Risk Management

Looking to Land

Increasingly, finance executives are taking the pilot's seat in site selection.
Randy MyersJanuary 1, 2005

The Boeing Co. has a lot riding on the 7E7 DreamLiner, the superefficient midsize passenger jet it plans to start producing in 2008. The company has already pumped billions of dollars into development of the aircraft, which it hopes will recapture some of the market share it has lost in recent years to European competitor Airbus SAS. So deciding where it would assemble the 7E7 was no small matter. Over the course of the plane’s production life, the wrong site could add hundreds of millions of dollars to the company’s costs.

Given the stakes, it’s not surprising that Boeing tapped one of its senior financial executives, Craig Saddler, to oversee the site-selection process. As vice president of business management for the 7E7 program, Saddler has overall fiduciary responsibility for its success.

“We started producing the Boeing 747 and the Boeing 737 in the late 1960s, and we’re still selling both of those planes today,” notes Saddler. “These are 30-, 40-, even 50-year decisions.”

Boeing is hardly alone in turning to the finance department for site-selection help. According to real estate services firms, CFOs and other senior financial executives are increasingly getting the nod to lead major site-selection programs. A variety of reasons is cited, including a growing desire to subject site decisions to the same sort of return-on-investment analysis demanded of other capital expenditures. It’s not enough anymore simply to know whether a particular location has the appropriate communication and transportation infrastructure in place, or even how those factors might influence supply chain costs. Companies also must consider how the depth and breadth of the labor force in a particular location will affect their staffing ability; how wage structures compare among various locales; what the tax consequences of a decision will be; and how any financial incentives proffered by state or local governments might factor into the equation, perhaps even influencing how the deal is financed.

“We try to get the CFO involved as early as possible,” says Ed McCallum, senior principal with site-selection consultants McCallum Sweeney Consulting Inc., based in Greenville, South Carolina. “We want to understand whether their [company’s] financing, their cost structure, or the degree to which they’re leveraged is strategic to the site-selection process, or just one of many factors to be considered.” McCallum says that financial considerations are frequently glossed over in the site-selection process, “particularly when you’re dealing with people who are more manufacturing or technically oriented. They’ll say, ‘We won’t worry about that; we’ll let the finance guys worry about that.’ But you can’t worry about it after the fact; you have to integrate it into the process.”

“I think companies have woken up to the changing economic environment and realized they have to shift their focus to where their real cost drivers are and what the value of each is,” adds King White, senior vice president with real estate services firm Trammell Crow Co. That argues, he says, for a broader, holistic site-selection analysis that the CFO is uniquely qualified to undertake — particularly since he or she must consider the interests of the entire organization, not just one function. “The CFO can look at all the competing interests,” confirms Gary Bingham, director of marketing for Puerto Rico Industrial Development Co.’s New Business Development Group, “and decide which location makes the most sense.”

Even Sarbanes-Oxley is prompting a bigger role for CFOs in site-selection decisions, if only indirectly. According to Bob Hess, managing director in charge of the supply-chain and workplace-solutions consulting practice at real estate services firm Cushman Wakefield, Sarbanes-Oxley’s emphasis on transparent financial reporting is steering companies away from doing only high-level documentation of their real estate decisions in favor of creating a well-documented paper trail and making clear the justification for the transaction itself, especially when creative financing or significant debt structures underpin the move.

Because CFOs oversee the financial reporting process, this, too, argues for their greater participation in the site selection process.

The Plane Facts

Boeing began the search for an assembly site for its 7E7 plane in May 2003. Saddler headed up a team that included tax, finance, manufacturing, real estate, and human-relations experts from Boeing, assisted by consultants from McCallum Sweeney. Early on, they decided that the assembly plant should be located in the continental United States, because that’s where Boeing’s engineering expertise resides and because it was already familiar with this country’s airplane-certification requirements. Once the team whittled the field down from more than 80 possibilities to approximately 10 finalists, Saddler began visiting each site personally.

“You can look at numbers and pictures on a wall and it just doesn’t give you a perspective on what you’re going into,” he says. “In my case, there were three sites I thought were going to be really fantastic, and when we got there it became obvious that, based on the infrastructure, they just wouldn’t work.” The key criterion for the project, he says — the “real showstopper” — was transportation, including ready access to a port for delivery of parts and components, as well as access to an airfield.

Boeing assembles its existing wide-body airplanes in Everett, Washington, but at first blush Everett was not an obvious choice for the new assembly site, owing to what had become, in the eyes of most manufacturers, an unfriendly business climate. The state hired accounting firm Deloitte & Touche to help it win the competition for the 7E7 assembly facility, and the firm reported to Gov. Gary Locke that Boeing’s costs in Everett would be 25 percent higher than in some other states, due to Washington’s tax and regulatory structure.

Washington’s state legislature responded that June by passing a massive $3.2 billion, 20-year tax break for the aerospace industry and overhauling its unemployment-insurance program to save businesses in that state more than $100 million a year. Later, the state pledged another $24 million to build and operate a training center for 7E7 workers. Saddler says Washington also committed to improving the rail system between Everett and Puget Sound and to making some improvements to the Port of Everett. After a long and secretive selection process, Boeing chose to assemble the 7E7 in Everett using existing Boeing facilities.

Saddler says Washington’s incentive package was a “huge factor” in Boeing’s decision to stay in Everett. But he also insists that, heading into the decision, wringing incentives out of the various sites in contention for the assembly facility was the least of his concerns. “You first have to figure out the logistics issues, the transportation costs, the business climate within a state or location, and the human-resource factors,” he says. “You can’t even have a conversation about incentives until you have all those right.” In Saddler’s case, that meant overseeing the development of approximately 100 spreadsheets modeling all of the quantitative elements factoring into Boeing’s decision, such as state and local tax rates and labor costs, as well as a host of qualitative factors, including the availability of training and education programs, the political environment, and even the weather.

More Than Numbers

Like Boeing, six-year-old Allconnect Inc., an Atlanta-based company that assists consumers in ordering utility and communications services, saw the wisdom of involving its finance group when it decided in April 2004 that it needed to open a second call center to supplement its Atlanta facility. Allconnect hired Trammell Crow to assist with the search, but it also put its CFO, Ed Millman, at the center of the effort. When it was time to analyze potential sites identified by Trammell Crow, it was Millman who crunched the numbers to see which made the most sense from a financial perspective.

And when it was time to visit those sites, it was Millman who jumped on a plane with Allconnect chief operating officer Craig Preston to meet with local economic-development officials and find out just what sort of tax and other financial incentives they might throw Allconnect’s way. The company ultimately chose a 25,000-square-foot building in St. George, Utah, and while local authorities there were able to provide some training and job credits, Millman, like Saddler, says incentives were not the primary determining factor in locating there.

“There were other locations we looked at where the incentive packages were much, much stronger,” admits Millman. “But you tend to get what you pay for. For us, the depth and quality of the local workforce was the key driver.”

Indeed, despite the importance of building a business case for any new building site, CFOs who have run the numbers warn that’s only part of the decision-making process. Steve Mayer, executive vice president and CFO of Human Genome Sciences Inc., in Rockville, Maryland, recalls working through a formal site-selection process for a manufacturing facility in 1996 that assessed about 50 locations in three states. He got involved from the start, he says, to help search for financing incentives that might be available from state or local governments.

At the end of the process, one site was the clear winner based on a set of pre-established criteria, yet he and the rest of the company’s leadership team ultimately concluded that it was the wrong choice at that time. (The site wasn’t close to the company’s research-and-development operations, and the new facility would be working on development-stage products.) The company ultimately found a suitable site in Montgomery County, Maryland, close to its other operations. Nonetheless, Mayer says that if he had it to do over, he wouldn’t skip the formal search.

“I think it is important to go through a fairly rigorous process, but then to use it more as a tool than an absolute determinant of your site,” he says. “It was valuable, in the end, because it allowed us to be confident in making our decision based on other, qualitative factors. We were able to understand very clearly the cost of our decision.”

Sometimes, though, a package of incentives can simply be too generous to be refused. “There are some very aggressive states and countries out there,” comments McCallum. “We worked with a start-up pharmaceutical company where not only the state but the local community offered no-recourse equity investment into the project and forgivable loans. This had such an impact on the project that it just steered it to that location and made it go.”

Randy Myers is a contributing editor of CFO.

A Portfolio-Management Approach

As CFOs become more deeply involved in real estate decisions, they are also forging a broader approach to the process. Four years ago, United Technologies Corp. adopted a portfolio-management approach to its real estate needs after concluding that decentralization wasn’t the most efficient way to oversee 100 million square feet of space around the globe. Ron Zappile, president of the company’s United Technologies Realty Inc. unit, leads a six-person team that routinely analyzes the company’s real estate portfolio for potential cost savings, including co-location opportunities. When a business unit needs a new facility, Zappile’s group helps it assess that need, analyze potential sites, and compile the relevant information needed to compare the top candidates, including information about the labor force, transportation and other logistics issues, and the availability of any financial incentives from government sources. “There is a high level of financial analysis that we do based on the requirements the business units are telling us they have,” says Zappile. Final decisions are then vetted by the company’s finance organization. —R.M.