The recent decision by Amazon to split its second headquarters between New York and Virginia has focused broad attention on the process of how to find new corporate sites. Such decisions can have an enormous impact not just on costs, but also on the ease of attracting talent and the quality of the workforce. High-profile announcements have helped elevate the importance of these searches beyond a company’s real estate and finance functions to where they belong—with the executive leadership team.
Technology now enables a more distributed, flexible workforce. Factors such as the rapid pace of change in communications technology, the growth of high-quality customer interaction through mobile technology, and the importance of cybersecurity all mean that reliability and adaptability of talent tend to outweigh considerations of cost. Consequently, incentives are not necessarily material to the decision outside of some manufacturing location choices.
The risks and returns associated with location choice are immense, yet the rigor that senior managers employ in site selection is not always commensurate with its importance. The range of viable sites has increased significantly as a result of educational and infrastructural advances in emerging economies, now considered talent pools for the highest-level skills and occupations. High-quality labor market data and improvements in data analysis enable a more detailed assessment of the risk and returns of potential locations.
Still, despite a huge expansion of potential business locations, as well as more information available about them, many international firms remain conservative in their site choices, going to familiar locations or the top major business-friendly metropolitan areas. With greater choice comes greater complexity of decision-making, which may explain a reluctance to tackle the process. The scale of gains and losses from the optimal location choice are such that a thorough analysis is not only justified but essential.
This is underlined by the high cost of a poor decision. Some major outsourcing initiatives have had to be reversed due to an insufficient analysis of a location prior to site selection. For example, firms that located all of their IT services in India or all of their manufacturing in China based on unsophisticated cost-based analyses are now unwinding those decisions. A major tech company is currently considering moving its R&D function out of Southeast Asia, where China’s influence might compromise their intellectual property. Another firm is having to move its back-office operations, because corruption levels have made doing businesses too difficult.
There has been a huge improvement in the quantity and quality of data about location suitability. In particular, the volume of data on workforces is growing, and its quality and sophistication is improving and will continue to do so. The depth of detail varies internationally. For example, in many geographies, it is possible to specify with some precision the numbers of individuals with a particular qualification, as well as projected numbers for the near and medium term.
Which criteria drive location decisions? Key factors in location choice—irrespective of geography—can be grouped into four broad headings.
In another example, one can assess readiness to relocate and estimate the likely attrition if moving from one city to another. Job posting sources such as Indeed or job posting consolidators (e.g., Gartner’s TalentNeuron) generate insights on talent demand at a skill level, and LinkedIn subscription tools provide sophisticated search capabilities on available skills and certifications at the metropolitan level. Current cost and quality of living data are available from Mercer, as well as from other sources.
A comprehensive external labor market analysis reduces the uncertainty involved in location choice, especially when matched with internal labor market analysis. A location decision can be re-thought as a strategic investment, incorporating factors such as culture, growth opportunities and risk appetite, in addition to skills, availability and cost.
Ultimately, this process can result in profitable, albeit counterintuitive decisions: For example, deciding not to merge units, even though operating costs would be reduced, because that decision would help retain talent and optimize performance.
Which criteria drive location decisions? Key factors in location choice—irrespective of geography—can be grouped into four broad headings:
The first relates to the labor market. What data is available on the caliber of talent? This includes diversity, technical skills, business skills, languages spoken and assessment of likely trends, based on investments in education and training and attainment levels in education? What are the demographic trends in the region, including employment rates and age profiles?
Are other high-tech companies present in the area, and would proximity to competitors be a positive or negative force? An advantage is that there will be a local supply of people with relevant skills; disadvantages include the potential loss of people to rivals and competition for talent driving up wages.
A second factor is cost, including the direct costs of hiring staff and other business costs such as transport, power and telecommunications, among others. This includes not just salaries but total remuneration, general and wage inflation, taxation (both employment taxes and corporate rates), currency fluctuations and economic incentives.
The third factor is community, meaning nonlabor factors about the location such as weather, natural hazard risks, transportation options, personal security, cultural life and quality of the built and natural environment.
Finally, business climate is an important factor. Regulations regarding labor, taxes and import tariffs are an aspect of this, as are political stability, the ease or difficulty of setting up in business, the degree and nature of union power in the region, the quality of infrastructure and levels of corruption.
A similar mix of criteria will be common to most location decisions. But while it is typical, for example, that the biggest individual factors are cost and labor availability, the weighting of each factor will depend upon context. For example, if a particular specialty is scarce and high-level, such as in nuclear engineering, then the question of availability of people with specialist qualifications and experience will be a decisive factor—less so in the context of a more widely available and rapidly acquired skill, such as digital marketing.
The attention to location strategy that high-profile headquarters searches have created is a welcome change. Organizations need to create a disciplined process for site decisions that factor both their existing workforce and changes in labor markets. Objective facts need to be brought into the process to help make what are often emotionally charged decisions.
This article was originally published in Brink News.
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