By Pete Mohan, Site Selection Consultant for Wadley Donovan Gutshaw Consulting
Since 2014, back office employment growth has been modest at best. In light of the performance of the economy over that period, the concerns over that stagnation are justified, and multiple factors are to blame. For this article, “back office” is defined to encompass all administrative functions that don’t require a specialized four-year degree, including customer service, financial clerking, data entry, etc.
As back office operations have evolved, two tiers of center have emerged; companies have opted to increase complexity of tasks and level of responsibility in some centers, oftentimes requiring a bachelor’s degree; for centers not requiring that level of education, finding cost-effective locations to train-up entry and experienced talent is the priority. Due to this bifurcation of back office labor needs, both high- and low-level operations face unique challenges, and each have opportunities for growth.
Current State of Back Office Employment (see Table A)
Back office employment in the U.S. has grown at less than half the rate of total employment since 2014 (2.8 percent vs. 5.9 percent). Back office employment in medium- and large-sized metros has grown more rapidly than smaller metros as well as the national rate. However, this trend seems to be driven primarily by general labor availability, as total employment growth still outpaces back office growth by at least 50 percent in each of the different metro area size groupings. Additionally, in the 160 metros with employment growing faster than the U.S. rate, back office employment has increased by 8.7 percent, whereas metros growing slower than 5.9 percent have lost 2.4 percent of back office employment over the past three years.
Despite growing at a slower pace than overall employment, regardless of metro size, back office wage growth has outpaced overall average wage growth, indicating that at all scales the back office labor market is relatively tight.
Unemployment levels have dropped, and back office workers with a bachelor’s degree have found new opportunities in which pay is commensurate with their education. Because of this, the organic presence of underemployed four-year grads in applicant pools for low-level back office operation has diminished. As a result, back office recruiting has essentially split in two directions: those centers whose function requires paying for the skill-level of a degree-holder, and those which do not.
The Bifurcation of Back Office
Since the Great Recession, back office operations have vacuumed up college graduates as limited employment opportunities existed for entry-level workers in most metros. Companies began to leverage their surplus of educational capital by increasing responsibility for their existing workforce, or creating new roles that would maximize the talent of recent graduate hires. At the very least, companies enjoyed the increased quality afforded by their underemployed workforce.
Due to wage pressure from higher-paying back office operations, plus resulting decreased applicant flow, lower-level back office faces the issue of increased turnover and training costs in addition to declining worker quality. This tracks with the trend that back office expansion has been greatest in areas of high population growth, as companies have found it easier to maintain adequate supply in a tightening labor environment. Low-level back office is not isolated in facing labor pressure from above, however. Higher-function back office’s hold on entry-level college talent faces the emergence of large “Middle Office” operations which have been placing major demands on educated labor in medium/large metro areas.
The Rise of “Middle Office”
Most high-level back office operations that prefer a college-educated workforce have less of a demand for specific majors (although business degrees often more desired), and more of a need for abstract skills like communication and analytical abilities. The opportunity to train and mold these candidates is often preferred over experienced talent or graduates who are pursuing a more acute career path.
In recent years a trend has emerged in which companies have sought to establish large “middle office” operations in Tier Two metro areas that offer more affordable labor than the Tier One metros (like New York, Chicago, Dallas) where these positions were commonly housed. Middle office operations are defined for this article to encompass most administrative and operational tasks, including accounting, HR, sales, purchasing, business analysts and often include an IT staff dedicated to enterprise management.
Clearly a middle office operation will occupy a different tier within the labor force than even high-level back office, and will require more specialized graduates. Higher pay levels and demand for more experienced workers and managerial-level staff are key differentiating factors. Despite demanding mostly separate workforces, middle office still stands as a threat to the success of high-level back offices. Middle office centers offer unparalleled career-pathing opportunities, and often will siphon the best and brightest performers from back offices.
Entry employees typically will spend the first few years out of school in high-level back office operations, but will look to parlay that experience into an opportunity in a middle-office or operations center, thereby limiting the potential for extended tenure employees. This will penalize companies fiscally for additional training costs, but more importantly limit the pool of candidates for future internal hires and development of managerial-level staff.
Trends in Middle Office
Middle office has grown substantially vis-à-vis back office, leveraging the education level of young workers, with employment increasing by 8.1 percent since 2014, outpacing overall national employment growth. This growth has unsurprisingly been concentrated in large metro areas, as those with a workforce over 500,000 gaining 10.1 percent in middle office employment over the same period.
Wages have inflated, but at a rate slower than both the national average and back office. Despite robust employment growth, markets have been able to absorb these operations without becoming saturated or encountering hyper-inflation. Like back office, middle office expansion is concentrated in high growth areas (See Table B). Metros with an existing annual supply of university resources and a reputation for vibrant work/life culture have supplemented talent supply by attracting educated young people from smaller regional markets as well as across state borders. This has allowed supply to keep pace with demand in these markets, preventing negative externalities caused by saturation. Meanwhile, smaller areas (especially college towns) are cultivating the talent, but are unable to prevent it from draining to regional economic hubs.
Despite middle office heavily demanding a diverse mix of administrative skills, with the escalating importance of IT workers in the day-to-day operations of any company, acquiring technology skills has been a driving factor in many of the most-recently sited middle office centers. The scarcity of tech talent nationwide limits the location options that can accommodate both IT and other middle office functions. It’s no surprise that some of the hottest markets for middle office are also the most active metros in the tech industry (for example, Austin’s middle office employment has grown by 31 percent since 2014; Minneapolis – 25 percent; Raleigh – 24 percent; Tampa -19 percent).
Some recent examples of middle office sitings include the G.E. Global Operations Center in downtown Cincinnati (announced 1,400 jobs in 2014, recently announced will now be growing to 1,800); the Deloitte U.S. Delivery Center in Orlando (in ’14 announced 1,000 jobs in IT, business, HR); and Credit Suisse’s announcement to add 1,200 to 2,000 new operations jobs in Raleigh, including relocating some roles from New York City (Credit Suisse had an established headcount in Raleigh, of which 40% was technology). Each of these moves was at least partially predicated on securing IT talent, in addition to more traditional middle office operational functions.
Avoiding Competitive Exposure from Middle Office It is important to understand the scale of metro necessary to support a large middle office operation has a lower limit. While middle office employment has enjoyed growth across all metro scales, the most impactful centers like the examples mentioned above are confined to areas that have a critical mass to support them. Tier Two metros like Raleigh, Cincinnati, Denver, etc. will continue to compete for these projects, while some Tier Three metros will be considered (e.g. Verizon placed a 1,000 employee shared service center in Tulsa, and CoStar placing 300 in Richmond). To mitigate this threat, back office can find markets that are flush with graduate talent for their size, yet would not be on the radar for a new middle office operation; markets like Albuquerque, Savannah, and the Lehigh Valley.
To further bolster defenses against future competition, establishing direct partnerships with universities is imperative so that regardless of which competitors arrive, a talent pipeline has been edified and local brand exposure can be leveraged. Additionally, it is critical (especially in single function operations) that career-pathing opportunities are clearly communicated, both in job postings and within corporate culture. The advancement channels offered by large middle office centers are one of their most appealing elements to attract talent, so efforts to communicate promotional opportunities can go a long way toward attracting and retaining valued employees.
Despite the proliferation of middle office operations throughout the U.S., high-end back office has opportunities in mid-sized metros that can afford robust talent supply while avoiding the most onerous competitors. Challenges Abound for Low-End Back Office While high-end back office centers face stiff competition from the flourishing middle office sector, low-end back office faces a slew of more indirect complications.
The first comes in the shape of programmed state minimum wage increases that are rolling out over the next few years, with more states likely to follow suit in the near future. While in a few cases back office wages will abut minimum wage escalations, many will be fiscally affected by the overall inflation of wages in these markets. Smaller, more rural metro areas in California (Fresno), Colorado (Pueblo), Arizona (Tucson) could feel pressure from companies wanting to leave for greener pastures if they don’t feel they’re getting adequate applicant quantity or quality for the rate they’re required to pay. This could generate a locational advantage for states whose statutory minimums are unlikely to rise in the near future. Regardless, minimum wage increases are bound to have an impact on all lower-paying industries.
In some markets where other unskilled occupations (like distribution or low-end manufacturing) have seen significant wage increases, new competition for back office talent has developed. At what point does a person making $12/hr at a call center leave to work in a climate controlled warehouse offering $14/hr? These value propositions are becoming more and more common.
In addition to in-market competition, back office (especially low-end) continues to face pressure from abroad. Companies willing to tolerate some level of foreign accent in customer-facing roles can easily find offshoring candidates for half the all-in cost of a U.S.-based center. In some cases, for a role in the U.S. that would not attract workers with a bachelor’s degree, a workforce with 100 percent of four-year educated talent in, say, a Central European nation could be had for a fraction of the cost of uneducated American talent. As more and more nations develop their BPO sectors, the number of markets abroad that are competitive with U.S. options will continue to grow, and play a role in the industry’s domestic decline.
While large job announcements and their corresponding incentives packages continue to dominate the news, low-end back office announcements will not garner the same level of excitement or financial aid. Many areas have increased minimum wage thresholds for incentive eligibility to the point that low-end back office will rarely qualify. Training grants and equipment sales tax exemptions will often be on the table, but not to a level that will amount to significant cost offset. There simply isn’t much incentive money out there for low-level back office within the U.S.
Complicating these factors is an economy near full employment, which will continue to drive turnover and wage pressure at lesser-paying back office operations. Overall, the current labor landscape facing low-end back office is more difficult than most industries. Opportunities Exist for Low-End Back Office Despite the gloomy outlook portrayed above, there remains niche markets that can foster successful low-end back office operations. Certainly, the scale of the center will play into where it should be located.
For larger operations, the best locales are those with significant critical mass (e.g. a market with back office employment of at least 50:1 ratio to projected hires – that is, a center requiring 1,000 FTE should have at least 50,000 back office employees), a moderate cost of living where a back-office wage still holds buying power, and roster of competitors that is not so daunting that you enter the market as a bottom-rung employer.
For smaller operations, if the labor need is one that can be accommodated in nearly any size of metro area (or micropolitan area), the opportunity to find a market where “employer-of-choice” status can be obtained. This may be in a town of 30,000 where unemployment has stayed high after a factory closure, and a shuttered K-Mart can be rehabbed into speculative office space. Another solution is a college town where many students pay their way through school working part-time, and the only current employment options are in retail or hospitality, and students would be happy to earn $12/hr on a structured 20-hour schedule. A third option is blue-collar cities or military towns where male unemployment is minimal, but employment opportunities for female workers or military spouses are limited.
Overall, despite negative factors influencing the low-end back office market, there are opportunities available for companies willing to dig for the right location. Conclusion Over the course of the past few years, back office has seen a bifurcation of its labor needs. Because of this, careful consideration of how to position a center within a market or where to locate new operations must embrace an orientation that offers sustainable access to necessary talent. Finding locations where long-term competition risk is minimized and opportunity to achieve “employer-of-choice” status exists is key to success.
Back office operations can bolster its labor supply by securing a permanent entry-level talent pipeline through educational partnership; or, additionally, through the thoughtful positioning of wages to maximize opportunity to source experienced talent from lower-paying back offices as well as other industries that may hold underemployed talent like retail or distribution.
Despite back-office employment’s tepid growth, legitimate opportunities abound if careful consideration of recruiting and competition pitfalls are observed. A shifting labor landscape will further exacerbate the need for new and relocating back office operations, and more than ever, whether these centers thrive will be depend heavily on their location.
BIO: Pete Mohan is a Site Selection Consultant for Wadley Donovan Gutshaw Consulting’s Jacksonville office. In his four years as a consultant with WDGC he has helped locate projects totaling over 10,000 jobs across varying industries and client needs, including manufacturing, distribution, financial services, and headquarters relocation. Pete’s previous experience includes environmental remediation, manufacturing, neighborhood management, and entrepreneurship; he studied Civil and Environmental Engineering at Marquette University as well as City and Regional Planning at Clemson University.
