Site Selection Risks Can Be Managed

Managing risk around selecting a new business location such as a corporate headquarters, a new data center, or a manufacturing facility is a critical process that will help to ensure that the chosen location meets immediate business requirements — and addresses the long-term objectives of the company and its employees. It is also true that the selection and implementation of a new site is considered by many companies to be a major strategic decision fraught with risk.

One expert, Catherine Von Seggern, a location specialist with the Ernst & Young real estate advisory group, agrees that there are risks, but she also points out they are all manageable — with the proper pre-planning and analysis in place. We asked her about the stages of the site selection life cycle and, based on her experience, what are the key risks that need to be considered and managed.

How do you view the site selection life cycle and its associated risks?
Von Seggern: The site selection process can be organized along three broad categories: strategy, selection, and implementation. Associated risks can also be viewed across these categories. Strategy risks would evolve from a lack of definition around the project objectives, or misalignment of the objectives with the business requirements. Selection risks would focus more on location criteria specifics and whether they were understood and met the business requirements. Implementation risks are more related to the design and construction of the facility, as well as issues that might arise from move management, such as diminished service levels or operational disruptions.

Can you give us a couple of examples of risks?
Von Seggern: Moving employees from a high-cost, centralized location to a low-cost, decentralized facility, or choosing a site for a manufacturing plant — which must be properly situated to ensure accessibility to supplies and the appropriate distribution of products to clients — are both examples of high-risk decisions. New facility risks can manifest themselves in several ways. The new facility opens, but is never fully utilized or the company exits early. A new facility changes function repeatedly, and perhaps the company never achieves the return on investment (ROI) envisioned. Or it could even be that in the new location, a company fails to meet hiring targets. The key to managing all of these risks is to build a team of resources — internal, external, or both — who together are able to ensure all aspects of the processes are managed consistently and properly.

What are the issues that revolve around designing a strategy to reduce these risks?
Von Seggern: There are basically three main components that will help to ensure a successful strategy: First is the understanding of the strategic context or business drivers. Next is defining the business requirement, and then comes the need for project governance. One of the most critical aspects of selecting an optimal site is defining and documenting location criteria including costs, access, and labor quality and availability. Once the strategic drivers are identified, they must be aligned with the requirements of the businesses to be relocated. This involves a detailed look at the business units, along with headcounts, etc., that are to be relocated. What functions do they perform? With whom do they interact? And what skill sets do they need to perform their job? Then you have to look at the downsides, such as the potential loss of key personnel and knowledge about processes, which may be further complicated by legacy systems. That is a key risk for many companies.

What action steps do you recommend?
Von Seggern: The best way to mitigate these issues is through the involvement of relevant stakeholders in detailed working sessions in order to identify the business requirements. “Top-down” and “bottom-up” interviews can also be used to develop an understanding of the work processes, adjacency requirements, and required skill sets. Baseline modeling of the costs associated with running existing operations for comparison to potential location alternatives is also recommended.

Is there a step that really brings all of these issues together?
Von Seggern: Project governance is critical throughout the life cycle of the site selection process and brings focus and direction to the location decision process. It also helps to create alignment among stakeholders. The big risks from a lack of governance include inadequate management support, disengaged leadership, poor communication, and, many times, a lack of alignment on project goals. Our group often recommends a project governance approach that includes representation at the committee, program, and project levels. The project steering committee provides strategic guidance, project approvals, and policy decision. The program working committee is responsible for program management, issue resolution, steering committee reporting, and project-level tracking. The project team includes representation from affected business units, as well as human resources, information technology, real estate, finance, and corporate communications. The project team assists with data collections and validation, needs definition, issues, risks, and contingencies, as well as helping to ensure employee investment and buy-in.

What about the actual selection of a site?
Von Seggern: Once the business drivers and location criteria have been identified and weighted, and the appropriate team of resources gathered, the risks associated with the actual location selection should be fairly easy to identify. These risks relate to ensuring the locations under consideration can meet the requirements identified by the business units and can fulfill the company’s long-term objectives.

What is the most difficult challenge here?
Von Seggern: The challenge is guaranteeing that the appropriate resources — such as the site selection provider — are selected and that sufficient data is both collected and properly analyzed. The site selection criteria would include a detailed look into the following aspects of a country, region, and location: demographic/socioeconomic factors; labor force; costs from a real estate and labor perspective, both one-time and recurring; infrastructure and accessibility; quality of life; and taxation and incentives.

So all of the risks relate back to how the new location supports the business?
Von Seggern: Each of these criteria should be considered in relation to the identified business requirements. For instance, when looking at labor availability for an organization’s finance group, it would not be enough to consider only the working population and unemployment rate. The number of certified public accountants “CPAs” or Series 7-qualified persons, coupled with the number of accounting graduates, also may be important. Further, ensuring that the information is up-to-date and accounts for cost increases that might not be reflected in published data is of critical importance. Our approach is to look at the above criteria at a higher level when selecting states for consideration and then to narrow the search into regions and cities/sites with more in-depth analysis and in-market validation. Obtaining the detailed information is critical, as is the cost/risk analysis and weighting of that information against the business criteria that have been developed.

So when you go to pull the trigger on capturing a new location, the risks are pretty much mitigated?
Von Seggern: After the location has been selected, the risks morph to other issues associated with the facility. For example, the risks around design, construction, fit-out, and move-in must be identified, analyzed, and monitored. While these may be the easier risks to identify — because construction and project management risks are well documented — they are not always well analyzed and monitored.

Construction cost overruns seem to be the biggest risk these days. Is that true?
Von Seggern: The construction process is complex and time-consuming and involves a number of components that must be interrelated and managed. Projects may become subject to poor oversight, cost and time overruns, and service provider failure, and many times results do not support the business case. Implementation risks must be identified on a project-by-project basis through an understanding of previous lessons learned, by seeking the advice and knowledge of experts, and through brainstorming or facilitated group sessions. Once identified, consistent reporting and review of costs, milestones, and schedules are critical in both the ongoing monitoring of the implementation as well as in dealing with other issues that might arise, such as redesign, scope change, and reprioritized objectives.