Relocating yourself out of your best workers

As the laggards of the mindless cost-cutting euphoria hasten to relocate their companies from higher cost states to lower cost states, they find that they leave their best workers and institutional knowledge behind.  Seduced by the song of lower labor costs, less taxes, and lighter regulations,  the last of the cost-chasing companies are falling over themselves to move from their traditional headquarters to the Midwest or Southeast.

These companies are finding that, along with a higher cost structure, they also leave behind their best workers and often decades of institutional learning, technique and culture.

In 2001 Boeing relocated its headquarters from the capital of commercial aviation, Seattle, to Chicago.  Although this was by no means the first such move, it managed to capture the attention of the public in a way that similar moves by insurance companies and banks had failed to do a decade earlier.  Ironically, Boeing's move -- much criticized at the time -- seems strategically sound and well planned by comparison to the current herd of cost-chasers.

Many companies fail to consider the implied organizational costs when making moves from states like New York or California to places like Tennessee or Georgia. ... Many companies have evolved over many decades, and their employees from top executives to front-line workers are deeply integrated into the corporate culture, which itself is very reflective of the community and region in which it is located.  More importantly, a regional relocation often saps a company of not only its corporate culture, but very often its institutional learning.

"Institutional learning" is more than fuzzy-speak from organizational consulting types.  It tangibly represents real, quantifiable techniques and processes which have remained elusive to every generation of would-be knowledge management systems and methodologies. 

Not everything about a companies workers -- people -- is a fungible commodity.  Management talent, skill, learning, and culture are the most important of these attributes, and they are often abandoned at the state line when companies pick up and move.

...another example of short-term corporate planning.  In the case of corporate relocations it is the cost-reduction fallacy.  Companies think that by lowering labor costs and taxes they will improve their bottom line.  In fact, there is very little empirical evidence to support that conclusion.  Instead, the company tends to take a large cost hit initially, suffer a quarter or two "taking a bath", then enjoy a couple quarters of positive earnings boosts.  After that, the best performers' market caps usually return to exactly where they were before the move; the rest actually settle into permanently lower market caps.

Why would market capitalizations actually suffer as a result of cost reductions and tax improvement?  After all, these surely are a positive impact on the bottom-line.  It is true that the bottom-line benefits by moving a company from Manhattan to Nashville, but the benefit of that is temporary to most companies.  After the company has "spent" all of the cost-advantage benefit it usually finds itself in a long period of corporate readjustment as it struggles to discover a new corporate culture, identity and rebuild its lost and damaged institutional mechanisms.  During this period of time many companies actually shrink market size while modestly growing net income.  They have essentially traded a functional management organization for a cheaper cost structure.  Thus, net income rises while market capitalization actually falls.

And worse, there appears to be no demand by Wall Street or the market at large forcing companies to make these moves.  Except in specific situations, investors allocate capital to companies they see as having positive growth and cash flow prospects.  Of course keeping costs under control is always a concern to shareholders, but most shareholders are not so easily convinced by ultra-short-term thinking.  They are usually more concerned about competitive advantage, market share, and corporate governance.

Corporate governance brings up the last, perhaps most overlooked yet certainly the most important factor overlooked in cost-justified corporate moves.  This is especially true in today's regulatory environment.  In order for a company to be well governed it must employ managers and directors capable of executing responsibly.  These managers and directors must be immersed in an ecosystem of management talent that continually reinforces obligations and responsibilities.  Such ecosystems tend to exist only in the larger metro areas, which are by no accident the traditional locations of corporate headquarters.  Of course good managers can always be relocated.  But the engine which creates and reinforces these managers resides elsewhere.

The latest addition to the casualty list of ill-conceived corporate moves is Nissan's US headquarters.  Nissan chief Carlos Ghosn has suddenly found himself on the receiving end of intense criticism for deciding to move Nissan's headquarters from Gardena (suburban Los Angeles) to outside of Nashville, Tennessee. 

His primary justification for doing so was the fact that, after holding an "auction" for states to bid on Nissan with tax break promises, Tennessee ponied up $197M in commitments, while California offered only $20M, which it placed heavy conditions upon (in fact, California rescinded its tax bribe before the final decision was rendered).  Much criticism has been written about state-to-state tax bribery.  Unfortunately, thanks to a recent Supreme Court ruling, we are stuck with this practice for the foreseeable future.

Ghosn, who committed to carry out this move despite criticism, hired Boston Consulting Group to write a report declaring the genius of his decision.  He has since crossed the point of no return, and Nissan continues its relocation.

They do so without over 60% of their total corporate staff, and without nearly all of their top managers and directors.  Mr. Ghosn himself lost most of his direct reports as the Vice President offices all sat empty in Nashville.  Since, Nissan has replaced most of those managers; such jobs are not hard to fill in a tight economy.  However, shareholders are already questioning the abrupt shift in Nissan's marketing strategy as well as other less noticeable strategic changes. 

Such sudden changes of course should be no surprise once one considers that Nissan is essentially a different company--a newer company which must now go through corporate remedial learning.  And, just about the time when they get that right and return to their pre-move strength, probably about the same time as yet another new chief takes the helm, they'll be lured out of Tennessee by a bribe from yet another state.

Comments

[astrid]

That is quite a surprising move, given that Nissan's US headquarters can't be all that big. Nissan is a Japanese company largely owned by an even larger French parents. Furthermore, I assume the primary function of the US headquarters is to deal with marketing and sales - specifically the kind of jobs that require a lot of hands on experience and are highly vulnerable to disruptions.

It's also just silly from a cultural perspective, Ghosn has managed his amazing Nissan turnaround by marketing to people who live on the coasts, moving the headquarter to a cultural backwater will certainly cause friction for the coastal dealers, ad men, and customers.

[randolfe]

Nissan US HQ, if I understand correctly, also houses quite a bit of logistical and manufacturing management. Such management can probably be replaced and retrained in Tennessee without a great deal of pain fairly quickly. However, I believe that many organizational consultants would argue with even that.

The problem is definitely the marketing, sales and advertising functions. Building a team in Nashville will require 100% import of talent. There is a self-selection conundrum here. Quite simply, do the best, most experienced ad, marketing and sales folks move from San Francisco, LA, NYC, Chicago, etc. to Nashville? Even for a real-salary jump, most will not, and remember that most won't get a nominal salary increase, so they're taking a psychological paycut to move into isolation from their industry's gravitational center.

So instead the second and third rate managers take up the offer. Now Nissan has the task of rebuilding a stellar team with lower quality management.

Even worse, most of these transplants to Tennessee won't stay. Because they aren't generally the top-shelf managers in their fields, they'll just use Nissan Tennessee as a springboard to get into that top firm or corporate organization as soon as they develop their skills and credibility enough. Finally, Nissan will eventually use up its "free cost credits", and be forced to hold yet another tax bribery auction. The same argument will start all over again when the folks in Nashville are asked to relocate to Elko Nevada or Bismarck South Dakota.

Cost is not everything. Value is everything.

[Mike]

I moved to Colorado Springs from San Diego. My company employs 2000+ workers in San Diego while the Colorado Springs office has less than 100. I was the first to jump ship, but I will not be alone as a couple more are also leaving SD for the cheaper living in Colorado Springs. For certain companies, it makes sense to expand existing offices in low overhead areas while shrinking the presence in high overhead areas. I know our customers are charged a LOT more for work done in San Diego as opposed to work done in Colorado Springs.

[astrid]

Mike, what kind of work do you do? I think Randy and I both agree that there's lots of work that are easy to transfer anywhere (including offshore, given the right kind of training and oversight structure), but many of the jobs Nissan USA are moving can only be moved with losses in institutional knowledge.

[astrid]

Randy, the other thing your last comment brings up are the signals that a business sends to its employees and potential employees. Nissan USA, by signaling its commitment to cost cutting, shows that it may be willing to move again for future cost savings, leaving anyone who doesn't want to move high and dry. Thus, many potential future hires are discouraged from applying because they fear a disruptive future move.

I've been thinking about the long term consequences of such behavior since the google hiring discussion came up on patrick.net. Google's hiring policy and pay schedule is not one that will inspire long term loyalty. A lot of their employees are going in to get a line in their resume and will take off for a higher paying job in a couple years. Maybe such a strategy is not hugely disruptive for the engineering department, but I sure hope they don't do hiring for all their departments in the same manner.

[randolfe]

Astrid,

Google brings up a lot of interesting questions. I'm not convinced that the Google analysis is exactly the same as Nissan USA for many reasons; not the least being that Nissan is an established industry company while Google is (currently) an innovating company.

The comparison I make is more of a "Microsoft Gamble". Back in the early 90s MSFT was doing the exact same thing Google is doing now vis-a-vis its employees. I turned down a job with MSFT in 1993 because they paid substantially below market salary and were big on some "stock option" stuff I wasn't familiar with (myself being a Chicagoan at that time). Many employees did jump ship after getting a couple years of MSFT on their resumes. However, those who stayed through the sweet years made from many hundreds of thousands to millions beyond their salaries. And, as salaries in tech crashed back to earth, Microserfs found themselves making the premium salaries in the industry.

I intend to finish and publish a draft piece I have on Google's strategy next week sometime.

[randolfe]

Mike,

I'm not sure your industry, but as Astrid said there are plenty of industries or even functional departments within any industry that can be very successfully relocated. A great example is the "on-shoring" of clerical, data entry, or other clerk jobs to very low-cost, high loyalty areas like Kansas. Companies in Silicon Valley have been doing that since the early 80s.

But, to have moved R&D or Engineering out of Silicon Valley before the mid 90s was suicide. Of course since then many of those technical and programming skills have become commodities and are available across the US and globally -- often for lower labor costs. Even in software, however, I would argue that a great degree of the R&D process is as much art and technique as it is method. There is enormous benefit which is nearly always overlooked by cost-cutters that is derived from trade community.

[astrid]

Randy,

I look forward to reading the Google piece. The Microsoft gamble is one heck of a gamble for the employee, Microsoft did much much better than almost anyone could have imagined possible. But perhaps enough people believe Google can be the same kind of exceptional company that it'll actually happen.

[randolfe]

Astrid,

That is it in a nutshell. My skepticism about Google's larger strategy is tempered by what I see as a very successful example of corporate and cultural development. Whether Google becomes "the next Microsoft" or not is as much up to Google as it is the fates.

[Peter P]

Cost is not everything. Value is everything.

One of the rare universal truths.