The Siting Expert: Location Selection Drivers and Trends

With over 30 years of management consulting experience consisting of nearly 400 site selection engagements around the world spanning most every type of industry and business function imaginable, our keynote speaker Phil Schneider offered a depth of experience and perspective few can match.  To set the table for the day, he presented a detailed, “behind the scenes” look at how the site selection process works and examined key trends shaping future business decision-making with regard to locating capital and people.

Triggers and Decision Factors

Schneider began by discussing the wide variety of factors that can trigger the need for a new location.  The most common influence is the need to improve market access -- getting the product or service to customers more efficiently and effectively.  Reducing operating costs is another common trigger.  Other influential triggers include the introduction of a new product or service (which existing facilities cannot handle), improving access to skilled labor, the need for upgraded infrastructure to handle increased operating demands, and the need to reduce operating risk of all types.  Contrary to common perceptions, he noted the business tax and regulatory environment is not the biggest trigger, but that does not mean it is not an important consideration in the site selection process.  Some historically influential factors have lost influence over time.  Chief among these, he observed, are labor management relations.  Whereas thirty years ago “right to work” laws were a major influence moving manufacturing from north to south, it is far less so today.

What do companies prioritize and emphasize?  Decision factors will vary from industry to industry and function to function, but a number of key issues are always looked at to some extent.  At the top of the list is the workforce and talent pool.  Schneider emphasized that ability to sustain a high-quality workforce over time is just as important a consideration as developing and attracting that workforce in the first place.  Noting that “turnover rates eat a company alive,” Schneider pointed out sustaining the workforce requires finding places where talent is and wants to stay and reducing dependence on in-migrating populations.  Infrastructure considerations, in all its forms, are a close second.  As Schneider stated, “It’s the first two things we look at.  If you don’t have workforce and you don’t have infrastructure, you’re not getting projects and growth.”

With respect to variable operating costs (e.g. cost of work force, taxes, real estate, utilities) Schneider emphasized how important it is to look at these variable costs holistically, since an uncompetitive cost structure in one area can be more than offset by comparative advantages in other cost areas.  Taxes in particular, he cautioned, “are often not what they seem.”  The absence of one particular tax may be more than offset by other, more onerous, taxes.  High published rates may be very different from effective tax rates, which in reality could be quite favorable for a specific industry or function.

One decision location factor which has increased in popularity in recent years is “clustering” – choosing to locate in places where other companies with similar needs and requirements are located.  The idea behind clustering is that it creates an environment of increased productivity (through specialized inputs, access to information and knowledge transfer, and access to services and public goods), more rapid innovation (through cooperative research and firm competition), and new business formation.  Schneider, however, cautioned that clustering can have several unintended consequences.  The injection of thousands of highly paid people in highly connected businesses can disrupt the local economy by stretching infrastructure too thin and driving critical support businesses out of the market, impacting local affordability, and also making it much more difficult to actually sustain a workforce.

A final and often-overlooked decision factor is implementation – can you get the project executed.  Schneider stated “you would be shocked” at how many otherwise good places fail this critical final test because local and state government processes are prone to unacceptably long delays or there is a lack of critical implementation services, such as construction.

A Look at Process

Shifting attention to the process employed in location decision-making, Schneider argued two misperceptions permeate the general public about how this is accomplished.  The first is that site selection is fundamentally a task of identification.  Instead, it’s a task of elimination, or in his words, “systematically eliminating places that sub-optimize critical goals, objectives and specifications.”  He presented an inverted pyramid “filter” in which at every stage flaws and problems are identified and candidates are removed from consideration.  Once the pool is reduced through this initial screening -- to maybe 3-5 potential locations -- then the deep dive into finding the optimal operating conditions begin.  And only then do any negotiations begin with respect to incentives.

That leads to the second public misconception -- that site selection is little more than shopping for tax incentives and credits.  He noted, “the places that have greatest incentives are places that need them because they are some of the worst places to do business or they have some sort of fundamental flaw.”  Conceding that some recent high-profile case studies in the news create that appearance, he argued decision making focused on incentives is exceedingly rare -- perhaps constituting 1-2% of projects -- and is an awful way to approach business decision making.  As he said, “Incentives are here today and gone tomorrow, while operating conditions exist for years.”

Instead, sophisticated site selection decision models are used to bring analytical discipline to a decision process that inherently features significant emotional investment and internal company departmental biases.  These models employ factor weights, scores, and model scenarios to inject necessary objectivity and allow capital requests to be backed up by solid evidence.

Site Selection Trends

Schneider observed that how consultants approach site selection and how clients perceive projects has changed dramatically.  Much of this has to do with globalization.  Thirty years ago, international projects for Schneider were rare and exotic.  Recently, however, he went five years without a project that looked solely at the U.S.

Schneider identified three trends that have accompanied the ever-increasing complexity of the business decision-making ecosystem.  First is the insatiable desire for more data so firms can better manage the risk of projects over time.  Second, decision making models are getting more and more sophisticated – more scenario building and “what if” analyses.  Finally, there is an expectation that the process be done faster.  An analysis that used to be put together in 12-18 months is now expected to be completed in 4-6 weeks.  For this reason, there is a major effort to automate the process as much as possible and obtain the necessary site data even before a client requires it.  As an example of this, Schneider hypothesized that Amazon’s recent regional headquarters solicitation was as much a data gathering effort as a site selection effort.  Amazon now has an invaluable database and the best economic development ideas from hundreds of cities across the United States enabling them to potentially build an automated selection process for themselves.

What are the challenges for site selectors?  In addition to acute talent shortages and serious infrastructure woes, Schneider also identified an anti-incentives backlash.  Confessing that most in his business “wished they would go away too and projects would be based on their merits,” he noted this is how free market capitalism has existed for decades, and incentives exist all over the world.  He said it’s important to recognize that location decisions reflect a public-private partnership with both sides eventually getting something from the relationship.  By providing incentives, governments are essentially recognizing the payoff over time and investing a portion of that upfront to win the project.  In the press, however, it is portrayed as a handout to companies.  Unfortunately, some recent failed high-profile projects do merit that criticism.  But he argued these cases are the exception, and there is no question that a decision by any state to rid itself of all credits and incentives would be welcomed by its neighbors.

What are the common features of site selection project and negotiation failure?  Schneider identified three reasons: lack of transparency, surprise, and greed – with greed being most prevalent.  Companies may try to extract concessions and commitments that reach far beyond what they are contributing to the community, or refuse to get involved in the civic culture of the community.  Similarly, governments seek to “win” by failing to accommodate reasonable company requests to make the project work given the jobs, investment and local spending benefits the community will realize.  The likelihood of project success, he maintained, improves where there is a balanced public-private partnership and the business has made efforts to be inclusive with other community stakeholders.

A Closer Look at the Workforce Challenge

Schneider concluded by returning to his primary concern, our acute workforce shortage.  He noted the mounting skills shortage is not only pervasive across the spectrum of businesses but it is also getting more serious because jobs are changing frequently and expectation of needed skill sets is constantly evolving.  Advanced processes are rapidly changing workforce demand.  He remarked there is no longer any manufacturing out there that isn’t “advanced” manufacturing, and described what goes on today on plant floors and even basic warehousing operations as “mindblowing” due to the constant march of automation and technology.  But the growing gap in workforce expectations versus workforce capabilities extends far beyond technical skills to include soft skills like communication, critical thinking, team building, adaptability and cultural awareness.  The result of all this is a simultaneous displacement of existing workers while critical workforce needs go unfilled.

He argued the talent problem is complex and rooted in a number of interrelated causes at the public, private, and individual level.  Ultimately, it demands a massive collaborative planning effort and dedication of resources, along with close partnership between the public, private, institutional, and non-profit sectors.  “It has taken decades to get into this workforce dilemma,” he noted, “and it will probably take decades to get out.”