Three Lessons from Amazon’s HQ2
In the week since Amazon announced plans to build a second, equal, headquarters dubbed ‘HQ2’ in North America, a frenzy of city officials, journalists and analysts have offered up their picks to match Amazon’s criteria. Given the potential to add 50,000 new high-paying jobs, and a capital investment of $5 billion over the next 15 years, we can expect to see every detail of the public bidding unfold at least until the October 19 submission deadline.
In my role as a data scientist with Atlas, I was intrigued to see if I could best predict where Amazon was headed. The results might be somewhat surprising, but what I found more insightful than the outcomes was thinking through Amazon’s decision process. Specifically, three insights struck me about how the world’s most significant eCommerce company is approaching such a gargantuan decision.
Cost is (still) King
Frugality is one of Amazon’s leadership principles and there is no doubt that it’s courting substantial incentive packages from interested locations. Half of the eight RFP decision drivers mention incentives directly, ‘partnerships with the state’, and the desire for a ‘friendly business climate.’ Amazon doesn’t mince words in saying that these will be ‘significant factors in the decision-making process’. The only unknown is how generous and creative cities will be in their eagerness to work with Amazon.
The RFP is less direct on the topic of labor costs, though we can make some assumptions based on the proposed ‘average compensation greater than $100,000’. Given the professional talent, especially in engineering, that Amazon hopes to source for HQ2, it’s interesting to note that $100,000 is roughly the average salary of an entry level software engineer at Amazon. Though the caveat ‘the actual average wage rate may vary… depending upon prevailing rates at the final location’ may signal Amazon’s actual intent is to find a labor market where the dollar goes further.
Opening a new location gives Amazon opportunities to create cost efficiencies from both tax incentive programs and lower market wages. Twenty years ago, Seattle was an ideal place to start Amazon. Now, Seattle has some of the fastest rising costs in the country. Seattle has changed while Amazon’s focus has remained steady. That can’t simply be an issue for Amazon. Cities change over time — it’s what they do.
The first question executives everywhere should ask is whether the locations they’re in have changed from the ones they’ve chosen. If so, there’s a real reason to consider departing.
Go to the Talent
Americans are moving at the lowest rate on record, according to the latest Census data and Pew Research. Amazon was founded in Seattle for two reasons: to be close to a major book distributor (Ingram’s in nearby Oregon) and to be close to technical talent. Today, there are more than 6,400 open positions at Amazon HQ in Seattle at an office of 40,000 people. More than doubling in size to fill an additional 50,000 (primarily) technical jobs in the Pacific Northwest is untenable and Amazon knows it. They’re specifically asking for a list of local universities and the number of students graduating with relevant degrees in the past three years.
To keep up with recruitment — and likely avoid the expense of relocation — Amazon is going to move closer to the universities supplying its talent.
Nothing about Seattle’s technical labor pool has changed. It’s still the asset that enabled Amazon’s early growth. But Amazon has changed and the strength that the city once offered isn’t deep enough for the company’s next phase.
This begs the second question for managers everywhere; “What resources did your locations once offer that your company has now outgrown?”
A City that Fits Your Culture
In the long-term, the most important requirement will be finding a location where employees will “enjoy living.” Although this is the most nebulous of their requirements, Amazon does drop hints at what this could look like throughout the RFP:
- Easy commutes — Amazon celebrates that 20% of their HQ employees walk to work, and they specifically require that public transport be available on-site, plus major roadways within 2 miles.
- An abundance of nearby restaurants, hotels, services, and recreation options
- A strong education system, with K-12 education programs related to computer science.
For Amazon, all of these factors help the company keep costs low, keep employees at work, and retain them over time. Easy commutes decrease employees’ needs for cars and Amazon’s need for parking lots. Nearby restaurants and activities keep them happy and in the office. K-12 education keeps them at Amazon while their kids grow up, eventually adding to the labor pool. And all of these things ultimately help Amazon deliver competitive prices and superior experiences to customers.
Google, Apple, and Facebook create these types of environments by relying on expensive corporate benefits programs. Busses shuttle people to and from work, on-campus restaurants keep employees present, and children of employees flock to local private schools. Amazon is clearly looking to avoid that expense and rely on its city to augment its benefits program. While local officials scramble to offer tax cuts, Amazon is openly looking to community infrastructure, education, and quality-of-life benefits funded by local taxpayers to supplement their own programs.
So the last question as you think about your location strategy should be, “How can you use your location choices to improve your value proposition to employees without adopting new costs?”
So where will they go?
The cities that can offer these things may not be the first you’d think. Using a similarity algorithm that measures how areas compare to Amazon’s Seattle HQ on local population diversity, existing technical labor force, commuter options and points of interest I identified 10 potential metro areas that meet Amazon’s ‘cultural fit’: Seattle, Portland, San Francisco, Denver, Austin, Chicago, Miami, Washington D.C., Philadelphia and New York. Many of the cities you might otherwise guess.
But with Amazon’s clear commitment to keeping costs low, I believe it’s possible to get much more specific. By narrowing it down to only cities close to the top 25 universities for engineering, you can eliminate staying in Seattle, as well as Portland, Denver, and Miami. Then stacking each city up against cost of living in Seattle, using CNN Money’s cost of living index, eliminates San Francisco, Washington D.C., and New York.
This leaves three interesting options: Austin, Philadelphia, and Chicago that, with the right incentive package, might just be the home of Amazon’s HQ2. A home that tells us a lot about the company Amazon is today and aspires to maintain into the future.
