Greenfield or Brownfield: What's Best for Your Organization?
First, as background insights, my personal experience has been managing, starting or improving the operations in six different shared services in multiple industries ranging in annual revenue from approximately one to seven billion in annual revenue all located in North America (US and Canada). This was as an employee and not as a consultant (although one company did engage me as a consultant for a short-term project). Each organization made a determination as to whether a Greenfield site (completely new location) was more advantageous than selection an existing (Brownfield) site.
I would like to make it easy for all those embarking on this effort and say there is a magic formula and your job is simple. However, the truth is most organizations select an existing site because of the internal political climate, timeliness or other internal cultural factors, and those factors generally take precedent over the site-selection determination when it comes to choosing between Greenfield or Brownfield. I can recommend some steps and considerations that you may use to get started or assist you in making this decision for your organization.
From the beginning, understand that most of the work and activities is focused on communications and presentations and not the actual legwork to find a site. Convincing all the appropriate internal customers from HR, finance, IT and executive management is the lion's share of the work.
The narrative in this article addresses selecting a site within the US market and does not consider offshoring as a solution. The profile of a company that may fit this model is an organization that has most of its employees and revenue in North America and is not a global player as yet.
Make an early assessment of your companies’ executive willingness to make a selection
Executive management - from the CEO, CFO and other senior executives - is either open or not to starting somewhere completely new. It is important to have early discussions and make your case that the location should be based on some solid metrics and not someone’s desire to be close to corporate or some other business unit. If the company is decentralized then the move to shared services is not as daunting. For many of us that have started this process it can be frustrating, as while you may be tasked with the site-selection activity, many executives within a company have opinions about where the location should be located. Prior to meeting with the company's executives, I suggest outlining the core dimensions you would use as the decision factors for selecting a site. This does not exclude or include any known existing sites your company may have available but does lay the foundation for an empirical decision.
Examples of Decision Criteria
- Labor Costs
- Labor Availability
- Non Labor Costs
- Economic Incentives
- Future Labor Costs
- Labor Flexibility
- Work Ethic
- Community Attractiveness
- Ease of Travel
The list of examples above provide some areas to focus as a company and each carries a different weight for any individual company. Solid definitions should be written in no more than a few sentences each. If you get too wordy in the definitions, the readers will generally lose interest.
Now with the solid foundation of criteria and clear explanations of the steps you will take to make the determination, you are ready to prepare your next presentation points.
Debunk the Myths
Be prepared to present your case. Every shared services I have been involved from start-up had a selection process that contained the myths used by individuals to move down a path that you would prefer to avoid. An example would be the suggestion that your company may have space available that is not being used and it would be "just great for shared services to help avoid the cost of that space". I would suggest that you be prepared to answer this suggestion as generally a company would not determine where to place a business unit, a factory or sales team based on some poor decision made earlier about a location. Let the decision factors make the choice clear and avoid these internal recommendations. If forced to consider an existing space, I would recommend using market rent as a measure for comparative purposes versus the "free" concept - as nothing is free.
Another clear challenge is that many employees do not relocate, so it is understood 95%+ of all employees in a new site are new to the company. Internal executives may suggest that should be a strong factor to select a site that is close to the existing employees that currently work in the operation. Generally this is a false premise, as I have found good dedicated employees that work hard everywhere I have created an operation. There are training, education and other challenges in a start-up but you gain other advantages as well. However, the myth is that "my employees here are better than yours". It sounds funny when you say it that way - and of course you would not present your facts in an unprofessional manner - but for this point it was stated somewhat humorously.
- Saves under utilized rent expense
- We will lose good employees
- I need to watch the operation
- Too far for me to travel
Narrow the Options
I would suggest for those that do not have the resources or experience in selecting a site that external consultants be used where appropriate. Some external resources already have demographics related to the labor pool, wage rates and various other data points that would be important to any decision. This helps narrow your location choices based on your criteria, will help streamline the activity and avoid getting bogged down in location that may not have a sufficient employee base for your type operation.
Shared services is generally 75% hourly employees and 25% exempt, so selecting a location (city, community) with the right mix of talent at the right rates is important. Generally, the South and Midwest offer many options for this type of balance and have many communities that fit a shared services model. Remember no one really visits shared services; they do not meet the public or sell products for your company so where they are located is not as significant as where you might put your corporate office. The drivers for those types of decisions are different.
Considering these broad suggestions, you have narrowed your area to a particular region. The next steps would be to list those communities that fit your particular mix of employee requirements. You may find that in some communities they simply do not have the numbers of talented employee you seek. If you need 100-200 accountant-type employees and the competition is high or talent pool is limited, then you would place that community lower on the list of options. The smaller your operation in terms of employees the less of an issue this factor would be, but generally if you are performing a site selection then the employee count is in the 100-500+ range. Once you have a draft list of communities, you would start making community visits and learn about the area. This can be done by a variety of internal and external resources.
Another suggestion would be to meet with the economic department and local business development individuals in the region that you are considering. These individuals generally know of every vacant space and what is or is not viable for your type of operation. They also will share information regarding the area and the positive points about their community. This information can be extremely beneficial. Also, remember these individuals while quasi-independent still want your employees in their area. However, I have found most very professional and upfront, and key to the selection process.
The types of data they can share can range from:
- Largest employers in the area
- Types of employees by job category
- Wage rates
- Traffic patterns
- Where employees live and commute
- Business growth and competition
- Leisure activities in the area
- Tax situation
- Contacts with local companies and their HR departments
- Vacant space and reality contacts
Most shared services are lease operations with an internal build-out so you may find many locations do not have the right square footage available depending on your size and PSF cost requirements. I have worked on operations that required from 30,000-75,000 square feet and some communities that look like a great fit simply had no larger lease spaces available at the rates in our cost model. Generally, shared services are located in a decent class-B-type space and that meant a cost per square foot of $7.00 to $13.00 in our model. There are many other factors to lease negotiations as many of you are no doubt well aware and the intent is not to discuss those points here; however TI allowances, lease escalations and what is and is not included are all important pieces to the rent and occupancy puzzle.
While each company has relationships with various consultants, it all depends on the individual assigned for this particular activity as to whether they are a good fit or not. I am not recommending any one over another as all have positive points to contribute. Some companies have a wealth of payroll and employment data as well. The bottom line is you engage these individuals to cut to decision timeline by contributing information that they already possess.
Focus on the Important Things
I have been involved in many shared services where the discussions move in directions that are unproductive when it comes to the site selection. Remember one thing: shared services is a people business. If you do not have the right qualified employees (and generally this is finance, accounting, human resources and similar functions) then you have more issues than successes. Do not worry about wage rates and rent costs as much as finding qualified employees. If you select a location that has the lowest wage rates, the lowest rent costs, etc. and you find you have no employees, then you have nothing. Selecting a site is about balancing the decision factors, and there is no such thing as perfection - it’s more about "balanced".
A selection process starts with preparation, and having materials and a basis for making a selection. The entire process can take from three months to over a year depending on the complexities, size and scope of the shared services. After selection, there are the build and development activities related to a whole host of processes, so getting the site-selection decision is a key first step. One reason companies do not make selections is the fact it takes time and effort: generally they have decided to create shared services and they desire to get on with it as soon as possible. Once it’s decided to move ahead, most firms are eager to move and forget about building the right foundation. This quick move can lead to failure or second-guessing if not handled properly. Make sure there is time in the project plan for this knowledge and learning phase. If not, this can be short-sighted. It’s about finding qualified people at the right wage rates in a desirable, great location. Generally, labor costs are between 60% and 75% of the total costs on any shared services organization so getting that right is obviously important. Also, shared services generally stay in the location selected for many years: getting location right is also a key measure of success.
This information is at a high level and simply touches some of the elements in making a determination for a Greenfield or Brownfield site. The take-aways should be: build solid relationships with the decision makers; have the decision matrix and factors clearly documented; narrow the search base on high level criteria; and communicate, communicate, communicate.