From the November 2008 issue of Entrepreneur

If labor costs are eating into your profits, is the answer to move all or part of your company to a location where people will work for less?

Possibly, but you have to look beyond the local pay scales and also consider current and future work force availability and characteristics, says Billy Joe Camp, president of World Business Advisors, a site selection consulting firm. "The work force has to be available, or the relocation isn't going to work," says Camp. He adds that wages tend to be standard within specific industries in spite of geography, but there are locations where savings can be made in the nonwage portion of the compensation package.

Tim Nitti, a principal with location strategy firm KLG, agrees. "Probably the single biggest emerging reason why anyone is moving companies--at least outside of the manufacturing sector--is access to talent," says Nitti. In locations where talent is in short supply, labor costs will continue to increase. And any sort of talent shortage can seriously inhibit a company's growth. "I may not even care that there's a rate differential today," says Nitti. "What I'm looking for is: Can I get the talent I need, and is it in a place where the talent base is likely to keep growing? That will help me control those costs in the future and have the talent to run my business."

When evaluating an area's labor pool, Camp advises factoring in the cost to develop your work force. Most locations offer a training subsidy or other assistance as a relocation incentive. You also need to know about the career habits of the available workers: "What is the history of this work force?" asks Camp. "Is it a work force that's traditionally loyal to the companies they work for? Is the history that the work force gets developed and they move on to something else? Or is there no history?"

To get those answers, ask the area's economic development agency to set up private meetings for you to talk with representatives of companies that already operate there. "Amazingly, they get very candid with each other," says Camp.

If you're bringing employees with you, it's unlikely you'll be able to reduce their salaries, but you may realize long-term savings by holding those wages steady until the local market catches up, says Nitti. As you add people in the new location, you can bring those folks on board at a lower cost.

Nitti says he sees small and midsize businesses that are talent-constrained in their existing market looking to move to support their growth. "A lot of entrepreneurs will start their businesses where they live, and it's not necessarily the optimal place [in terms of work force] once their company gets to a certain size," he says. In that case, it's less about cheaper labor and more that "you need a fundamentally different operating platform and staffing platform than you have in your current location," says Nitti. "[Entrepreneurs] understand that if they have a serious long-term need for talent and they stay where they've traditionally been in the big employment centers, their costs are just going to keep getting worse and worse."

Jacquelyn Lynn is the author of The Entrepreneur's Almanac.