Considerations for Back-Office Consolidation

Q: My company has made the decision to consolidate some of our back-office and shared service centers to reduce costs. What should I take into consideration when deciding which facility should stay open and which ones we should close?

The Expert Says: The economic reasons for a consolidation of operations can be powerful and compelling. It is important to realize that these consolidation projects, much like new facility investments, oftentimes involve important and complex location decisions. There is a number of factors that a company should use to evaluate its existing locations and the attractiveness of those locations for a consolidated back-office or shared service center.

First, you should consider the operating costs associated with your operations in each location. These costs include labor rates (assuming you have different salary and wage structures in each location), real estate costs, other costs associated with your workforce (workers compensation and unemployment insurance), utility rates (particularly for electricity and telecommunications), and taxes. These items will have a long-term impact on the cost of operations of your back office or shared service facility.

Second, you will need to consider the investment costs associated with each location under consideration. The most important investment cost you will face is real estate. How easy or difficult will it be to expand any of the facilities you are currently occupying to take into account the new consolidated operations? If your expansion requirements call for new construction, what are the potential costs associated with that project? Do you own the facilities in any of the communities under consideration? If so, how easy or difficult is it going to be to dispose of that facility? For all the facilities that you will be leaving, you also will need to take into account the carrying costs associated with those facilities as part of your cost analysis.

Third, you will want to consider the ability to relocate existing employees from the various locations. Before you begin to look at the communities under consideration, you need to first define your employee retention goals. Many times, companies that undertake consolidation projects also are planning a re-engineering or reduction in workforce as a part of that consolidation and therefore the ability to relocate employees is less of a concern. However, companies often find that they have a few key employees with institutional knowledge for whom retention is critical. The new location must enable the company to meet its employee relocation goals; once relocated, companies must be confident their employees will want to stay.

Regarding retention goals, companies should look at the access to quality housing, cost of living, low crime rates, shorter commute times, quality education, quality day care and access to high-quality healthcare when evaluating potential new communities. Even if you do make the decision to relocate a significant portion of your workforce, the availability of a qualified labor pool for current and future vacancies is an important factor in evaluating your communities. Turnover should be anticipated; as a result, the demand on the labor market will remain strong for a while after relocation.

Other issues that may be important to your decision include: air transportation, legal and tax environment, proximity to customers, suppliers and internal operations. All of these should be taken into consideration when looking at the particular communities under consideration.


By Jeannette T. Goldsmith, Principal, McCallum Sweeney Consulting