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Labor Costs: Generating Savings Through Lower Wages

Saving even $1 per hour on employee wages can translate into hundreds of thousands of dollars in savings each year for some companies. Given those statistics, it is no surprise that labor costs consistently rank as one of the top factors in site selection decisions.

November 2012
Labor costs tied for second with labor availability in Area Development’s 2011 Corporate Survey. An overwhelming majority of respondents (88.4 percent) rated both labor costs and the availability of skilled labor as “very important” or “important” in the site selection decision. Labor was second only to highway accessibility among the factors.

Both cost and availability of labor are very much intertwined. “Every year we see an increase in the importance and the priority that corporate America is putting on the labor piece of the list of site selection criteria,” says Mark Seeley, a senior managing director of the Labor Analytics Group at CBRE. When companies are looking to relocate or expand their locations, they want to know first and foremost what the available labor pool is, and what it’s going to cost, Seeley adds.

Reducing its labor costs was one of the main reasons that Cambridge Security Services Corp. decided to relocate its headquarters to New Jersey. The company wanted to build a new facility to house a state-of-the-art command center to manage its operations. The company has 800 to 900 full-time employees, many of whom are based in the field. Ultimately, the company selected Newark as the location for its new 10,000-square-foot headquarters, which will serve as the base of operations for about 65 office staff.

Newark offers an available and trainable work force. But, what tipped the scales in Newark’s favor is a city program that trains workers and also offers those pre-screened, trained applicants to employers in the city. “It is a phenomenal program, and it was one of the driving forces for us to come here to Newark,” says Ralph Martell, senior vice president at Cambridge Security.

Martell estimates that by utilizing the city’s resources, the firm is saving about 22 percent of its usual hiring expenses per employee. That cost associated with hiring new employees can represent significant dollars when adding up advertising fees, as well as the time and resources that go into screening and conducting background checks on applicants. “All of those costs are being saved. In addition to that, these people come to us pre-screened with a particular skill set that we are looking for,” says Martell.

Targeting Lower-Cost Locations
In today’s slow-growth economic environment, companies are under intense pressure to reduce costs and create efficiencies. “We have seen the most emphasis on labor costs and labor availability among those clients focused on the office side — back office, call centers, and IT centers,” says Seeley. “Those types of projects absolutely require labor as the number-one criterion.”

Because those types of operations are so employee-dense, the payroll typically makes up 70 to 80 percent of total operating costs. Labor is the leading criterion from both the cost and skill perspectives; finding the right skill set is going to drive the performance and productivity of those operations. Companies are looking to move non-essential functions out to lower cost tier-two and even tier-three cities, particularly in cases where the company headquarters is located in a city such as New York or San Francisco or Chicago, where operating costs are higher due to a higher cost of living and higher real estate costs.

Secondary and tertiary locations in the interior of the country often have an abundance of workers with the necessary job skills at a fraction of the cost. “So in those situations, I think cost is having a larger impact,” agrees Michael McDermott, a director at Newmark Grubb Knight Frank in Chicago. From the back office perspective, there is still a lot of movement into the interior of the country from both coasts, he notes.

Savings Can Add Up

As stated, even a slight reduction in the hourly wage can translate to huge savings for a company’s bottom line. “When you are talking about 70 to 80 percent of the overall pie, even just a $1 per hour difference in wages can add up to a significant impact in operating cost savings,” confirms Seeley. For example, if a company employs 500 people and can relocate to a market where labor costs average $1 per hour less per worker that translates into a $1 million annual savings for the company.

Certainly, cost savings vary from project to project and skill set to skill set. As an example, companies that relocate an operation from a very high-cost market to a lower-cost location can reduce labor costs by as much as 15 to 30 percent, notes Seeley.

Phoenix is an example of a city that has done a good job on capitalizing on its lower labor costs. The city is home to more than 200 call centers, and the city has been successful in attracting companies from around the country that are looking to relocate operations to get away from more arduous legislative challenges, as well as to take advantage of lower-cost workers. For instance, relocating a call center or back office operation to Phoenix from southern California is not going to produce the same savings as relocating from Manhattan, where costs are higher, but it will still generate double-digit savings for many firms, Seeley explains.

Seeing significant savings in hourly wages may not be enough to convince a company to pack up operations and move half way across the country. However, it is usually sufficient to grab a company’s attention and get them to “kick the tires” on alternative locations, notes McDermott. However, one thing that prevents companies from making a major move, even with the promise of significant labor savings, is fear of disruption. “Losing that already trained work force can be quite a disruptive event,” says McDermott.

Not every business can sustain the delays associated with a relocation and the time it may take to ramp back up to prior activity levels. “Although the numbers always look lucrative, I have seen a number of companies try to make it by either staying put or moving somewhere nearby that also offers somewhat lower costs,” McDermott concludes.

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