Low costs lure financial institution back offices to Portland

A new study comparing 45 cities in the United States and abroad shows Portland to be in a favorable cost range for banks and financial service companies seeking to relocate corporate back office operations to lower-cost locations.

That's the observation of John Boyd, a principal of The Boyd Co., Inc., a Princeton, N.J., firm that provides independent location counsel to leading North American and overseas corporations. Founded in 1975, the company's clients include JPMorgan Chase & Co., Visa International, TD Canada Trust, Sun Life Financial, PNC Bank, Discover Card and Progressive Insurance. In the Portland area, Pratt & Whitney, with a plant in North Berwick, is a client.

“Portland enjoys significant labor cost savings vs. New York City — it's about 20% less,” says Boyd, who spoke with Mainebiz during a Patriot's Day visit to Portland to meet with a client. “Class A or Class B office space, the prices are very attractive in Portland — and by 'Portland,' we're not necessarily talking about downtown Portland. We're talking about the Greater Portland area. There's a plethora of office space opportunities and there's a significant cost variable vs. Boston.”

The Boyd Co.'s global site selection study compares operating costs scaled to a hypothetical 30,000-square-foot corporate back office in the financial services sector employing 125 workers. It came out in mid-March and compares metropolitan area populations of at least 500,000 that the company considers to be on the radar for new corporate back office relocations.

The study ranks Montreal as the least expensive North American back office location, with a total annual operating cost for the hypothetical corporate office of $7.1 million per year. San Francisco comes in as the most costly North American city at $12.4 million per year. Portland comes in at $10.1 million per year, approximately 20% less expensive than New York City ($11.96 million) and 10% less than Boston ($11.1 million). Tunis, in the North African country of Tunisia, is the lowest-cost city overall at $3 million annually.

Increasingly, Boyd says, companies are conducting global searches for locations to house back office operations — typically support functions like accounting, finance, information technology, customer service, human resources, marketing and training. Montreal, the lowest-cost North American city in the analysis, has attracted 2,000 jobs from Boston-based State Street Corp. and New York City-based Morgan Stanley, which announced in January a new efficiency plan called Project Streamline that's expected to reduce costs by $1 billion by 2017.

“Back office migration is one of the hottest sectors of the corporate relocation industry today,” Boyd Co.'s analysis states. “While back office moves by financial services firms to cities where operating costs are a fraction of financial capitals like New York and London is not entirely new, the pace is at an unprecedented level and is putting lower-cost Northeast markets in the sphere of New York City — like Portland — in play for new back office investment and jobs.”

What's driving those trends, the analysis states, is the realization by many banking and financial services companies that “improving the bottom line on the cost side of the ledger is far easier than on the revenue side.” Morgan Stanley, for example, opened last April an 184,000-square-foot back office in Bengaluru, India, housing 1,400 workers to support its technology and fund services businesses. It also has an office in Mumbai, India, with another 2,400 back office workers.

The back office cost-cutting strategy is part of the firm's effort to improve its return on equity from 8.5% to 10%, according to the Boyd Co. analysis. “We have too many employees based in high-cost centers doing work that can sensibly be done in lower-cost centers,” Morgan Stanley CEO James Gorman said in a recent earnings call with Wall Street analysts.

Likewise, according to the analysis, Goldman Sachs Group, UBS Group AG and Credit Suisse AG are all looking to expand their back office centers in Poland to benefit from the country's relatively inexpensive but skilled workforce. With the exception of Geneva, Switzerland, which appears slightly above the mid-point of the 45-city cost analysis list, the lowest-cost locations are all offshore. Five of the lowest 10 cities are in Canada.

Even so, in a tape-recorded interview about the back office analysis, Boyd says Portland has an opportunity to capitalize on one of the hottest sectors of the corporate relocation industry — namely, banking and financial services. The following is an edited transcript.

Mainebiz: What are some of your takeaway observations based on this new analysis, particularly in relation to Portland?

John Boyd: Portland has always been identified as a cost-competitive market. However, you are working with a number of very compelling and strong trends today. There's this de-centralization away from the head office. Companies within the financial services sector are taking labor-intensive operations out of the expensive address in Boston or Manhattan to lower-cost secondary, and even what we would term tertiary, markets.

Here's a major takeaway. Now, I'm going to meet with a company later today and I suspect this will be a major talking point: It's the competition that Portland is facing from Canada, specifically, Montreal. Montreal is the lowest-cost market in North America in this study. And it's why Morgan Stanley and State Street — which has operations in Boston and in Everett, not far from southern Maine — are putting jobs in Montreal right now. It's happening under the radar screen.

MB: That suggests it's no longer a domestic competition, but, in fact, an international competition to be considered as the host city for a major financial institution's back office headquarters. Is that how you see it?

JB: This is a major theme for Maine, obviously, because of the historically low exchange rate and proximity to Canada. The exchange rate in Quebec province is at historical lows, with 30% less cost to do business in Montreal.

Now, this is very interesting. Your governor, Paul LePage, has been very active in promoting incentives. There's been some push-back. It's politically contentious to talk about incentives today in this political climate. People regard them as 'corporate welfare.' But this is important, I think, for your readers to understand: Under the radar screen, Montreal enacted two, very powerful incentives that have lured companies like State Street and Morgan Stanley. The first incentive is a five-year income tax exemption for managers transferred from the United States to Montreal. That's powerful stuff. The second is a 24% tax credit for salaries of financial services professionals.

So this underscores the importance of incentives. Potentially, Bank of America, Morgan Stanley, State Street, JPMorgan, you name it, could move to Montreal, capitalize on the exchange rate and capitalize on those two very powerful, well-crafted business incentives.

MB: Were those incentives created with the intent of luring banking and financial service companies to locate offices in Montreal?

JB: Yes, they were. And the effort is really to lure industry, white-collar industry, from the 50 states to north of the border.

MB: So, if that's proving to be a somewhat compelling lure for U.S. banking and financial service companies to consider locating back office operations in Canada, is the flip side of that for states to create their own incentives to give a second thought to staying in the United States, but perhaps in a different municipality with lower costs?

JB: It underscores just how important incentives are today. We always talk about economic development as the second 'War Between the States.' But, in fact, it's more than that. Now, there's the reality of global competition, and you have your neighbors in the north, namely in the Province of Quebec, knocking on your door for this type of industry.

I think that's important, because five or six years ago, you wouldn't view Montreal as the threat that it is today, based upon the exchange rate and these economic incentives. Companies will always have a brick-and-mortar presence in Boston and New York City, but increasingly they want their back offices to go to lower-cost markets, like Montreal or Portland.

MB: How did you select these 45 cities to analyze for this study?

JB: The honest answer is: These are the cities that our clients are asking us to look at. We're obviously a for-profit company. We don't do these studies for our amusement. We meet with companies and we show them comparisons between the cities they've asked us to look at.

MB: So, in other words, these are cities that in some respect are already on the radar of your clients?

JB: These are the top 45 cities. So you might ask: Why would Tunisia be in this market? It's because one of our clients is Hewlett-Packard. And they have a back office in Tunisia. Airbus actually is putting operations in Tunisia. Despite all the civil war there, it is the most stable economy in northern Africa. Why would Warsaw, Poland, be in the study? Warsaw, in terms of industry attraction, is one of the most compelling markets in Eastern Europe.

MB: How often do you do these studies?

JB: Every three to four years. And every time we do a study for a particular industry, it reflects real-time labor market and real estate considerations of what projects are out there right now.

MB: Portland has certainly been cited by any number of national surveys for its quality of life. How much weight is given to 'quality of life' by companies thinking about relocating?

JB: This is an acronym that we employ in all of our office site selection projects: It's 'TALIO' — it's a spinoff from the British fox-hunting cry 'Tally ho!'

• T is for talent. Companies are only as good as their people.

• A is for access. Proximity to a major airport. Logan is only two hours away. You've got the Portland Jetport.

• L is for lifestyle. The quality of life here in Portland / southern Maine is 20% less costly with respect to cost-of-living than Boston. You've got world-class beaches. And Kennebunk and Kennebunkport, they're two of the most desirable beach, executive housing markets in North America. Markets that have proximity to major world-class beaches and exclusive zip codes today are a very powerful recruiting tool. Kennebunk and Kennebunkport are, really, regarded as premiere places for executives to have second homes within the context of North America. You've also got the presence of professional sports here in Portland with the Sea Dogs and the Pirates.

• I is for incentives. This is something that Paul LePage gets. These incentives are critical.

• O is for operating costs.

So, by that acronym, Portland is one of the most favorable places in North America to locate a back office operation, with the lowest-cost market in New England and a great lifestyle to offer.

MB: You've identified a lot of positives. Any negatives?

JB: The big negative is the negative that's always been true. Companies would be concerned about a tight labor market. There's about 3% unemployment here. But 'trophy projects,' major back office projects, have the ability to recruit and attract workers. The reality is if there was going to be an expansion here in Portland, or if you were to lure a significant project, you are going to attract workers from within a 90-mile radius. Portland is consistently ranked as one of the more hipster-friendly cities, with downtown walkable markets. That stuff influences corporate site selection processes.

MB: Do you have any clients who, since this study came out, are strongly weighing Portland as a market?

JB: Yes.

MB: Can you identify who they might be?

JB: No. It's really based on the fact that site selection is so confidential.

MB: I understand. So, what steps, if any, could state and local governments take to capitalize on a pretty favorable analysis showing that Portland competes very well as a possible back office location?

JB: I think the first thing to do is recognize who the competition is. It's more than just a second war between the states. Maine isn't competing just with Connecticut, Massachusetts and New York. You are competing with Montreal, whether you realize it or not. And that underscores the need for incentives. Job creation is a bipartisan goal. Democrats and Republicans in the state Legislature that have the reflex reaction against incentives should realize that not only other states but also Montreal are proactively using their incentives for projects like Morgan Stanley and like State Street. Those are two projects that easily could have come to Portland. Especially State Street.

MB: Are there any opportunities for Maine to recruit Canadian companies to locate back office operations here?

JB: Great question. The answer is: Yes, there is, despite the exchange rate.

Despite Canada's health care cost advantages and the exchange rate advantages, it is true that part of the maturation of the major Canadian global companies is to have a presence, a brick-and-mortar presence, in the United States.

MB: What concerns, if any, do you have about the quality and age of Portland's workforce, the education levels and skillsets?

JB: This is one of the more exaggerated minuses that we talk about. The reality is, companies are sophisticated enough to realize that for a signature trophy project, the workforce will relocate, or drive 90 miles. The significance of 90 miles: If a company restricts its relocation to within 90 miles of where it's moving from, it avoids severance pay. And it allows them to keep the bulk of their workforce.

This idea of Portland being an exciting place for millennials — well, companies think that way. HR directors think that way. Portland is an asset: It's a real gem of a low-cost urban area that's desirable to live in. That's a big recruitment tool.

MB: If a financial or banking institution chooses to locate its back office operations here, what might be the multiplier effect?

JB: Multiplier effects for attracting a financial services back office, with a weighted average earning approaching $50,000 a year, those multiplier effects are very powerful and positive. They include the effect on residential real estate, retail, hospitality, corporate sponsorship of Sea Dogs and Pirates games, of the art museum, encouraging other cultural amenities here, providing a catalyst for expanded air service at the airport. All of these things are multiplier effects, very powerful ones.

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