|Is Your Corporate Footprint Stuck in the Mud? |
By Darin Buelow, Matt Szuhaj, Josh Timberlake and Matt Adams
Wednesday, 28th March 2012
When Ken was asked by his CEO to attend a meeting about the company’s global footprint strategy, he wasn’t sure what to expect; hadn’t they just finished moving the last labor-intensive production line to Suzhou? As director of operations, Ken felt like he had a pretty good handle on how the company was doing in terms of facilities utilization—it seemed unlikely that they could squeeze more out of any of their sites.
Upon his arrival, Ken was ushered into a darkened conference room where he greeted the other members of the leadership team who were getting settled. A few moments later, the CEO welcomed them.
“I hope you had a good trip in. Today is all about learning, exploring possibilities, and generating ideas to create significant value for our company.”
Ken watched as the facilitator further dimmed the lights and tapped his keyboard. Several large computer screens on the wall of the conference room glowed, showing a world map with a constellation of about 30 colored indicators. Ken recognized the locations of their manufacturing and distribution sites but noticed the headquarters, back office, contact centers, data center and R&D hubs were shown as well.
The facilitator pressed a few more buttons and a number of charts and tables popped up across the map depicting the company’s financials for last year, employee headcounts, operating costs and more. The head of HR answered a few questions about talent issues in some of the back office and R&D sites.
“Let’s run a few hypotheticals,” the facilitator said. He double-tapped the indicator for one of the R&D sites. It blinked slowly. “What if we were to redeploy this to a market that had better industry presence, a growing base of engineering talent and also offered R&D tax credits?”
He dragged the blinking site across the screen to a Southeast Asian country and released it. Ken immediately noticed a new column on one of the tables that showed an improvement in financial performance.
His mind raced. One of his production sites was getting hammered with an electricity rate increase that he was going to have a hard time dealing with. Ken began to realize that the company’s footprint strategy hinged on much more than just the utilization of their facilities.
Why do companies get stuck?
Many organizations recognize that geography is a key driver of corporate performance. Yet many maintain ineffective and inefficient footprints that can hamper talent attraction and retention, increase operating costs, overexpose them to risk and depress shareholder value. Why do companies leave value on the table by suboptimizing their geographic deployment, and how can they better capture that benefit?
During good economic times, many companies expand rapidly and deploy enterprise assets in pursuit of singular objectives—to increase revenue, reduce costs or source new talent. In times of hardship, companies in search of immediate solutions may take an unsophisticated approach to disposing of high-cost or underperforming operations.
Fewer companies are deliberate and proactive in assessing their overall corporate footprint and the degree to which it supports and contributes to the business strategy. Geographic variables such as talent availability, operating costs, risk or tax regulations can change quickly. Mergers and acquisitions generate additional footprint complexity, often yielding overlap in some geographies and underrepresentation in others.
Yet many companies lack mechanisms to effectively evaluate and react to these changes. Some make footprint decisions at the subenterprise (e.g. business unit or regional) level. Others, through sheer inertia, continue to perform the same functions in the same geographies while the world changes around them. Still others regard footprint decisions primarily in terms of real estate rather than a more expansive view that considers the proper location for every corporate function and asset.
By enhancing “locational awareness” and evaluating the corporate footprint with a more holistic perspective, companies can more efficiently and effectively position assets and strike a balance between market access, talent availability, risk mitigation and cost containment.
Extraordinary events of the past few years have presented significant challenges for many companies. Though global organizations have faced location and footprint decisions for decades, these circumstances, and the continuation of longer-term business trends, have altered the cost and conditions that companies enjoyed—sometimes profoundly. Beyond these events and trends, there are traditional triggers for footprint realignment that can create more urgency around such decisions.
Companies are occasionally jolted into location awareness by disruptive political, natural or economic events. Prior to the 2011 Arab Spring upheaval in the Middle East, Egypt had been considered a budding global technology destination where many global IT companies have tapped an abundant, low-cost supply of programming talent to create tens of thousands of jobs.1 Foreign companies are undoubtedly taking a more cautious view of Egypt, and the Middle East in general, in light of the recent and predominantly unpredicted uprisings.
Escalation of drug-related violence in northern Mexico has also influenced the footprint strategy of many leading organizations. One major global retailer cancelled plans to deploy a new several hundred person back-office support center in Monterrey after a wave of crime—which was historically focused along Mexico’s border with the United States—threatened to sweep through northern Mexico’s hub city as well. Validating the company’s concerns, conditions did subsequently deteriorate to the point that Monterrey’s violence levels are as extreme as anywhere in the country.2 Global manufacturers, who operate thousands of maquiladora facilities along Mexico’s northern border, are also exercising increasing caution.3
Other globally felt events, such as the Japan earthquake and tsunami of 2011, and recent terrorist activity in locations ranging from Mumbai to Norway, can have similar ramifications. For companies directly affected—and even those that were not—global events often serve as triggers to reevaluate location and supply chain risk within the portfolio. The aftermath of these shocks can range from companies taking a renewed organizational focus on risk mitigation strategies and contingency planning, to delaying or revisiting investment plans, or potentially to redeploying existing operations to lower-risk locations.
Possibly nothing impacts companies’ global footprint decisions more than their outlook on the economy. During good economic times, companies eagerly invest in new production sites, R&D operations or other expansion initiatives. The recent global recession and concerns of a “double dip” have pushed companies to try to do more with less. Many organizations have been forced to cut costs to remain competitive throughout the turmoil. Many large-scale capital investments have been put on hold, replaced on the corporate “to-do” list by initiatives aimed at reducing real estate, labor or other costs.
Illustration by Alex Nabaum