How Call Centers Can Negotiate Valuable Economic Incentives and Stay in Compliance
by King White, on Oct 24, 2016 2:37:47 PM
Call centers have become a huge job-creating industry that economic development organizations typically want to attract to their communities. To help lure call centers, economic developers will often offer economic incentives to offset a call center’s start-up and on-going operating costs. To help understand the best ways to negotiate economic incentives and stay in compliance, I wanted to share some of the best practices developed through my experiences of helping over 1,000 call center projects secure millions of dollars in economic incentives over the last 20 years.
Job creation is the No. 1 factor to leverage during negotiations
The greatest leverage that call centers have to maximize economic incentives is jobs. Call centers create a lot of jobs, and communities need jobs to drive down unemployment, generate payroll taxes and create office jobs for their citizens. Typically, a call center needs to create at least 50 to 100 jobs to attract interest from economic developers, and the more jobs, the better. Fast job creation will also generate the greatest opportunity for receiving valuable economic incentives, which include cash grants, payroll rebates, training subsidies or other job related inducements.
Wage rates are often too low to make call center eligible for economic incentives
Call centers have historically been known for paying low wages. This often contradicts one of main objectives of economic development organizations — to increase the overall wage base of a community or region. Call center wages often fall below the average wage within a county or metro area and, as a result, may not be eligible for economic incentives. However, call centers will frequently find tertiary metro areas with a population of less than 1 million to be more aggressive with economic incentives due to lower wage bases and a desire for greater industry diversification.
Capital investment is minimal compared to other targeted industries
Many companies often think they are making a huge investment when they set up a call center. When compared to other project types such as manufacturing plants, distributions centers and data centers, the capital investment of a call center is minimal, especially if taking over a recently vacated call center facility. Regardless, it is still important to focus on reducing capital investment by aggressively negotiating cash grants, infrastructure grants, real and personal property tax abatements and even real estate grants. These incentives can significantly reduce up-front capital expenditures and on-going operating costs.
Economic incentive programs call centers should consider
As mentioned above, there are various type of statutory and discretionary economic incentive programs that I recommend targeting. The following provides a good list of programs to pursue:
- Cash grants – These are the most valuable economic incentives for call centers. For example, in many cities in Texas, call centers may be eligible for cash grants for each job created. These will range between $0 to $5,000 per job depending on the city.
- Tax credits – Tax credits often come in the form of payroll tax rebates. The most important factor is to make sure they are refundable. Refundable tax credits are like cash while non-refundable credits can only be applied to your tax liabilities within the state you are operating. If you are incorporated in another state, you will most likely never be able to use the non-refundable tax credits unless they are transferable and sold on the open market to third parties.
- Infrastructure grants - These grants are often given in lieu of cash. They include paying for fiber to your building, increased power supply to the site, addition of roads and/or ingress/egress to a building.
- Training subsidies – Many cities offer training subsidies in the form of cash or reimbursements. These incentives can be very tricky to put a valuation on them, and the compliance process can be a nightmare. Cash grants are one thing, but when reimbursement is offered, companies need to read the fine print. These reimbursements can be limited to only the trainer’s time and material not to agent wages. Furthermore, the trainer may need to be provided by a government-related entity, not your employees. As a result, it can result in a lot of paperwork and yield very little value.
- Tax abatements – Tax abatements are one of the most common forms of economic incentives. These can help reduce your real (building) and personal (furniture and equipment) taxes by 25% to 100% over five to 10 years, or more. Their value can add up over time and help drive down annual operating expenses.
- Real estate grants – Occasionally we have been able to find communities willing to provide land or a free building. The land or building is typically owned by the city or economic development organization. There are even speculative buildings that have been financed and built by economic developers to attract call centers whereby they provide a turnkey facility for $0 rent over the lease term.
- Competition restrictions – On a few occasions, we have been able to secure non-compete rights to help reduce the risk of competitors entering the labor market after a client opens its call center. These can be very difficult to negotiate, but we have successfully done it in the past by requiring the city to not offer any economic incentives to competitors for a specified period of time or once the labor market has a hit the critical 3% call center saturation rate.
How call centers can stay in compliance and avoid clawbacks
Call centers have historically been known for their constant job fluctuations. Whether moving jobs offshore, outsourcing to a third party, relocating to a lower-cost geography or responding to a downturn in the economy, call centers should structure economic incentive agreements to provide for ultimate flexibility to avoid the dreaded clawback. Economic developers can recover incentives if the agreement includes a “clawback” provision that requires a company to essentially pay back incentives if they failed to meet their commitments. There are a couple of ways to avoid clawbacks — either provide conservative job creation and capital investment commitments or seek to get paid the economic incentives over time as earned instead of up-front.
The most important thing to remember is that economic incentives are not worth anything if you select a labor market that is unable to provide a sustainable workforce at the wages needed to make your call center operationally efficient. That is why economic incentives should always be considered “icing on the cake” and one of the final deciding factors during the site selection process that differentiates one good labor market from another. Hopefully, this provides you some great insight on how to maximize your ability to negotiation and utilize economic incentives over their useful life for your next call center project based on my experiences over the last 20 years in the call center site selection business.