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A Middle East Point of View | Spring 2012 | 33

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When Ken was asked by his CEO to attend ameeting about the company’s global footprintstrategy, he wasn’t sure what to expect. Hadn’t they just finished moving the last labor-intensiveproduction line to Suzhou? As director ofoperations, Ken felt like he had a pretty goodhandle on how the company was doing in terms of facilities utilization – it seemed unlikely thatthey could squeeze more out of any of their sites.

Is yourcorporatefootprintstuck in the mud?

34 | Spring 2012 | A Middle East Point of View

Upon his arrival, Ken was ushered into a darkenedconference room where he greeted the other membersof the leadership team who were getting settled. A fewmoments later, the CEO welcomed them.

“I hope you had a good trip in. Today is all aboutlearning, exploring possibilities, and generating ideas tocreate significant value for our company.”

Ken watched as the facilitator further dimmed the lightsand tapped his keyboard. Several large computerscreens on the wall of the conference room glowed,showing a world map with a constellation of about 30colored indicators. Ken recognized the locations of theirmanufacturing and distribution sites but noticed theheadquarters, back office, contact centers, data centerand R&D hubs were shown as well.

The facilitator pressed a few more buttons and anumber of charts and tables popped up across the mapdepicting the company’s financials for last year,employee headcounts, operating costs and more. Thehead of HR answered a few questions about talentissues in some of the back office and R&D sites.

“Let’s run a few hypotheticals,” the facilitator said. Hedouble-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 growingbase of engineering talent and also offered R&D taxcredits?”

He dragged the blinking site across the screen to aSoutheast Asian country and released it. Kenimmediately noticed a new column on one of the tablesthat showed an improvement in financial performance.

His mind raced. One of his production sites was gettinghammered with an electricity rate increase that he wasgoing to have a hard time dealing with. Ken began torealize that the company’s footprint strategy hinged onmuch more than just the utilization of their facilities.

Why do companies get stuck?Many organizations recognize that geography is a keydriver of corporate performance. Yet many maintainineffective and inefficient footprints that can hampertalent attraction and retention, increase operating costs,overexpose them to risk and depress shareholder value.Why do companies leave value on the table bysuboptimizing their geographic deployment, and howcan they better capture that benefit?

During good economic times, many companies expandrapidly and deploy enterprise assets in pursuit of singularobjectives – to increase revenue, reduce costs or sourcenew talent. In times of hardship, companies in search ofimmediate solutions may take an unsophisticatedapproach to disposing of high-cost or underperformingoperations.

Fewer companies are deliberate and proactive inassessing their overall corporate footprint and thedegree to which it supports and contributes to thebusiness strategy. Geographic variables such as talentavailability, operating costs, risk or tax regulations canchange quickly. Mergers and acquisitions generateadditional footprint complexity, often yielding overlap insome geographies and underrepresentation in others.

Yet many companies lack mechanisms to effectivelyevaluate and react to these changes. Some makefootprint decisions at the subenterprise (e.g. businessunit or regional) level. Others, through sheer inertia,continue to perform the same functions in the samegeographies while the world changes around them. Stillothers regard footprint decisions primarily in terms of

Many organizations recognize thatgeography is a key driver of corporateperformance. Yet many maintainineffective and inefficient footprintsthat can hamper talent attraction andretention, increase operating costs,overexpose them to risk and depressshareholder value.


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real estate rather than a more expansive view thatconsiders the proper location for every corporatefunction and asset.

By enhancing “locational awareness” and evaluating thecorporate footprint with a more holistic perspective,companies can more efficiently and effectively positionassets and strike a balance between market access,talent availability, risk mitigation and cost containment.

Dynamic ChallengesExtraordinary events of the past few years havepresented significant challenges for many companies.Though global organizations have faced location andfootprint decisions for decades, these circumstances,and the continuation of longer-term business trends,have altered the cost and conditions that companiesenjoyed – sometimes profoundly. Beyond these eventsand trends, there are traditional triggers for footprintrealignment that can create more urgency around suchdecisions.

Disruptive events Companies are occasionally jolted into locationawareness by disruptive political, natural or economicevents. Prior to the 2011 Arab Spring upheaval in theMiddle East, Egypt had been considered a buddingglobal technology destination where many global ITcompanies have tapped an abundant, low-cost supplyof programming talent to create tens of thousands ofjobs.1 Foreign companies are undoubtedly taking a morecautious view of Egypt, and the Middle East in general,in light of the recent and predominantly unpredicteduprisings.

Escalation of drug-related violence in northern Mexicohas also influenced the footprint strategy of manyleading organizations. One major global retailercancelled plans to deploy a new several hundred personback-office support center in Monterrey after a wave ofcrime – which was historically focused along Mexico’sborder with the United States – threatened to sweepthrough northern Mexico’s hub city as well. Validatingthe company’s concerns, conditions did subsequently

deteriorate to the point that Monterrey’s violence levelsare as extreme as anywhere in the country.2 Globalmanufacturers, who operate thousands of maquiladorafacilities along Mexico’s northern border, are alsoexercising increasing caution.3

What is a “Footprint”?A company’s footprint is more than just the realestate it occupies. It includes the people itemploys; customer access and speed to marketit experiences; operating costs it incurs, and therisk it undertakes. Where companies locate theirassets helps dictate the potential value they canachieve as an organization. This configuration ofattributes – the “footprint” – includes a widearray of corporate assets such as: • Capital• Talent• Machinery and equipment• Inventory• Contract manufacturers• Facilities• Intellectual property

By enhancing “locational awareness”and evaluating the corporate footprintwith a more holistic perspective,companies can more efficiently andeffectively position assets and strike abalance between market access, talentavailability, risk mitigation and costcontainment


Other globally felt events, such as the Japan earthquakeand tsunami of 2011, and recent terrorist activity inlocations ranging from Mumbai to Norway, can havesimilar ramifications. For companies directly affected –and even those that were not – global events oftenserve as triggers to reevaluate location and supply chainrisk within the portfolio. The aftermath of these shockscan range from companies taking a renewedorganizational focus on risk mitigation strategies andcontingency planning, to delaying or revisitinginvestment plans, or potentially to redeploying existingoperations to lower-risk locations.

The economyPossibly nothing impacts companies’ global footprintdecisions more than their outlook on the economy.During good economic times, companies eagerly investin new production sites, R&D operations or otherexpansion initiatives. The recent global recession andconcerns of a “double dip” have pushed companies totry to do more with less. Many organizations have beenforced to cut costs to remain competitive throughoutthe turmoil. Many large-scale capital investments havebeen put on hold, replaced on the corporate “to-do” listby initiatives aimed at reducing real estate, labor orother costs.

While priorities often shift toward consolidation in thiseconomic landscape, footprint optimization is equallyimportant in good economic times as in bad. Mergersand acquisitions, for example, present an opportunetime to reduce redundancy. Many companies, however,address redundancy at the business unit level, and fewtake the opportunity not only to review where the newcombined footprint is, but also where it is not.

Forward thinking companies are constantly working toright-size their footprint and deployment of assets forboth current and future economic conditions,understanding that the legacy footprint that wassuitable for the last economic period is unlikely to beoptimal for the next.

Going greenIncreasing volatility in energy costs is another trendsignificantly influencing footprint decisions. When fuelprices soared late in the ’00s, some companies broughtmanufacturing back from distant low-cost countries,while others increased their distribution capacity to getcloser to customers. But the fuel effect has transcendedcosts, as a growing emphasis on sustainability furtherenhances the importance of energy in the footprint

A number of ongoing trends havedramatically impacted companiesboth home and abroad and areshowing no signs of reversing anytime soon. These trends will likelycontinue to influence locationdecisions and may requirecompanies to anticipate the impacton their operations and therefore ontheir global footprint.


equation. Increasingly, companies are seeking to identifyrenewable energy sources as production inputs – notonly for cost containment reasons, but for corporatesocial responsibility as well. This has led to theemergence of several new industrial hubs that featurehydroelectric or geothermal power. Executives inenergy-intensive manufacturing industries are turningtheir attention to locations such as East Malaysia, wheredemand for developed industrial land in Sarawak has faroutpaced supply; Quebec, Canada; and, although lessso in the wake of the financial and natural disasters thathave befallen it lately, Iceland.

Megatrends A number of ongoing trends have dramatically impactedcompanies both home and abroad and are showing nosigns of reversing any time soon. These trends will likelycontinue to influence location decisions and may requirecompanies to anticipate the impact on their operationsand therefore on their global footprint.

China’s continued evolutionThe decisions that led many global companies to Chinaa decade ago cannot be automatically assumed to holdvalid today. China’s coastal wage rates are escalating atdouble-digit rates;4 this combined with the potential riskfor revaluation of the Chinese yuan has led to morecompanies considering other Asian candidate countriesfor low-cost, export-oriented manufacturing. At thesame time, China is producing a massive, growing andincreasingly talented pool of engineers, computerscientists and IT graduates (estimated at over 500,000per year).5 While many companies are exiting – orbypassing – China for low-skilled manufacturing, savvycompanies are seeking to backfill those positions bygrowing and diversifying in-country research anddevelopment or high-tech manufacturing capabilities.

Increasing share of demand coming fromemerging marketsGlobal economics are constantly evolving, as illustratedby changes in cross-border investment. A more diversegroup of countries draws foreign direct investment (FDI)each year, and emerging economies such as India,Turkey, Brazil and several Southeast Asian nations areattracting a growing share.6 (See figure 1.) Forbusinesses, this means the environments in which theyoperate – or those in which they could potentiallyoperate – are experiencing perpetual changes in talent,technology, infrastructure and operating costs that canfurther increase (or in some cases, decrease) theirattractiveness for future investment. The influx of capital and jobs has helped increaseconsumer spending in many emerging economies.Spending power in 35 top emerging market countriesgrew by an average of 83 percent from 2001 to 2009,contributing to a cycle of growth and expansion thatoften leads to more foreign investment.7 As demandstagnates in many developed countries and companiesincreasingly turn to burgeoning markets for revenue,they are positioning footprints to build market presenceand brand reputation for long-term sales growth.

Fewer companies are deliberate andproactive in assessing their overallcorporate footprint and the degreeto which it supports and contributesto the business strategy

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Skill migration and competition for talentThe specter of the Baby Boomer generation’s retirementfrom the U.S. workforce has made media headlines forthe last few years, but the aging of the workforce is not limited to the U.S. In fact, the trend is impactingcountries such as Japan and Germany far moreseverely.8 Though the economic recession hasdampened news of it, a competition for talent toreplace those exiting the workforce looms, forcingcompanies to be more creative about where they findskilled personnel. Similarly, these trends will likely require companies to give more thought to other talent strategies, such as utilizing mobile technology to engage professionals remotely.

Narrowing gap in educational qualityMany emerging countries have invested heavily in theireducation systems over the years, recognizing its valueto enhance their position in the global economy. Thiseducational development has closed the gap betweentop-tier developed markets and some emergingcountries, such as Romania and Chile, particularly at theuniversity level. These developments may presentopportunities to get ahead of the curve by graduallyshifting the work done at existing locations to the typesof activities aligned with the emerging skills andeducation levels. For example, it is becoming morecommon for companies to consider R&D placement inmarkets that may have been more focused on low-skillmanufacturing – or would not have even come tomind – 10 years ago.

Continued manufacturing automationA long-running debate concerns the relative benefits oflabor arbitrage in offshore manufacturing versus costreduction and efficiency enhancement throughautomation. As technology continues to improve andarbitrage opportunities decline in many growing

Source | Economic intelligence unit, September 2011

$0 $10

Foreign direct investment in flow

2005

2014

FDI ($US billions)

$20 $30 $40 $50 $60 $70 $80 $90 $100>$100

Long-term benefits of a properlyaligned footprint can greatly exceedthe cost of implementation


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markets, automation is again gaining traction. This, inturn, has led to what some call the “Talent Paradox”:high unemployment levels in areas with protractedshortages of skilled workers. Many companies fromCleveland to Cincinnati, for example, struggle to findR&D and innovation talent, although Ohio’sunemployment rate continues to exceed 9 percent. Thisphenomenon is not limited to North America andEurope, but is also extending to other countriesthroughout the world as companies replace man-hourswith kilowatt hours. For some industries andmanufacturing processes, automation advancements arereshaping location and footprint decisions as companiessuffer from skill and talent shortages in legacy locations.

Evolving government policyChina’s recent discouragement of low-skilledmanufacturing (through reduced incentives andincreased legislative restrictions), an evolvingimmigration policy in the United States that mayincorporate potentially restrictive provisions beingdebated in state and federal legislation, and theenactment of treaties in South America and Asia thatcould result in trade protections for regional economiesare all policy trends that can have a profound impact oncompanies’ existing footprint and the decisions theymake for the future. Restrictive measures enacted byone country can have a ripple effect on others; Canada,whose immigration slogan is “Canada Wants You!,” hasused policy to welcome top-skilled talent shut out byrestrictions in the United States. South Americancountries, particularly Brazil and Argentina, have startedimplementing policies to restrict some labor-intensivemanufacturing imports, particularly from China, toprotect a domestic industry described as “under siege”by Brazil’s finance minister.9 Other Asian countries suchas Vietnam, Cambodia and Bangladesh have benefittedfrom China’s dissuasive stance toward lower-endmanufacturing. These legislative maneuvers should notbe viewed in isolation, but rather should be regarded asinterconnected forces.

A potentially game-changing shift in enterprise valueAssessing the enterprise footprint and executing therecommended realignments are not small endeavors.Footprint optimization can be costly and timeconsuming. But companies able to do so are realizingshort-term financial benefits and likely better positioningthemselves for long-term success.

Aligning an enterprise footprint primarily creates valuethrough infrastructural and operational economies ofscale and flexibility. Real estate expenditure decreasesand the reduction of redundant positions arefundamental value drivers; however, othergeographically variable operating conditions and costscan also contribute additional ongoing value.Companies can materially improve deploymentperformance by enhancing their access to appropriatelabor skills and leveraging cost arbitrage, as well asmanaging other operational costs such as taxes, utilitiesand logistics. The characteristics of a company’s specificfootprint determine the relative impact of these factorswhich, when balanced for both existing and newlocations, are essential to realizing sustainable benefits.

Companies can materially improvedeployment performance by enhancingtheir access to appropriate labor skillsand leveraging cost arbitrage, as well asmanaging other operational costs

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Realizing the benefits of a realigned footprint requiresmaterial investments and implementation planning. The primary investments include costs associated withexiting existing facilities, capital expenditures for newfacilities, equipment relocation, employee severance and stay bonuses, relocation of key personnel, andincremental recruiting and training. The requiredexpenditures can be significant and can reach $50million for large-scale redeployments. In addition,detailed implementation and communications planningis essential to retain key talent and mitigate potentialimpacts to productivity during the transition. A detailedevaluation of organizational design and operationalprocesses should also be utilized to provide thefoundation for change and facilitate redeploymentdecisions. Absent this perspective, changes to thefootprint may not yield the expected results.

Long-term benefits of a properly aligned footprint cangreatly exceed the cost of implementation. Present value cost savings over a 10-year period can range from 5 to 25 percent, with headquarter redeploymentsrepresenting the lower end and realignment ofdistribution operations typically nearer the upper end

of the range. Deployment of shared service operationsand realignment of commercial operations typically yieldpresent value savings of 10–15 percent. Payback periodsand return on investment also vary but generally are two to five years and two to five times investment levels on a present value basis, respectively. Eventhough a significant effort and cost are required toalign a footprint, the financial and operational return to an enterprise can be sustaining, as shown in thefollowing examples.

“One size doesn’t fit all”A leading global nutrition company has experiencedrapid organic growth over the past decade, putting astrain on all facets of the business. As a result ofuncoordinated growth, the company had adopteddivergent footprints in key regions of the world.European operations had become highly dispersedacross countries, leading to redundant people, processesand space. Conversely, its U.S. footprint had grownoverly centralized in a single metropolitan area with ahigh cost of living, which inflated wages for skill setsthat could be efficiently sourced in other lower-costlocations and exposed the company to elevated levels ofbusiness disruption risk associated with centralization ina city susceptible to natural disasters. With growthprojections approaching double digits annually, theexisting footprints were no longer sustainable.

With a mandate from top executives, the company set out to systematically define a configuration andlocations conducive to future business growth. Thesolution, in this case, lay somewhere between thelegacy U.S. and European models. Extracting selectedfunctions from the countries in Europe andconsolidating them in a low-cost, in-region “center of excellence” is expected to yield present value costsavings of 10–15 percent, generate returns of three

Footprint optimization can be costlyand time consuming. But companiesable to do so are realizing short-termfinancial benefits and likely betterpositioning themselves for long-term success.


to five times the costs of implementation, and createeconomies of scale in Europe. In the United States,deployment of a second “hub” is anticipated to reduceoperating costs for the enterprise by 5 percent, yield areturn of twice the cost of implementation, provideaccess to new talent, and offer risk diversification.

The new footprint strategy is not without obstacles;moves to the new locations will be costly, transitions arelikely to be challenging to manage and key personnelmay be lost in the process. However, those issues can be anticipated and mitigation plans implemented. Withmanageable challenges and payback periods ofapproximately three to five years, the implementationcosts proved to be a beneficial investment for afootprint that offers a flexible, cost effective andsustainable platform to support future growth.

“Room to grow”With an increasing number of drugs in the pipeline, this highly profitable developer and manufacturer ofpharmaceuticals anticipated rapid growth that wouldrequire additional staff and facilities. As a reaction to itsgrowth expectations and dispersed footprint, companyexecutives sponsored an initiative to evaluatedeployment options across the entire enterprise,including headquarters, R&D, manufacturing andcommercial activities. The objectives of the programincluded not only supporting growth and thedevelopment of commercial capabilities but alsoreinvigorating R&D and innovation within theorganization and redefining the company culture to be more collaborative.

Through a structured and disciplined process, thecompany developed guiding principles based on thestrategic goals to evaluate potential deployment

scenarios that could support consolidation and futuregrowth. These principles, which focused on theretention and attraction of specialized highly skilledtalent, and a broad financial analysis were used toanalyze the trade-offs between five distinct deploymentscenarios ranging from partial consolidation to full co-location of operations. The company selected adeployment scenario calling for consolidation ofoperations into a single location. In addition tofacilitating the company’s cultural and operations goals,the deployment strategy offered present value operatingcost savings of 15–20 percent, a return of approximatelythree times the costs of implementation, and a paybackperiod under three years. Also as a result of broadplanning, employee turnover has been minor andresearch collaboration has measurably increased.

Mergers and acquisitions generateadditional footprint complexity, oftenyielding overlap in some geographiesand underrepresentation in others

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The way forwardThrough work with a variety of leading companies supporting enterprise footprint optimization initiatives, we haveidentified a number of key insights, described in the accompanying table.

Do... Don’t...

Set the tone at the topLeadership buy-in and communication up front is criticalto encouraging supportive contributions among keystakeholders and mitigating organizational uncertainty.Identify a senior leader to take responsibility for designand execution of changes, and clearly communicate theimportance of positive participation early in the process.

Don’t wait for a crisisWhen crises strike, companies tend to favor decisiveaction over rigorous analysis. Enterprise footprintoptimization presents the opportunity to take a stepback to proactively align location footprint and strategicplanning to make urgent reactions to crises eitherunnecessary or at least more efficient.

Take a holistic viewTo be effective, the optimization process should considereverything from key strategic objectives, such asenterprise sustainability and market growth, tooperating requirements, such as talent availability, riskmanagement and cost containment.

Don’t undercommit The potential for a transformative impact on thebusiness in terms of positioning it for the future anddeveloping a source for sustainable competitiveadvantage justifies the expenditure of time andresources. Insufficient leadership communication ordedication of resources could lead to transition costswithout realization of the full benefit of footprintoptimization.

Start with quick winsIn many cases, there are immediate improvementopportunities that can start delivering benefits in lessthan three months. These “quick wins” not only canmake the overall effort self-funding, they can help buildmomentum and credibility, which are essential tosustained improvement and gradual pursuit of a targetfootprint.

Don’t forget about taxThe intricacies of international tax law often present aprime opportunity for a footprint assessment. In fact, forsome companies, the tax incentives offered by particularjurisdictions can justify the entire effort.

Consider long-term objectivesA key component of enterprise footprint optimization isliterally mapping the future of the organization. Withthat in mind, it is important to align the footprint withstrategic objectives, include scenario analysis as part ofthe initiative to identify key factors that could impactplans, and build in footprint flexibility to quickly respondto change.

Don’t ignore change managementIntegrating effective organizational design adjustments,aligning talent management and incentives withchanges, and identifying and addressing the impact oncorporate culture are essential to long-term success.

Challenge traditional assumptions Sophisticated tools such as advanced analytics can alloworganizations to test assumptions and model profitabilityat a depth not previously feasible. These initiatives offerthe opportunity to validate or refute standardassumptions using these resources as part of footprintmodeling.

Don’t view the exercise solely as one in cost reduction. While cost reduction is a potentially significantcomponent, organizations that focus exclusively on thatobjective miss the true benefits of balancing a widerange of critical factors, from cost efficiency andoperating requirements to talent availability, tax impactsand access to new markets.


For leading companies, internationalization is starting togive way to true globalization as these organizationsextend their reach to all corners of the habitable worldin search of new markets, resources, talent pools andcost advantages. Yet this path can be challenging tonavigate as the business environment is constantlyevolving, from gradual changes in costs and talentmarkets to political and natural events impactingeconomies.

Companies not focused on these dynamics can bequickly left behind, encumbered by locations that nolonger suit their needs, unnecessary redundancy in theiroperations, elevated risk levels, and footprints that donot position them to anticipate and address changequickly. On the other hand, companies that proactivelymanage their global footprint can gain a competitiveadvantage that would be difficult to replicate, literallypositioning the organization globally to achieve itsstrategic objectives, both in the short term and for thefuture.

Reprinted from Deloitte Review, issue #10 : 2012

by Darin Buelow, principal with Deloitte ConsultingLLP., Matt Szuhaj, director with Deloitte ConsultingLLP., Josh Timberlake, senior manager with DeloitteConsulting LLP. and Matt Adams, manager withDeloitte Consulting LLP. All authors are part of theStrategy and Operations practice of Deloitte Consulting LLP.

Endnotes1 Bloomberg Business Week, July 2, 2009

<http://www.businessweek.com/blogs/globespotting/archives/2009/07/egypts_bid_for.html>

2 PBS News Hour, February 23, 2011<http://www.pbs.org/newshour/bb/world/jan-june11/mexico_02-23.html>

3 Forbes, May 20 2010 <http://www.forbes.com/2010/05/20/calderon-drug-war-business-washington-mexico.html>

4 Reuters, August 12 2011<http://www.reuters.com/article/2011/08/12/us-usa-manufacturing-china-idUSTRE77B2IV20110812>

5 Money.cnn.com, July 29 2010<http://money.cnn.com/2010/07/29/news/international/china_engineering_grads.fortune/index.htm>

6 Economist Intelligence Unit, September 20117 World Bank, per capita incomes at purchasing power parity,

2011 (countries are emerging market economies and includeAlgeria, Argentina, Belarus, Brazil, Bulgaria, Chile, China,Colombia, Costa Rica, Croatia, Dominican Republic, EquatorialGuinea, Estonia, Hungary, Latvia, Lithuania, Malaysia,Mauritius, Mexico, Oman, Panama, Peru, Poland, Romania,Russia, Saudi Arabia, Slovak Republic, Slovenia, Suriname,Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, and Uruguay)

8 US Census Bureau International Database, 2011 Estimates9 The Economist, September 24, 2011

<http://www.economist.com/node/21530144>

Do... Don’t...

Align incentivesTraditional incentive programs tend to reinforce thestatus quo and encourage optimization within individualfunctions rather than for the enterprise as a whole. Toaddress the issue, incentives should be realigned so thatmanagers and employees are motivated to both supportchanges and focus on overall margins rather thanfocusing on increasing performance within theirparticular function.

Don’t let groups opt out There may be legitimate reasons to exclude certaingroups, functions or geographies, but each group thatopts out erodes the benefits of a holistic review. Manytimes, individual groups perceive the exercise as a threatrather than an opportunity, further emphasizing theneed for strong, early and consistent communication.

Repeat as needed Plan to periodically repeat the analysis as the businessenvironment changes and your footprint evolves. Thegood news is that subsequent analyses will likely takeonly a fraction of the time and effort that was requiredinitially.

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