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Finding a Strategic Location for Shared Services Operations

In today's tough economic times, companies considering operational innovations can reduce their uncertainty with a solid risk management strategy.

April 2012
A Shared Service Operation (SSO) is comprised of single or multiple back office support centralized in one geographic location. This operation is managed as a "business within a business" that defines prices and market services related to finance, HR, IT, and supply chain to geographically disperse business units within a country, region, or around the globe.

When the decision is made to embark on the shared services journey, the facility location question will present itself quickly in the minds of stakeholders and the SSO leader. Given typical project drivers such as reducing costs and improving service levels, companies often cannot justify locating near headquarters in metropolitan cities, but also have to exercise caution in moving too far out where labor may be scarce. As an added layer of complexity, companies are beginning to develop enterprise shared services models that provide services to all global locations from a handful of strategically placed hubs.

We have found that making a final selection on a city (or cities) drums up more emotion among stakeholders than critical analytical thought. For that reason, it is important that this be taken account in a site selection methodology such as the one depicted in Chart 1.

Stakeholder Ground Rules

The first three steps noted in Chart 1 focus on identifying who really has a stake in the location decision, as this is often unclear from the offset and can be thinned down. Agreement upon the location criteria followed by a democratic survey of the relative importance of each of the criteria gives all stakeholders an equal say in the factors that influence the location. Key questions such as those that follow can be used to "thin down" a large list of self-proclaimed stakeholders:

  • Do they have responsibility for the services being delivered?

  • Could the location decision significantly impact their operations?

  • Will they need to move to this location or visit frequently?

Ground rules need to be set at the onset of this assessment. Do all stakeholders share an equal vote? Do any have veto power? Can the results be appealed/reviewed once they have been compiled? - and so forth. Once these rules are in place, a manual or electronic survey can be administered requesting prioritization of important location criteria such as:

  • Cost: labor, real-estate, facilities, taxes, economic incentives

  • Labor supply: schools, businesses, languages, turnover

  • Infrastructure: power, water, telecom, natural disaster probability

  • Geopolitical: political, economic, crime

  • Cultural: similarity/difference from regional locations

  • Logistics: travel from key locations, travel from neighboring business units

  • Other: ease of doing business index

Data Collection and Analysis
Subsequent steps 4-6 in the assessment are much more quantifiable. Candidate cities are brainstormed and "non-starters" are weeded out. Research on criteria for each of the cities can be collected from a wide variety of open source data such as city investment agencies, World Bank website, political stability indices, natural disaster indices, etc. Each of the cities can be normalized on a scale of 1-100 to give key stakeholders an easy visual of the relative location on the criteria continuum. Results of key stakeholder criteria weighting (Chart 2) can now be contrasted with the relative score of each city for the candidate locations. This will force the most logical city candidates to bubble up and the cities that do not meet stakeholder criteria to fall to the bottom.

Prepare for the data to be challenged! The debates will start when stakeholders witness their city falling out of the top three candidates, thus making them long-shot contenders. New criteria will be developed, requests for the data sources will be made, and new city candidates will emerge. The project leader must be prepared to defend the data sources and fall back on the initial project guidelines that were agreed upon at the project onset.

Economic Incentives
It is important that economic incentives be considered in the cost criteria for this study. Most cities have a government-funded agency that has the sole mission of attracting business to their city. This not only makes them a valuable source of data for their city, but can also elevate their city higher in ranking based upon economic incentives that are sometimes sizeable. This often comes in the form of real estate offers, tax incentives, technology and training grants, and many other creative packages. It is important to secure the offer in writing before making final decisions.

Our firm encountered this real scenario in the selection of Santiago, Chile, as an SSO site shortly before the third-largest earthquake in history shook Valparaiso, one hour to the west of Santiago. Grants that had been secured in Santiago quickly shifted to rebuild the city of Valparaiso. Though Santiago was still selected, the economic grants in training and technology were significantly reduced. This also led to some discussion of locating in Valparaiso to take advantage of much more significant grants.

Site Visits

At this point, we likely have three to five cities that have survived the scrutiny and challenges of the stakeholders. It is likely that all of the final contestants have very good matches with the stakeholder criteria rankings and that all would be viable locations. The difference between the score rankings is likely minimal, and it would not be prudent to make a final decision based upon the data alone any longer. So far, this methodology has only accounted for historical city data that may or may not hold 3-5 years into the future. This is where site visits become a viable tie-breaking mechanism.

Site visits can be arranged through peer networks; however it is likely that a local city investment agency can arrange a much more productive visit to the city that is combined with a few shared services sites. These tours frequently take the shape of a city tour, followed by a hosted presentation of local statistics that might include 3-5 year projections. It is important to come prepared to these visits and ask very direct questions to the investment agency about future projections and very direct questions to the shared services leadership about their experience locating here. We have found that the relationship between shared services tours and city investment agencies is informal and unbiased.

The investment agencies frequently offer post-decision valuable integration assistance in exchange for an informal agreement to host future candidate companies that are evaluating their city. Meetings with shared services leaders prove to be very valuable in sorting through the data that landed you on the site visit. These people have lived through a buildout and are now living through ongoing operational challenges. Questions can be asked that transcend the analysis and easily break ties between cities, such as:
  • What are the specific tax and regulatory benefit opportunities?

  • What shared services turnover rates have you experienced?

  • Describe your recruiting and retention challenges.

  • Describe your experience with the language capability.

  • Are there specific issues with labor (turnover rates, retention rates, performance, etc.)?

  • What has been your experience with local suppliers/vendors (particularly technology)?

  • Are there logistical challenges (e.g., mail system, electricity, commute, etc.)?

  • What has been your experience complying with local government (tax, labor laws, etc.)?

  • What is the worker culture/attitude toward change?

  • Why did you select this location?

  • What would you have done differently?

In Sum

A site selection can be one of the more challenging steps in a shared services design and implementation. We have found that making this decision earlier versus later is beneficial, primarily to avoid costly delays in the implementation once stakeholders are aligned on the design concept and business case. It is also difficult to create an accurate business case without knowledge of the SSO location. Business cases should account for city-specific costs such as relocation, hiring, training, economic incentives, technology, and vendor costs. A non-specific site location business case will miss many of these costs and benefits that will certainly materialize in implementation.

Our team has been able to help companies through this methodology in as little as two to three months before final site selection. Meanwhile, the company can simultaneously engage in developing the shared services operations scope of services and design. We have found the number one killer of shared services projects is related to lengthy stalls and loss of momentum while sensitive issues are debated at the executive levels. A well thought out site location methodology that accounts for political sensitivity, hard city data, economic incentives, and face-to-face site visits will ensure that the implementation team can hit the ground running with a known location when the firing pistol sounds.

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