Setting up a facility in Europe may be the most important decision in the life of your company. What's at stake is the profitability of the business.

The locations of facilities have great influence on the operations and risk perspectives of a company. New European locations often require investments of millions of dollars, so choosing the wrong location is a very expensive mistake.

Real estate is also an important cost factor. For non-manufacturing operations, real estate costs are generally one of the most important cost factors (10-15 percent of total costs). Moreover, well-managed real estate can be instrumental in substantial cost savings up to 20 percent of annual real estate costs.

Before adopting a multi-stage site selection approach, it is important that the new project (site, building) be linked to the company's overall business and real estate strategy. The process is the same everywhere in the world: from a long list of regions down to the final choice.

Our approach focuses on the costs and the quality of the new location. Cost factors include labor, transportation, occupancy (rent), incentives, taxes, etc.; quality factors include labor availability, labor flexibility, business climate, infrastructure and utilities.

It is clear that each type of investment project has its own set of location requirements. Customer contact centers have other needs than, for example, food processing plants. The best location for a European logistics center is not necessarily (read - probably) the same as for European headquarters.

And even within a group of, for instance, medical technology production centers, there are important differences in delivery times, supplier bases, specific facilities and permits needed.

Labor must be accounted for

The personnel issue has become a critical success factor for nearly every site selection in Europe.

Labor costs and availability are the main drivers for many site selection processes. Some European regions show clear signs of overheating, resulting in labor shortages, rising wages and competition amongst employers.

Take, for example, Web-enabled customer contact centers. Cities like Dublin, Amsterdam and London have benefited from the flow of pan-European customer contact centers of mainly U.S. companies.

These cities offer a multi-lingual work force with reasonable costs. But their success has turned into a problem - overheating of the labor market. Companies are now looking for second-tier cities in favored countries: Birmingham, Glasgow and Liverpool in the UK; Lille, Lyon, Metz, Montpellier and Toulouse in France; and Rotterdam, The Hague and Maastricht in the Netherlands.

Furthermore, companies are now looking at locations in 'new' countries like Spain and Portugal. In some cases the strategy of having one pan-European customer contact center is now being replaced by hybrid structures, or a combination of a central facility, satellites for specific markets and partial outsourcing.

Is there enough bandwidth?

The Internet and e-business have changed many business processes significantly, and consequently, also location requirements. Technical support has become remote Web-enabled support, traditional finance and administration departments are moving to standardized global processes (leading to the emergence of European shared services centers) and the Web has led to new direct purchasing channels.

All these changes have forced a review of site selection processes.

First, telecom infrastructure (bandwidth) is becoming a critical location factor. The availability of various telecom providers, the bandwidth capacity and the cost structures vary by region in Europe.

And - in typical Europe fashion - the differences within a country are sometimes larger than between countries. In other words, location still matters in this wrongly-dubbed "anytime-anywhere" era.

Secondly, the Web enabling of so many business functions leads to changing workplace requirements: flexible workplaces and telecommuting are examples.

Telecom infrastructure changes all levels of site selection: the choice between countries, the choice between regions in a country, the choice of buildings within a region and the establishment of the workplace itself.

Trends hit the continent

Apart from the new location requirements mentioned, there are a number of trends influencing site selection processes in Europe.

First is the scale of operations. The geographical scope of site selection is changing. The last decade saw a growth from new facilities covering a national market to European or even global coverage.

Secondly, companies are taking the opportunity to outsource.

In manufacturing, contract manufacturers (examples: SCI, Flextronics, Solectron) are opening sites in Europe. Third-party call center operators (like Sitel, Stream, beCogent) are taking a larger share of the customer care market.

In logistics, the majority of the companies that want to have a European warehouse and distribution facility outsource to specialized third-party logistic service providers. But even in R&D and data centers, third parties are on the rise.

Count your costs

Earlier I mentioned that the final choice of a site is an assessment of costs and quality factors. Let's look at the establishment of a hypothetical shared services center, which brings together all finance, accounting and legal people at one location.

The question for the company is whether the existing national center is the best location. Maybe the best option is a completely new facility, which could be located anywhere in Europe.

In order to make an informed decision, a company must look at its costs over a period of time, not just one or two years. And the business must decide what is most important - reducing costs, locating a site that fits all the quality parameters, or a combination of both.

Manufacturing plants offer variety of choices

In the high-tech manufacturing field we see a split between northwest Europe and southern, central and eastern European locations. Southern Europe (Spain, Portugal, Northern Italy) locations are chosen for their combination of labor skills and moderate costs.

The lowest cost areas can be found in countries like the Czech Republic, Hungary and Poland. Not surprisingly, a number of electronic contract manufacturers have heavily invested in these areas.

Northwest Europe, with Ireland and the UK as hotspots, is the favorite location for the R&D and marketing facilities of high-tech companies. The urgent need for many medium-sized U.S. companies to have a manufacturing presence in Europe has resulted in integrated facilities in northwest Europe, with a combination of assembly, R&D, sales and distribution functions under one roof.

New plants in the more traditional manufacturing industries are limited in number. Ongoing consolidation has led to a reduction of the number of operations and sites. Besides that, the preferred growth strategy is through mergers and acquisitions instead of opening new greenfield sites.

Logistics centers deliver the goods

The first step in setting up a logistics center is answering the question of whether you want to subcontract. In general, subcontracting is on the rise in Europe.

The second question is about the right structure. As mentioned earlier, in some cases a European solution with one European distribution center is being replaced by effective satellite distribution centers.

For example, Yamaha's European spare parts distribution center in Lyon serves as a satellite facility for the Amsterdam-based European distribution center, as well as a regional facility for products produced in southern Europe.

International office operations

The typical type of international office is the European headquarters of a company. Many small, fast-growing high-tech and e-business companies need to have a consolidated office in Europe. They often choose Europe's business capitals (London, Amsterdam, Brussels, Frankfurt, Paris) because of a strong need to be close to other headquarters, specialized service providers and a major international airport.

The second group of international offices consists of back offices, with mainly two types: customer contact centers and shared services centers.

Earlier we talked about the new generation of Web-enabled customer contact centers. A relative recent phenomenon is the increase of pan-European shared services centers.

Shared services centers are offices, established by international companies, where operational activities take place.

These offices, which are physically separated from the headquarters, support the core business activities of the company.

The shared services center, or back office, involves the sharing of company resources (organizational, staff and technology) to provide defined services to internal (finance) functions or external (call centers) in an effective and efficient manner.

A wide variety of activities can be carried out in shared services centers, such as:

_accounting/administration

_financial services

_customer support

_(technical) support to sub-sidiaries or distributors

_telesales and/or telemarketing

_data entry and/or data processing

The main reasons for setting up an SSC are better service and improvement in quality, reduction of administration costs and employee reduction.

New technology has made it possible to organize these shared services on a pan-European level. In the last two years alone many companies have decided to set-up a European SSC. Recent examples are AMP, Baxter, Exxon, Dickinson, Bristol-Myers Squibb, Citibank, DHL, Fiat, GE Capital, GM, Guinness, IBM, Michelin, Nike, Oracle, Reebok, Sony and UUNet.

Golden rules of site selection

Assuming that your European operation will fall under one of the three categories discussed, here are the 12 Golden Rules of Site Selection, gleaned from BCI's experience in hundreds of projects.

No. 1 - Link the location decision process with the overall strategy

For most companies, setting up a new multimillion-dollar facility in Europe is a challenge they do not cope with every year. The project profile should be clearly linked to the company's overall strategy.

For example, if you want to set up a European customer contact center you need clear answers on the following questions: How will your company organize its customer service operations for the next five years? Which processes have to be operated in the new center? Have you thoroughly looked at outsourcing?

No. 2 - Take a long-term corporate view

Some regions in Europe offer high incentives and tax breaks, in some cases up to 60 percent of the investment cost. But incentives are usually given to compensate certain negative aspects of a regional investment climate, such as a peripheral location or low-skilled labor force.

If you are siting a facility, it is in many cases an investment for at least 10 years. Don't focus only on one-time savings (investment subsidies, employment grants, training costs) but take the whole picture of running a business for 10 years.

No. 3 - Don't be locked into old ways of thinking

Sometimes the site selection process is already very much determined by objectives like "We don't want to set up our call center in the United Kingdom because our competitors are already over there." Challenge these ideas to be sure they are real drivers.

No. 4 - Don't assume anything

Many site searches start with a blanket assumption about square footage requirements. Don't put on physical parameters until you've done some thinking.

What is the assembly process about? Is a distribution area included? And office space? What about parking? Can the building have different floors? What is the timing of the possible expansion?

Are you prepared to pay for an option for the additional land or do you want to buy the whole plot immediately?

No. 5 - Set clear priorities in location requirements

Once you start discussing a project's outline with more people in the company, the list of location requirements adds on every day. Set clear priorities in location requirements. Determine the most important cost and quality factors, and write them down before you start assessing locations.

No. 6 - Focus on regions, not countries

The differences among European countries are huge. In countries like the UK, France and Germany, variations in labor, real estate and telecom costs can be more than 50 percent. From the beginning, the process should be focused on regions and not on countries.

No. 7 - Anticipate future regional development

During the site selection process you will gather loads of data, but forecasts for the future are sometimes overlooked. It is crucial to have forecasts of, for example, the labor and real estate markets, because they can heavily influence your future operating costs.

No. 8 - Don't settle for mediocrity

The wrong building in the right region, a perfect site in the third-best region, an excellent building without good accessibility, we have seen it all. In the end, the region chosen, the site selected and the building leased or built should meet all your requirements.

No. 9 - Develop an escape plan

Nearly all site searches for new facilities have a positive start: the company is growing, and wants to expand.

But, what if sales take a downturn? Have you thought about leasing instead of buying? Offices, assembly and logistics operations can be leased in Europe quite easily. Will you be able to lease your space to another user if you need to bail out?

No. 10 - Challenge all information

It is a very hard job in Europe to find accurate, up-to-date, reliable, international comparable data on all cost and quality items for all the hundreds of European regions. Be careful with statistics of government agencies. Don't take data at face value.

No. 11 - Plan, plan, plan

Choosing a location doesn't end the site location process. What is the scheduled opening date? How long will construction take? What about environmental permits? When do you hope to start with training the new staff?

Develop a realistic time plan and stick to it.

No. 12 - If in doubt, get help

With 16 years of experience, we know how to make a deal, what the realistic opportunities are, what the various elements should be and how it can be made Brussels-proof (the European

Commission has a controlling responsibility).

At first sight, site selection in Europe does not differ from site selection in the United States. But experiences of many firms show that the different languages and business practices, unreliable data, the variety in incentive and tax schemes and the assessment of all location factors are strong challenges.

An impartial, experienced location specialist can be a cost-effective and confidential guide through Europe's site selection jungle.

Ren‚ Buck is founder and president of Buck Consultants International, a leading corporate real estate and site selection advisor. Buck Consultants International has nine offices in Europe and one in New York, operating under the abbreviation BCI. Rene Buck can be contacted at rene.buck@bciglobal.com.