Workforce in Tier II and Tier III Cities
By Tim Myllykangas and Mitch Jacoby
Many companies are rethinking site selection strategy, a trend that impacts cities and businesses globally. Companies are looking at rebalancing, consolidating, or reducing headcount for a growing list of job titles in larger Tier I cities. They are shifting their focus towards smaller cities such as Detroit, Nashville, and even Dubuque, IA, where IBM announced last year they will relocate and consolidate over 1,400 people.
Companies have historically established locations in large cities to increase brand recognition and gain access to abundant labor. Once-preferred Tier I cities are no longer viewed as the only ones worth considering, even for jobs requiring 4-year degrees and industry experience. Why?
By growing in smaller Tier II and Tier III locations, companies can lower operating costs and improve labor quality. Some small community characteristics are:
-Lower sector saturation
-Stronger recruitment
-Reduced turnover
-Decreased labor costs
-Lower business operating costs
Sound too good to be true? Lower labor costs coupled with higher quality is a reality in small communities. Given the growing list of diverse project types (i.e. headquarters, tech support, R&D, IT, customer support, manufacturing, distribution) in smaller cities, companies are frequently amazed at the improved workforce performance and operational savings, as well as impressive economic incentive packages that are available in Tier II and Tier III cities.
In the past, herd mentality drove site selection. The thought was, if the competition and more than 1 million people are already there, then the workforce must be ample, good quality, and priced at market. This is not the case across all job titles and functions. Businesses should identify ways to improve productivity and lower operating costs while maintaining some presence in larger metros, but not all job functions must remain there. Pigeonholed for only low-end or “back-office” functions, small cities are now able to fill those needs, providing equally talented and loyal workforces for higher-level jobs.
How can one argue with large city success? For years, companies grew in existing locations. The problem is that they haven’t measured performance, i.e. wage, recruitment, turnover, and saturation. Consequently, few realize that they’ve run out of cost-effective labor. For example, cities like Phoenix or Orlando, once thought ideal for customer support, are no longer optimal since competitors entered the market, expanded, and pushed sector saturation levels upward. If companies were keeping an eye on these saturation levels, they would be looking for new, less saturated areas which could save from 20%-30% on current labor and operating costs.
Other reasons companies cite for relocating certain jobs to smaller communities include:
-Tele-commuting
-High-speed internet availability
-Business continuity
-Disaster recovery
-Time zone coverage
-Expanded business hours
-Commute time
-Footprint optimization
There also exists a significant difference in the mindset of small city employees versus large city counterparts. A higher percentage of small city workers value jobs more than their Tier I peers since fewer employment alternatives exist. Small city workers choose to stay for the “quality of life,” and commute times can be 50% shorter than in large cities. These workers value stability and longer-term employment, thereby reducing turnover by 20-50% in many cases.
To be competitive, companies must look more objectively at their workforce options and consider a small city business strategy. New jobs are more meaningful to small cities. They are far more motivated to compete for all job types and do whatever is necessary to win new jobs. They typically provide more, larger incentives than large cities. Moreover, Tier II and Tier III cities often have more available cost-effective real estate.
Ultimately, not every project works in smaller cities, but those that do benefit from improved workforce quality, reduced operating cost and added benefits like cheaper real estate and higher incentives. To reduce costs and improve profitability, companies must consider:
1. Bottom line relocation impact?
2. Job functions for possible relocation/consolidation?
3. Potential labor cost savings?
4. What are competitors doing to improve labor costs and profitability?
5. How are we measuring performance in our location selection process?
6. What incentives are we leaving on the table?
Where are you or your clients looking to expand or relocate?
Tags: sector saturation, Site Selection, tier II cities, tier III cities
This entry was posted on Wednesday, May 19th, 2010 at 9:00 am and is filed under Workforce & Location Planning. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.