The Information Technology Industry’s Definitive Guide to Site Selection

21 Jul, 2013

By: Chris Engle,Tony DeLisi

When Marc Andressen, founder of Netscape and now venture capitalist, announced two years ago that “software is eating the world,” (WSJ, 8/20/2011) one might think that he was prone to exaggeration or at least to odd metaphors. But recent trends support his point – that software is playing an integral part of our lives, our businesses and the economy. In fact, site selection of IT operations has become a critical concern for companies of many industries, from health care to automotive to distribution industries.

In this article, we will present an update of the information technology sector and its near-term direction. Our focus will be on computer and software industries, and we will touch on the industries that are increasingly dependent on IT for their growth and R&D. We will then review the top site selection requirements for IT companies and operations, with a focus on how companies can find the best workforce and business climate for their expansion. Finally, we will offer a checklist of a typical site selection process that any IT or IT-focused company can follow.

Trends in the IT Industry

The information technology industry is one of the primary drivers of today’s economic recovery, and the outlook for this diverse industry is brighter than ever. Through the economic recession, the technology industry has remained one of the strongest pillars of the US economy. Information technology employment grew 12 percent from 2007 to 2012, creating over 300,000 jobs, while the overall U.S economy lost 420,000 jobs.

The domestic information technology industry is benefitting from an improving cost environment and a marketplace that increasingly requires speed and razor-sharp focus on the customer. These and other factors have led to resurgence in technology employment and production within the U.S.

Renewed belief in America’s manufacturing and technology renaissance is gaining steam. Last year, the Boston Consulting Group made big news by announcing that U.S. manufacturing cost would reach parity with China in the next few years once other costs such as transportation and the protection of intellectual property were included. Several high-profile reshoring promises have been made recently:  Apple announced that the company would resume making Macs in the U.S. for the first time in more than a decade and Google’s futuristic Google Glass is currently manufactured by Chinese firm Foxconn in the U.S. Other tech-focused industries point to continued domestic manufacturing, from Boeing’s Dreamliner in South Carolina and Washington to Tesla’s Model S sports car in California.

The growth in the smartphone “app economy” has translated to thousands of small teams creating new tools for businesses and consumers, or just to entertain. Unlike large-scale manufacturing, software applications start with a small base of users, are highly focused on unique consumer preferences and must endure constant change on the path to profitability. This process is best done with small teams working face-to-face. Offshoring remains an important part of software development, but product design and “market touch” will mean that U.S.-based software job creation will continue. One study last year estimated over 300,000 jobs are supported by app development (direct jobs, not including multiplier effects). Apple Computer estimates that their devices account for 300,000 jobs alone, which means that development for all platforms could push the overall number of jobs past one million.

Given these positive trends and the fact that many IT operations are characterized by high wages and capital investments, it is no surprise that communities across the U.S. are boosting their efforts (and their incentives) to win high-impact technology projects.

In the following sections, our focus will be on the site selection requirements of IT companies and IT operations.

The Search for a Talented Workforce and Communities that Attract Them

Access to a pool of highly educated, talented and technically skilled workers is vital to any technology company. Locating in communities with a large pool of technical workers enables companies to grow without recruiting and relocating costly technical talent. Technical functions tend to cluster in different regions as workforce specialties in IT vary across the globe. For example, a computer manufacturer may have its management in San Jose, R&D in Boulder, manufacturing in Austin and Taiwan and back offices in Charlotte and Bangalore.

Universities play a large role in technology industry site selection. Local technical graduates help companies manage labor costs that are by far one of their largest expenditures. Site selectors  should look at colleges and universities in a community, evaluating the enrollment and degrees conferred in engineering, life sciences, business, computer science and any other degrees relevant to their clients. Alongside graduation numbers, reputation of the school’s programs is a key factor.

Research activities at universities are another significant catalyst for growth and major driver of technology site selection, particularly for small and mid-size firms. Research universities supply knowledge-based workers for the local talent pipeline and fundamental research that fuels private-sector technological innovation. They also support entrepreneurial networks, with the professors and students often transforming research and technologies into start-up companies. Most of the nation’s large technology metros have at least one top-tier research university.

Talent is about more than schools though, and many companies increasingly look at the quality of life factors that drive talent attraction. Not all workers seek the same types of communities, but quality of life factors commonly sought by technology companies include large youth populations, relative affordability (particularly housing), air transportation access and the “cool factors,” such as art, music and events. Technology companies seek communities that display a range of capacity for attracting talent through both quality of life and employment opportunities.

The Role of Costs and Incentives in IT Site Selection

Alongside the search for a talented workforce, business costs and competition are major factors that influence technology company location decisions. Significant business costs facing businesses include taxes, healthcare, construction, energy, transportation and general operations. Relatively high domestic costs in most of these categories often make it difficult for American technology manufacturers to compete in the global market and many choose to move some of their operations overseas. However, companies also seek predictability and avoidance of risk associated with their investments and thus also select locations with regulatory transparency and rule of law, which increases the competitiveness of American communities.

Many incentives come from variations in tax systems across states. This goes beyond variations in corporate and personal income taxes. Some states can offer general tax credits for investments in research and development, while others do not. Some states apply sales taxes to the purchase of computer equipment, which can be a large disincentive for data centers. States with triple-factor-sales formulas for corporate income tax calculations are preferred by technology manufacturers, which export a majority of their products or services out of the state.

Labor-intensive firms such as software developers, by contrast, often do not make as significant investments in facilities, and instead are better served by incentives that provide extensive workforce training programs or tax credits based on job creation, not investment. The recent Apple $287 million expansion in Austin, Texas, was awarded over $30 million in incentives by the State of Texas, Travis County, and the City of Austin based on the number of jobs created, wage levels and capital investment. These awards were primarily granted through deferred taxes on the new investment.

As the war for talent continues to ratchet up, many locations are also emphasizing strong programs for training workers in specific skillsets. South Carolina’s readySC program provides recruitment, testing and training services for company needs at low to no cost through the state’s Center for Accelerated Technology Training. South Carolina, like many states, additionally offers tax credits incentivizing high-wage jobs. Companies that create a minimum 10 jobs a year may quality for South Carolina’s Jobs Tax Credit, which provides a credit against the employer’s income tax ranging from $1,500 to $8,000 per job depending on certain criteria.

Summary of Site Selection Process for Information Technology Companies

While the site selection process is similar across any industry, the specific needs of information technology operations require a focus on the following priorities:

1. Project Set-up. At the outset, it is important to establish project goals and objectives and clear criteria of needs for the project. Top management, financial executives, site selection consultants and other relevant project staff should establish a project scope, desired outcomes and timeframe for completion.

2. Determine an Incentives Strategy. Software and other information technology companies are often unaware of potential incentives available, such as training funding and research and development tax credits. Identify incentives of interest and do the research.

3. Issue a Request for Proposals. After establishing an internal list of potential site locations for the project, the company or site selection consultant typically issues a request for proposals to this list of communities, usually between five and 15 locations. The request for proposals should include all data necessary to assist in the decision-making process: workforce skills, costs and availability; taxes; incentives; and building and utility costs. RFPs should generally keep the company name confidential, using project code names and reliance on consultants to interact with local communities until the project nears the final stages.

4. Evaluation of Proposals. After collecting proposals from target communities, evaluate each prospective location based on the criteria established in the Project Set-up phase. Criteria must often be separated into “essentials” and “wants.”

5. Incentives Evaluation and Community Interviews. Communities will generally include some description of types and values of available incentives, but the value of these to a specific project can often be difficult to gauge. Communicate directly with a community to fully understand potential packages and in turn evaluate in detail with internal tax and other specialists.

6. On-site Evaluation of Short-Listed Communities and their Sites. After evaluating proposals, the project team should establish a short-list of three to five communities that have the best fit based on research already conducted. At this point, set up visits (for company representatives or consultants, if the project is confidential) to short-listed communities with local representatives available to present sites, conduct tours and answer questions.

7. Benchmarking Costs and Tax Burden. With collected data, incentive evaluations and on-site visits completed, the project team should conduct a benchmarking analysis of short-listed communities, detailing in comparable terms costs such as labor, utilities, real estate, taxes and incentives. Evaluation of these costs is complicated and varies from state to state and, therefore, tax evaluation should be conducted by a tax expert.

8. Select Top Locations and Engage in Closing Negotiations. Once leadership has determined their short-list of three to five choices, request final offers. This is typically when the incentive and real estate negotiations are most intense and internal deadlines for decision-making are set.

9. Final Selection. Once all final offers from top short-listed communities are in, the CEO, board and executive team of the company will make their final selection. Company executives may choose to visit each community and meet with local leadership again. These final trips are often highly important, particularly for technology companies that will be evaluating the community, not just on the technical merits, but also on the enthusiasm of leadership and local quality of life because these leaders are often determining if this is a community in which they wish to live and grow, not just open shop. Once a decision is made, technology companies should maximize publicity and exposure to the community, building goodwill and local support for the project while letting local talent, graduating students and the world know where they are and what they will need.