How much of a role does a company's headquarters play in its overall success? To many CEOs, choosing the right place to base a company is as important as what it does and who it hires.
Just look at Google (GOOG), the top performer on BusinessWeek's BW50, our annual list of the best performers from each of the 10 sectors that make up the S&P 500-stock index.
After outgrowing two other Silicon Valley sites, Google moved into to one of the area's biggest office parks in 2003, went public the next year, and purchased the property in 2006 for $319 million. The four-building, 978,000-square-foot Mountain View (Calif.) headquarters, known as the Googleplex, is renowned for its furnishings (giant rubber balls, dinosaur skeleton, SpaceShipOne replica) and facilities (free laundry, swimming pools, sand volleyball court, gourmet cafeterias). Who wouldn't want to work here?
Follow the Talent
"[In Google's case] it's all about recruiting talent," says Lou D'Avanzo, a broker at New York-based commercial real estate firm Cushman & Wakefield. "They want to set something up so they can control their growth for the future. They are looking to create a culture, a place of their own."
And how they have grown. Just last year, Google doubled its staff to 10,000. It increased its revenue by 67%, to $10.6 billion. The search giant's market capitalization zoomed from $23 billion at the time of its IPO in 2004, to $136.7 billion by the end of 2006.
If you're a company with plans for big growth, purchasing or building a "suburban campus" headquarters may be a better option than leasing a building in a city. "You don't want to be locked out of space," D'Avanzo says. "And as cities get more congested, there will be more people that look to suburban locations."
But to attract the right employees for your industry, you may need to be in a big city, or at least near one. The large and skilled workforce in New York City makes it a necessary location for many headquarters, especially for companies in banking and finance, and for those with European clients. California, on the other hand, is still the nation's high-tech hub because of its large number of engineers, research centers, and venture capitalists. Of the 50 companies on the BW50 list, 20 are based in New York or California, with 8 in New York City and 8 in the Bay Area.
Moving the Call Centers
There are 3.8 billion square feet of office space in the U.S., with an annual average asking rent of $24.58 per square foot, according to El Segundo (Calif.)-based real estate corporation CB Richard Ellis (CBG), which, coincidentally, is No. 16 on the BW50 list. Rents vary widely, from as much as $150 per square foot in Manhattan to $18 per square foot in Albuquerque, N.M.
But the high price of office real estate in big cities like New York and desirable areas like Northern California is no deterrent for wealthy investment banks and high-flying tech companies, since having access to the right workforce is essential to their productivity. "Even though rents have risen, their revenues have risen by more," says D'Avanzo.
To cut costs, even deep-pocketed companies may keep their headquarters in a major center but move back-office operations elsewhere. "If you're a big New York bank, you're probably going to have your headquarters in New York, but you may put your call center operations in Fargo, N.D.," says Jeff Waters, senior managing director at CB Richard Ellis Consulting. Morgan Stanley (MS) (No. 39 on the BW50) is based in midtown Manhattan but has offices in Atlanta, Salt Lake City, and West Conshohocken, Pa.
When a company decides to relocate or move certain operations, the decision is often driven by the cheaper cost of labor in other areas. "Relocation decisions are rarely made on the cost of real estate," says Waters. "The cost of labor is so much more significant." Companies can also recruit and retain employees more easily in smaller markets, since opportunities are limited.
UPS Heads South
As you might expect, United Parcel Service (UPS)—No. 33 on the BW50—has moved around a lot since its beginnings in the early 20th century. UPS started out in Seattle in 1907, relocated its headquarters to Manhattan in 1930, and moved to Greenwich, Conn. in 1975.
But Greenwich, originally conceived as a refuge from the madness of the city, turned out to be far from ideal, for a number of reasons. It was expensive, for one. "We were moving younger managers to the headquarters in Connecticut, and they'd be facing an hour-and-a-half commute to find a house they could afford," says UPS spokesperson Norman Black.
Getting to and from the airport in New York, 35 miles and easily an hour's drive away, was also a drag for UPS employees. "People wasted so much time traveling," says Susan Rosenberg, also a UPS spokesperson. "We have a very strong culture of promotion from within; it was becoming somewhat of a disincentive to be promoted to the corporate office."
In 1991, UPS decided to move the headquarters to Atlanta, Ga., where the median home price at the time was just $86,000, according to the National Association of Realtors, compared with $165,100 in southwestern Connecticut and $480,000 in Greenwich. UPS was expanding internationally at the time and had recently begun operating its own airline, making Atlanta an ideal location because of the city's airport, which is the busiest in the world. Hartsfield-Jackson Atlanta International Airport accommodated 84.8 million passengers and 976,447 flights in 2006, and has more nonstop flights and destinations than any other hub.
Goodbye, "Hustle and Bustle"
An astonishing number of employees moved down to the new HQ—including 92% of managers and 56% of administrative employees, according to the company. "If 10% make a major move, we're kind of surprised," says CB Richard Ellis' Waters. UPS offered help—relocating employees were guaranteed purchase of their homes, those with high school seniors in the family could stay in Connecticut until graduation, and relocation assistance centers were set up in both Connecticut and Atlanta.
"Everybody was very surprised," says Rosenberg, who helped with the move. "But clearly the new location satisfied some of the quality-of-life issues."
And UPS wasn't finished. In 1994, the company had a new headquarters designed and built to work with the site's natural surroundings and provide a more enjoyable work environment for employees. The 623,000-square-foot facility is built over a ravine and waterfall, and it's surrounded by hundreds of trees and preserved woodlands that include a jogging trail. The tree canopy provides shade in the summer and insulation in the winter, saving energy and money.
"They knew what it was like to be in the middle of bustling Manhattan, and they wanted to create an environment that was set aside from the hustle and bustle," says Black. "You may spend your whole career at UPS—and [the building and location] certainly helped keep people there."
Click here to see the headquarters of the top performers from the BW50.