Location? Location? Location?

Fall 2009 By James Krohe Jr.

Does it really matter where your company is headquartered?

JAMES KROHE JR. is a Chicago-area writer and editor. His most recent article was “Right, Now: What does it mean to be a good global citizen?”, in the March/April issue.

Distance is dead—or at least ailing, they say, slain by the Internet and advanced telephony and jet aircraft. A big company’s headquarters can be set up anywhere there’s an airport and a good dry cleaner, and, increasingly, that’s where they’re going: In a modest but significant trend, Fortune 500 companies are abandoning their traditional homes in skyscrapered metropolises for smaller cities that their executives once considered fit only for golf weekends. A few are decentralizing their C-suite operations or even abandoning fixed headquarters altogether.

Has siting a corporate headquarters really become the one real-estate deal in which “location, location, location” does not matter? “That is a very dangerous cliché,” says veteran location consultant Bob Hess, echoing most of his colleagues in the trade. Location still matters, if for new reasons, and the HQ locations that matter to business are new too. In fact, as distance matters less and less, location may matter more.

Close to the Action
There is one certain test of location’s importance: Will the company make more money with its headquarters in one place than in another? “I don’t think you’re going to find a lot of data on that,” says Hess, formerly a partner of Deloitte & Touche Fantus Corporate Real Estate Services. There are simply too many variables affecting company performance.

How about the fact that big companies occasionally shift their headquarters from one location to another? Surely, a corporation wouldn’t go to the trouble of changing places unless the new spot conferred some concrete advantage. Maybe, but there is less to this to-ing and fro-ing than meets the eye. Headquarters often get moved for reasons that have little to do with the qualities of their location per se: to shed staff or to indulge the boss (see “When Pittsburgh Just Won’t Do,” below) or because directors succumb to the same dubious logic that leads baseball clubs to change managers in the middle of a losing streak—to “shake things up.”

“Eight of the ten top criteria for a new headquarters city are related to costs,” insists Howard Silverman, who runs Canadian location consultancy Corporate Affairs International. Some locations are indisputably cheaper to do business in than others. In the 2008 Fortune 500 list, Texas overtook New York State at the top of the list of big-company headquarters states (Texas currently hosts fifty-eight, compared to New York’s fifty-five and California’s fifty-two), and analysts looked no further for an explanation than the state’s low taxes and cheap labor and land.

In the opinion of many a wily location expert, however, the cost-saving rationale for most HQ moves is based on some convenient arithmetic. Greenville, S.C., location consultant Mark M. Sweeney is among those who warn that a new location’s cost savings are almost always less than the relocation costs. That’s especially true if the company is honest and counts both reduced productivity during the transition period and losses among executive ranks. In other words, lowering costs matters, but moving to a new location isn’t the best way to do it.

A big chunk of the HQ moves each year are made not to change locations but, rather, because of a change in ownership. The headquarters of most merged or newly acquired firms, for instance, are absorbed by their new owners or transferred to the headquarters of the bigger partner—wherever that city happens to be. Usually. But in 2008, the newly created MillerCoors announced a plan to shift its HQ to Chicago. The new location mattered only to the extent that it was not Milwaukee or Denver, since the board wanted to avoid offending executives at the headquarters of its parent firms in those cities. “It’s the bias for a neutral city that keys the decision,” MillerCoors CEO Leo Kiely told reporters in Denver.

Well-run firms have always strived to put their top executives close to the institutions or people with whom they most need to have face-to-face conversations. The result is the corporate HQ operation that is not merely divided but dispersed. Most of the executives of Halliburton Co., the world’s second-largest oilfield-services company, work out of its “principal executive office” in Houston, but in 2007 the firm installed its CEO in new digs in Dubai, where the oil is.

Late in 2006, Amsterdam-based Irdeto Holdings BV decided that establishing a senior-executive presence in Asia would be just the thing, since that’s where customers were keenest on Irdeto’s media-content protection services. The CEO planted the company flag in Beijing, and he and junior executives alternate shifts in their existing headquarters in the Netherlands.

In a competitive environment in which key stakeholders are spread around the globe, goes the argument, senior executives must be all over the globe too. Accenture Ltd.’s roots are in Chicago, but the consultancy is a genuinely global firm, with more than half of its clients and employees outside of the United States. For years, Accenture’s nominal headquarters has been wherever the head of its managing partner was quartered. (At the moment, that is Boston.) Its chief operating office is based in Austin, the CFO is in New York, and the general consul and deputy GC work out of yet other cities.

A tireless proselyte for the company-without-a-country concept is William Amelio, former CEO of Lenovo Group Ltd. That company performs its main C-suite functions out of nine operational hubs in five different nations in both the Northern and Southern hemispheres. Amelio was based in Singapore; the company chairman lives in Raleigh, N.C.; the CFO is in Hong Kong; the HR head is in Seattle; worldwide marketing is coordinated in India.

For the moment, however, the decentralized headquarters looks like an expedient masquerading as an innovation. Lenovo recently abandoned Bill Amelio, and it may soon abandon his “worldsourcing” organizational scheme too. Most companies, including some giants, continue to administer their far-flung empires pretty much the way they always did; the fact that “far” is measured on the global rather than a continental scale introduces new complications of distance and language, but nothing that the Internet and Berlitz can’t deal with.

Rather than remove their headquarters from a specific place, many firms turn their headquarters into a place. The suburban campus in particular—socially self-sufficient, often gated and patrolled by private security forces, neither in or of the communities that surround them—could be located anywhere. Old-economy firms—Chevron is one of many—work out of such compounds. So do new-economy giants such as Intel, Google, and Microsoft. The HQ compound has been likened to college campuses, parks, and monasteries, but whatever the specific model, all are alike in their tenuous connection to the world around them. The only difference between being in a Portland or a Poughkeepsie is the ZIP code.

Living for the City
All modern large-firm HQ operations feed on the specialized labor that gathers like pigeons in the centers of big cities. That’s why, even though Fortune 500 firms can be found in American towns as small as thirteen thousand (Warsaw, Ind., headquarters of Biomet Inc.), most are located in and near big cities. There, demand is sufficient to sustain such highly adapted creatures as investment bankers and market analysts, M&A specialists, attorneys, and advertising whizzes.

Big company, big city, big building—so what’s new? Two things, actually. One, there are more big cities than ever. More crucially, cities are not just growing—they are changing. In place of the familiar “metropolitan area” consisting of a central city and its suburbs is the super- or mega-region, an urban gal­axy composed of clusters of smallish places. Southeast Flor­ida is a good example of a sprawling, scattered area that is nevertheless able to support the kinds of professional services that once were available only in the biggest cities’ downtowns.

Not only are there more biggish cities and big-city-ish places for a company to choose from—smaller cities are more like big cities than they used to be. “A lot of what I call the amenity structures that used to exist only in one or two U.S. cities now exist in ten or twelve—not in the same depth as a New York or Chicago, maybe, but sufficient,” says trend guru Joel Kotkin. “Let’s say I’m a Columbia University-trained MBA. Thirty years ago, if I landed in Dallas or Houston or St. Louis or Atlanta, I’d say, ‘Gee, I’m in the sticks.’ Now …”

These days, a good siting consultant’s list of possibilities will include not only places that didn’t used to show up on some lists but a few places that you might never have heard of. It is easy to imagine a future in which so many cities fit the bill as big-company HQ sites that choosing one city over another will cease to matter.

Businesspeople should have learned by now. however, to be wary of futures that exist only in the imagination. As differences between cities become smaller, those differences matter more. As Kotkin put it in his book The New Geography: How the Digital Revolution Is Reshaping the American Landscape: “If people, companies, or industries can truly live anywhere … where to locate becomes increasingly contingent on the peculiar attributes of any given location.”

For those who like bullet points, here’s one: As location—where a place is—matters less, “placeness”—a city’s own peculiar combination of climate, culture, people, and history—comes to matter more.

Beyond “Family-Friendly”
The aspects of placeness that matter to a big company siting its headquarters have not changed much: reasonable real-estate costs, decent schools, a few more-than-decent golf courses. However, the typical headquarters’ need for people has changed a great deal. Big-company HQ operations are organized differently, and staffed with different kinds of people who do different kinds of work—and all of these differences have implications for siting.

Increasingly, people who comprise an HQ talent base—knowledge workers—are unmarried or gay or ethnically and racially diverse, notes urban theorist and prognosticator Rich­ard Florida, author of The Rise of the Creative Class. That leaves companies based in less socially diverse cities in a quandary and, perhaps, at a disadvantage. In contrast, location in a bigger city, says Thomas Klier, a senior economist at the Federal Reserve Bank of Chicago, means that a corporate HQ staff can “draw on a rich talent pool coming from many backgrounds.”

Bob Hess recalls Boeing’s years in the bushes of Washington state, when the company’s headquarters was located next to one of its assembly plants on a street at King County Airport named—you couldn’t make this up—East Marginal Way South. “You couldn’t have told Boeing a number of years ago,” Hess says, “that where they were located didn’t impact their ability to attract the talent they needed to run a headquarters operations of a global company.”

Easier travel and access to customers were not the only reasons that led AT&T’s decision, announced last year, to kiss San Antonio goodbye and leave for Dallas. By world standards, Dallas is hardly polyglot, but it’s more so than San Antonio. Chairman and CEO Randall Stephenson told The Dallas Morning News in March that AT&T’s move had attracted good people from as far away as Virginia: It “allowed us to tap not just the local pool, which is huge, but also the national talent pool.”

Old-style headquarters used to be staffed mainly by bureaucrats and apprentice CEOs, steady types with spouses and kids along for the career ride. To accommodate them, companies set up shop in places with “family-friendly” character. But recruits these days find “family-friendly” less of a selling point, because a lot of today’s bright young things aren’t in families. Many come to positions of company responsibility younger than they used to be, and they’re getting married later than they used to. Not all of them consider the availability of suburban ranch houses in good school districts as one of a city’s charms. They are more likely to demand a lively social life—which to a generation of up-and-comers means upscale bars and a dating scene. “Companies have to think in terms of finding a location that is attractive to people in a particular life stage,” urges Florida, whose latest book is Who’s Your City? “And some companies are doing that.”

Most big companies don’t need thinkers so much as doers. Google may want to shift paradigms, but a mass retailer just wants to shift the merchandise. A young exec on the make who chafes at life in Bentonville, Ark., is unlikely to be the kind of exec that Wal-Mart wants anyway. But staffers at a lot of HQs who once brokered creative ideas flowing in from divisions are now expected to supply them. Companies thus need to recruit brains and not only bureaucrats for the non-executive HQ staff.

“Today a lot of battles are won through creativity and strategies, and you have to find not just number-crunchers but people who can create vision for the corporation,” says consultant Howard Silverman. “Not all those are available in every location in North America. You can find greater thinkers in the Boston region than in a Shelbyville, Kentucky.”

Creative people are assumed to lead lives whose sophistication (or eccentricity) cannot find fulfillment just anywhere. Portland attracts them because of its outdoor attractions, university cities because of their indoor attractions. Where such places don’t exist, they are being created; Joel Kotkin has described as “nerdistans” those districts of cities such as Raleigh, N.C., and Irvine, Calif., that attract new-economy knowledge workers.

Richard Florida made his name writing about how creative people are congregating in certain geographical areas the way wildebeest congregate on the plains during the rainy season. Talent-hungry companies will follow the herds, as the lions do, in hope of a feast. The trend helps explains why otherwise-unlikely places such as Austin—where more residents have advanced degrees than have Texas accents—have become corporate HQ outposts.

Where’s the Buzz?
“You can put the head office anywhere on the planet,” Silverman explains. “However, there are usually strategic reasons why one would choose one or another. Often the major cities are centers of power and decision-making. Some industries”—finance and media, to name two—”can’t afford to not be in the center.”

Obviously, where the centers of power and decision-making are located varies with the industry. “A company wants to be where the action is. If all the action is on Wall Street, you don’t want to be in a small town in the Midwest,” Silverman says. “If a good part of my business is with the U.S. military, then Washington is the place I want to be.”

“It’s about sustainability and innovation and talent and sometimes image,” says Bob Hess. If Manhattan has what you need—talent, contacts, visibility—then it may be worth the higher expense. That was what AOL concluded when it moved its senior executives in 2007 from its campus outside Dulles International Airport upon deciding to reinvent itself from a Wal-Mart of dial-up Internet access to a purveyor of online advertising.

Sir Peter Hall, professor of planning at University College London, has spent a lifetime thinking about how cities work. In a 2000 interview with The Wall Street Journal, Hall wondered aloud about why so many Silicon Valley firms were reluctant to leave the congested and expensive thirty-mile stretch between Palo Alto and San Jose. “Why don’t they move to the less crowded East Bay [north of the Valley] or the even less crowded [California] Central Valley?” he asked. “Because they are terrified they’ll lose the face-to-face buzz.”

That buzz deals with matters more substantive than straightening out one’s tee shots. Donald Palmer, professor of management at the University of California, Davis Graduate School of Management, has argued for years that as conventional business information becomes easier to obtain, the value of unconventional information in the form of high-level gossip rises. Such information must be traded face to face to keep it private.

“I continue to think that corporate headquarters, because they concentrative on strategic issues, need access to proprietary and time-sensitive information,” Palmer says. “And such information is best accessed when they are in close proximity to the original sources of that information—other corporate headquarters—because proximity allows for the development of trust and frequent contact. I think firms tend not to opt for peripheral locations unless their need for strategic information is low.”

The centers of power and decision-making in this country used to be—and for certain industries remain—New York, Chicago, and Washington, D.C. But it was not all that long ago that Boston and Philadelphia were on that list. As for tomorrow, new centers of power and decision-making are being born all the time. Look at Charlotte, N.C., one of the world’s top cities for banking (and, increasingly) insurance. Charlotte put itself on the map not by enticing big-money firms to relocate there but by making its own banks big. Go-getters such as NationsBank’s Hugh McColl and First Union’s Ed Crutchfield exploited North Carolina’s liberal banking laws in the 1980s and ‘90s to acquire other banks, until they had the heft to start acquiring national institutions such as Bank of America, which in turn took over Merrill Lynch. Thus Charlotte’s emergence as what Joel Kotkin has called “a true full-tilt competitor to New York as a financial capital.”

In the past, cities became great business centers because of what was in the ground, or where they were on a map. These days, geography matters less than attitude and culture; call it chutzpah, hustle, and above all ambition, expressed in policy. ‘Twas always thus. Peter Hall notes that hubs of industrial innovation—places such as Manchester around the 1780s, Chicago in the mid-1800s, Detroit a generation or two later, Silicon Valley today—have long been strivers for economic influence in markets dominated by established industrial centers. The city-building dynamic remains the same—only the ZIP code has changed. Charlotte, says Kotkin, is “a classic opportunity city, a place built by newcomers used to not getting too much respect.”

That’s a pattern. Many of the companies that inhabit the new HQ cities are not migrants but, rather, small homegrown firms that grew into big companies in the 1990s. During that dec­ade, for example, the San Francisco Bay Area acquired several headquarters of companies associated with the so-called new economy. Just under half of these are not new to the area—just to the Fortune 500 list. The trend suggests a small truth: Cities are not great big-company HQ locations because they are great cities; they become great cities because they are home to America’s big companies.

Everybody Knows This Is Nowhere
One last test: Most firms seldom stray from their hometowns, even when strict business logic suggests they might be better off if they did. Many of those hometowns—apologies in advance to chambers of commerce everywhere—would not be regarded as headquarters cities by the wider world. That suggests that location matters very much, at least to them.

Ask an Archer Daniels Midland (Decatur, Ill.) or Cummins Engine (Columbus, Ind.) why it ignores the siren call of bigger, more exciting, and arguably more convenient cities, and you will hear the usual paeans—often sincere—about commitment and values and traditions. Where they are is who they are. It’s hard to imagine Wal-Mart anywhere but Bentonville, just as it is impossible to imagine any other major retailer basing itself in Bentonville. Procter & Gamble makes sense in its native Cincinnati for the same reasons Aunt Mabel never left To­peka—not in spite of that city’s Midwesternness but because of it.

The crucial issue is not where the C-suite is located but what goes on inside it. A good company can do business just about anywhere, in part because its own success makes its host city a location fit for business. A successful firm that grows big will adapt the local business environment to its needs by attracting skilled labor and ancillary businesses hoping to feed off the scraps that fall from its table. In time, any old place becomes the company’s special place.

Look at Indianapolis. The Indiana capital for decades had few of the attributes of a national HQ city. But it was home to pharmaceutical giant Eli Lilly, which was founded there in 1876. (The company’s website helpfully informs visitors that Indianapolis is “in the Midwestern section of the United States.”) As large companies do, Lilly attracted smaller firms as suppliers or subcontractors, gradually creating a critical mass of medical- and pharmaceutical-related firms. Now that medicine and engineering are beginning to blur, the nearby presence of Purdue University, “a world-class nanotechnology center, and the solid and rapidly growing biotechnology infrastructure,” according to one CEO who, in January, relocated his biotech firm from Cincinnati to Indianapolis—is a further draw to firms in the field. State and local governments, all too aware of Lilly’s status as a huge employer, solidified the company’s claim to local prominence by learning to be indulgent. (One result is the Indiana 21st Century Research and Technology Fund, which helps with R&D and academic-commercial partnerships.)

In short, there’s often no place like home. Ask one of the many companies that headed off to the big city, thinking they have what it takes to make it, only to find they are yokels at heart. North Sioux City, S.D., was a fine place for Gateway to make it as a no-frills computer assembler, but when Gateway began losing ground to Dell it decided to reinvent itself as a consumer-electronics maker. It set up shop in San Diego—and did so poorly under the palm trees that it was sold to Acer.

Ford in 1998 moved Lincoln Mercury’s staff from Dearborn to Irvine, Calif., where the rest of the company’s then-stable of luxury makes was quartered. The hope was that by relocating to a late-twentieth-century California city where design talent was hanging from every tree like oranges, Lincoln could be re-imagined as a late-twentieth-century sort of car. After four years, Ford moved Lincoln Mercury back to Dearborn, having learned that Mercury designed stodgy cars not because it was based in Detroit but because it was Mercury.

The papers are filled with similar tales. In 2000, GM moved a chunk of its fledgling e-commerce operation to San Francisco, to take advantage of Silicon Valley’s ideas and talent. After nearly a decade breathing the Bay’s invigorating air, the unit proposed allowing GM dealers to sell cars on eBay. Where a company would seem to matter a lot less than who it is. If you can make it in Indianapolis—or Decatur or Bentonville—you can make it anywhere. And if you can make it anywhere, then any “where” will do.