Expense Management: The Case for the Middle Office Relocation

67 percent of CEOs said they have never considered splitting off a portion of their professional jobs from their existing headquarters to a lower-cost market.

For many companies, choosing the right location, in proximity of their business’s ecosystem, is a top priority and a primary driver of revenue. It therefore comes as no surprise that when evaluating different expense management strategies, the notion of moving a portion of their employees to a lower-cost market doesn’t typically top the list of considerations.

A study of 283 CEOs conducted in May by Chief Executive Group reaffirms this theory, as two-thirds of respondents (67%) said they have never considered splitting off a portion of their professional jobs from their existing headquarters to a lower-cost market.

The exodus trend from high-priced markets is intensifying, however, particularly within the financial services industry, where AllianceBernstein, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan and Morgan Stanley are among those that have moved jobs out of expensive cities to lower-cost states.

In most cases, the company will choose to keep the front office undisturbed to ensure continuity and seamless access to client-facing staff, while the back office may be outsourced or automated. The middle office, however, where we find mid-level professional jobs like marketing, accounting and human resources, is one that typically does not require anchoring to corporate headquarters. Experts say it represents a core growth area of value-add corporate activities.

Relocating or setting up the middle office in a lower-cost market affords many financial benefits to both employers and employees. While the strategy may not be suitable for all companies — geographically decoupling operations is not always a prudent strategy for certain small firms — opting to relocate mid-level jobs to Richmond, Virginia, for instance, could save a Manhattan- or Washington, D.C.-based headquarters 15-20 percent annually.

Dennis Donovan, principal at Wadley Donovan Gutshaw Consulting Group: “It has been our experience that when companies redeploy business operations and achieve a 15% to 20% annual cost reduction, the financial payback (savings to recoup one-time costs) period is attractive (typically less than 3 years). This is before any incentives, which only enhance the business case.”

“Companies should always have a diverse team and footprint. Technology and work cultures make it too easy not to.”

Barry Matherly, president and CEO of Greater Richmond Partnership, says his area has been recognized as a very favorable location for growing a middle office. “Capital One, our region’s largest employer, has been operating this way for over a decade,” he remarks listing several other major employers who have made Richmond their home, including Brink’s, CarMax, Genworth Financial, McKesson Medical-Surgical, SunTrust Mortgage and Universal.

CoStar is one of those companies, and Senior Vice President Lisa Ruggles says a number of their employees were in fact excited about the opportunity to relocate to Richmond from Washington, D.C. “They discovered that they were able to afford a larger, nicer apartment or purchase a house without compromising on quality of life,” she says. “Richmond has an amazing outdoor scene, and many of our employees bike or walk to work.”

The “sweet spot” location for the middle office is reported to be mid-sized metropolitan areas with established talent pools, strong alignments with regional universities to inject future talent and attractive quality of life and costs for residents.

At “K” Line America, Senior Vice President and Corporate Secretary David Mills says the company designated Virginia as the ideal location to centralize its business functions because of these aspects. “We were looking for a city that could reduce our operating costs, but at the same time offer a quality of life to entice some of our more tenured employees to relocate to the new site with us.”

Melanie C. Nolen :Melanie is research editor for Corporate Board Member and Chief Executive. She has more than ten years of experience writing for the corporate and financial industry across Canada and the United States. She is based in Nashville, Tennessee.