Leveraging Business Geography: An Enterprise Value Driven Approach

The rapid pace of global change associated with evolving market conditions, demographic shifts, currency / financial volatility, geo-political risks, and energy costs have made sustainable, long term enterprise value growth one of the central business challenge of our times. In this article, we will explore the influence of geography on corporate value creation, and opportunities to enhance location and real estate decision making based on a comprehensive organizational view, rather than a linear site selection or asset utilization perspective.

Is Place Important?

Given the emotional and financial investment that we continue to make in our choices of where to live and work, the fact that this question is even being asked today seems to be a bit strange. It may be due to highly mobile yet productive work lives many of us live and the headline grabbing trends of outsourcing and off-shoring. However, a closer look very quickly reveals that it is not that Place is no longer important, but rather that now different attributes of Place have become important for certain activities. The difficulty to deal with this more complex and evolving reality has led to a populist but incorrect view that place is no longer important.

The traditional characteristics of geographic place or location haven’t changed much for functions like manufacturing and distribution or other high infrastructure or physical asset dependent functions (such as R&D labs). But for other knowledge and service driven activities, the traditional proximity dependence is no longer necessarily the dominant factor.

Predictions over the past several years that the geographic locations of corporate operations will no longer matter in the virtual / internet enabled economy are far from true. If anything, Place holds greater importance than ever products still need to be produced somewhere, and call center service agents need to be sitting somewhere.

That said, ‘virtuality’ has transformed the way we work. Perhaps a better way to phrase the Place question is to say that the geography of people, and where and how they work has changed. The knowledge workplace of the future (and more and more of the present) is an increasingly virtual environment where the requirement to be in one place has yielded to location decisions based on access to and retention of talent, employee quality of life and cost of living.

Technology has enabled an entire generation that is now entering the work force, to expect a virtual, flexible work environment; to link career with personal fulfillment; and sometimes, to escape the constraints of a fixed, traditional workplace. Even in a virtual workplace however, geography still matters; it just matters differently. A few examples:

• Young, generation Y knowledge workers congregate to cities, larger and smaller, based on quality of life, culture, education and the inherent clustering of career opportunities. Cities such as New York, Singapore, London and many others are commensurately booming
• A home based customer servicing program can release the constraints of a specific commutable site, but still may achieve better results if located in a ‘cultural geography’ aligned to the market these ‘customer-facing’ agents are serving
• Outsourced functions seek not only lower costs but relevant talent that comes from the demographics and cultures of places like Ireland in the 1990s or India post Y2K

Figure 1 illustrates how place attributes map against typical corporate functions along cultural and geographic lines.

So the traditional specificity of a ‘physical geography’ will continue to be obviously essential for a capital and site intensive manufacturing plant, where geographic elements are critical drivers for achieving desired results. But, for many other companies in knowledge oriented businesses, competitive advantage isn’t so clearly tied to the factors of physical geography.

Some may be thinking that the rise of the ‘virtual workplace’ will make such perspectives seem outdated, but these networked communities of knowledge workers exist somewhere, and the cultural geography remains critical, even if technology helps reduce the restrictions of physical geography. For example, work at home environments for call center representatives may appear placeless within the traditional definition of the ‘office’, but regional language and culture nuances, cost of living driven talent clustering, and other geographic factors remain key to such customer-facing business operations.

Labor supply and demand dynamics, driven by demographics and skills, further add specificity of place. The virtual workplace is best defined as a network of physical places. The importance of cultural vs. physical geography attributes that define these place ranges from a very high for cultural importance for low infrastructure (e.g., work at home or anywhere), to satellite drop, to increasing importance of physical factors for larger (high infrastructure) corporate offices, with hoteling and collaborative spaces that have a specific corporate identity and also rely somewhat more on the traditional attributes of easy accessibility and proximity to industry clusters.

Summary Point One: Place does matter, though the importance of the different attributes of geography ranges across a broad spectrum of cultural and physical factors that can be very different for each type of corporate activity. The map of a 21st century global enterprise is a complex physical and virtual network of places representing the geographic footprint of the corporation.

Different Lenses / Same Vision?

It is easy to go off track in making effective geographic decisions about the corporate footprint. In addition to increased complexity and changing importance of different geographic attributes, the nature of the corporate organization — complex, and politically charged, can further feed less effective decision making. Vision and competing priorities are often sorted out against a backdrop of short term financials and shareholder value.

Operating performance needs to be balanced against customer/market demands, employees and stakeholders. Risk and opportunity trade-off with each other in an environment of uncertainty. On top of these factors is a real estate and workplace portfolio to plan and manage, which brings out the often very personal emotions people hold for their work environment.

It is no surprise then, that the location footprint of a typical global enterprise is far from leveraged effectively. More often than not, location decisions are only at a business unit or functional level rather than coordinated within a broader framework of corporate imperatives.

Often, business geography decisions are made by default ‘we had space in our existing operation in Buckleberry Junction, so lets move payroll administration and accounting there’ never mind if the labor market is not scalable there or its logistical fit into the broader supply chain is tenuous. And, way too often, managers of different functions and businesses go along their merry, uncoordinated way in picking sites (e.g. IT is off picking sites for software development, whilst HR is looking at locations for shared services both with apparent blinders to the broader needs and plan. Not to pick on IT and HR (it could be any entity), but this lone ranger mentality not only drives corporate real estate leaders crazy, but is not a sound approach to corporate decision-making.

In many companies, there is no coordinated view on process, people, place and property individual managers and their teams are concentrating on the needs of their own operations and silo thinking is common. Does this sound familiar:

• HR leadership is focused, rightly, on the war for talent and where to source sustainable talent in the next 10 years They want to tap into hot markets in Asia and South America but hold on, because
• The director of IT insists on a combination of outsourcing and captive technology centers and has heard that Eastern Europe has some incredible skills in this regard but wait a minute
• The CFO runs a tight ship over CRE and asset optimization is a key priority CRE leadership will not authorize any new lease signings until existing surplus space in its core markets (NY and London) are fully occupied plus why not tap into China, because ‘costs are low’ finally, to add fuel to the fire
• The head of marketing wants to expand customer facing presence in new global markets but none of the countries HR, IT, and the CFO are focused on are part of Marketing’s target expansion geography.

They all want what’s best for the company, and their annual P&L, but they’ve different points of view on how to arrive. It doesn’t have to be like that.

Summary Point Two: Silo thinking and reactive decision making often compromise the geographic footprint of the enterprise and regularly miss opportunities to create corporate value.

Fundamental Drivers: The Strategic View

There is a better way. CRE leaders and other decision makers would benefit from a holistic framework or blueprint to guide corporate real estate, workplace and location decisions based on a unified set of guiding principles and measures for the geography of the enterprise.

Such a blueprint represents more than linear site selection and space utilization perspectives. One such approach is the use of a familiar ‘Balanced Scorecard’ (which is based on the work of Norton and Kaplan as described in a series of articles from 1993 through 1996) framework applied to corporate geography in order to make effective location decisions and create alignment with overall business strategy. While each business will need to tailor the specific measures and elements of the approach, a blueprint for corporate geography is about optimizing cost and performance based on four factors:

• Financial Performance: profitability and asset optimization
• Processes: efficient operations, balancing costs with product /service quality at an acceptable risk level
• Customers and Markets: brand positioning and products and services;
• Knowledge: the experience, learning and talent base of the organization, (and often the driver of innovation and differentiation)

Let’s explore each of these further and focus on how they relate to corporate geography (see Figure 2).

Financial Performance. This is the essential bottom line. We have rarely, if ever seen a project where cost, even if downplayed initially, was not a key decision driver. And this is not just initial cost but bottom line shareholder value (please see next section for more detail on shareholder value).

Process: Whether services or production oriented, business operations or ‘processes’ need to be efficient, adaptable to change, and aligned to the needs of the marketplace. If knowledge and talent provide the fuel for the enterprise, process represents the mechanics of the business, whether strategic planning or financial controls, servicing or production, sourcing or distribution. The geographic environments of these processes are important components of cost and effectiveness.

Customers and Markets: The marketplace for products and services has clear geographic dimensions. The customization of market niches by demographics, culture, needs, and preferences, are directly connected to where these customers are. For customer facing jobs, this most typically means having physical market presence near customers. For distribution, it ties into transportation optimization. How your customers perceive your products or services is often wrapped in their experience in interacting with the company.

Knowledge: Sustaining and developing the learning and brain trust are fundamental to continued success as an enterprise. Challenges may be related to retaining the work force or how and where to source future talent. These are some of the biggest challenges facing companies. Talent, skilled labor and a scalable, sustainable work force are central to specific location decisions and for planning the most effective corporate footprint. Concerns about predicted shortages of talent in the US and Europe have been a big, perhaps the biggest, issue for HR leaders in the past few years but can be fully integrated into the geography of place.

For business leaders, this presents multiple challenges on how to continue to develop the knowledge to meet future needs. Workplace, career path, flexibility, place attraction and sourcing of general and specialized employees all come into play. Geography factors into much of this: some combination of talent clusters by industry; multiple language skills; quality of life, education, and pools of low cost labor are usually at the top of most site selection and workplace environment decisions (see Figure 3).

Given the relatively long term implications and capital intensity associated with most decisions around enterprise geography, it is critical to evaluate the impact on each of the elements of the balanced scorecard in terms of opportunity and risk over time.

Summary Point Three: The proactive use of holistic frameworks that rely on metrics tied to corporate strategy can allow CRE executives to assume leadership or coordinating responsibility to establish priorities and protocols for portfolio and workplace decisions, plan for future requirements more effectively and minimize silo thinking across the enterprise.

A Flexible Approach to Manage Dynamic Enterprise Geography

Using a holistic framework to make discrete individual decision is not by itself adequate for a rapidly changing global business environment. Additionally, a framework for integrating corporate geography and footprint planning must be flexible to the specific mix of functionality and business operations in the enterprise; the maturity of markets, products and services; and the constraints of time. These dimensions establish the relative importance and weight of each decision factor (see Figure 4).

Functionality: By functions, we mean the footprint and business components of the company’s operating model. Footprint components range from HQ and corporate centers, IT sites and R&D laboratories (typically representing the brain trust of the enterprise) to manufacturing, distribution, call centers, shared services, and other cost-driven components. Business components represent the product and service lines, typically the profit centers of the company.

Consider that the decision factors and importance thereof will vary by function what is important to a HQ site is different from a manufacturing site. That said, the integrated decision framework can help align the guiding principles which will be important to all corporate geography decisions. Figure 5 illustrates a sample of differing priorities by function, per each of the Balanced Scorecard elements described earlier.

Life Cycle: Services and products evolve and companies change over time. Life cycle changes are continuous from discovery /introduction, to growth, maturity and eventual decline until new services and products aligned to new conditions and markets are introduced and so the process continues. From a corporate geography lens, this means growing and managing a footprint that is flexible to support changing conditions. Consider the representative situations in Figure 6.

Timing: Timing is a key to any business decision. Whether it is a 5-year planning horizon to source talent, balancing short-term lease expirations with longer term footprint decisions, or setting up a new lower cost production site, the constraint of time is an unavoidable influence on decisions.

Summary Point Four: An integrated framework must be a dynamic, flexible tool to support varying and changing needs, but unified through a core set of guiding principles for making corporate geography decisions.

Enterprise Geography as an Agent of Shareholder Value Creation

The balanced scorecard approach can help drive holistic decisions and cut across silos, but it is often unable to link the impact to measurable shareholder value. While it is intuitively apparent that improving the corporate footprint is an important component of competitiveness and can contribute significantly to cost savings, customer/market growth, knowledge development, and process efficiency, we would recommend using the Enterprise Value Map (EVM) to quantify the impact to shareholder value (see Figure 7).

Using the EVM, your company’s geographic footprint of corporate capital investment (in plants, M&E, offices and infrastructure) can be linked directly with shareholder value. Figure 6 illustrates at a high level the potential use of this tool.

Consider the following examples:

• An advanced technology manufacturer in a high profit, emerging industry seeks to locate new production facilities based on market development opportunities in Asia (revenue growth) competitive pressure to reduce costs (operating margin) and a low tax environment (operating margin)
• A global financial services company seeks to rationalize its operating footprint, anchoring growth at key existing and new centers. It seeks new shared services processes and sites (operating margin), improved quality of call center servicing (revenue growth), new sources of future talent, (expectations) all while considering the utilization of existing versus new sites (asset efficiency)

Summary Point Five: Using the enterprise value map makes it possible to link and measure the impact of your enterprise geography on shareholder value.

Summary and Close

Place does matter, though the relative importance of the different attributes of geography ranges across a broad spectrum of cultural and physical factors that can be markedly different for each type of corporate activity. The map of a 21st century global enterprise is a complex physical and virtual network of places representing the footprint or geography of the corporation.

In part due to increased complexity of business geography and the inherent organizational challenges of silo thinking and reactive decision making, decisions to improve the geographic footprint of the enterprise are compromised.

The proactive use of holistic frameworks that rely on metrics tied to corporate strategy can allow CRE executives to assume leadership or coordinating responsibility to establish priorities and protocols for portfolio and workplace decisions (beyond site selection), plan for future requirements more effectively, and minimize silo thinking across the enterprise.

Additionally, an integrated framework must be a dynamic, flexible tool to support varying and changing needs, but unified through a core set of guiding principles for making corporate geography decisions.

Finally, using the enterprise value map it is possible to link and measure the impact of your enterprise geography on shareholder value.

About the Authors

George Bouri is Principal, Deloitte Consulting LLP.

Lawrence Moretti is Specialist Leader, Deloitte Consulting LLP.

Gagandeep Singh is Senior Manager, Deloitte Consulting LLP.