By Dennis J. Donovan, Principal, Wadley Donovan Gutshaw Consulting
In this article, we address the drivers underlying location decisions within the financial and business services sector. This sector encompasses a wide swath of industries and functions. But there are common themes underpinning location decisions across the industry/functional spectrum.
First, we look at industry composition. This review is followed by a discussion of the most critical locational influences shaping the geographic deployment of business operations. Lastly, we discuss a structured process to follow when siting new or relocating existing facilities.
The financial and business services industry, a term that is used loosely, consists of banking, insurance, and B2B professional services. Segments include the following:
Among the functions often deployed as standalone entities by financial/business services enterprises are:
1. Corporate Headquarters (i.e., front office)
2. Middle Office, e.g.,
- Requiring knowledge workers
- Serving as a bridge to C-suite and customer-centric functions to infrastructure support operations
- Examples include
- Asset Management
- Market Research
- Information Technology
- Human Resources (including recruitment)
- Inside sales
3. Back office
- Transaction Processing
- IT support, such as Help Desk
- Claims Processing
- Customer Service
- Debt recovering
4. Shared Services Centers
- Centralized support operations on a standard platform
- Services the corporate enterprise
- Functions often included are
- Information Technology
- Human Resources
- Logistics/Supply Chain
5. Business Process Outsourcing (BPO)
- Multi-function services provided by third party firms
- Spans the spectrum of back office operations
6. Call Centers (often a single focus facility)
7. Revenue Cycle Management
- Oriented to Healthcare
- Services embrace the entire patient experience from inquiry through discharge
- Both hospitals and outsourcers provide
- A significant focus is on finance
Financial Services is a $5.4 trillion industry in the United States. Compounded annual growth is projected to exceed nine percent. Underlying robust growth are a number of dynamics including mobile banking, improving customer experience with technology, personalization of services/products, digital engagement, and increased demand for more customized insurance.
Business services (professional/scientific/technical) comprises a $950 billion industry in the United States. Robust growth is forecasted, averaging around 8.5 percent per annum. Fueling revenue growth are forces such as receding negative impact of COVID-19, increased rate of small business formation, increased need for specialized knowledge, rising level of outsourcing, stable/growing economy in developed countries, greater demand from emerging economies, and increased consumer spending both in the U.S. and globally.
Rapid introduction of nascent technologies will be essential for companies to successfully compete in both industry sectors. Technology imperatives include hyper automation (such as machine learning, process mining, process automation, and API integration to replace elevated levels of complexity with end-to-end automation, especially in the back office). Digitization of customer delivery services, innovation/collaboration, cloud fluency, and cybersecurity risk protection/compliance, also constitute underlying dynamics characterized by the industry.
These trends will result in significant employment expansion in both sectors. Finding workers with both technical and soft skills will be essential for success. The war for talent will thus become one of the major challenges facing the industry over the long-term. Location strategy will be a pivotal tactical component for companies to win the war for talent (recruitment/retention).
Charting a Course of Action
A strategic thrust that is becoming prevalent is to evaluate the existing geographic footprint of a company’s business operations. This effort is undertaken after growth projections have been agreed upon by executive management.
The ultimate objectives are to:
1. Determine which sites to potentially expand, by function
2. Target sites for potential downsizing, by function
3. Pinpoint sites to remain status quo
4. Determine need for greenfield (new) sites
- By function
- Office space
5. Ascertain if any relocation should be explored
- Existing site to existing site
- Existing site to new site
6. Explore a seed-and-grow strategy, by function
- Redeploy a small cadre (e.g., 25-50 people) to a new location
- Depending on efficacy, place growth at the new site and backfill attrition (from the existing site) at the new site
We envision a substantial level of location activity within financial and business services over the near future. Among the reasons for an impressive level of new/expanding operations are strong growth, human resource limitations at existing sites, geographic diversification of the corporate footprint, flexibility to efficiently accommodate future capacity, application of new technologies, and cost containment.
Once this strategic analysis has been completed, the next challenge is to find optimal locations for new business capacity, assuming that greenfield options should be pursued. Let us now delve into the most important locational influences, by major function.
Corporate headquarters relocation is an infrequent occurrence. Principal reasons why companies move their headquarters are:
- Consolidation after a merger or acquisition
- Reduction of operating costs
- Closer proximity to customers and/or company operations
- Better global accessibility
- Tap into an established industry ecosystem
While there have been a few notable headquarters relocations within financial/business services (e.g., Alliance Bernstein from New York to Nashville and Charles Schwab from California to Dallas) three more common practices are (a) redeploy selected back and/or middle office operations; (b) cap growth at headquarters and establish new back/middle office functions in more cost-effective locations; (c) relocate only the C-suite (often less than 100 people).
When companies do relocate headquarters, the following often assume primacy in location selection:
- Customer proximity
- Domestic and global air access
- Talent pool depth/breadth
- Attractive quality of life
- Moderate living costs
We have witnessed an uptick in companies either relocating or opening new middle office operations. Availability of knowledge workers in metro areas with a reasonable operating cost structure dominate location decisions for middle offices.
Frequently, middle offices will gravitate to mid-size metros to assume labor market leadership at a favorable cost level. Examples include Hogan Lovells (law firm global business support center in Louisville), Goldman Sachs (asset management in South Florida) and CoStar (research, data analytics, and software development) in Richmond.
Back offices can be single focus (e.g., customer service) or an amalgam of support services (customer service, inside sales, transaction processing, claims processing, payroll, etc.). Scale (especially headcount and mix of functions) will dictate whether a back office needs to be sited in a larger metro or could flourish in a smaller metro.
Large multi-purpose back offices have tended to gravitate to Tier One metros or fast-growing Tier Two metros. Examples of companies following this precept are BoA, Citigroup, JPMC and Wells Fargo. Deployment options have included Dallas, Phoenix and Tampa.
Frequently, single, or dual focused back offices (e.g., customer service and/or transaction processing) have opted for less costly smaller to mid-sized metros. Examples include Ameriprise (Las Vegas), Citigroup (Tucson), GEICO (Buffalo), Global Lending Services (Greenville, SC), Littler Mendelson (law administration support in Kansas City), Mastercard (St. Louis), State Farm (Greeley, CO), Stride/K-12 (Knoxville) and T-Mobile (Albuquerque).
Back office site selection is primarily driven by the availability of requisite skillsets (both experienced and qualified entry-level) and labor costs. Companies seek locations where competitive demand has not outstripped supply, wage levels are modest, labor supply/cost escalation is unlikely to occur, and new hires possess excellent basic skills. Due to labor shortages and/or escalating costs, we are seeing a greater number of companies willing to consider small to mid-size metros, accepting tradeoffs such as air access. We expect this trend to gather steam in the next few years.
In addition to HR dynamics, all companies planning to site a new back office insist on locating in an area with available office space. Due to timing and cost, build-to-suit options are generally unacceptable. Finding available space in a favorable labor market is becoming a more daunting challenge. Importantly, office space needs to be situated in the optimal sub-labor market. In other words, the facility must be located close to where the bulk of potential new hires reside. This parameter is increasingly key as the propensity for sustaining a longer commute (certainly over thirty minutes) is declining. Keep the concept of “sub-labor market” in mind in deciding where to place your new back office.
Additional influential siting considerations embrace good air service, low natural disaster risk, time zone, broadband, and community colleges as a future talent pipeline.
We did touch upon call centers under back office. However, due to the sheer size of this industry subsector, a few additional insights are warranted.
More than any other functional subset, call center location decisions comprise “HR Deals.” Among all geographically variable factors, HR (i.e., labor market) vastly predominates the final locational choice.
Unless the call center involves higher-end (i.e., more complex) client support (either B2B or B2C), new facilities should be established in locations characterized by:
- An employer landscape that would allow the call center to earn/maintain employer-of-choice status
- This caveat often means avoiding areas with a large presence of headquarters, high tech enterprises, and middle office within financial services
- Existing call centers should comprise a “feeder pool” for the new operation
- Wage levels for experienced CSRs and entry level should be less than the U.S. average
- There should be a distinct variance in the call center’s wage vs. the underemployed (e.g., retail sales reps)
- The underemployed pool should be at least twenty-five times greater than projected headcount for the call center
- Median household income should be less than the U.S. norm so that the incoming call center’s wage would have “buying power”
- Limited air access and an unexciting image/perception could be viewed as “barriers to entry” thereby ensuring a competitive labor market advantage
- Available office will usually be a “must have” but it is imperative that the space is available in the (1) Best metro area and (2) Best sub-labor market within the area
- Incentives should be viewed as “nice to have” or “icing on the cake.” It is far more important to find the optimal long-range labor market and an available building within the preferred geographic sector
If siting a call center offshore, additional considerations should embody:
- Language capabilities
- Time zone
- Payroll burden resulting from mandated/customary benefits
- Labor regulation
- Electric power and telecom reliability
- Cybersecurity risk
- Social/political risk
- Currency stability
- Taxes (including VAT)
- Crime/security (including for expats and visitors)
- Air Access
Business Process Outsourcing (BPO) Entities
This segment constitutes a dynamic subset of financial and business services. BPO companies offer specialized services oriented to non-core business activities such as data entry, call centers, finance, market research, IT, selected HR functions, social media analytics, equity research and search engine optimization.
Major BPO enterprises typically have global footprints with delivery centers in multiple countries. Access to knowledge workers in respective disciplines (reflecting composition of the center) constitutes a paramount location criterion. Labor costs are also a prime consideration. This is especially true if services tend to be more routine/repetitive. This is one reason many BPO service delivery centers operate in lower cost Eastern/Central Europe, Pacific, and Latin American countries. Among the more prevalent countries for BPOs are Ireland, Spain, Poland, Hungary, Lithuania, Portugal, South Africa, Brazil, Argentina, Uruguay, Columbia, India, Philippines and Malaysia. Even within the U.S., we observe some BPOs located in smaller, less costly areas. Of course, for higher-end functions, service delivery centers will be in larger areas where labor costs will, ideally, be more moderate but, nonetheless, higher than in the smaller locations.
Genpact is a good example, as the company operates service delivery centers in Tier One metros like Atlanta, Boston, Chicago, Dallas and New York. But centers are also located in smaller areas like Bentonville AR, Danville IL, and Wilkes-Barre PA.
BPO activities will continue to proliferate as the outsourcing trend accelerates. Among the leading players in this sector are Accenture, ADP, Cognizant, EXL, Genpact, Helpware, IBM, Infosys, and Vserve.
IT is often housed with other back/middle office activities. However, companies will establish separate, new IT hubs. These hubs could either be in locations containing other company operations or in greenfield (new locations). In siting new tech hubs, function (e.g., software development) and scale (headcount) will dictate the type of metro area selected.
Given that there is a global shortage of IT talent, we observe that larger software centers are being established in Tier One or Two metros characterized by strong population growth, including in migration. Growth is a pivotal force in ensuring that labor supply will be at least adequate for companies offering competitive pay, benefits, and HR practices (e.g., flexible work arrangements). Recent examples include Atlanta (Cisco, Fiserv, and Google), Dallas (Barclays, Capital One, Ernst & Young, Infocision, and State Farm), and Phoenix (Amazon, Apple, Moov Technologies, Penny Mac Financial, Yelp, and ZipRecruiter). Among fast growing Tier Two metros where IT hubs are gravitating toward include Austin (Amazon, Crowd Street, Google, Green Dot, and Oracle), Pittsburgh (Facebook, Google, Microsoft, PNC, Uber, and Zoom), Raleigh/Durham (Apple, Fidelity, Google, Met Life, Q2, and Swiss Bank), Salt Lake City (Brex, Discover Card, Microsoft, Oracle, SAP/Qualtrics, and VISA), and Tampa (Drift, Genesis Systems, TheIncLab, and Rapid Systems).
For more modest-scale centers, smaller communities can work, especially if there is not extensive direct labor market competition. Some examples include Rural Sourcing (Ft. Wayne), Net Abstraction (Augusta GA), and IBM (Baton Rouge).
Here again, HR is the predominant driver for location of IT hubs. Pertinent evaluation factors include:
1. Talent Pool Depth
- Experienced (e.g., 1-5 years)
- Functions (e.g., data analytics)
- Recent college graduates
- Four-Year colleges/universities
- Increasingly greater reliance on Two-Year colleges as well
2. Diversity within the IT industry and talent pipeline
3. Extent of competitive demand
4. Site orientation to targeted skillsets
- IT professionals are increasingly resisting even more moderate commutes
- Commute time is among the initial questions raised when interviewing for an IT position
5. Market level salaries
- In many cases prefer below either high-cost metros or the national average
- Stability of labor costs (avoid future wage escalation)
6. Robust Technology Infrastructure
7. Moderate cost-of-living
8. Quality of life attractive for regional/national recruiting
9. Air Service (nonstop to at least several gateways)
10. Attractive available office space
11. Reliable telecom and electric power
12. Low natural disaster risk
13. Incentives which can tip the scales once down to a shortlist:
- Refundable payroll tax credits can be meaningful
- Other desirable incentives often include
- Deal closing funds
- Machinery & Equipment Tax Exemptions (Sales and Property)
- Pre employment training
When siting nearshore or offshore operations additional considerations embrace:
- Political/social stability/risk
- Cybersecurity risk
- Intellectual Property Protection
- Taxation such as VAT
- Labor regulations
- Mandated/customary benefits (add to base salary)
- Expatriate/visitor safety
Shared Services Centers (SSCs)
Shared services centers represent a consolidation of non-core back (and in some cases middle) office services delivered from centralized locations. SSCs provide such services at lower costs, with high quality/reliability, and embody standardization/harmonization of work processes. The service delivery platform must be flexible to both leverage growth and manage business downturns. Shared services are provided in-house as opposed to outsourced (under the BPO model). Services often contained in an SSN include one or more of the following: compliance, finance, human resource management, information technology, legal, purchasing and security.
Large corporations will usually operate several shared services centers focused on geographic regions such as United States, Latin America, Europe and Asia.
The site selection principles enumerated above, especially for BPOs, apply to SSCs. Most critical is talent availability, language capability, operating cost (these tend to be fairly cost sensitive operations), access, and risk. As with all location decisions, tradeoffs will need to be weighed (e.g., proximity to headquarters vs. maximum cost savings).
Financial and business services represent a wide swath of both the U.S. and global economy. Due to the increased demand (business and consumer), adoption of digitization of business processes, introduction of the latest technology, labor market constraints, and rationalization of corporate footprints we anticipate a heady level of location activity within this sector.
There are a range of corporate operations that constitute subsets of this broad industry. These include headquarters, middle office, back office, call centers (often a standalone function), information technology (often a standalone function), revenue cycle management, business processing outsourcing (BPOs) and shared services center (SSC).
Functional composition, scale (especially headcount) and talent skillset will shape geographic deployment strategy for financial and business services. From a strategic perspective, the following should be addressed before a site selection exercise:
1. Translate projected growth into operating requirements including new and enhanced skills required for successful staffing
2. Assess the existing footprint, especially labor market capacity, by function to determine:
- Maximum headcount by function
- Payroll and other operating costs
- Physical constraints
- Sites to grow, cap, downsize
- Need for greenfield (new) sites
- Any relocation (wholesale, partial, seed/grow)
3. Map out a gameplan for both short-range and long-term geographic deployment, by function
4. Delineate parameters for each deployment alternate
The paradigm moving forward will be that human resources will assume primacy in finding new locations for selected corporate functions. In some cases, this could call for deployment in large metros that have a sufficient critical mass (existing and growing) of talent albeit at a high operating cost platform. In other situations, companies might look for smaller metros where labor market conditions are favorable and costs markedly lower. But tradeoffs would need to be weighed (less accessible, limits on future headcount size, and more challenging for regional/rational recruiting).
While available office space will continue to be strongly preferred, two points to remember: (a) the site needs to be both efficient and attractive and (b) the office should be close to where targeted skillsets reside. Resistance to longer commutes is here to stay. Physical sites must be able to enhance recruitment/retention of talent. Thus, be cognizant of “sub-labor market” when evaluating a metro area.
Concerning remote work, here is our take. Positions that heretofore could effectively operate remotely will continue to do. These include sales, research and consulting.
However, WDGC does not envision wholesale work-at-home. A hybrid workspace model will prevail. This paradigm will involve a flexible arrangement such as one to three days a week in the office and one to three days at home. They should be the same days each week (i.e., not rotating). Additionally, office space standards will increase in part due to health and safety due to COVID-19.
Lastly, when deploying financial/business services offshore (or nearshore) beware of so called “hot spots.” These areas often will display extensive competitive demand for talent, escalating salaries, and rising turnover. Companies that cannot afford to be near the top of the food chain from a compensation standpoint might encounter these detriments in hot spot locations.
Bottomline, adhere to a structured approach when determining where to site new capacity within the financial services/business services sector. See what the existing footprint has to offer. Then, if necessary, search for the optimal greenfield location. Human resource dynamics will predominate the decision factors in terms of choosing locations that will maximize potential success of the new (or expanded) site.
Dennis J. Donovan is a founder and Principal of Wadley Donovan Gutshaw Consulting, LLC based in Bridgewater, NJ. WDGC has been advising companies on location strategy and business site selection for four decades. The firm has a global practice and clientele have included numerous financial and business services enterprises.