Posted by Theofanis Manolikas on March 17th, 2020.
Location, Location, Location: Most regard that as the first rule of real estate. Simply put, it refers to the fact that a home’s value can vary dramatically based solely on its location. Nice neighborhood with good schools, low crime, and beautiful tree-lined streets? In a place like that, a home will command a much higher price than an identical home located in a high-crime area with failing schools and poor infrastructure. Well, biopharma companies that are planning to move into Europe need to remember that rule and be very strategic about where they locate their European headquarters. Making the wrong decision can bring major costs, both direct and indirect. Plus, it can hurt the brand if the location needs to be changed to another hub.
In this article, another in our series on the Seven Keys to Success in Europe, we tackle the issue of deciding how to locate a European headquarters. Below, we outline why it’s important to be systematic in making this decision, as well as some key things to keep in mind when doing so. In addition, we describe a process that any company can use to weigh its options and move forward with confidence.
The Costs of a Bad Decision
Selecting the right location for a European HQ is an important decision. There are various factors that should go into selecting the right city, and the wrong decision could lead to numerous challenges. It could, for example, make it harder and more costly to find and recruit talent. A wrong decision could result in higher turnover due to quality of life issues, which also brings significant costs. There could be negative tax implications, transportation costs could be much higher, and the list goes on and on.
While the importance of this decision should seem obvious, not every company moving into Europe seems to understand that. In our experience, a significant percentage of the time (roughly 40%), companies select headquarters cities using very “non-scientific” approaches. While this phenomenon is most often seen with smaller companies, even larger ones can fall victim to it. For example, a city might be selected because the CEO has an affinity for it, or perhaps a recently hired European General Manager happens to be from there, or maybe some other subjective reason is used.
Once a bad decision is made, a company can suffer multiple years of headaches and sub-optimal performance due to various location-related factors. Finally, after a company in that situation has had enough, it then must endure added cost and disruption when it finally admits its error and moves to another location. It doesn’t have to be that way, and a systematic decision-making process can help a company avoid a lot of pain.
Developing a Systematic Decision-Making Process
Innovative biopharma companies are, at their core, scientific organizations. Or, they at least have significant scientific capabilities. In keeping with that theme, companies should use a “scientific” process to decide on a European headquarters location; a process that is systematic, logical, fact-based, and objective.
The first step in this process is to identify the criteria that are potentially important to the company, then group them. Example criteria might include:
- Proximity to other life science companies
- Proximity to top-ranked universities
- Proximity to life science incubators
- Access to funding
- Access to talent
- Cost of talent
- Labor productivity
- Flexibility of labor laws
- Migration laws
- Ease of doing business
- Business tax structure
- Access to transportation
- Quality of infrastructure / Connectivity
- Attractiveness of location / Quality of life
- Availability of international schooling
- Cost of living
- Language barriers
The list above is not comprehensive, but it should provide a good idea of the many criteria that could factor into a decision. Individual criteria can generally be organized into a number of groups. For example, one group of criteria could relate to talent recruitment. Another group could relate to a location’s general access to the rest of the world (e.g., connectivity, access to transportation, etc.). Yet another group of criteria might relate to access to funding and other resources.
Not all companies’ needs and objectives are the same. A given set of criteria might be far more important to one company than to another. This brings us to the second step in the process: Weighting. Based on their importance to the company, all criteria should be assigned percentage weights, indicating their relative importance vs. each other.
At this point, it’s pretty easy to see where this process is going. The next step is to devise a single, consistent scoring scale that can be applied to each criterion. The simplest approach is to apply a scale of 1 to 5 (or perhaps 10) with 1 being a poor score and 5 (or 10) being an excellent score. For each criterion, it’s important to clearly and objectively define what a 1, 2, 3, etc. actually means. This will ensure that the raw scores are not assigned in a subjective manner, as that would undercut the entire process. A “3” for “Cost of Living” must, for example, have a clear and objective definition.
Once a company has identified and grouped its criteria, assigned weights to them, devised an overall scoring system, and defined how that system applies to each criterion, the company will have a system in place for evaluating potential locations. At this point, it will need to create a list of potential cities to consider. This should not be a “boil the ocean” exercise in which a large number of locations are assessed and scored. In most cases, the company will have a short-list of potential cities or metropolitan areas to assess. A “boil the ocean” approach would be time- and cost-prohibitive anyway, without adding much value.
Finally, decision-makers should run the assessment and score each location on each criterion. This will result in an overall score for each location. Deciding where to go might be as easy as selecting the highest-scoring metro area. However, it may not be. Sometimes, the scoring system can help narrow the list down, while some degree of common sense and subjectivity is required to make a final judgment.
In our team’s experience, there are some tips to keep in mind as a company goes through this process. One important tip is to avoid letting near-term tax incentives drive the decision. Those incentives will end at some point. When they do, the company could deeply regret moving to a city if it really had nothing else to offer.
Another thing to keep in mind: It can be preferable to go to a smaller country. In smaller countries, it’s often easier to build a diverse team and not be “overwhelmed” by a single nationality in the talent pool.
Speaking of smaller countries, If a company decides to go to Switzerland, then it must really do it. The location cannot be “on paper” with a small office of 1-2 people just for tax purposes.
Also, it’s wise to make full use of national (or Cantonal, etc.) business development offices. They can provide a wealth of information, introductions, and other assistance to aid any evaluation process. Once an office is up and running, those resources can also help a company navigate various legal and regulatory requirements related to operating an office in the area (for example, helping to secure work permits for non-EU nationals and so on).
Finally, there are some locations that any company should consider. Some of the “hottest” locations for life science companies today are:
- Zurich/Zug – Long known as a hub for the life sciences, this area is often quite attractive to companies entering Europe. It would score highly on most of the criteria listed previously.
- Amsterdam – This city is coming on strong and is seen as competitive to Zurich/Zug.
- Dublin – Dublin is a nice city, and it’s getting some attention these days. Most interest today is due to its attractive tax environment. It does, however, have some serious drawbacks that must be considered. For example, recruiting talent from abroad is a major challenge. While Dublin is attractive as a supply chain and manufacturing hub, it is challenging to attract key positions for the European HQ (Medical, Market Access, Regulatory Affairs, etc.).
- Basel: This is an interesting hub due to its proximity to several multinational companies. Companies that consider developing an additional R&D hub should pay attention to Basel and give it due consideration.
- London: London has an attractive talent pool. However, the downstream impact of the recent “Brexit” is still uncertain, and the stricter immigration rules it could make it difficult to attract candidates.
To sum up the key message of this paper: A company should not take this decision lightly. Establishing a European headquarters is a big step and the location needs to be well chosen. Companies should use a systematic and objective due diligence process that involves these key steps:
- Determine which location criteria are most pertinent.
- Weight the criteria.
- Create a scoring scale.
- Define how the scale should apply to each criterion.
- Build a list of potential location targets.
- Collect information regarding locations / key criteria.
- Evaluate and score potential locations.
- Select the headquarters location using data and common sense.
Blue Matter Expert Contributors:
Partner Expert Contributors:
Michael Bentley, Experienced Human Resources executive
Oliver Oliver Schiltz, LLM, Managing Partner, Switzerland & Partner, Global Healthcare & Life Sciences Practice, Heidrick & Struggles