By Dennis J. Donovan, Wadley Donovan Gutshaw Consulting (WDGC)
This article addresses location dynamics within the high technology sector. The term high-tech is rather amorphous. Broadly speaking it can apply to any industry wherein advanced technology (such as Industry 4.0) is widely utilized. To provide a pragmatic framework for illuminating site selection strategy and trends we will adopt a more nuanced definition of high technology. Essentially high tech embraces a group of industries characterized by a rapid pace of innovation. These industries typically involve a high concentration of workers in STEM fields (science, technology, engineering, and mathematics). For purposes of this article high-technology industries include the following:
Viewed from an occupational perspective the following occupational groupings are well represented in high technology businesses:
Depending on the base measure, high tech employment accounts for 4.6 percent-5.6 percent of the U.S. workforce. In addition, while several of these industries have gone through a period of consolidation (e.g., telecom) others have expanded significantly faster than the overall workforce. Consider the following:
Note: (1) High tech growth rate by Industry excludes Computer & Electronics Manufacturing, Telecom, and Aerospace.
High Tech Geography
When looking at where high technology is geographically clustered the most pertinent indicator is employment. WDGC quantified high-tech employment, per the above occupational groupings (Engineering, IT, Science, Math) for all 382 U.S. metropolitan areas. We did not produce a rank order by industry as there were too many gaps (not reported) in the Bureau of Labor Statistics database. Hence, when relying on occupational statistics, high tech will expand beyond the industries listed above. In Chart One, we display metros featuring a high-tech labor pool of at least 10,000. There are 101 metros meeting this threshold. As displayed in the chart, the high-tech talent base ranges from 10,000 to almost 475,000 among the 101 metros. WDGC assigned the areas to five tiers in terms of critical mass (# high-tech workers).
These differentiations are important for site selection. Scale comprises an important factor in selecting a new location. For instance, if a new facility will require 250 workers an early metric to begin identifying potential locations would be total high-tech employment. In this case, perhaps a ratio of 100:1 would be appropriate. That means to initially qualify an area would need to have a pool of 25,000.
When companies seek to establish new high-tech facilities a frequent overriding consideration is industry ecosystem. This embraces dynamics such as talent pool size/composition, industry growth, proportion of the industry in relation to population (or labor force), presence of technical universities, presence of similar companies, venture capital, patents issued, and entrepreneurship.
In Chart One we added a few measures that could be combined with critical mass for initial “screening” of possible locations. The chart also presents, for the 101 metros, five-year high tech growth rate, rankings on patents issued and venture capital, along with rankings for entrepreneurship. Ideal locations would have sufficient size (i.e., critical mass) and rate well on these additional factors.
It is interesting to note that nine metros have five-year growth rates and high-tech industry concentration 1.5 times the national average. These metros are San Francisco, San Jose, Detroit, Denver, Portland (OR), Raleigh/Durham, Salt Lake City, Madison (WI), and Boulder. Map A depicts all 101 metros by critical mass and industry concentration. Bottomline, on the geographic dispersion of the high-tech sector:
- There are the well-established and obvious metros for deploying new operations
- Nonetheless, many metros with more moderate critical mass also display attractive industry ecosystems
- All regions of the country feature ample possibilities for deploying high-tech businesses where industry presence/ecosystem is an important locational determinant.
The diverse range of locational alternatives in the U.S. clearly refutes the one-size fits all paradyme. Depending on a company’s specific headcount and other operating requirements there are plenty of legitimate options from a geographic deployment perspective. Consider recently established new or expanded tech operations across the U.S. metropolitan landscape.
Before leaving this section, we offer a few thoughts on Canada and offshore. Canada, like the U.S., has several high-tech hubs, both large and moderate in size. When conducting a site search initially focused on the U.S., some companies will ultimately opt to put Canada in play as well.
Regarding offshore, the first task is to determine which region (e.g., EMEA) makes the most sense for business reasons. Then a structured process would be followed to identify the best locational candidates. Beware that this task is more challenging vis-à-vis the U.S. as published data (e.g., employment by occupation) is far less extensive. One starting point could be examination of published studies listing global tech hot spots. An example would be the Innovation Cities Index produced by 2thinknow.
The relative importance of various locational criteria will be dependent on a number of strategic business parameters. Among these are:
- Industry (e.g., medical equipment)
- Function (e.g., pilot manufacturing)
- Drivers (behind establishing the proposed operation)
- Operating objectives
- Existing footprint
- End-to-end supply chain
- Other company entities
- Business partners
- Operating requirements
Once these parameters are set then a project team will define and weight location criteria. Often criteria will be divided into two broad categories. They are cost and operational factors. Talent will frequently comprise the paramount consideration both for cost and operational factors. Illustrative criteria for locating high-tech enterprises are enumerated below.
Decision Making Process
Site selection studies are often conducted in four phases. This building block process does not materially vary by industry or company. What does change is the degree of emphasis placed on individual criteria. The diagram below (Chart Two) outlines the decision-making process.
Phase One is critical in that its outcome will determine the type and character of the ultimate location. This phase defines the project.
The second phase consists of two stages. In the first stage desktop research is undertaken to identify a longlist (up to 10) of potentially suitable locations. Stage Two embraces outreach to the lead economic development agencies in longlisted areas to obtain information/insights not available from published sources (e.g., comparable employers). The longlist is then pared by combining desktop and RFI responses from the economic development organizations. A shortlist, typically three areas, is then generated. Phase Two is metric driven. Areas failing to meet statistical thresholds are eliminated.
Phase Three is where the rubber hits the road. The project team visits shortlisted areas to perform firsthand evaluation. Often the most critical intelligence will be gathered from conversations with employers in the specific industry. Sites/buildings are assessed. It is important that this assessment goes beyond real estate. The ultimate property must enhance the company’s ability to recruit/retain a top-quality workforce. Phase Three analysis cannot be static. The project team needs to gauge whether future operating conditions, especially labor market, will remain favorable in the future.
Final due diligence comprises Phase Four. The primary emphasis is placed on selecting the ultimate site or building. Incentives negotiations dovetail with real estate as the former can often be site specific. Additional due diligence also needs to be performed including legal, recruiting/training, tax, technology, and risk. Communicating the decision to stakeholders ends Phase Four. The project then advances to the construction (or implementation) phase.
High-technology location searches for new (or expanding) corporate facilities will often involve assessing the tradeoff between industry ecosystem and cost (both for the business and any professionals to be relocated). This determination will involve “how much of a good thing” is necessary. It could very well be that a large, growing critical mass/ecosystem is justified for legitimate reasons. These include talent acquisition, people/business collaboration, enhancing an innovation culture, and fortifying company brand/reputation. Should that be the case then a substantial cost premium (especially HR and real estate) is indeed justified.
However, it could be that a smaller, and perhaps less recognizable, high-tech hub would work perfectly well and at a noticeably lower cost. There is a diverse range of metros that should be given a look if being in a mega metro/industry ecosystem is not an imperative. Examples would include IBM Client Innovation Center in Baton Rouge, LA, Appirio’s (Cloud Computing/Cloud Consulting) HQ in Indianapolis, IN, and KLA-Tencor’s (Capital Equipment) R&D Center in Ann Arbor, MI.
We should also note that not every facility in a high-tech business needs to be in an industry hub. For instance, a manufacturing plant with high volume, standardized products, and long production runs can successfully operate in locations that do not possess an extensive high-tech industry ecosystem.
When searching for a new site the first order of business is to examine the company’s existing footprint. Is there a business case to be made for at least considering one or more current locations? These could then be contrasted against new or greenfield locations.
At the end of the day, talent trumps all other considerations for siting innovation intensive (or high-tech) operations. It is critical to identify the scale and mix of requisite talent or skillsets, including the proportion requiring experience vs. new college grads. Then a metric driven, systematic process needs to be followed to land in the most favorable, labor market for the long-term. This includes the optimal submarket in an area. In addition, the final site or building must be viewed not only as a real estate deal, but as an HR deal as well.
Of course, other important factors must also be considered, ranging from risk to proximities (e.g., access between a manufacturing plant and an R&D center). Scorecards (something like the one appearing in Chart 3) are an effective tool for both selecting the ultimate site and presenting results to key stakeholders.
About the Author
Dennis J. Donovan is a principal of Wadley Donovan Gutshaw Consulting based in Bridgewater, NJ and Jacksonville, FL. WDGC specializes in corporate site selection. Clients have included a variety of high-technology enterprises.