Putting the Location Decision into a Business Context

The view of the best location for a business, or for one of its various functions, can vary widely depending upon the seat in which one sits. A CEO is likely to focus on macro factors that significantly impact the corporate bottom line. All the individuals involved with operating cost structure and market positioning over an extended period of time usually provide their prism for view of a location's suitability. A corporate real estate executive charged with keeping real estate and facility costs down may focus more intently on the costs tied directly to a specific location and the terms of the real estate deal. And real estate services providers often evaluate a site or location based on the economic efficiency of a deal. None of these views is wrong, but each is typically incomplete. A process that focuses a company on incorporating all of these considerations in a strategic business context will deliver the best location for conducting a specific business function(s). A suitable site-specific location can then be determined.

Strategic context is essential to success.
Business location implies a much broader, more encompassing view of place. A "business" location - versus a "site" location - incorporates both quantitative and qualitative factors associated with a specific business, and it must be evaluated in the context of its ability to help achieve overall business goals. Depending upon the actual business functions that will occur at a specific location, the appropriate weighting of the various attributes typically becomes an exercise of assembling all of the essential business factors and considering them in the context of meeting overall business goals.

In our business location services practice, our initial focus with any client is to gain as complete an understanding as possible of a company's strategic context for evaluating a suitable market and site. While there are numerous questions, focusing on those key drivers of future business success should remain the focus:

• Are the activities to occur here considered core to the company's ongoing business operations?
• Is this a new growth area or target market for future business?
• What are the key factors to success of the operations that will be conducted here?
• Are they people-driven (i.e., access to specific kinds of labor or key retail demographics)?
• Are logistic attributes most important?
• How long does the company expect to operate here?
• Does the firm have other operations nearby that could be considered for consolidation with a potential new site?
• Are there competitive considerations relative to any potential locations?
• Is proximity to key resources, vendors, or distribution channels a key requisite?

The answers to these and other key business questions allow the development of an evaluation process that will capture and appropriately weight and explore the various business and site elements that will impact the overall success of a particular location for a user. Putting markets and sites through a rigorous phased process allows all parties involved - from the various business groups impacted by a decision to the service providers charged with procuring a site - to understand the full range of key factors driving a business' location decision.

A roadmap is key to knowing where to go.
A rigorous process for vetting potential locations provides an analytic roadmap to demonstrate to a company and its various internal interest groups - e.g., operations, HR, finance - to agree upon and commit to a common set of location attributes that will drive the process forward. The phases outlined below provide a screening process for evaluating the suitability of a specific site for its intended business purposes and strategic objectives.

Phase 1 - Develops location strategy from business strategy. Preliminary cost profile is used to determine relative emphasis on key qualitative and quantitative business criteria:
    • Labor
    • Operational requirements
    • Operating costs
    • Quality of life/business
    • Operating environment
    • Other
Phase 2 - A screening process based on weighted location attributes is used to assess an initial list of communities based on threshold company requirements:
    • Labor market attributes
    • Cost structure
    • Operating environment
    • Other threshold attributes
This yields a narrowed list of potentially suitable markets for detailed analysis.
Phase 3 - Prepares geo-variable cost comparisons reflecting incremental cash flow analyses of potential locations. The resulting trade-off analysis weighs qualitative factors versus geo-variable operating costs and creates a short list of communities or markets.
Phase 4 - There is no substitute for in-market corroboration of primary and secondary due diligence data. Ultimately, field visits yield real-time information and inform key decision-makers of the merits of the attributes they have most heavily weighted during their process. The visits also provide the forum for comparing the merits of specific sites and transaction terms in the markets:
    • Potential site/building options
    • Locational attributes
    • Incentive possibilities
    • Human resource issues
    • Labor market considerations
    • Logistics infrastructure
Phase 5 - Prioritizes and finalizes the negotiation process relative to the final specific locations selected. This ensures the preservation of viable alternatives in the event that one should fall through.

This five-phase process should take a company from defining for itself the key business success attributes, through translation to location attributes and the vetting of potential markets and locations against these, to yield an optimal place and site to do business. Attributes and their weightings vary across business types, but the analytic process will provide a roadmap and discipline to ensure a successful outcome.

Make a qualitative-quantitative trade-off.
While many companies refer to the process they seek as site selection, most consider the same qualitative/quantitative give and take when ultimately selecting the "right site." However, many site selection efforts fall short of delivering the "best place to do business" because they do not appropriately consider and weight the total long-term operating costs of selecting one site over another.

Real estate service providers, developers, and economic development professionals often find themselves confused by the final location decisions made by companies. The consternation often stems from not being privy to the complete view of the company or the "prism" through which it ultimately views a location or a site. Companies are sometimes accused of not making the best deal or leaving money on the table. However, it is not uncommon for our business location clients to spend more time discussing labor and regulatory environments, demographic trends, and competitive pressures when comparing one market against another. It is also not uncommon for companies to select a higher-cost real estate deal based on the potential lower operating cost in another business area, or the need to preserve flexibility of occupancy in a market or region. Other factors such as community support and long-term prospects of an area for business growth rarely get communicated back to local market professionals when final decisions are made.

Industries that rely heavily on specific resources, commodities, or site-specific attributes like port access rightly factor these necessities into their location decisions. Businesses considering how to maximize retail exposure have different locational considerations. Successful call center locations are highly reliant upon a relatively low-cost labor force in the immediate area. And determining the best place for a headquarters location presents other considerations including community assimilation, impact on corporate brand, etc.

While each type of business may have very different considerations, they all must ultimately weigh the benefits of qualitative attributes against those more easily quantifiable cost-related attributes tied to overall cost structures of operating in a particular business location. The chart on page 36 illustrates the decision options in a comparative matrix that allows a company to visually consider the differences presented by various location options, providing a framework for discussion by a company and its various stakeholders.

Form follows function.
The sine qua non view of the architect states that form should follow function, and thus it is with selecting the best site for a business activity. An optimal physical site, in the absence of a compelling business case, will rightfully get short shrift during the location analysis process. But when satisfactory business locations or markets have been determined, physical sites should be scrutinized for their ability to support the business requirements as effectively and efficiently as possible. Site selection implies identifying the best physical spot for the conduct of a specific business function. A disconnect exists between characteristics of the optimal site, or the best deal, and the holistic mindset that may decline the most efficient real estate deal in favor of a site that will provide either a lower cost operating structure or one that will minimize the occupancy or move-in risks.

When approaching the process of business location selection, companies that spend time at the beginning of their search determining and prioritizing those business attributes that are most aligned with their own key business success factors will use an appropriate frame of reference in which to evaluate the appropriateness of one location or market versus another. When the place or market has been identified, that is when true site selection begins. As the saying goes, "There is more than one way to skin a cat." So too there is generally more than one location option in a market(s) that will deliver the specific locational and physical site attributes sought. Each of these alternatives will usually come at slightly differing deal terms. It is at this point that "selecting the best site" appropriately becomes the task at hand.

Remember why you're there in the first place.
The ultimate decision of which site will best fill a company's specific requirements must be the result of first considering the best place for the company to perform a specific function. Unless the strategic context for why the company chooses to be there in the first place is incorporated into the site selection process, the final decision cannot effectively satisfy the location attributes that will lead to business success. Understanding this view, a company will find itself in a position to approach site selection from the business location perspective first; then the best physical site for the job will follow.