2 Director of Finance

By Peter Storm

FINDING THE BEST LOCATION CREATES A CHALLENGE for international companies, and – more to the point – the challenge often ends up. Moreover, the time available to deliver the promised benefi t is continuously shrinking: new foreign investments must provide benefi ts immediately. Because decision-makers will be held accountable for choices, it is clear that Financial Directors must understand and infl uence these decisions.

This article provides an overview of the process.

Finding Business LocationsIt is normal practice to initiate a location review project with support from one of the large consultancy fi rms. The business owner defi nes some requirements and, after a period of paid-for research a shortlist is presented. The exact criteria that resulted in the selection are not always clear, and sometimes are not even supported by objective data, and can be based on personal preferences or local contacts.

This approach is not only a “black box”, it can also be very expensive. For large companies this approach is sometimes the best choice. After all, consulting agencies will often discount consulting fees during the

selection process based on their assumption that they’ll be in the best place to help their client implement the Foreign Direct Investment (FDI) project, and be able to charge a large volume of implementation services.

In order to save costs other companies use an internet-based research instead. Problem is that there are billions of pages on the Internet, and every new set of keywords results in a new list of potential locations. Moreover, these search results are generated based on the way locations chose to promote themselves ( via “search engine optimization”, or SEO), regardless of your needs. Google ranks the locations based on the chosen keywords and how these relate to the websites of location agencies. In spite of the challenges, according to The World Bank (Global Investment Promotion Benchmarking – compares the performance of nationally-mandated investment promotion intermediaries on their effectiveness in meeting investors’ information needs), companies increasingly use the Internet as a way to identify and analyze potential locations. In case of emerging markets the use of the Internet was even higher.

The Internet approach is inherently cheap and easy, and therefore can be a good option. As with all searches on

Finding the best business location

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Director of Finance 3

Financial Planning

Peter Storm, CEO at Global-Arena.com

the Internet, however, the actual effectiveness is negatively impacted by the sheer overdose of irrelevant ‘stuff ’ that is available on the web, clogging search efforts. This is also impacted by paid-for content (“Google Adwords”) that shows up in your search result even if you’re not looking for it. Separating the wheat from the chaff is becoming an art…

We believe that the best approach combines the best of both worlds. Focused analysis – transparent, objective analysis of reliable and comparable information – paired with the power of the Internet. The analysis helps sort, organize, and filter the unparalleled mass of information available on the web.

This approach could be used to generate a ‘long-list’ of locations. Use an online tool to take the search criteria that have been defined based upon your strategic needs, run the analysis to get a short-list, and then get hands-on again when reviewing candidate sites. Meetings with representatives of those sites can be used to evaluate ‘chemistry’ and cultural fit, and thus help steer your decision towards the location best matching your business and personal needs. In addition, they can be used to identify and target incentives.

The Best Location:“Best” is viewed differently depending on the planned sector/function specific activity. An organization working toward an systematic analysis and objective location decision will quickly find themselves buried in data. Location factors will be varied – encompassing things like labor availability, productivity and flexibility, market attractiveness, cost of living and a variety of socio-political measures.

It is not easy to objectively compare and rank these factors. To be objective, it is necessary that the data – which comes from a multitude of sources – is comparable and consistently defined. Moreover, although comparable and consistent data sources are necessary, they are not sufficient to reach a solution: the appropriate data series are not easily ranked. (For example: How does GDP per capita relate to local unemployment rate? What does labor productivity per person employed mean compared to average redundancy costs?)

In addition, the aspects that are most important to a decision maker will vary depending on the purpose planned for the location. The needs of a regional headquarters site are far different from those for a factory.

A multivariate, statistical model combines a variety of data sources encompassing economic (e.g. things like GDP, Labor productivity, Cost of Living), talent (e.g. things like education capabilities, labor market flexibility) and human (e.g. things like socio-political stability, corruption index) factors. To be useful, the model must be dynamic, that is, it must allow the user to determine the relative importance of the different location factors.

It is also important that decisions are supported by current data. Consider a situation from Poland in 2007. In that time frame, there was a huge increase in investments into Poland. The surge was supported by analysis of historical data that indicated (correctly at the time) the presence of a skilled workforce, moderate wages and extensive fluency in English. Unfortunately, by the time newly created production facilities were completed and work was being sourced, conditions had changed. A large number of skilled workers had left Poland for jobs in the Western part of the EU. Organizations then had to source workforce in countries like Romania and relocate them

to Poland. If more current data and trend analysis were used, these organizations may have invested in Romania in the first place.

This example shows that a location decision cannot be determined by simple analysis of an existing situation. Macro-economic indicators used to support a decision take time to reflect rapid changes. All analysis should be reviewed in the context of current political and economic developments. This is a process we strongly recommend the customer should do jointly with a consulting firm.

Business DemandsIt can be important to gauge a second opinion about location selections. During the review it often becomes clear that conclusions have been reached in isolation (if, for example, a single consultant was used) or subjectively (if, for example, chosen because the consulting agency can pocket a finder’s fee for bringing customers to a particular location).

In contrast, build a transparent process with well-defined and agreed criteria using independent data sources. This transparency makes it easier to understand and support the result. As stated earlier, though, major location decisions are not made solely based on the results of a model. The model helps to generate a useful short-list, but the final selection can only be made after site visits and negotiations have taken place.

The use of independent data and multiple criteria makes it possible to perform periodic reviews of business locations. This provides insight in the relative performance and comparative advantages of the locations and gives the information needed to negotiate better conditions over time. The technique is particularly useful during a merger, acquisition or divestiture. In the global world, it is important to continuously review and evaluate the competitiveness of business locations.

SummaryUsing the Internet to search for locations is becoming increasingly relevant, but everyone experiences information overload. The Internet provides a gazillion hits for every query, ranked largely based on paid-for content and SEO, and not ranked based upon your needs. To effectively use the Internet for your search efforts it is fundamental to begin location analysis by determining the most appropriate process. It is of paramount importance to determine in advance when/how you’re using the Internet, and when/how you’re using consulting firms.

We strongly recommend a combination of the two, so as to maximize your options at a very low cost, while maximizing the effectiveness of your decision with high accuracy. Available time and available resources (cost…!) will help you determine the optimal balance between Internet and consulting.

Establishing a new HQ-relocation can be a disruptive process, opening a new foreign subsidiary can be very costly and risky business. Deciding on the best location is a massive challenge with huge impacts for the company. It is key to have these challenges become successes, and to have these impacts be profitable. As Financial Directors you now have effective tools to help you achieve that. n