Geography is a key driver of corporate performance, yet many companies maintain ineffective and inefficient footprints that can hamper talent attraction and retention, increase operating costs, overexpose them to risk and depress shareholder value. Deloitte consultants Darin Buelow, Matt Szuhaj, Josh Timberlake and Matt Adams aver that by evaluating their footprints more holistically, companies can more efficiently and effectively position assets and strike a balance between market access, talent availability, risk mitigation and cost containment.
A company’s footprint is more than just the real estate it occupies. It’s an array of corporate assets that include capital, talent, machinery and equipment, inventory, contract manufacturers, facilities and intellectual property. It includes customer access and speed to market they experience, operating costs incurred, and risks undertaken. Where companies locate their assets helps dictate the potential organizational value.
Assessing an enterprise’s footprint and executing the recommended realignments are not small endeavors – they can be costly and time consuming. But companies able to do so are realizing short-term financial benefits and likely better positioning themselves for long-term success.
Aligning an enterprise footprint primarily creates value through infrastructural and operational economies of scale and flexibility. Real estate expenditure decreases and the reduction of redundant positions are fundamental value drivers. However, other geographically variable operating conditions and costs can contribute additional ongoing value. Companies can materially improve deployment performance by enhancing their access to appropriate labor skills and leveraging cost arbitrage, as well as managing other operational costs such as taxes, utilities and logistics.
Realizing the benefits of a realigned footprint requires material investments and implementation planning. The primary investments include costs associated with exiting existing facilities, capital expenditures for new facilities, equipment relocation, employee severance and stay bonuses, relocation of key personnel, and incremental recruiting and training.
Long-term benefits of a properly aligned footprint can greatly exceed the cost of implementation. Present value cost savings over a 10-year period can range from five to 25 percent, with headquarter redeployments representing the lower end and realignment of distribution operations typically nearer the upper end of the range. Payback periods and return on investment also vary but generally are two to five years and two to five times investment levels on a present value basis, respectively.
DOs and DON’Ts
Through work with a variety of leading companies supporting enterprise footprint optimization initiatives, we have identified a number of key insights.
- Set the tone at the top – Leadership buy-in and communication is critical to encouraging supportive contributions among key stakeholders and mitigating organizational uncertainty. Identify a senior leader to take responsibility for design and execution of changes, and clearly communicate the importance of positive participation early in the process.
- Take a holistic view – To be effective, the optimization process should consider everything from key strategic objectives, such as enterprise sustainability and market growth, to operating requirements such as talent availability, risk management, and cost containment.
- Start with quick wins – In many cases, there are immediate improvement opportunities that can start delivering benefits in less than three months. These “quick wins” can both make the overall effort self-funding and help build momentum and credibility – all essential to sustained improvement and gradual pursuit of a target footprint.
- Consider long-term objectives – A key component of enterprise footprint optimization is literally mapping the future of the organization. Align the footprint with strategic objectives, include scenario analysis as part of the initiative to identify key factors that could impact plans, and build in footprint flexibility to quickly respond to change.
- Challenge traditional assumptions – Sophisticated tools like advanced analytics can allow organizations to test assumptions and model profitability at a depth not previously feasible. These initiatives offer the opportunity to validate or refute standard assumptions using these resources as part of footprint modeling.
- Align incentives – Traditional incentive programs tend to reinforce the status quo and encourage optimization within individual functions, rather than for the enterprise as a whole. To address the issue, incentives should be realigned so that managers and employees are motivated to both support changes and focus on overall margins, rather than focusing on increasing performance within their particular function.
- Repeat as needed. Plan to periodically repeat the analysis as the business environment changes and your footprint evolves. The good news is that subsequent analyses will likely take only a fraction of the time and effort that was required initially.
- Wait for a crisis – When crises strike, companies tend to favor decisive action over rigorous analysis. Enterprise footprint optimization can present the opportunity to take a step back to proactively align location footprint and strategic planning to make urgent reactions to crises either unnecessary or more efficient.
- Under-commit – The potential for transforming the business for the future and developing a source for sustainable competitive advantage justifies the expenditure of time and resources. Insufficient leadership communication or dedication of resources could lead to transition costs without realization of full footprint optimization benefit.
- Forget about tax – The intricacies of international tax law often present a prime opportunity for a footprint assessment. In fact, for some companies, the tax incentives offered by particular jurisdictions can justify the entire effort.
- Ignore change management –Integrating effective organizational design adjustments, aligning talent management and incentives with changes, and identifying and addressing the impact on corporate culture are essential to long-term success.
- View the exercise solely as one in cost reduction – While cost reduction is potentially significant, organizations that focus exclusively on that objective can miss the true benefits of balancing a wide range of critical factors, from cost efficiency and operating requirements to talent availability, tax impacts, and access to new markets.
- Let groups opt out – There may be legitimate reasons to exclude certain groups, functions, or geographies, but each group that opts out erodes the benefits of a holistic review. Many times, individual groups perceive the exercise as a threat rather than an opportunity, further emphasizing the need for strong, early, and consistent communication.
The Path Forward
For leading companies, internationalization is starting to give way to true globalization as these organizations extend their search of new markets, resources, talent pools and cost advantages. The path can be challenging to navigate as the business environment constantly evolves from gradual changes in costs and talent markets to political and natural events impacting economies.
Companies not focused on these dynamics can be quickly left behind, encumbered by locations that no longer suit their needs, unnecessary redundancy in their operations, elevated risk levels, and footprints that do not position them to anticipate and address change quickly. However, companies that proactively manage their global footprints can gain a competitive advantage that would be difficult to replicate, literally positioning the organization globally to achieve its strategic objectives, both in the short-term and for the future.
This article is excerpted from a Deloitte Review Issue 10 article, titled “Is your corporate footprint stuck in the mud?” Darin Buelow is a principal, Matt Szuhaj is a director, Josh Timberlake is a senior manager and Matt Adams is a manager – all in the Strategy & Operations practice of Deloitte Consulting LLP.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Visit www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. For a detailed description of the legal structure of Deloitte LLP and its subsidiaries, visit www.deloitte.com/us/about.