ROI for Workforce & Location Planning Projects
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
This entry was posted on Wednesday, January 11th, 2012 at 7:00 am and is filed under Workforce & Location Planning. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.