What is it about Dublin that has attracted the big, established giants of the SaaS industry, as well as the up and coming superstars?
The Irish capital has been a home away from home for US-based companies like Microsoft, Google, Oracle, IBM, SAP and Salesforce for a number of years now. It has also become a very popular first port of call outside of the US for rapidly growing SaaS companies like Dropbox, Slack, Workday, Zendesk and Docusign to name but a few. Dublins burgeoning tech sector, which employs over 100,000 people in a greater urban area of 1.2 million, has created a density of techies and an intensity of both competition and collaboration that is typical of successful industry clusters. But what is it that makes SaaS companies choose Dublin, apart from the obvious attractions of Silicon Valley-like weather conditions that is?
The naysayers will assert that its the low-tax environment, but there are other markets with similar tax incentives who have failed to draw so many big names. Not to mention the fact that those big names tend to establish a base in Dublin and then quickly grow it, with 93% of tech companies considering their establishment in the Emerald Isle a success. Its probably not just the tax benefits and great Guinness that keeps the Lary Pages, Drew Houstons and Stewart Butterfields of this world coming back, so the question may need a more analytical approach. Also, as a Dublin-based SaaS professional and a native of the island myself, a measure of objectivity is required to answer this question. Furthermore, a look at the characteristics that make a successful industry cluster should help to identify other cities that share those characteristics and just might help predict where the next tech hub will be.
Not for the first time, we will divert to the godfather of business strategy, Michael E. Porter, to help put some structure on our thoughts. In his book, The Competitive Advantage of Nations, Porter uses the Diamond Model to describe why particular nations/locations developed a competitive advantage in specific industries. According to the diamond model, the variables which determine this competitive advantage are: factor conditions; demand conditions; related and supporting industries; firm strategy, structure, and rivalry; government; and chance. Like any theoretical economic model, Porters Diamond struggles to consider the huge number of potential variables that influence real-life business decisions and is particularly limited when it comes to describing globalised industries. For you economics nerds, check out the more complete Double Diamond Model, but for the purposes of this discussion the basic, rough diamond of Porter will suffice.
Included in factor conditions are human resources, physical resources, knowledge resources, capital resources and infrastructure and probably the shiniest corner of Dublins diamond. Dublin boasts a well-educated, talented, indigenous workforce (I would say that) sure. However, it also attracts top talent from all over Europe with a great quality of life. The presence of the big software companies for 10+ years has created a pool of talent with experience in building and growing businesses across EMEA a key attraction to new arrivals like Slack and Wrike. Ireland has got talent and, following a long, hard recession, its talent is comparatively cheap. Also crucial to US SaaS companies is the cultural proximity and the simple fact that we share a native language this helps no end in the establishment of a European subsidiary and in keeping it on track with HQs strategy.
The supporting infrastructure required by SaaS is of a high standard in Dublin. Knowledge resources in the form of third-level educational and research facilities are abundant, however, a recognised dearth of STEM and language graduates coming out of Irish universities has necessitated an openness to immigration and a change in educational policy to service tech industrys requirements. In terms of capital resources, there is a vibrant venture capital community in Dublin as well as easy access to debt financing and government funding. Another factor is the 45% drop in office rental prices that occurred in Dublin post-crash mind you, prices are creeping back up and putting competitiveness at risk.
Porter asserts that sophisticated buyers in the local market can drive innovation in companies which forces them to be more competitive internationally. It is true that Ireland is home to some pretty demanding, innovative and advanced customers particularly from the Medtech, Pharma, Financial Services and Tech industry however, the demand that attracts US-based firms to Ireland is not domestic but rather regional. The Eurozone is the real prize and the openness of the Irish economy to trade with the rest of Europe, the removal of exchange rate risk due to its membership of the EMU makes Ireland an ideal base from which to access the European market. The point at which SaaS companies decided to establish their Dublin HQ2 normally coincides with a strategic decision to expand its reach beyond the US and an assault on the European market is generally the first option.
Related and supporting industries:
Dublin has also become the datacentre capital of Europe (the cooling costs are considerably lower than in Silicon Valley for obvious reasons) so a key input is close at hand for SaaS companies. Supporting industries are also located in Dublin with the International Financial Services Centre (IFSC) located in Dublins Docklands area, also home to the majority of its tech cluster. Most of the major banks, accountancy firms, consulting houses and law firms that serve the tech industry have established bases in Dublin for similar reasons. This not only allows ease of access to supporting services but also provides a measure of confidence in the local economy as a location for international business.
Firm strategy, structure and rivalry:
Competitiveness breeds success. I have recently spoken about the hyper-competitive nature of the SaaS industry and the difficulty in gaining a competitive advantage that will see a company thrive where the majority of its peers inevitably fail. The physical clustering of SaaS companies in locations like Dublin only serves to intensify this competition. People move between companies easily when theyre in the same location, and when they move to competitors they take knowledge and experience with them. The symmetry of information and difficulty in gaining and maintaining an edge drives companies to be more innovative and ultimately makes them more competitive in the global market than a competitor that is geographically isolated. On the flip side of that coin is collaboration and geographic clustering also allows for knowledge sharing amongst companies in the same industry who might not be in the same vertical or in direct competition. This could happen anywhere, of course, but now that a SaaS cluster has established itself in Dublin, it makes more sense for others to join.
The government has undoubtedly been influential in attracting SaaS companies to Dublin. A tax regime that is very favourable to international business has seen a huge amount of foreign direct investment pour into Ireland. Corporation Profits Tax (CPT) stands at 12.5%. This combined with incentives support from organisations like the Industrial Development Authority (IDA) and Enterprise Ireland and a R&D tax credit scheme provide significant financial benefits to established and early-stage companies. The question which arises at this stage is whether the multi-nationals that have invested in Ireland will remain if the tax environment became less favourable? Other European Union leaders have been putting significant pressure on the Irish government to harmonise CPT with the rest of the EU while in the US, President Obama is endeavouring to close the loophole that allows US multi-nationals to avoid paying tax on overseas profits. If these two measures are successful, we will quickly find out whether the companies in question are putting down roots in Dublin or are just passing through.
The final factor in Porters Diamond is chance. Id rather not think of Dublins success becoming a SaaS hub as a matter of chance maybe its the luck of the Irish.