John M. Rhodes, Senior Principal, Moran, Stahl & Boyer, LLC (Apr/May 10)
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.