Monday, September 30 2019
By Dennis J. Donovan, Wadley Donovan Gutshaw Consulting
Back offices comprise an agglomeration of support activities that are pivotal to successful operation of corporate (and not-for-profit) enterprises. These business units typically support c-suite and client interfacing operations. Among functions usually associated with a back office are accounting, payroll, recruiting, planning, inventory management, procurement, regulatory compliance, supply chain management, market research, document management, transaction processing, inside sales, customer service, and IT help desk.
This article addresses the keys to optimal geographic deployment for back office entities. Up first is a brief discussion on strategic considerations that proceed an initiative to uncover the ultimate location. Then we outline the key elements involved in establishing the framework for a back-office location analysis. Subsequently, the multi-phase process that should be followed to land in the best spot is outlined.
Prior to engaging in actual site selection, executive management needs to (a) determine what will constitute the proposed back office and (b) are there other strategic alternatives that should be explored.
Ascertaining the “What” part of the equation is dependent on any number of business considerations. Examples include:
This exercise will result in determination of the composition and scale of operations to be deployed/redeployed. It will also yield any existing sites that should be included as potential locational candidates or benchmarked for comparative purposes.
Then the questions of outsourcing and/or offshoring should at least be deliberated. Pros and cons are weighed such as:
From our experience, most corporations, especially the larger ones do outsource one or more functions to business process service providers. But wholesale outsourcing is relatively rare.
Concerning offshoring, there was a spate moving back office functions from the U.S. to low cost countries during the mid-1990’s to about the middle of this decade. The offshoring spanned two categories. First was deploying back office functions to Europe, Asia, or Latin America to serve customers (internal and external) within these regions. Second was to offshore to serve the U.S. market from a substantially lower cost platform.
Today we still see companies establishing back office centers (either captive or third party) to serve regional markets (e.g., shared services centers for Europe). However, there is comparatively less volume of corporations offshoring to serve the U.S. market. There are five reasons for this phenomenon. They are (a) most companies already have a sizable offshore footprint; (b) the introduction of technology/process improvement has reduced the cost of labor as a proportion of total expense; (c) labor quality issues especially for voice intensive operations has created customer pushback; (d) cybersecurity threats can be intensified offshore; and (e) company brand/reputation can take a hit given the prevailing “buy American” syndrome.
Another strategic option involves a remote workforce.
More often than not, this model becomes a hybrid; i.e., combination of on-site and remote workers. From WDGC’s experience we have observed the remote workforce strategy as more applicable to selected functions. These include customer service, records processing/coding, and telesales. Among the pros and cons to weigh in deciding on a remote workforce alternative are:
We have not witnessed a large-scale remote workforce being adopted as a strategic HR alternative for the vast majority of companies. Where there is a remote workforce an attractive model is to establish a physical satellite office for training management/team meetings and occasional work in the office. This helps to mitigate some of the aforementioned disadvantages.
Today, a more common model is to (a) allow some critical personnel to work remotely and (b) permit employees to telecommute one or a couple of days a week. They would be on-site the remainder of the week.
If the chosen strategy is to site pursue a physical back office (new capacity, consolidation, or relocation) a structured process needs to be followed to reach the final destination. As will be evident later, the decision equation is overwhelmingly influenced by human resources (i.e., talent supply, quality, cost).
Back Office Site Selection Process
At the outset a project team (internal and external) should be created. The team is usually led by an operations executive. Day to day oversight often is the responsibility of a manager in human resources, real estate, or one of the targeted units (e.g., customer service). The team then establishes the framework that will shape the analytical process and final outcome. Framework dimensions include:
Now comes the challenge of developing project parameters. Most critical is headcount. This includes initial (day one) and mature (possibly year three) size, ramp-up (time to reach target levels), mix of qualified entry level vs. experienced (industry and/or function), supervisor to employee ratio, maximum acceptable turnover, ideal characteristics for new hires (by position), new hire testing, off-shift staffing, and weekend staffing.
Budgeted compensation levels should also be established. Include the following starting salary, mid-point, maximum, time to reach maximum, and incentive/pay for performance/rewards.
Perhaps the most crucial HR planning elements are scale, skill mix (experienced vs. entry level), and starting wage rate. These will have significant influence over the character of potentially suitable locations (e.g., typically the greater the experience proportion the larger and more costly areas will be the prime locational candidates).
Among additional parameters that need to be quantified are office space, capex, air service, and risk tolerance.
Once this baseline information is delineated, the location analysis activates. This consists of three phases as outlined below.
Location Screening (Phase One)
The principal objective in this phase is to generate a shortlist (2-4) of the most promising locations. These would be brought forward to the next phase (on-the-scene due diligence). Screening is metric driven. For example, if the back office will require 50 experienced accounting clerks, the screening threshold could be 500 (10:1 ratio). This would be the minimum critical mass for that skillset to qualify a metro area. Those areas facing to meet this threshold would be rejected.
Location screening is undertaken in a series of rounds. Each round features a metric or threshold along with supporting rationale. Areas pass/fail by round. Initial to middle rounds rely upon published and proprietary data sources for requisite statistical information. Applying statistical thresholds by round will yield a longlist (often 6-10) of potentially suitable locations. An illustration of a multi-round screen germane to back offices follows:
Adhering to a process similar to the above, can only take you so far. At this juncture it is advisable to reach out to each longlisted area’s economic development organization (EDO). Issue a Request for Information (RFI) to elicit insights on each area’s compatibility for the project in question. The RFI often includes:
Gather results for the multi-round statistical screen and analysis of RFI responses to rank/score each area (along with any benchmarks). The best areas will score highest on labor market considerations, lowest on cost (especially labor), and no big red flags on other issues. Be sure to infuse judgement into the rankings. Consider utilizing a scorecard like the one illustrated in Figure 1 to produce the shortlist of finalist locations.
Locational Evaluation (Phase Two)
The objective in this phase is to select the optimal location and best alternative. We define location as: (a) metro; (b) sub labor market or where in metro; (c) community; and (d) shortlist of sites/buildings in the preferred submarket/community (or perhaps close by communities).
This is the “boots on the ground” phase. We are seeking insights on current and emerging operating conditions, especially labor market, to determine which location will perform best over the long haul.
Analytical input should embrace the following:
In addition, map the residential clustering of the labor pool and competitive employers. This will buttress opinions of employers/others on the optimal sub-labor market. The map should display talent pool depth by primary (30 minute) and secondary (45 minute) commute sheds. When plotting competing employers assign the following classification regarding demand: (a) takers (likely to hire from your operation; (b) feeders (your operation can draw talent away); or (c) neutral. The chosen location would have far more feeders than takers.
The team now huddles to contrast the shortlisted locations. Rate how each area stacks up on dynamics such as:
Each area will be ranked/scored on human resources, costs, real estate, and other factors. The top-rated area should offer the most favorable labor market at an affordable cost along with one or more available buildings in the optimal sub-market. Then there should be no showstoppers on other variables.
Incentives can be instrumental in choosing the final location. However, it is far more important to locate in a market that optimizes attainment of HR objectives. Incentives should thus be viewed as enhancing the most compelling locational choice.
Final Due Diligence (Phase Three)
The objective in this phase is to reach the end game; i.e., (final location and worksite). Frequently, the project team is expanded to include additional expertise required for final due diligence. New team members might include legal, environmental, office space design/layout, project management, and corporate affairs.
The major focal points in Phase Three are final negotiations for incentives and real estate. Note for the former, payroll tax rebates (or some form of job creation subsidies) tend to be the most meaningful incentive for back offices. Grants or forgivable loans can also be important. Additional incentives could embrace property tax abatement, sales tax refunds, capital investment tax credits, and subsidies for pre-employment training.
Real estate negotiations will often be led by a commercial broker. Negotiations will cover a range of considerations such as free rent, tenant work letter, building improvements, lease terms, lease rates, future rent increases, lease cancellation, sub-lease rights, signage, security, parking, expansion potential, additional amenities, etc.
Incentives and real estate negotiations must be closely coordinated. The team’s project point person also needs to coordinate with other due diligence players.
Given the tight labor market in the U.S. it has become a greater challenge finding locations that will work from an HR perspective. They exist but are fewer and farther between. Consequently, it is vitally important to define, in as much granularity as possible, the new back office’s staffing composition/level and maximum acceptable compensation level. Thereafter, craft a series of statistical thresholds that when applied will produce a longlist of metros (or counties) featuring the greatest likelihood of sustaining HR requirements.
From that point forward dig deep into the competitive landscape (as it is now and emerging) to ascertain how well the new entity fits in. Strive to find locations where the labor market feeders have a much greater presence than the takers.
Be sure to delimit the best sub labor market and then see if there are acceptable sites/buildings in the best place from an HR standpoint. In addition to effectively and cost efficiently housing the new operation, the work site should materially enhance your ability to recruit/retain class A talent at a moderate and sustainable cost.
If offshoring to a lower cost (platform) be sure to conduct due diligence on the range of factors similar to a U.S. site search. Additional emphasis will need to be placed on considerations such as labor regulations (e.g., easy of hiring/firing), mandated/customary benefits, utility reliability, workforce quality, language capability, security, foreign company taxation, and multi-dimensional risk (e.g., political, social, financial). Among countries where back offices have gone in the recent past are India, Malaysia, Philippines, Ghana, Kenya, South Africa, Poland, Croatia, Bulgaria, Estonia, Portugal, Spain, Northern Ireland, Slovenia, Greece, Costa Rica, Jamaica, Trinidad/Tobago, and Columbia.
In the U.S. we have observed a tendency for higher end back offices (e.g., shared services centers) locating in mid-size metros. The drivers are sufficient talent pool (including a college pipeline) and moderate costs (primarily labor and secondarily occupancy). Examples include the newly announced Getronics (500 employees) shared services center in Greenville, South Carolina and the Verizon financial services hub (addition of 500 employees to the local presence) in Tulsa, Oklahoma (see photo 1). For customer service centers a sub (or mini) trend is to site modest size operations in smaller and/or more rural areas for labor and cost reasons. These areas would have populations of less than 100,000. Examples include Candor Health in Floyd County, Georgia and Sykes in Perry County, Kentucky.
To ensure that your next back office location will perform above expectations, follow a logical, building process such as that denoted above. And remember this adage “At the end of the day it’s all about people.” Back office locations are first and foremost HR deals.
About the Author
Dennis J. Donovan is Principal of Wadley Donovan Gutshaw Consulting (WDGC) based in Bridgewater, New Jersey. For over four decades the firm has been advising companies on geographic deployment of corporate facilities. Client projects have included numerous back offices.