As appeared in the Winter 2004 edition of Trade & Industry Development magazine

Site Selection for the Technology Industry

By:  Angelos Angelou

Few industries are so globally-driven as the technology industry. While many pundits once predicted a world where “place” would have a diminished role in an age of infinite communications, location has become even more important to the success of technology companies.

Prior to 2000, technology relocations or expansions were closely tied to a search for a quality, competitive labor supply in a tight environment. Now, site selection has been expanded to achieve higher, more strategic purposes over the long-term. Site selection for the technology industry has now become the lifeline to new capital, new markets, and new research.

The technology industry is now entering its next growth phase. The past two years were difficult times for the technology industry. With the post-Y2K decline in technology equipment spending and the subsequent crash in the NASDAQ, technology companies have been hesitant to make capital investments. Despite recent turbulence, the technology industry still stands to be a top catalyst for growth in the U.S. economy. Historically over the last 20 years, the sector has grown at three times the rate of the national economy and its high wages and investment levels will continue to command even greater levels of incentives and recruitment activities from communities across the U.S. Technology companies are now vying for position in the next expansion phase.

Site selection has become more complicated as decisions become even more global in nature. Offshoring has become a top issue. The ability to access new global markets is now a major factor in manufacturing investments. Traditional companies continue to explore outsourcing opportunities, and at times off-loading their IT departments to large service providers such as HP, IBM, and EDS. Regardless of industry or size, technology companies are now critically evaluating how their location decisions affect their bottom line, customer relations, and strategic position.

Site Selection Trends in Technology

For the purposes of this article, we will limit our definition of technology to the electronics, software, and biotech industries. These industries are umbrella groups for most of today’s leading technologies such as semiconductor chip manufacturing, computer assembly, software design, Internet services, and pharmaceutical research.

While each industry and each company will have its own unique requirements and concerns, technology companies are united in their search for the best talent, research, and business climate in the world.

The Search for Talent
Access to a pool of highly educated, talented, and technically skilled workers is vital to any technology company. Manufacturers seek workers who are smart and trainable. To attain world-class levels of quality and productivity, manufacturers seek intangible qualities such as attention to detail, work ethic, adaptability to change, and quality consciousness.

Communities with a large pool of technical workers enable companies to grow without recruiting and relocating costly technical talent. Employee talent is an important asset and key differentiator for tech companies. Success breeds success as star companies and best-in-class workers seek out each other. Technical functions tend to cluster in different regions as workforce specialties vary across the globe. For example, a computer manufacturer may have its headquarters and engineering in San Jose, manufacturing in Austin and Taiwan and back offices in Phoenix or Bangalore, India.

The Search for Research Universities
Universities play a larger role in the technology industry than ever before. Universities play a dual-role: they deliver new research to the marketplace and train the industry’s next cutting-edge workforce. Availability of local technical graduates is important for technology companies, especially growing ones. Local technical graduates help companies manage labor costs that are by far the largest expenditure of most high tech service firms. As technologies evolve, skills acquired in school only a few years ago may be obsolete today. Success for companies can depend upon whether workers can quickly upgrade.

Site selectors will evaluate the enrollment and degrees conferred in engineering, life sciences, business and computer science or any other degrees that are relevant to their clients. Reputation of the school’s programs and graduates is also a key factor. The Metropolitan New Economy Index ranks the leading metro areas for degrees granted in science and engineering. Raleigh-Durham, Austin and Boston were ranked first, second and third respectively.

Research universities consistently are one of the most important catalysts for technical growth in all tech metros. These universities not only supply knowledge based workers and research, but also plant the entrepreneurial seeds as professors and students often transform technologies into start-up companies. Today’s research becomes tomorrow’s new technologies and products. University research is one of the most important drivers of technology site selection decisions, particularly for small and mid-size firms. Many of the nation’s most successful technology firms located in cities with university-level research activity. San Jose is littered with companies that started with local university graduates and technologies, for example Google, Sun Microsystems, and Hewlett Packard.

A key driver of university research is federal funding. Grants from NASA, the Department of Defense, and the Department of Health and Human Services help drive leading-edge technologies. The Federal government doled out $22 billion in grants for research and development in science and engineering in 2001. The top 50 recipients of these funds included prominent private institutions: Johns Hopkins, Harvard, and Stanford as well as large public schools like the Universities of Michigan, North Carolina, and Colorado. These top 50 schools accounted for over 36% of the grants, leaving the majority of the funds to be dispersed among lesser-known institutions.

Most if not all of the nation’s tech metros have at least one top-tier research university. San Jose has Stanford and Berkeley, Boston has Harvard and MIT, and Raleigh-Durham has Duke and UNC. According to data from the National Science Foundation, in 2001, San Jose area universities received $1.4 billion in R&D funding, Boston $980 million, and Raleigh-Durham received $921 million.

The Search for a Competitive Business Climate
Corporate site selection is increasingly affected by tax environments, and more than ever, companies seek predictability and avoidance of risk in their tax burden. Most tax and incentives decisions are made by capital- or research-intensive industries such as semiconductor manufacturing, electronics manufacturing, and biotech research. Tax liabilities can vary greatly from state to state. While some states suffer high property taxes, which greatly affect manufacturers, they often compensate with accelerated depreciation schedules for technology equipment or investment and R&D tax credits on income or purchases. Income tax apportionment formulas can also vary widely from state to state. States with triple-factor-sales formulas for corporate income heavily favor technology companies who export a majority of their products or services out of the state. Labor-intensive firms should closely monitor the impact of income taxes in many states. Due to the complexity and variability of tax systems across the U.S., technology companies should employ the services of a talented site selector or accounting firm to truly estimate the impact of their location decision. Often, this analysis is done too late in the process to alter a decision or be used as a basis for incentives negotiations.

Business climate evaluations should be based solely on tax analysis. Economic growth observations may often sway a decision. Companies seek out high growth, dynamic environments for many reasons. Often, economic growth suggests better job opportunities in the region, which makes recruiting talent easier. Also, a location’s entrepreneurial and networking environment assists companies by allowing them to connect with entrepreneurs commercializing new technology. Workers also enjoy immense benefits by casually connecting with their technical peers in town. Financing availability, particularly venture capital, is a top reason why smaller technology firms relocate. As small businesses grow, they require higher levels of capital to hire new employees, develop prototypes, and launch their products to market. Venture capital firms prefer to invest in firms close in proximity to them so that they are more familiar with the company and can exert more control. The combination of talent, research, and financing form the core of the technology clusters in the U.S. such as Boston, San Jose, Austin, and Raleigh-Durham.

The Site Selection Process for Technology Companies
Once the site selection team has determined its needs and ranked them in importance, they must start the evaluation process:

The site selection process is comprised of seven main steps, which begin with the project set-up.

1. Project set up / needs assessment / scope of search
2. Determine Incentives Strategy (optional)
3. Issue Requests for Proposals (optional)
4. Evaluation of top locations and sites
5. Cost of operation benchmarking
6. Short-list communities and engage in closing negotiations (optional)
7. Final selection

Step 1: Project Set-u p / Needs Assessment
It is important to determine project goals, facility needs, and site selection criteria in the initial phases of any site selection project. Initiate a 1-2 day brainstorming session regarding the scope of the project, desired outcomes, and timeframe. These meetings should include top management, facility directors, financial executives, accounting consultants, and site selection consultants. Often, executives have early expectations on where their next facility or office is best suited. A discussion of incentives begins here, with the site selection consultants giving an early assessment of what incentives could be available based on similar type expansions and relocations. Milestones and success metrics should be set. The most effective site selection efforts allow 6 to 12 months for the full evaluation, negotiation, and selection of a community.

Step 2: Determine an Incentives Strategy (optional)
Most technology companies are moving at a pace too fast to allow the exploration of incentives in their site selection decisions. For many, incentives are often the icing on the cake, sweetening the deal often after a decision has already been made. Software companies are generally too small to see the benefit of financial incentives or just don’t qualify. Others, such as manufacturers, know just how valuable incentives can be. New industries such as nanotechnology, biotechnology, and fuel cells, are now caught up in a virtual “incentives arms race” among states and communities. Hiring a site selection consultant is a requirement to effectively explore the full range of incentives opportunities. In addition, a consultant provides a firm “arm’s length” protection from any problems or aggressive negotiations that might sour the public relations impact of an announced move. While the primary goal of incentives is to remedy a prejudiced or burdensome tax system, incentives often become a stamp of approval by communities that large technology companies seek in their local public relations. More than ever, incentives are cash-based, where state and local governments commit funds to invest in infrastructure, workforce training grants, free land and buildings, or even straight cash to a company in order to win large projects and make a marketing statement to the world.

Step 3: Issue a Request for Proposals (optional)
If a technology company desires to pursue incentives, it is important that its site selection representative issue a “request for proposal” to a large list of communities. This ensures that a full range of options are presented to the decisionmakers, and incentives negotiations can begin. Technology companies should present themselves to communities in a confidential fashion, using project code names and relying on non-staff to interact with local representatives.

Step 4: Evaluation of Top Locations and Sites
The technology company or its site selection consultant must do thorough research on its list of potential locations. Today, communities maintain much of their information on an economic development website. In fact, site selectors use the Internet to gain most of the information they need in their evaluation before any phone calls or visits occur. Typing “Texas Economic Development” into Google will generally take you to the appropriate Texas website, and other websites aim to centralize information for numerous communities across the U.S. Communities should be evaluated for each of the criteria set out in Step 1: Project Set-up. Good site selectors will devise a weighted ranking system for all factors and rate communities on each.

For technology companies that require very specific sites for new construction, such as an electronics manufacturer, visits to a community must be conducted by an experienced engineering or site selection team. These individuals make drive-by evaluations of sites and typically get information for local chambers of commerce on their acreage, topography, soil type, zoning, geotechnical conditions, utilities, and access points. Often, the lack of sites and infrastructure may remove a community from a site selector’s review list. Technology companies are increasingly focused on the supply of developed, “shovel-ready” sites in communities around the U.S., thus raising the bar for corporate recruitment. Many communities pre-certify their manufacturing site for specific uses such as semiconductor manufacturing or automotive manufacturing.

Utility evaluations are still very important to technology firms. The demands of the digital world result in the large consumption of power. Affordable, reliable electricity is of utmost importance, particularly for manufacturers or datacenters. Dual-feed and gasoline-powered generators are extreme examples of requirements. Reliable telecommunications are equally important. Site selectors will evaluate brownouts, outages due to storms, power spikes and excess capacity for peak periods. After the recent massive black outs in the northeast, reliability of the electric grid gets deserves scrutiny.

Step 5: Cost of operation benchmarking
Technology firms vary in their attention to costs. Manufacturers and large consumers of electricity do thorough evaluations of the costs for various locations. This benchmarking analysis should cover the cost of labor, supplier purchases, air travel among locations, real estate costs, and tax costs. This analysis is generally done by the site selection consultant or an in-house financial analyst.

Step 6: Short-list communities and engage in closing negotiations (optional)
As the process moves to the final stages, the competing area’s recurring cost structure becomes an important factor. Benchmarking the final communities for a variety of weighted scores can help determine where an operation would experience the lowest operating costs. Numerous factors are ranked and weighted for all areas in contention to determine which areas are best suited for the operation.

If incentives are part of the selection process, intense negotiations are required in the final weeks of the decision. Corporate executives must be involved in these negotiations and an internal understanding of incentives targets must be understood by all. Confidentiality is best kept throughout negotiations with communities.

Step 7: Final selection
The final selection of a community often rests on one or two key requirements: the availability of a site, the desire of the CEO, a marketing goal, or an incentive. The winning city is almost certain to be the one which brought the most comfort and enthusiasm to the CEO and the executive team. Thorough evaluations by staff and consultants can provide strong guidance to decisionmakers, but not a final decision. Once a decision is made, technology companies should make every effort to maximize the publicity and exposure in the community in order to build goodwill and begin to attract the much needed technical talent that they will need.

Closing Tip: Most technology companies are after a young and entrepreneurial workforce. The strong presence of the 25-45 year old age group may be one of the most important and decisive demographics in determining if a community will make it to the short list.