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.”

Circumventing talent scarcity

CEOs are increasingly concerned over the quality of talent, and, in our recent poll, many suggested they fear a much smaller qualified talent pool outside of large metro areas. But Matherly says employers in his region can hire top-tier talent at a fraction of the cost without sacrificing quality. He says the level of bachelor’s degree or higher attainment far exceeds the U.S. average, at 36.1 percent vs 31.8 percent.

“We have ten Fortune 1000 companies headquartered here and several major divisional headquarters. We are a net migrater of talent, particularly from Washington, DC; New York, NY; Baltimore, MD; Charlottesville, VA; and Hampton Roads, VA,” he explains. “Business leadership has helped create a multidimensional ecosystem for developing education and training strategies to meet the current and emerging needs of companies operating in the region.”

Brian Brown, corporate COO and general counsel at AvePoint, an independent software vendor and manufacturer headquartered in Jersey City, New Jersey, shares his experience: “We have top-tier talent who made the decision to forego major market living and the sticker price that comes with that lifestyle. As one of the largest technology employers in the area, AvePoint happens to be in an attractive industry that exudes growth and learning opportunities. Even though salaries are 10 to 20 percent less than average salaries nationally, working and living in Richmond is quite affordable, with its Southern charm and proximity to Northern cities that our workforce has chosen to designate as nice getaway locations.”

Research indeed shows that mid-sized metropolitan areas offer companies the ability to easily recruit equitable talent at a fraction of the cost. In Richmond, salaries are, on average, 20 percent less than major metros in the Northeast and real estate costs, nearly one-third. What’s more, the majority of young workers, who typically earn lower wages, at least on a learning curve, often can’t afford to live in large, urban cities. They are, therefore, building a qualified and motivated talent pool that employers who turn a blind eye to the lower-cost market strategy may not be able to tap into.

“We have allowed some associates to work remotely and to relocate to lower cost markets,” commented the president of an upper mid-sized manufacturing company in Ohio. “We are already spread out among several locations and don’t want to lose the talent where they currently live and want to stay.”

And with the rise of telecommuting and flexible working policies, the move towards a more modern, mobile work environment may soon permeate the corporate world, allowing both employers and employees to keep costs at a minimum while enjoying a greater quality of life. “Companies should always have a diverse team and footprint,” observed the divisional president of a large industrial manufacturing corporation. “Technology and work cultures make it too easy not to.”

Matherly says his area is gaining 19,600 new residents annually with an average age of 26, and McKesson Medical-Surgical President, Stanton McComb, says his company has benefitted from this young and diverse talent pool. “It has been a strategic advantage for us.”

 

Read more: Millennials Often Prioritize Place Over Position

" 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.."