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Area Development - Site Selection, Facility Planning and Workforce Development

Evaluating Labor Costs -in Good Times and in Bad

Has the loss of 5.7 million jobs had an impact on the consideration of labor costs in the site selection decision?

June/July 09
Reflecting on the Corporate Survey over the past decade, the responses have been very consistent. Keeping in mind that the past 10 years have seen extreme swings in business conditions, one could ask, "Should there be consistency in the location selection factors in good times and in bad?"

The Current Situation
Customarily, labor costs are a key factor in any location decision - but we are certainly not living in a customary economic climate. According to the U.S. Bureau of Labor Statistics, since the recession began in December 2007, 5.7 million jobs have been lost. U.S. industry has also seen worker concessions to a level never experienced in recent history; there also seems to be a ground swell of interest in relocating offshore employment back to domestic soil. So, with these major corrections in motion, has corporate America changed its viewpoint on the importance of labor costs - as a key selection factor?

The stark truth is that this single factor still provides the most potential cost savings of any single consideration in the selection process - for most, but not all, location decisions. The Corporate Survey respondents are resolute in placing a heavy weight on this factor as they continue to view the site selection decision as a long-term commitment, which will be required to perform equally well in both up and down business cycles.

However, the recent economic climate has indeed caused a change in certain labor markets, which will have a direct impact on labor costs. Although "labor costs" as a key factor in the site selection decision has not changed in the opinion of the respondents, what has changed is the need to evaluate the labor statistics in a re-focused manner. The need to collect "live data" has never been more important to determining a location.

Historical Contribution
Although some variations exist between even the most seasoned site selection professionals, the fundamental methods utilized in the site selection industry remain fairly common. Typical cost factors analyzed in most studies - which are "location sensitive" - are common to all facility types and include labor, occupancy, utilities, travel, freight, and taxes. Additionally, technology and equipment costs are a critical capital cost component - but typically will not vary by location. As illustrated in the accompanying chart, while labor costs are always important, the labor cost factor is critical to the success of some operations - but not very critical in others. For example, the location selection choices for a manufacturing or call center operation may show a wide range of labor costs (typically up to 35 percent) - and the choices for a headquarters or research and development operation may show only slight (5-10 percent) differences. At the risk of oversimplifying - manufacturing, distribution, warehousing, call centers, and back office operations are primarily cost-driven decisions, while headquarters, research and development, and specialized operations (like data centers) are driven by other more heavily weighted factors, such as labor quality, availability of intellectual capital, and location convenience. Additionally, in order to attract and retain certain skill sets, many organizations will utilize a one-tier wage approach for specialized operations - rather than adjusting the wage to fit the local compensation environment - thereby diluting the opportunity to realize labor cost savings for the entire population of certain specialized operations.

Data-Collection Methods
For those location decisions where labor cost savings are a primary driver, the ability to accurately measure the actual wage and benefit dimensions of a labor shed is extremely important. Published data, from even the most respected reporting sources, may be outdated - even on the first day of availability. Most critical location decisions will incorporate several methods of sourcing data - including the four key sources noted below - all with certain advantages and drawbacks.

1. Government reporting sources such as the Bureau of Labor Statistics (BLS), County Business Patterns, union election trends, U.S. Census data, and others provide a highly organized and systematic method of tracking and reporting historical information. This data is categorized into certain skill sets, industry classifications, and sorted by geographical region (state, county, and MSA.)

These reports provide meaningful information during the initial screening portion of a location selection process. From a macro standpoint, they are very useful when comparing one region/location to another. Data is defined, collected, and sorted in a similar fashion - by one objective reporting agency - thereby allowing for an "apples-to-apples" comparison.

2. Private employment agencies collect, sort, and report employment conditions in both industry and geo-specific categories. In most cases, finalized reports - even customized analyses - rely on aged data. Additionally, unless the same private company/agency was responsible for the data evaluations in all communities being evaluated (which would be unusual), it becomes very difficult, if not impossible, to bring about an "apples-to-apples" comparison.

3. Locally conducted surveys typically administered by public/private agencies involved with economic or community development activities are nonobjective and are produced to be utilized in promotional materials. The results of these findings are usually favorable to the specific locations being promoted and may contain significant data gaps in those areas that have not produced positive results for the local community. The time-tested method of using third-party independent analysis - while relying on nonobjective data - produces questionable results.

4. In-person real-time interviews, often referred to as "employer interviews," can provide the most current data regarding wages, benefits, and labor-management relations. Although it is sometimes difficult to arrange a meeting with existing employers (to request confidential information regarding their most recent experiences in recruiting and compensating employees), the initial introduction and resultant meetings can best be arranged through the regional or local economic development agencies. The agencies rely on the cooperation of the existing employers to serve as "community ambassadors" - as part of the effort to bring other employers into the region.

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