In the upcoming years, the European Union (EU) will expand. Ultimately, 13 new countries will be added to the existing 15 member states, creating a unified powerful market of more than $10 billion.

But what does unified mean? Language and cultural differences, different political settings, huge regional variations in location factors, and difficulties in finding the right comparable data are now, and still will be, challenges that investors have to overcome.

Having the right location and suitable real estate is of key importance. The locations of facilities have great influence on the operations and risk perspectives of a company.

New locations often require investments running into the millions of dollars, so choosing the wrong location is a very expensive mistake.

But just as importantly, real estate is also an operational cost factor.

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

Before adopting a multi-stage site selection approach, it is important that the new project is linked to the company’s overall business and real estate strategy. In a typical location search we distinguish six stages. The process is the same around the world: from a long list of regions coming down to the final choice (see figure 1).

Cost and Quality are Leading Factors

In general, our approach focuses on the cost and quality of the new location. Cost factors include labor, transportation, occupancy, 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.

For example, customer contact centers have needs that food processing plants don’t; the best location for a European logistics center is not necessarily (read: probably not) the same as for European headquarters.

Even within a specific business, such as med-tech production centers, there are important differences in delivery times, supplier bases, specific facilities and permits needed.

Companies Look for New Balances

Whatever business your company is in, whatever technology drives your business process, whatever your dependency on economic development, your company has to fight two wars during the next several years: the war for margins and the war for talent.

To be successful in the war for margins, cost effectiveness and speed of innovation are important. Not only costs to operate the business but also costs to innovate, and to renew products and processes.

The war for talent is about getting, having and keeping the right work force. ‘Right’ can refer to technological skills, attitude/motivation, language skills, cost levels, availability, etc.

In the economic boom of the late 1990s, many companies accepted high costs in order to find the best talent and offered them an excellent working environment (A in figure 2). Nowadays, companies are looking for the best conditions for talent against lowest costs with maximum flexibility (B in figure 2).

Developing Different Scenarios

The time has past that a company had a simple greenfield project — “Let’s find a new call center location” or “We need a distribution site to deliver our products to our clients in Southern Europe.”

Projects today are often composed of consolidation, expansion and the integration of new or merged units at the same time. It is important to develop scenarios and assess them from a financial, quality and strategic points of view.

Just a small real life example. If a company has three call centers: one small (50 seats), one medium-sized (100 seats, close to the smaller one), and one large (200 seats). The company wants to expand with another 200 seats. There are various options:

Expand in all three locations;

Expand the larger one and consolidate the small and mid-sized one;

Consolidate all three centers at the largest site and expand there;

Build a new customer care center and close the three existing ones;

Eventually move to a lower cost country.

An in-depth assessment is in these cases the only way to compile the right strategy.

Outsourcing Continues to Impact

Companies are outsourcing more and more. Companies want to focus on their core business/core competences, or want to control costs. They want to benefit from economies of scale with the third party, or they want to keep up to speed with new technological solutions.

So, outsourcing is definitely on the rise. In Europe, logistics has been subcontracted already for a long time to well-known companies such as Deutsche Post, TPG, Exel, Stinnes, Kühne & Nagel, Geodis and Tibbett & Britten.

Subcontracting manufacturing leads to growing companies such as Jabil, Solectron, Flextronics and Celestica in the electronics industry. In the medical industry, third-party manufacturers such as Trivirex, CMA, Plexus and Quintiles are in the picture.

Back office operations follow the same route: think about third-party call center operators such as Sitel, Stream, Convergys, Sykes, Xtrasource.

The growth of subcontracting or outsourcing has not come to an end, yet. On the contrary, figure 3 pictures the expected development of subcontracting.

The one pan-European Solution

In the 1990s, the paradigm within companies was to organize as much business functions as possible on a pan-European level.

Taking advantage of economies of scale, companies established pan-European distribution centers, pan-European customer care centers, pan-European shared services centers, etc.

But the hot spots for these pan-European operations became less competitive. London, Dublin and Amsterdam, the traditional hosts of European call centers, got an overheated labor market, and the centrally positioned Benelux countries (Belgium, Luxembourg and the Netherlands) faced fast rising land costs, thus becoming less attractive to pan-European distribution centers.

But also in the business processes, differences appear. In supply chain solutions, distinctions are being made between slow-moving vs. fast-moving products, or between spare parts vs. end products. Above all, the clients want to have fast and reliable deliveries.

Also in customer care operations, a split is made between first-tier and second-tier assistance. Companies now have the choice between four types of structure (figure 4) to organize their European logistics, customer care or shared services:

The decentralized, non-coordinated structure, where each European country has its own service center;

The centralized, pan-European structure, where service is delivered out of one center, maximizing economies of scale and guaranteeing a consistent service offering;

A coordinated regional structure: where regional centers apply, supported by one European IT platform;

Hub-and-spoke structure (or distributed structure), where a distinction is being made between the functions performed in a hub center (central distribution center, central call center) and spoke centers (regional distribution centers, regional country- or language-based call centers).

Finding the Optimal Location

Our site selection studies are always based on a combination of cost and quality factors.

But what cost factors and what quality factors to include in the analyses varies from project to project.

The conclusion is clear. There is no top location in Europe for all types of operations. Based on the specific project characteristics, you have to investigate what the best location (in terms of cost and quality) is for your project.

At first glance, 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, difficult-to-get reliable data, the variety in incentive and tax schemes and the assessment of all location factors are strong challenges.

René Buck is founder and president of Buck Consultants International (BCI), a corporate real estate and site selection adviser. BCI, with eight offices in Europe and one in New York, has 17 years of location advice in Europe. You can reach Buck at +31-243790222 or via e-mail at rene.buck@bciglobal.com.