Archive for the ‘Workforce & Location Planning’ Category
|ROI for Workforce & Location Planning Projects
Wednesday, January 11th, 2012
By Tim Myllykangas, Principal
I was recently honored to have presented a workshop at the 2011 CFO Rising West Conference and Expo, which focused on “The Top 10 Strategic Challenges for the CFO.” Our workshop—Stay or Go?: Corporate Location Planning”—was well-received, with those in attendance interested in the variables that drive corporate location. As expected, they wanted to learn about the savings that can be realized when workforce and other performance benchmarks of an existing portfolio are measured and aligned with the business.
To reiterate what Workforce & Location Planning (W&LP) is all about, it is the first step in the corporate real estate cycle since it starts with a clean-slate perspective—i.e., it looks at the broader picture beyond the current real estate portfolio. Addressing what the C-Suite is most interested in, it focuses on ideal corporate locations based on workforce recruitment, retention, labor market saturation, competition, turnover, and salary levels.
But how can we demonstrate the value proposition, or return on investment, regarding W&LP and incentive fees? Actually, it is easy to do so.
Money-Saving Measures
In general, workforce and location planning specialists save companies money because:
-Labor cost reductions of 20%-40% per year are regularly achieved and easily measured.
-Labor cost reductions are typically 6-12 times that of real estate cost reductions.
-Labor performance indicators typically increase by 15%–25%.
-Turnover typically declines by 25%–35%, eliminating significant re-training costs.
-Incentives from municipalities generate savings through grants, abatements, discounts, etc.
-W&LP specialists measure sector saturation (the competition for and degree of utilization of the workforce) in the company’s current location(s) as well as in alternative locations. Sector saturation is the most important, yet least understood, factor in determining optimal locations. Since saturation data does not reside in any database or web site, it requires real-time primary research.
-Underemployment data is one of the top three workforce analysis factors, but this also does not reside in any database or web site. And most cities do not calculate it due to its complexity. Identifying which city has higher underemployment is actually more critical than identifying one that has a higher population or sector presence, and this will identify the city with lower labor costs, lower turnover and higher labor quality. Unemployment, a common data point used by companies, is not only an inaccurate measure of workforce availability but in some cases is an inverse indicator of work ethic. High unemployment, while thought to be a positive factor, often signals a lower work ethic, while low unemployment often signals a strong work ethic with the local workforce less willing to file for unemployment insurance and more likely to take a job that is below their skill level. And this is reflected in higher underemployment.
As a typical example of W&LP in action, consider our experience in identifying optimal labor markets for a 300-employee customer service center. The process resulted in higher labor quality and lower turnover, and over the five-year term of the lease, labor savings equaled $16 million, real estate savings was $3,200,000, and incentives added $500,000.
Labor Costs, Incentives, and Real Estate Cost
What if we were to extrapolate typical, minimum and average savings for a 500-employee, 60,000-square-foot facility? Consider the following projections:
Here are two ways to concisely summarize the numbers presented to the left:
-$1/SF/yr rent savings on 50,000 SF = $250,000 (5-year term)
-$1/hr labor savings on 250 jobs = $2,500,000 (5-year term, 50K SF)
Or…
-10% rent savings on 50,000 SF = $500,000 (5-year term, $20/SF rent)
-10% labor savings on 250 jobs = $6,250,000 (5-year term, $50K average salary, 50K SF)
Savings will vary according to individual circumstances, but the preceding examples give you an idea of what can be expected. It confirms that a properly planned workforce relocation, consolidation, and/or expansion can drive substantial savings in real estate and incentives, but the most significant savings is derived from reduced labor costs. As cost containment continues to be the mantra in the C-Suite, it makes sense to see how Workforce & Location Planning can improve the bottom line.
Tags: corporate real estate, cost savings, Site Selection
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Workforce & Location Planning: The First Step in the Real Estate Process
Wednesday, August 3rd, 2011
By Tim Myllykangas, Principal
Founder, Workforce & Location Planning
Earlier this year, when I was speaking at the CFO Rising conference, I asked those attending my session if they knew how Workforce & Location Planning (W&LP) could help them with their corporate location planning. More than 90% indicated they had never used a workforce planning consultant. But by the end of the session, many said they could definitely benefit from this service and wanted to learn more.
Indeed, it is important for C-Suite executives to be familiar with this offering as part of an integrated package of corporate real estate services. Accordingly, I thought this would be a good time to address what W&LP is all about and how it can meet your needs.
The Process
In a nutshell, W&LP is primarily about business and workforce strategy, not just real estate strategy.
Often, companies first examine their current portfolio and try to work within those parameters. This is a function of Real Estate Portfolio Strategic Planning, which is actually step 2 in a typical portfolio optimization process.
In a typical portfolio or multi-city project, W&LP is the first step in the process since it starts with a clean-slate perspective—i.e., it looks at the broader picture beyond the current real estate portfolio. Addressing what the C-Suite is typically most interested in upfront, it focuses on finding ideal corporate locations based on workforce recruitment, retention, labor market sector saturation, competition, turnover, and salary levels. In other words, W&LP is ensuring that the most valuable asset and largest expense—people—is driving the location decisions for existing and new locations. The goal is to create an optimized workforce footprint, whether that involves existing locations or not.
In addition to workforce, other non-real estate location factors we research, analyze, and compare include: power costs, power reliability, natural disaster risk assessment, and incentives.
The Pitfalls
Some companies think they can short-circuit the process by working with brokers or consultants who don’t specialize in W&LP. For example, they will pull labor costs from a web site and plug that into a cost-line analysis. This is a dangerous approach for several reasons:
-Companies need to take a “deep dive” into competition levels, recruitment, retention, turnover, etc. A slightly lower-wage city might actually have higher turnover, making total labor costs higher when re-training and recruitment costs are considered, or a lower-cost community may have an insufficient amount of labor.
-Our research has found that in many cities there is an inverse relationship between unemployment rates and workforce supply. In some cities, the higher the unemployment rate, the lower the available workforce, often due to a lower work ethic. In some cities with lower unemployment rates, there can be more available workforce. This is due to higher levels of under-employment, a factor that is far more indicative of the ability to recruit and retain than unemployment.
-Companies need to work with experts who can interpret the data collected from multiple sources and understand its limitations, where and how data is often over-averaged, especially if the source is a free web site. Without the benefit of more comprehensive, “real data,” companies often ill-advisedly eliminate cities that might potentially be great candidates, or they might keep poor choices on the short-list that should be eliminated.
The added value lies in analyzing and interpreting the data from many sources, then turning that into strategic, actionable recommendations.
Tags: corporate real estate, cost savings, location planning, Site Selection, unemployment
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Data Center Location Planning
Wednesday, May 25th, 2011
By Tim Myllykangas, Principal and Mitch Jacoby, Principal
Factors to consider when evaluating the optimal location vary by the type of facility. For customer service centers, labor is usually the most significant cost. For an industrial or logistics project, freight costs are the most important factor. But what are the key drivers and most significant savings opportunities in identifying an optimal location for a data center? Access to telecommunications fiber and availability of real estate are important, but the single most significant variable in selecting the optimal site for most data center projects is the cost of electricity.
Typical top drivers in determining an optimal data center location include:
-Power Rates: These can vary by state, county, municipality, utility district, industrial park, and incentive zone.
-Power Reliability: Using industry indices such as CAIDI (Customer Average Interruption Duration Index), SAIDI (System Average Interruption Duration Index), and SAIFI (System Average Interruption Frequency Index), significant differences in power outage frequency and duration can be identified in advance.
-Sales Tax Rates: In some cases, the most significant savings opportunity is through sales tax on technology line charges, as well as on construction and equipment costs.
-Natural Disaster Risk: Researching and comparing the historical frequency of occurrence for the eight major Declared Disaster categories can add or delete a location from the short-list, and can align with a company’s Business Continuity or Disaster Recovery Plan.
We recently worked with a Fortune 500 technology client that was seeking a new data center location, and planned to hire 200 people which would require a 400,000 SF building in the US. The company wanted to consider multiple options, on both the east and west coasts. Initially, 32 communities were identified for a long list that had competitive variables, with the most significant driver being the cost of electricity. The client requested that a current location be considered, but it soon became clear that power costs for the current location were two to three times higher than those for any of the communities on the long list. A short list of six sites was identified from the initial long list, until the finalist community was selected.
Through research and comprehensive analysis, the company identified 10-year savings opportunities as noted below:
Power: $163,000,000
Labor: $ 14,000,000
Incentives: $ 5,800,000
Real Estate: $ 2,600,000
Total $185,400,000
Real estate cost savings were minimal, as any of the alternatives would involve a build-to-suit and the differences in construction and land purchase costs across the various states were not significant compared to total project costs.
Clearly, researching, analyzing, and identifying the most cost effective and reliable power sources are the the key location drivers for data centers. To maximize savings and select the most competitive locations, companies should make the non-real estate location decision factors the key project drivers before focusing on the real estate.
Tags: corporate real estate, cost savings, data center, Site Selection
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Industrial Location Planning
Wednesday, November 10th, 2010
By Tim Myllykangas and Mitch Jacoby
So you have a client that needs space in an industrial building. Just a basic real estate project, right? Run a market survey, get some market deal comps, and start touring. You may want to reconsider that approach and beef up your offerings by researching and analyzing the typical location drivers for manufacturing, distribution, and warehouse projects.
The top drivers in determining an optimal industrial location are as follows:
-Logistics: Freight costs and delivery times for both raw materials and finished product
-Power Rates: Rates vary by state, county, municipality, utility district, industrial park, and incentive zone
-Power Reliability: Using industry indices such as CAIDI (Customer Average Interruption Duration Index), SAIDI (System Average Interruption Duration Index), and SAIFI (System Average Interruption Frequency Index)
-Natural Disaster Risk: Probability of occurrence for the eight major Declared Disaster categories
-Workforce: Identifying optimal labor pools, performing a sector saturation comparison, and looking at wage levels
-Labor Unions: Historical and current organization attempts, activity by sector and by company, and effect on wage levels
Consider this: a plastics product company was seeking to identify a new, optimal location for a 500,000 SF, 250-employee manufacturing and distribution facility in North America. Given that this would be a new location, the company required options in multiple states and communities, ultimately considering a long list of over 40 communities in 12 states with 18 logistics hubs. From this long list, four finalist logistics hubs were considered optimal in terms of freight costs, delivery times, power rates, reliability, and workforce.
Through research and comprehensive analysis, the company identified 10-year savings opportunities as noted below:
Labor: $4,000,000 or $16,000/job
Power: $12,000,000 or $48,000/job
Freight: $45,000,000 or $180,000/job
Total: $61,000,000 or $244,000/job
Surprisingly, freight cost savings were not only significant but dwarfed both labor and power cost savings. And no matter how much was saved on real estate, it would not likely come close to the freight savings. In addition, delivery times were reduced by 32%, and labor pools with high under-employment were identified.
The take away? By analyzing and researching the key location drivers for industrial projects in numerous geographic regions, substantial savings can be realized for your client. Regardless of economic conditions, a proven process of finding optimal locations for your client will deliver meaningful savings, making you look smart and on the leading edge of corporate services.
Tags: corporate real estate, industrial, manufacturing, Site Selection
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Workforce Optimization
Wednesday, September 22nd, 2010
By Tim Myllykangas and Mitch Jacoby
In our previous post, we noted that a growing list of companies both large and small are looking at their workforce as a way to reduce costs. These companies are going beyond their real estate costs, and are considering a much larger expense: labor. Although real estate costs are typically the second largest P&L expense, the annual cost of labor is usually 6-10 times greater than the cost of real estate. Consequently, a workforce optimization analysis can in many cases lead to significant savings…and typically a new real estate project, even for companies with flat or negative growth.
The typical client project team consists of representatives from Finance, HR, Operations, and Real Estate. Once a workforce optimization analysis is performed, where factors such as labor quality, availability, and costs are examined to identify more favorable markets for the client’s job descriptions, a business case can be made to consolidate, expand, and/or relocate the real estate footprint. The bonus for clients in these projects is normally not just reduced labor costs, but that they have a labor pool with higher underemployment, leading to lower turnover and a more loyal workforce. Additionally, clients can receive state or local incentives which in some cases can be significant.
So, which companies are doing this? Business giants like Hewlett-Packard (HP) are consolidating their national footprint in places such as Conway, AR; Rio Rancho, NM; and Dubuque, IA. These locations are small towns for sure and many would say too small, but the companies’ successes to date are clear proof of the benefits of finding the more favorable markets for a client’s labor needs.
According to HP, it selected Conway, AR as the location for 1,300 new sales and support jobs, as well as technical positions as part of its national consolidation strategy. These types of jobs are not the low-paying, entry-level jobs requiring little education that most people typically think of when companies move to small towns like Conway. These positions require college degrees and reportedly pay starting salaries in the $30,000-$50,000+ range.
Not every project works in a smaller city, but the benefits that are achieved for those that do include improved workforce quality, lower labor costs, cheaper real estate, and often meaningful incentives from the local community and state.
Are you considering a move to a smaller market to reduce labor costs?
Tags: cost savings, Site Selection
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Workforce in Tier II and Tier III Cities
Wednesday, May 19th, 2010
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
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Underemployment: What is it and why does it matter?
Wednesday, March 24th, 2010
By Michelle Cammarata
Every month, the government reports the national unemploym
ent rate, and journalists and pundits dissect the news for its economic and political implications. Recently, along with the usual reporting on unemployment, we’re seeing a growing focus on underemployment, defined in simplest terms as unemployed persons plus employed persons who are working part-time but seek full-time work. One of five Americans were underemployed as of mid-March, according to a much-discussed report from Gallup. (Read the article and Gallup’s methodology here.) The Bureau of Labor Statistics (BLS) reported underemployment for February at 16.8%, the official government measure.
The unemployment rate has fallen slowly in recent months, a cause for so
me cautious optimism. Yet underemployment remains persistently high. For economists, underemployment is a source of concern about consumer spending, the housing market, and other facets of the economy. For consumers, it’s a real barrier to simply making ends meet. To understand the social, economic, and political impacts of widespread underemployment, it’s useful first to understand exactly what these terms mean and what they measure.
The BLS, a unit of the U.S. Department of Labor, is the principal fact-finding agency for the federal government in the field of labor economics and statistics. The BLS also conducts several measures of labor underutilization, referred to as U-1 through U-6. (Click here for a discussion of BLS methodology.)
The data above are for February 2010, released in March and are adjusted to account for normal seasonal events such as winter weather and holidays that affect employment.
The underemployment rate (U-6) is 7.1 points higher than the unemployment rate (U-3) of 9.7%. Combine the U-3 rate of 9.7% and the U-6 rate of 16.8%, and the data show that more than one quarter of the labor force is not fully employed.
-Lower incomes mean lower government revenues, which mean cuts to programs and services.
-Consumers remain wary, in bargain hunting mode, preventing a rebound in consumer spending.
-Money worries affect our health, well being, and self esteem and put undue strain on our relationships, leading to trouble at home.
A look beyond the unemployment rate to understand what is happening in the labor market reveals alarming conditions and highlights a need for public policies to support job creation and private sector innovation to put unemployed and underemployed back to full-time work.
Tags: BLS, Bureau of Labor Statistics, Gallup, underemployment, unemployment
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From New Business Incentives to Hand to Hand Combat: How Smaller Cities Compete for Investment
Wednesday, January 27th, 2010
By Michelle Cammarata
When the going gets tough, how can economic developers in small cities compete for jobs and investment? For a recent research project, I learned how officials from Richmond to Boise are working harder and smarter. One local official described his work as “hand to hand combat,” reflecting the fierce battle for every project. In this war for new business, the weapons include low business costs, incentives, and a skilled workforce.
Low Costs + Diverse Economy = Stability
Omaha’s low costs and diverse economic base has helped to keep the unemployment rate at just 4.6%.1 With 10,000 jobs, the Air Force is the region’s largest employer. Other institutional employers include the University of Nebraska. Low rents and a skilled workforce support a strong financial services sector, while Omaha’s technology infrastructure and low power costs attract data centers. Nebraska is the nation’s only public power state, and generation and distribution of electricity are provided by a not for profit entity.
Innovations in Incentives
Innovative economic developers are changing business incentives programs to suit the times. Incentives for a New Kentucky (INK) offers tax benefits for companies that are often overlooked: existing businesses and those re-investing in facilities, even if they are not creating new jobs. Officials in Bowling Green believe they have a major advantage in business retention. Faced with the choice to close their local plant or a facility in another state, consolidating companies will choose to stay in Kentucky, they reason. When the economy improves, Bowling Green will capture the new jobs.
Investing in Workforce
Investments in human capital make a major impact as Kingsport, TN has shown with the “Educate and Grow” campaign, designed to reverse the region’s overreliance on heavy manufacturing, shrinking younger workforce, and sinking educational achievement. Local leaders launched a K to 14 program, the first in the country, to extend high school by an optional two years. Kingsport high school graduates are eligible for a scholarship at Northeast State Technical Community College. The community has invested in an “academic village” that includes regional training centers for advanced manufacturing and health professionals. The effort has paid off with new businesses, a growing young adult population, and an increase in residents earning college degrees.
Culture Matters
In headquarters site selection, quality of life plays a major role, and smaller cities with the right assets can win. To beat Atlanta for MeadWestvaco’s headquarters, leaders in Richmond showed that their hometown offers all the cultural amenities of a big city, with shorter commutes and lower housing costs. Greater Richmond boasts 10 colleges and universities, a fine arts museum, a science museum, and 400 years of history.
Small Cities Think Big
Whether their populations and budgets are large or small, the challenges facing economic developers will not disappear any time soon. Yet, no matter where we are in the business cycle, smaller cities can compete and win by thinking big, aiming high, and developing the business climates and cultural assets that employers value.
1 Bureau of Labor Statistics, Nov. 2009
Tags: business incentives, economic develoment, Site Selection
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