If you live in Nigeria, it’s probably safe to say you’ve used Nairaland, which is Nigeria’s biggest home grown website – it’s not based in Lagos. Seun Osewa started the company from nothing and has so far built a multi-million naira enterprise. A self-confessed contrarian celebrity, his office is in Ota.
So why set up away from trendy-tech Lagos ? He rightly identified: “[that] our reliance on an ad network for revenue meant that our location didn’t matter” and more importantly that the crucial talent pool, which will help the business grow, was easy to find as there were two universities in the town.
Part of the reason the e-business model has flourished is that it eliminates the need for a business to have a physical presence somewhere in order to trade there. I have no idea where Facebook is, but it seems to do fairly well and I would hazard that few people ever go to its premises. Conventional business wisdom advocates that for a business to remain healthy, it should have anorexic overhead costs (and obese profit margins). Tech companies setting up in Lagos and elsewhere could argue that the benefits of recruiting talented personnel far outweigh the high costs.
There is also an argument somewhere for closer proximity to investors, industry events and meetings. Ok. But if your servers need power (which Lagos doesn’t have enough of), if you need good broadband speed (which slows down to a trickle) and if your employees are always late getting to work, then why choose a crowded city to exacerbate these issues?
This is not a tirade against Lagos – it is a great, tantalising city, but the reason cost / benefit analysis is taught on the MBA course is because one needs to think about the entire business model before setting up – if your costs exceed income, it’s time to think again.
For whatever reason, there are always people who can’t relocate to Lagos. They may be looking after families, ill relatives or they just seek an alternative place to live to bring up a family. That talent may be there for you to tap into.
The more people that try to use a city’s struggling utilities, the more likely they are to fail. Key business decisions about location should encompass every business need, and should not be a subjective view of one criteria. If you could save money in utilities, you could spend on attracting better staff.
Companies that locate in novel areas usually become the key local employers, and their very existence becomes an economic creator. You are far more likely to keep your staff if there is little competition in your local area. This represents a large cost saving to your business. Whilst changing staff can add dynamism to the workforce, there are large costs in constantly training new staff and for those employees to reach a level of economic productivity (as everyone has to adapt to new firms).
The basic laws of economics suggest that the further one moves away from the Central Business District (CBD) of a city, the more the rental rate for land reduces – see the graph below. This doesn’t tell the whole story, beauty spots and very rich neighbourhoods might escape this law, but if you are an entrepreneur, it’s worth bearing in mind.
The saving in this part of your fixed cost will increase your profit margin or perhaps allow you to challenge the competition by offering cheaper prices. The graph below shows the relationship that should be considered as part of the cost / benefit analysis. In the city, a firm would pay a high rent to be there but notice that at the 50 Km point the company achieves significant savings over its competition who are have paid high rents to cluster together. If this saving were invested in super-fast broadband connection, the bulk of the meetings could take place on-line. When deciding to set up, consider the options that are available rather than following the crowd.
If the price of land is expensive and rents are high, you will be forced to adopt a compromise solution. You are unlikely to find the perfect solution. However, moving away from that busy city may allow you to choose or design the option you want. Clearly, the larger the premises you need – the greater the saving and the greater your ability to get the premises you want.
As we discussed above, sometimes businesses want to group together to be efficient for the delivery of raw materials or to keep costs down. This can even work with your competition where duplication of resources is a straight forward waste. So if you and your competitor both have car parts delivered from the port, it could make sense to co-locate which would reduce your individual transport bill. By this logic, it would make more sense for those in the car/spare parts business to locate somewhere like Nnewi, where there is already a large manufacturing plant.
Sometimes Governments, be they local or national, will offer tax breaks to attract businesses to certain geographical areas. In the main this will be to reduce unemployment etc. The attractions are clear, but beware Governments can withdraw tax breaks as well as give them out.
It is important to analyse the true costs to your business. It is easy to recognise that if you are forced to run a generator to maintain your electricity supply, then that is a cost you must absorb (and eventually pass on to your customer). But think of the hidden costs; if your customers or staff are late, which wastes your resources, then that adds to your costs. So if you run a music studio and two bands were due in to record but run late, then your intake for the day will be reduced.
There is no doubting that those that live out of major cities are paid less, on average, than those that live in expensive areas and have to pay high bills. So for some job disciplines, the wage bill (one of a the highest in any company) may be reduced by not having to compete so strongly on the market for employees and by also not having to pay the Lagos premium. The reason call centres for multi-national companies in the UK moved overseas was to capitalise on cheap labour that could also speak English.
For those companies that are seeking Venture Capital (VC) funding to help them expand, there is a debate to be had about whether striking out on your own will lend stability to your business. Large cities constantly struggle with rival political factions, demonstrations, political upheaval etc. Not the sort of things which attract investors. Businesses which have used logic to determine their location are far more likely to attract that magical dollar.
I am not suggesting new businesses set up by themselves in totally foreign fields, with no infrastructure support or miles away from a workforce. What I am proposing is that you should look carefully at your partners to find out where you should be based. Who are your partners: where is there a plentiful supply of qualified labour? Where are the rents most economical? What is the supply of utilities like? What are the public and private transport links like? Where do your raw materials come from?
One of the most famous companies in the world, started by Jeff Bezos is Amazon. As he set out to start the company, Jeff knew he should locate the company based on where he could hire decent computer programmers; famously he packed his home up, sent the lorry west and told the removal men he would call them to tell them where they should go to. After some quick research he decided Seattle, home to Microsoft, was a good place to start.
Seun was also aware of the hidden costs that exist when a business operates from Nigeria, he considered the proximity to advertisers and suppliers but felt, on balance, that he had a less stressed workforce outside of Lagos – free of noise and traffic. In other words, a more productive workforce.
All businesses need access to funds, expertise and a customer base but those businesses that are able to think independently will survive those first incubator years. So a detailed analysis of the cost / benefit relationship in your planning is crucial if you want to survive. So if it worked for Nairaland, it can work for you.