December 23, 2003
U.S. Firms Hoping to Shave Costs
Look Closer to Home, Not Offshore
By Kris Maher, Staff Reporter of THE WALL STREET JOURNAL
When an information technology company in Palo Alto, Calif., wanted to set up a new office recently, it first considered going offshore, where it could have realized the greatest cost savings. But after the chief software architect at the company vetoed such a move, the company decided to settle on a U.S. city that could provide the next best option.
"Phoenix was the answer," says Manoj Jain, chief executive officer of Pipal Research Corp., a research and consulting firm based in Chicago, which was hired by the company to evaluate a number of U.S. cities on various costs including labor.
According to Mr. Jain, his client could have realized a savings of between 30% to 40% of the total project cost by relocating in India. But the company settled for a cost savings of roughly 20% in Phoenix, largely at the urging of the one company executive. "He said he wants people under his nose for quality control and just the overall implementation schedule," Mr. Jain says.
While many companies are sending jobs offshore to take advantage of huge labor cost savings, some employers uncomfortable with overseas operations are looking to reap savings in the U.S. by shifting from one city to another. Consultants describe the trend, which takes advantage of differences in salary levels in the cities, as a kind of labor-cost arbitrage. While the cost savings aren't as dramatic as they are overseas in developing nations, they are still large enough to motivate some companies to start fresh or seek out workers in a less costly U.S. city.
A survey this year by Mercer Human Resource Consulting in New York shows how widely average salaries for similar positions can vary from city to city. San Francisco, which had average salaries 22.9% above the national average, topped the list, while Little Rock, Ark., was at the bottom with average salaries at 10.6% below the national average. Birmingham, Ala., Asheville, N.C., Albuquerque, N.M., and Omaha, Neb., had salaries slightly higher than those in Little Rock.
"If I could find good talent in Memphis, which is 8% below the national average, it might be a good place to relocate if I'm currently sitting in Chicago, which is 10.9% above the average," says Darrell Cira, a senior compensation consultant at Mercer. He notes that companies now also typically look at labor "micromarkets," or what it costs on average to pay for particular positions or skill sets in various cities.
Other costs and factors, of course, are also taken into consideration when companies consider relocating, but several recent developments are causing them to seek out less expensive labor. For one thing, an increasing reliance on technology has made the moves especially attractive to companies that provide services that don't need to be tethered to a particular location.
Jeff Furst, president and CEO of FurstPerson Inc., a Chicago human-resources consulting and outsourcing company, estimates that up to 70% of an operating budget at a facility such as a call center goes to labor costs. Many such companies can trim their operating budgets by between 15% and 30% by switching cities, he adds.
The growing use of contract workers for short-term projects has also increased companies' efforts to shop for cheaper talent. In some cases, companies are even building databases of how much it costs to hire workers with certain skill sets in various cities. IQNavigator Inc., a Denver company that provides software to manage temporary workers and outsourced projects, provides software that enables companies such as Northrop Grumman Corp., to keep such records, according to John Martin, IQNavigator's senior vice president of corporate and product strategy.
"If a project isn't dependent on location, they can say, 'Should we do this in Los Angeles or Houston or Bethesda?"' says Mr. Martin. The popularity of offshoring itself has woken some companies to the potential for saving on labor expenses and to what some people are calling "best-shoring," he says.
