From Site Selection magazine, March 2007

Open Source Idol

Red Hat's global
search targets talent.

Among Red Hat's worldwide outposts of talent is this facility in Raleigh, N.C.

t's simple, really. Software producers don't need massive factories. They don't require blinding amounts of upfront capital investment. They don't need much in the way of traditional transportation infrastructure. What they do need: people. Smart people. Educated people. Technologically savvy people.
   For pioneering open sourcer Red Hat, the search for the right people drives the search for the right location – or locations, in this case. Red Hat's people search isn't just about finding techies. The company's Linux-based offerings require open source skills, and this can involve an entirely different mindset. It also means a different kind of location selection process.

Where in the World Are the
Best Open Sourcers?
   Red Hat's business model relies on revenue from subscriptions, which entitle purchasers to a full range of products, service and support, including customizing of applications, software, middleware, training and enhancements. Red Hat's customers are not individual consumers: They don't need to buy anything if they use Linux, since the source code is free. Instead, Red Hat customers are governments and businesses – and hardware manufacturers like IBM and Sun Microsystems – that have adapted Linux-based operating systems and need advanced support and training.
   If you are an individual consumer who knows, loves and uses Linux, Red Hat wants you – as an employee.
   "It all starts with raw talent for us," explains Gabriel Szulick, Red Hat's general manager for Latin America. Yes, the company's location search team looks for a deep labor pool with engineering skills. "But this doesn't always mean we go to the country or the city with the greatest number of college graduates with computer science degrees," he says. "The nature of the open source community is that these people might not have finished college at all."
   The vast communities of open source aficionados, linked by the Internet, could be enrolled in the world's leading universities. Or they may be self-taught computer wizards who spend their evenings tinkering with code and chatting about better paths in cyberspace. Because of this large, on-line community of Linux fans, "the best and the brightest in open source are known to each other, and we can find them," notes Tom Rabon, Red Hat's vice president for corporate affairs. "If there's not a vibrant open source community in a country, we won't go there."

The Power of Emerging Markets
   While Red Hat maintains multiple locations throughout the world, lately their site search has taken them to emerging markets, where open source rules, and where there are strong engineering traditions and an eager, productive, and relatively low-cost work force.
   In the past two months alone, Red Hat announced two new Eastern European location decisions: a US$1.7-million investment to double the size of its 10,000-sq.-ft. (929-sq.-m.) development facility in Brno, Czech Republic, and a $6.5-million service, research and support office in Vröac, Serbia, which will also serve customers in Romania, Hungary, Bulgaria and Croatia.
   The draw of such nations dates to the days of the Soviet Union, when emphasis on mathematics and technology education created a common culture that prized such skills. Today these former Soviet satellites control their own destinies as independent governments, but the engineering legacy endures. They offer tremendous appeal for firms that rely on a technical brain trust to power their products.
   "Historically, Eastern European workers have been productive,
and there's been an emphasis on engineering, and especially in open source," explains Szulick, part of Red Hat's global location team.

The Draw of India
   India's commitment to engineering education is well documented, as is the steady stream of companies setting up shop in cities whose names have become familiar: Hyderabad, Chennai, Delhi, Mumbai, Pune. Red Hat is ramping up its presence in India as well, not only to take advantage of the talent pool, but to support its growing customer base. The company recently purchased its Indian joint venture partner, and will invest more than $20 million on the sub-continent over the next two years. The expansion will support growth of its Pune-based research center, which ultimately will employ 150. With seven existing locations and 100 percent growth since 2004, the opportunities here appear boundless, say company officials.
   Rabon differentiates his company's Indian growth strategy from that of other technology firms. "India is a key, rapidly growing market for us. This isn't outsourcing. Our customers are there – they love open source in India, so we are expanding there to better serve these customers."
   Indeed, Red Hat was recently named India's fastest growing software company, claiming 95 percent of the Linux market. Clients include state and federal governments, the Central Bank of India and domestic technology giant Wipro.
   With IBM's newly announced $6-billion Indian investment, Red Hat could be looking to expand its footprint even more here. The two firms are partnering on an initiative aimed at promoting the development of open source and Linux-based solutions in emerging markets.

More Than Carnivale in Brazil
   Brazil fits the profile of intriguing emerging market countries: a nation that boasts the sophistication and educational attainments of developed nations while struggling against serious poverty issues, regulatory inconsistencies, spotty service provision and macroeconomic instability.
   "The appeal of these emerging market countries for us is that there is a lot of greenfield opportunity," Szulick explains. "In Brazil, for example, the computer hardware and software infrastructure are just now being built. In the developing world they are building everything from scratch, and we can get in on the ground floor," before users get used to other approaches. He notes that the company has a tougher sell in more industrialized nations. "In the U.S. and Europe there are a lot of legacy systems. We've all been trained on Windows and we have to break Windows habits."
   Just last year, Red Hat established a direct presence in both Brazil and Argentina, to drive Latin American growth. This year, the 6,600-sq.-ft. (613-sq.-m.) Sao Paulo office will grow to meet rising demand.

Expanding the Footprint
   Red Hat's flurry of recent location announcements indicates a company on fire. In the past year, revenues jumped 45 percent. At the end of 2006, Red Hat jumped from the tech-heavy volatility of the NASDAQ to the blue chip stability of the New York Stock Exchange.
   "These are heady times for Red Hat," says Rabon. "We have a unique challenge, which is how to manage our growth." The company is facing some difficult location-related decisions. "Every country wants us," he says. "Do we spend a whole lot immediately to populate the entire globe with facilities? We want to be good stewards of shareholder money." And this means elevating location decisions to the strategy level. "We don't want to grow too fast, otherwise it can cause problems on Wall Street," he adds.
   The decision-making involves the same type of calculus used by companies across all industry sectors, which brings them back to these emerging market countries.
   "We need a good source of local talent, and we consider the cost of hiring these people, as well as the general costs of doing business – the tax regime and the like," says Rabon. So, countries like the Czech Republic and India typically come out on top. Red Hat also recently established several Chinese beachheads, in Guangzhou, Shanghai and Beijing. The Beijing office is already expanding.

The Role of Incentives
   As Red Hat evaluates location options, company officials do consider the value of the incentives offered by various countries and localities. But according to Red Hat executives, their decisions aren't based on the dollar amount of incentives offered. "We will never be in the game in terms of capital investment, and that's what politicians are looking for when they offer huge financial incentives," says Rabon. "Our sex appeal is far less because we are investing less. There will never be a day when Red Hat says to a government: 'We will invest a billion dollars.' "
   Instead, Red Hat talks about partnerships. "If government officials are sophisticated, they will help – with training, with providing office space, with tax treatment," he says. And if they are interested in a partnership, Red Hat is interested in locating there.
   For the governments of countries facing complex problems with limited resources, the value goes well beyond a single, relatively small announcement, says Szulick. "It's not about how many plants we'll be able to build. Open source allows these nations a chance to develop their own indigenous software industry. It creates more than just a few jobs – it creates a new industry."


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