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From Site Selection magazine, March 2012

Divisional Headquarters’
Role Gains Focus

Regional headquarters still play a role for many organizations, but business units
are increasingly being centralized to maximize cost and labor-supply advantages.

Mary Legate, senior vice president, global mobility consulting for Paragon Global Resources, Inc., Coppell, Texas

re regional headquarters operations going the way of the dinosaur? Not exactly, but their role is evolving as business units are repositioned to take advantage of cost efficiencies and more favorable labor supplies that better meet larger corporate objectives. To the extent headquarters are relocated, the driving factor tends to be a combination of tax benefits and a business climate more conducive to successful and profitable operations. Aon Corp. announced in January the relocation of its global headquarters from Chicago, where it occupies one of that city's signature big-box skyscrapers at Aon Center, to London, where it will occupy that city's signature "Cheese Grater" building at Leadenhall. Aon Center will serve as the company's Americas headquarters with the addition of 750 jobs at that location. The move is largely seen as a play to improve its balance sheet with a more favorable taxation scheme that it enjoys in the Windy City.

Meanwhile, regional headquarters are not disappearing, but diminishing in their strategic roles as nodes supporting the larger organization. IBM Global Location Trends' most recent analysis makes this point: "We saw a further increase in the implementation of shared services organizations as companies continued their global optimization of internal business support operations. In parallel, the traditional regional headquarters function is declining as internal support and management functions are becoming more segmented and split into different shared services centers and centers of excellence.

"The new global economy will lead to a more fragmented internal operation that seeks to leverage talent pools and cost advantages across the globe. Focusing individual activities in locations offering the best combination of competencies and cost attractiveness will be a cornerstone of new corporate architectures, with different centers working in an integrated network that leverages resources optimally."

Competencies and Cost Attractiveness

Reduced costs is a key driver, according to IBM's analysis, as is "a more strategic approach to talent management, positioning the organization in labor markets that provide ample access to required skills … companies are recognizing the need for a more pro-active approach to global talent management, building up capacity in locations that offer the right combination of competencies and cost attractiveness."

This can be seen in the increasing role of divisional headquarters, notes René Buck, CEO of Buck Consultants International, a leading European site consultancy based in Belgium.

"If you look at the activities of headquarters, we see more and more division of activities," he relates. "So the question is, what kind of functions does the client want in a given building? Unilever has relocated its procurement department on a European basis to a location in Switzerland, whereas their headquarters remains in the Netherlands. We also see this in shared services and development and innovation management units being moved from the headquarters. Years ago, the headquarters had everything. More companies today are asking, "What is the real synergy between the functions, and is there still an argument for concentrating them in one location?' " By the same token, he notes, if multiple locations are executing similar tasks, perhaps those functions should be consolidated into one location.

Divisional headquarters are inherently linked to the business, but are increasingly sited where the action is in their niche, Buck explains. "In a large chemical company there might be a division focusing on pharmaceuticals, and our clients often want to be right in the middle of the pharmaceutical hotspots around the world. So these location decisions are not just tax and finance based but cluster based, because they will want to coordinate research and development there as well. The large companies have divisional headquarters spread around the globe. It sounds simple to just have everything in one building, but do different functions have the same location requirements? Frequently that's not the case." Pure regional headquarters, to the extent they are required for sound organizational reasons, tend to be located in the context of the corporate tax scheme, divisional headquarters in "the right ecosystem or cluster with proximity to universities and R&D," with attention also paid to labor costs.

Business Climates, Airports Drive U.S. Site Strategies

In the U.S., state-specific issues come into play, as companies seek regional, divisional and corporate headquarters locations. "Companies have been moving for years from high-tax, high-regulation, high-litigation states to business-friendly, low-tax, low-regulation, right-to-work states with normal employment laws and limits on frivolous lawsuits," says Mary Legate, senior vice president, global mobility consulting for Paragon Global Resources, Inc., Coppell, Texas, which specializes in domestic and international relocation and global assignment program development consulting. Her state's recently enacted loser-pays law, written to discourage frivolous lawsuits and championed by Gov. Rick Perry, is a case in point. "Gov. Perry has made Texas a state that is seen as a positive state for business," she acknowledges.

In broad terms, Legate notes, "companies are looking for a low cost of living for their people, a good quality of life, good schools and decent airports so they have national and international connectivity."

Robert Ady, president of Illinois-based site consulting firm Ady International, concurs. "International air service drives a lot of U.S. headquarters decisions for companies on the international side, which in the East usually means locating near Washington Dulles or JFK or Chicago, and then Atlanta in the South. While I was at World Business Chicago, 23 U.S. headquarters came to Chicago, mainly because management could get anywhere they needed to nonstop. They don't want connections or to have to drive two hours after they land."

Most regional headquarters decisions today have to do with reduced operating costs, especially when "some activities can be moved out of costly central business district space into a location with lower labor and occupancy costs, lower taxes and these days, most likely, incentives that will go along with that move. There's a major impetus to move those out of the major cities into smaller communities."

Unless that company is a high-tech player, in which case a city operation is deemed more desirable by many workers.

"These young technical people want to be downtown where the action is, not out in the suburbs,"says Ady. "Motorola, for example, has an office in downtown Chicago now to accommodate people that want that experience. A lot of these companies are leaving the big campuses in the suburbs and coming back into the city if it's a technical function. If it's a regional operation, they're spinning functions into smaller communities."

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