable waste of time and resources.
Location strategies fall somewhere along a continuum. At one end of the spectrum are tactical, cost-driven decisions; at the other end are strategic, performance-driven decisions. In between are choices that make concessions to all of the above. A cost-driven strategy emphasizes reductions in operating expenses and is frequently used when locating internal and external back-office functions, such as shared services and customer contact centers, and certain manufacturing operations. Industries sensitive to costs, such as retail, also favor cost-driven location strategies. A performance-driven location strategy ranks cost containment second to factors that enhance value, such as talent and skills availability, accessibility, image, and other considerations related to the ongoing viability of a company. Performance factor-driven operations include headquarters, sales offices, research and development centers, and advanced manufacturing operations that require a highly skilled work force.
Critical Success Factors
Cost and tactical considerations alone rarely drive a corporate headquarters relocation engagement. Instead, these moves often:
• Involve subjective, intangible factors, such as quality of life
• Draw the attention of high-level executives
• Occur in a highly politicized environment
• Focus on critical success factors related to people, communications, and business synergies
Strategy and a focus on improving performance characterize headquarters moves. Here are some of the most common headquarters performance objectives:
• Culture Shift: One of the most common reasons for moving the headquarters is the opportunity to accomplish wide-scale culture change. A new environment - and new blood - can help increase productivity and heighten vigor among front-office employees.
• Organizational Talent Development: How can a location attract specialized talent dedicated to the organization's mission? How attractive is the community for future recruits?
• Image Cultivation: For many organizations, location can profoundly influence image. Wouldn't perceptions of Apple be quite different if it were not located in Silicon Valley? What would happen to the reputation of Berkshire Hathaway if Warren Buffett, the so-called wizard of Omaha, resided in Las Vegas?
• Enhanced Communications: The factors that bear on business and achievement are complex and often tied to strategic vision. Thus, it is important for communications with stakeholders within and outside the company to be timely and clear.
• Improved Accessibility: Few factors promote communication better than access. And for a corporate headquarters, access often means the ability to travel anywhere in the world conveniently and economically.
• Access to Financial and Business Networks: The desire to be near the consultants, attorneys, and auditors that big corporations rely on for access to debt and capital markets motivated more than one headquarters move.
We have notably not addressed cost issues. Costs are often at the polar opposite of performance. That's not to say that you can't have both. However, it is often difficult to justify moving a headquarters predominantly to manage costs.
Which Cities Should You Consider?
Corporate headquarters have historically congregated in large, tier-one metros such as New York, Chicago, and Los Angeles, or in traditional business centers like Cleveland or Pittsburgh. Yet one of the most striking location dynamics of the last 20 years has been the shift of corporate headquarters to new metros (especially the Sunbelt cities of Atlanta and Dallas) as they close the business infrastructure gap with traditional headquarters locations. All of these areas typically have superior air access, full business support services, strong managerial and executive labor markets, a modern communications infrastructure, and the quality of life assets that executives typically demand.
Second-tier metropolitan areas, including regional market centers such as Charlotte, Phoenix, and Denver, are becoming more popular, particularly at the divisional level. These cities often feature clusters of locally-grown and dominant companies (although Charlotte's big banks now have a national presence), and they have become regional magnets for talent, making them a good fit for some types of corporate or divisional headquarters.
Some third-tier communities offer specific performance factors that create niche environments for particular headquarters. These include cities such as Austin and Raleigh - university communities, R&D centers, and state capitols that feature an attractive quality of life and revolve around a relatively narrow economic cluster (life sciences in Raleigh and software and technology in Austin).
Location Evaluation and Selection
With all of these choices, how does a company find its optimal headquarters location? The classic decision-making model translates a company's objectives into quantifiable headquarters location criteria that compare alternate destinations with the ultimate goal of selecting the most balanced location. Assuming that headquarters relocation will improve performance, the location screening should focus on quantifiable, geographically-variable performance factors - not necessarily cost metrics - unless locating a divisional or regional headquarters. These factors can be grouped based on overall project objectives and might look like this:
Measures of Access and Connectivity
The best proxies for connectivity are usually airport status and flight offerings, including
• Proximity to a major hub airport
• Number of non-stop flights to key destinations
• Ability to perform one-day "turnaround"
Global headquarters can almost never afford to be far from a major hub. The number of available non-stop flights usually correlates with hub status, according to the Federal Aviation Administration (FAA).
Measures of Attractiveness
These are the so-called "quality of life" variables. The challenge is to base evaluation on as many objective factors as possible. A number of strong indicators include:
• Cost of living
• Crime rate
• Public school quality
• Arts and recreational amenities
• Business climate
Business climate is the only non-quality of life measure here, but it can be an important consideration, particularly for headquarters in highly-regulated or highly-taxed industries.
Measures of Depth
These may be the most important performance measures as they relate directly to your ability to secure specialized headquarters talent:
• Proximity to Fortune 1000 headquarters
• Size and share of labor market by key managerial occupations
• Educational attainment of work force
• Presence of "Big Four" and other audit and consulting firms
• Availability of corporate law firms
• Proximity to top tier advertising agencies
Headquarters tend to cluster, creating a strong labor pool. However, some companies prefer to be apart, particularly if a key competitor dominates a specific market.
Operating costs more greatly affect divisional and regional headquarters location strategies. As wages can comprise 70 percent of overhead, the focus is often on managerial positions, as most levels above that are compensated on a national basis, which would not uncover significant geographic differences.
Availability of economic development incentives is another important cost factor. States and localities use incentives as a pricing strategy because they can make a difference in a project's financial feasibility at the margin. Some destinations target headquarters with specific incentive programs. Others will use a general approach focused on job creation, as opposed to capital investment. Cash grants, or programs providing monetizable tax credits, are typically considered to be the most valuable.
Finding the right destination for your headquarters means starting with a vision. Then determine your business's driving factors and prioritize your objectives. Before you start thinking about locations, know what you want to achieve. Do you need to relocate critical talent? How easy will it be to migrate to a new location? Will future markets be the same as those you have now? These all affect your headquarters location decision-making process and the alternatives you should consider. Place all factors into perspective, and don't be lured by an attractive environment if you suspect it will not meet your broad performance requirements.
You should take equal care to organize and manage this process. Be certain to maintain thorough documentation, as a logical, defensible decision-making methodology is the best way to ensure consensus within your organization. And do not forget that location strategy, planning, and implementation are distinct but equally important phases. Each requires that you procure appropriate internal and external resources (real estate, human resources, information technology, communications, government relations) for management, information, communications, and approvals.