Texas Sees Multiple Wins From Big Spending Attraction Strategy

The confirmation last month that credit card giant Visa will build a new IT center in Austin, was just another in a series of investment attraction wins for Texas. The Lone Star state has racked up similar investments from big name brands like HP, Apple, Samsung and General Motors in recent years. Most notable  is the lucrative nature of the deals. Visa will receive a package of give-backs and incentives from the Texas government –  to the tune of nearly  $10 million over ten years.

Incentives like this shows Texas’ aggressiveness in attracting companies to create jobs. But is this having an impact on outsourcers’ decisions to stay in the US rather than move to the Nearshore? And is the increasingly popular practice of ‘rural sourcing’ changing the game in Texas? .

State-Sponsored Incentives

The reason Visa’s incentives package is so large is that the city of Austin added $1.6 million to a previous $7.9 million offer from the state’s Texas Enterprise Fund. TEF is a program designed to provide financial benefits to new projects that create jobs, increase wages, and generally strengthen the state’s economy. By pledging to invest over $27 million locally on equipping the new facility, and to hire at least 794 full time workers (70% of whom will be local), Visa met those requirements.

TEF is just one of many state-run programs that Texas has implemented in recent years. The Texas Enterprise Zone Program refunds all sales and use taxes paid by eligible firms, while the Emerging Technology Program links universities and businesses to speed up the R&D and commercialization of new technologies. There’s no question about it – Texas is on a spending spree to attract business investment.

So is the strategy paying off? “It seems to be having an influence. Even which county in Texas companies move to can be determined by incentives,” said Cary Peele, CTO at Cecropia Solutions.” Apple had planned to locate in Williamson County, but reconsidered because they weren’t offered any incentives. But Travis County did, so that’s where they set up.” In March last year, Apple announced a new campus in Austin, which will add 3600 jobs over the next decade. The tech giant will receive around $36 million in incentives from state, county and city funds.

The national unemployment rate, hovering between 8 and 10% over the past few years, is a valuable opportunity for companies looking for capable lower-cost employees.

A Nearshore Complement, Not Replacement

The question is, does the spotlight on Texas make the Nearshore seem less attractive? So far, there’s no evidence for that. In fact, many sourcing firms are combining the capabilities in the US and Latin America, to drive better value and efficiency for clients. Cecropia Solutions is one such software firm, with centers in both Austin and San Jose, Costa Rica. “Many of our customers are from Texas,” said Peele. “Our Costa Rica office works as a complement to our Texas teams, which provide onsite support to clients.”

In recent years, Peele has seen many customers come back from traditional locations like India, to take advantage of this model. “Most of our clients are smaller operations. If you’re not a large player yourself, and you try using some massive third party like Tata or Infosys, you get no attention. You’re not even on their management radar.”

Small Town Sourcing

Those small and midsize customers are now learning to leverage another model being pioneered across the US, and especially in Texas. ‘Rural sourcing’ is the practice of using domestic talent in cheaper rural locations, to build software or meet any other sourcing need. The national unemployment rate, hovering between 8 and 10% over the past few years, is a valuable opportunity for companies looking for capable lower-cost employees.

“Even though the nearshore is a viable alternative for our US clients, there is a gap. We get lots of requests to bring people onsite,” said Imre Szenttornyay, Executive VP at ScreenIT, a talent acquisition firm. He recently moved to Lubbock, Texas, to build up his rural offering. “We leverage two facts – smaller towns need jobs, and the cost of living in these towns is much cheaper.”  According to him, rates in rural communities like Lubbock are 20-25% lower than for IT workers in urban areas with comparable skills.

By nature, rural sourcing is small scale. For larger projects, Szenttornyay brings in talent from Mexico on TN visas. Although he works with the Lubbock Economic Development Council, and organized the Lubbock Software Developer’s Group, the rural offering still has to be built up.

 Lack of talent supply

By offering incentives to attract companies, Texas is following a model that has worked, especially in Latin America. But what’s currently lacking is the human capital. “At the University of Texas, we saw the computer engineering enrolments go from 2,400 majors in the early 2000’s, to 800 in 2008,” said Peele, who sits on the university’s steering committee. Rural universities like Texas Tech are even worse, said Szenttornyay.

So perhaps Texas needs to beef up its skilled talent supply, instead of focusing on simply throwing money at tech firms. Last year, Texas cut public education spending by $5.4 billion.