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anaging risk has always been the cornerstone of the corporate relocation process, although rarely has a corporate executive or his economic development counterpart framed the decision-making process in quite those terms. In the post September 11th environment, however, risk management has moved beyond its traditional spheres of technological and financial risk assessment and now permeates virtually all aspects of corporate decision-making.
This new emphasis on understanding the locational and geographical attributes of risk began in earnest with the California electricity crisis of early 2001; it has changed the dialogue of corporate relocation decision-making and the framework in which it is best described. Site selection and risk management seem to be converging as quickly as site selection and labor-market analysis did during the 1990’s.
Minimizing Site Selection Risks
Opening a new facility is by its very nature a risky proposition for any organization. Only as a last resort do corporations typically add a new facility as a means of increasing production (or service) capacity or relocate an existing operation to reduce costs. Once committed to exploring a new location, however, the site selection process involves quantifying geographically variable costs, evaluating critical attributes and then minimizing, to varying degrees, key sources of risk.
Under the typical site selection scenario, the process of risk assessment begins after first deciding to explore relocation. Labor, political, financial and organizational risks are all considered and minimized. Will the proposed location attract sufficient labor at acceptable wages? Are there adequate protections for intellectual property and assurances for expedited permitting and/or other indications of political commitment? Will existing suppliers continue to support the operation at the new location? Given other alternatives, does the new location offer the least financial risk? After considering and evaluating the full range of critical attributes (i.e., risks), the site that presents the least risk to the decision-maker is almost always the location finally selected.
Relocation Initiated by Risk
In the post-September 11th environment, it has become common for companies to undertake comprehensive assessments of risk factors that might threaten operations in any part of the organization, and during this process a geographic or facility dimension to the risk review becomes inevitable. When risk reduction becomes the catalyst for a facility or geographic review, it introduces a new set of parameters for evaluating existing locations. For instance, some organizations — especially those in premier central business districts — now question the desirability of concentrating too many critical assets in one facility and are considering how best to balance risk management objectives against the organizational cohesiveness that results from colocation in a single facility. Is risk sufficiently reduced by locating critical functions in multiple locations throughout the same community, or is it necessary to locate operations in a more geographically diverse configuration?
But this rather straightforward example just scratches the surface of geographically oriented risk-analysis. Stated differently, if labor law, prevailing wages and utility reliability are all valid risk variables when siting a new facility, are they not equally valid parameters for assessing risk at existing facilities? Risk deconstruction provides an approach for methodically identifying the risk variables inherent in a static organizational structure rather than as part of an analysis first initiated to support a new venture (e.g., opening a new facility).
Risk Deconstruction
Most risk assessments are conducted from a functional perspective. A finance department reduces financial risks through a whole host of derivative and trading techniques. IT departments reduce technological risks by building system redundancy and through aggressive testing. Determining specific risks on a location by location basis is the facilities equivalent of a functional risk review. The status quo (e.g., location of specific facilities) is the benchmark from which risk is deconstructed through a process that is really the site selection process in reverse. The location is given and then the critical geographically sensitive variables are assessed. This functional approach to risk deconstruction is helpful, but it may be too limited because geographically variable rates are often cross-functional and not limited to discrete facilities. For example, a site-by-site analysis may overlook a situation in which a critical combination of facilities and/or suppliers is overly dependent upon a specific transport carrier or share an emerging political risk that may affect finance or trade relationships. Companies have recently appeared more anxious to identify and monitor “hidden” common risks to business operations.
One technique for identifying cross-functional risks is to evaluate fully integrated workflows for the most critical business operations and thereby break down a complex operation into its core components. Risk sources can then be identified for each significant component. After deconstructing risk elements in this manner, they can be reconstructed (aggregated) by specific risk source regardless of the workflow from which each element originated. Not all risks identified through this approach will be geographically variable (e.g., dependence upon a single supplier). However, risks that appear minor from the perspective of a single facility or operation sometimes loom larger when aggregated (or reconstructed) from all business sources. Examples might include country, transportation, climatic or utility risks.
Once key risk sources are identified they can be monitored, managed or reduced. At the very least, the risk management objectives that are identified through the process of risk
deconstruction should be incorporated into the site selection process each time a facility
decision is under review. Just as IT departments long ago learned not to site primary and backup systems on the same power grid, it will be interesting to see how heightened corporate risk awareness changes the parameters in which facilities are configured in the future. One development is already clear: Risk management is moving to the forefront of the site selection process.
