Location strategy is a significant component of an organization’s broader corporate strategy. Decisions concerning the choice of location tend to be long-term, global, multidimensional and carry high levels of financial commitment and risk. While the goal of leveraging location as a competitive advantage is not a new concept, the site selection process itself has become increasingly complex over time.
Emerging factors such as globalization, a shortage of specialized labor, evolving environmental regulations, the need to be closer to customers and suppliers and changing incentives have expanded the realm of crucial considerations. Data proliferation doesn’t simplify the site selection process. Instead, it demands a higher degree of objectivity, analytics and experience to make the right location decision.
While it’s worthwhile to understand that the site selection process is a substantial undertaking, it’s not an impossible task; leaders who educate themselves on the key issues are able to avoid common obstacles and pitfalls. Here are 5 questions all leaders should ask when launching a location strategy initiative:
1. DO WE HAVE THE RIGHT TEAM?
Tackling a location strategy project effectively requires an experienced and cross-functional team with specific technical skills and diverse subject-matter expertise. The team may vary depending on the type of real estate asset an organization seeks to build or relocate. A corporate headquarters may have a slightly different mix of team members than a manufacturing plant or an R&D center. In general, a well-rounded team will consist of top talent from human resources, cost accounting, finance, supply chain/logistics, tax, engineering, real estate/construction and representation from the business units most impacted by the project. Some organizations may also choose to augment their teams with external consultants to help steer the process, provide objectivity and experience and deliver the rigorous data analysis required for these studies. Assembling the right team upon project kickoff enables an organization to gain awareness and understand all the factors and implications involved in a decision.
“It’s important that the site selection team and executive sponsor are completely aligned on critical location factors and their relative weighting as this sets the direction for the data collection and analysis moving forward.”
In addition to the right experts, enterprise-level decisions involve C-Suite engagement and consensus. Some teams fail to involve top leadership until the final stages of a site selection study, which could result in a lack of agreement, stalled decisions and additional work. Selecting an executive sponsor and a steering committee early helps promote buy-in and ensures that top leadership is well aware of the hypotheses, approaches and assumptions that ultimately influence the business case. The location choice can have a profound impact on an organization’s financial results, culture, image and talent strategy. Ensuring the team builds consensus helps to enlist executive leaders as champions for the decision—an essential precursor to an effective transition to the new site.
2. ARE WE PRIORITIZING THE RIGHT THINGS?
Take, for example, a family that’s in the market for a new home. Their search criteria will be unique to the family’s specific needs, timeline and priorities. Some factors will be easily quantifiable, such as commute times and proximity to schools, while other factors, such as the architectural style of the home, may be more qualitative. Each search for a new home has its own unique set of considerations; this is also 3 true of the corporate site selection process.
When an organization decides to launch a site selection initiative, whether for a new operation or relocation, the site selection team should determine the project’s key success factors using a hypothesis-based approach. It’s important that the site selection team and executive sponsor are completely aligned on these critical location factors (CLFs) and their relative weighting as this sets the direction for the data collection and analysis moving forward.
Site selection teams should think broadly and exhaustively about all the factors and issues that may contribute to the success of the operation. Teams are often tempted to limit these factors to data that are readily available and quantifiable, such as published average labor costs or tax rates. However, relying on limited data may increase the likelihood that the search will result in a suboptimal location outcome, as a successful ramp-up and cost-effective, long-term operation are dependent upon a myriad of variables that should be assessed among candidate locations.
In a similar attempt to gain speed and efficiency, teams may also eliminate regions and narrow the search area too rapidly prior to vetting all the location options. To help reduce rash decisions, the site selection team should implement an agreed-upon process for eliminating locations. This will help teams objectively determine if an option is viable. For example, there will be instances where a candidate location exhibits fairly equal advantages and disadvantages. It’s often best to retain these borderline options, as the subsequent and deeper levels of analysis may result in new insights and alter the relative ranking of locations.
When building the initial set of criteria, teams tend to overemphasize economic development incentives too early and treat these benefits as a primary driver in the overall analysis. State and municipal incentives, while perhaps an important tie-breaker between finalist communities, can’t make up for a lack of skilled talent, operating risks, access to customers and suppliers and other vital needs. CEOs should ensure that the team isn’t too fixated on incentives at the cost of operating-cost advantages, issue-free development and long-term access to talent.
A site selection study shouldn’t take place in a silo and should be a logical extension of an organization’s overarching corporate strategy. There should be complete transparency about what is driving the location strategy—is it a cost-reduction initiative, market expansion or an opportunity to diversify risk? A successful site selection project should be compatible with the long-term vision of the organization, and the holistic set of CLFs should steer the study in the right direction.
3. DO WE WANT OUR PROJECT TO REMAIN CONFIDENTIAL?
Most organizations have several good reasons to keep the site selection process under wraps. Analysts, media, vendors, employees, competitors, government authorities and other players tend to seize on the news of a corporate location search and can introduce a high level of noise and distraction, both for the project team and executive leadership. However, a few recent mega-projects have made the conscious choice to launch their site searches with public announcements, perhaps seeking to leverage media attention to bring additional gravitas to their project during negotiations.
The question of confidentiality is an issue leaders should confront early on, as it merits reflection and debate. CEOs should confront the potential benefits and drawbacks of “going public” with a major site selection: What could be gained and lost? How will each constituency react? Here’s a brief overview of the main trade-offs:
POTENTIAL PROS OF GOING PUBLIC
POTENTIAL CONS OF GOING PUBLIC
- Encourages communities to self-select in or out of the process
- Appeases a wide array of political influencers
- Provides the appearance of open competition
- Accelerates the introduction of incentives into the process
4. IS OUR PROCESS BRINGING THE RIGHT LEVEL OF RIGOR?
- Increases complexity and workload for the team (i.e. more submissions)
- Introduces submissions bias early in the process
- Produces a perception of “auctioning” the project
- Affects the morale of existing employees
- Erodes relationship with eliminated locations
- Results in unnecessary responses and effort from locations that will not win
The data leveraged in a site selection study drives the quality of the final outcome. Low-quality data sources and poor data manipulation can lead to a suboptimal decision. Many teams believe the prevalence of online information will simplify the research and analysis phase but fail to understand that not all data is of equal relevance or accuracy.
As suggested earlier, a hypothesis-based approach helps to outline the data required to effectively assess location options. Once a team is focused on the right success factors, the subsequent steps of knowing what data sources to use and what boundaries or thresholds to set are the next milestones.
Common labor data sources include the Bureau of Labor Statistics, the U.S. Census and other state or government data providers. While this data can be useful as a high-level indicator of talent presence, the team should understand the assumptions used to generate this data, as they may have an impact on the site selection outcomes. There are numerous other labor data sources, including social media sources, for example, that can offer a deeper and more useful set of information about an area’s talent market and skill availability. Regardless of where the data comes from, conducting a data quality test and questioning reliability, frequency of collection and the age of the data is a necessary starting point.
Once reliable data is collected, it should be properly applied to yield strong results. Establishing boundary conditions and thresholds for retaining and eliminating locations is a complex task, as even the slightest adjustments can result in completely different outcomes. One way to arrive at realistic boundary conditions is through competitive benchmarking. This involves understanding where and how the organization’s most successful competitors are operating and what variables may be influencing their success. Another common approach is leveraging team members with deeper experiences in site selection to provide guidance on setting thresholds and boundaries.
Not all data will be neatly packaged and ready for use. Sometimes additional manipulation is required to make a data set more useful and aligned to the CLFs. Site selection teams should go beyond the basics to develop a deeper understanding of the options on the table. For example, in a labor market analysis, the obvious variables are labor cost and availability. However, many other factors, such as turnover, demographics, commuting patterns and activity from competitors, can impact the labor market in a given location. Teams should deepen their knowledge around core topics such as labor market supply and demand, tax implications, infrastructure and specific site conditions to avoid surprises and mitigate risk.
In addition, the site selection team should not limit their efforts to mining only published data; conducting primary research to eliminate research gaps is recommended to help gain a deeper understanding of the top three to five communities. This should include interviews with employers and recruiting agencies as well as detailed site and community inspections to provide an additional layer of due diligence and collect insights that are tailored to the organization’s priorities.
Throughout this process, all assumptions and data choices should be clearly documented so executive sponsors, the board and other stakeholders can easily review the methodology and decisions that led to the final shortlist and recommendation.
5. HOW ARE WE MAINTAINING COMPETITION FOR OUR INVESTMENT?
Proper site selection can only be achieved when competition among locations and real estate options persists throughout the process. Once a location or property owner believes that they are the winner, leverage in negotiations erodes quickly. Maintaining competition for an investment and job creation project will be a key determinant in the negotiated outcome for both incentives and real estate concessions.
There are a few leading practices that site selection teams should follow to help drive the most effective location decision:
1. Keep the external messaging consistent—the other side will likely be trying to ascertain its positioning and where the site selection team’s preference lies. Consistency in messaging is critical among all parties, including any external advisers who may unknowingly reveal which location is preferred.
2. Don’t let real estate negotiations get ahead of incentives negotiations, as this is one of the easiest ways to lose leverage.
3. Ensure that a viable and suitable backup alternative (community and site) is available for the project at all times and is fully vetted. The leading practice involves having two top choices through the incentives and real estate negotiations process.
REALIZING OPERATING ADVANTAGES FOR YEARS TO COME
Few corporate decisions have as far-reaching impact as the choice of operating locations. Site selection directly affects an organization’s P&L and balance sheet, as well as its ability to attract talent, serve customers, mitigate risks and enjoy structural cost advantages over its competitors. The importance of the CEO’s oversight of the location process can’t be overstated. With the numerous strategic demands on CEOs, only a small percentage are likely to choose to be directly involved in each location decision. For the rest, asking the right questions to challenge the site selection team can help improve the chances that the company will make an optimal deployment decision that will yield operating advantages for years to come.