Under pressure to conduct business efficiently, effectively and profitably, companies are jumping on the shared services centre (SSC) bandwagon, outsourcing some job functions to squeeze out more profits. The job functions vary widely – from data entry and customer service to conflict resolution and human resources (HR) – as do their locations. The bottom line: countries around the globe, and not just the usual suspects, now attract SSC business. The outlook for growth is good.

International Data Corporation estimates that the value of outsourcing services demand will reach $180bn by 2010 (see graph). HR functions (28%) are slated to take the lion’s share of the business with customer-interaction services (24%) weighing in second. In Europe, 95% of SSCs have some type of financial services function and 23% provide an IT service. Multi-disciplined SSCs are common, but HR and procurement functions remain low. Harvard Business School pegged the global outsourcing market to be worth $150m at the end of 2003.

More than 90% of large US companies outsource at least one activity. Reports also indicate that about 80% of Fortune 500 companies outsource some of their financial processes.

The Brussels-headquartered Shared Services and Business Process Outsourcing Association (SBPOA), which conducts an annual survey on SSC site selection preferences, found that in 2004 and 2003 about 44% of companies surveyed preferred a near-shore location. But many are increasingly considering offshore sites. The preference for offshore locations jumped from 7.4% in 2003 to 20% in 2004.

“Surprisingly, in 2003, 34% set up shared services centres within the corporate headquarters and did not consider offshore locations,” says Andre Rampat, SBPOA research director. “That dropped to 31% in 2004.”

Near-shore benefits

Near-shore locations have their benefits: being close to company operations, advantageous time zones, and language and cultural similarities. While near-shore sites are not necessarily the lowest cost locations, they tend to be cheaper than the primary corporate location. For US companies, Costa Rica, Jamaica, Brazil, Chile, Canada and Mexico are attractive.

Chipmaker Intel, for example, plans to open a centre for financial services in Costa Rica next year to centralise the accounting transactions of all its American operations, including those in the US. For two years, Intel has been operating a similar facility in Malaysia that handles its Asian financial operations. Costa Rica was selected for its existing installed infrastructure after analysis of several US and Latin American cities.

Chile ranks 15th in a survey by the Economist Intelligence Unit for 2005 offshore environments, the only Latin American country to be included in the top 15. AT Kearney places Chile behind India, China, Malaysia, Singapore, Brazil and Canada in its ranking. Among the companies operating SSCs in Chile are Unilever, PHP Billiton, Sodexho, Nestlé, Altec (Grupo Santander Central Hispano), Beiersdorf, Zurich Group, Clorox and Xerox.

Unilever established its financial SSC in Santiago, Chile, after a rigorous selection process in which PricewaterhouseCoopers evaluated 12 locations in seven countries: the US, Mexico, Costa Rica, Brazil, Uruguay, Argentina and Chile. Chile was selected because of the competitive costs of its high-quality HR, world-class telecoms infrastructure, and political and economic stability.

Primed for SSCs

Other locations in the US and Canada also excel as prime candidates, such as Ontario, the Atlantic Provinces, British Columbia, North Carolina, North Dakota, New York, Florida, Texas, Ohio and Tennessee. For example, O’Charley’s Inc (which operates 226 restaurants in 16 states in the US’s south-east and mid-west, three franchised restaurants in Michigan and one joint venture restaurant in Louisiana, as well as 101 restaurants under the Ninety Nine Restaurant and Pub chain in New England) selected Nashville, Tennessee, for its SSC and consolidated back-office functions.

“We felt this was a sound business decision as we integrate our concept and the O’Charley’s Inc corporate family,” says John Grady, concept president of Ninety Nine Restaurant and Pub. “The new SSC in Nashville will enable our management and restaurant co-workers to focus on what is most important to us: making sure our customers receive the great food and service they have come to expect from the Ninety Nine.”

European scene

SSCs in Europe are evolving more slowly than their counterparts in the US, perhaps due to Europe’s multiple countries, languages and cultures. IBM-PLI’s Shared Service Centre Monitor indicates that 65% of pan-European SSCs belong to US-owned companies.

The outlook bodes well for the UK, the Netherlands, Ireland, Poland, the Czech Republic, Hungary, Romania, Estonia and Bulgaria attracting near-shore operations. Indicators show that the market for pan-European SSCs is highly polarised, however, with 84% of facilities located in Ireland, the Netherlands, Spain and the UK.

“Favoured UK destinations for FDI in this sector include Manchester, London and Glasgow,” says Paul Wookey, CEO of the Locate in Kent agency. “Kent together with Belfast, Cardiff, Edinburgh, Birmingham, Nottingham and Norwich are considered ‘emerging’ destinations, and are followed by the Leeds and Sheffield areas as well as Bristol.”

Among the companies already operating SSCs in Kent are Atos Origin in Ashford, BAE Systems in Rochester, and Havas Shared Services in Maidstone. Advantages for Kent include its relatively low-cost location compared with other parts of southeast England, quality of life, proximity to London, availability of skills, and international and national transportation links.

“The business is driven as much by globalisation as increasing emphasis on business efficiency metrics, and is made possible by modern information communications and telecommunications technology,” says Mr Wookey.

Scotland has long been promoted for call centre and SSC business. When executives of Novar plc, a global electrical and engineering manufacturer recently acquired by Honeywell, decided the company needed a finance service centre elsewhere than its Weybridge, Surrey, headquarters they chose Glenrothes, Fife, just north of Edinburgh. Novar group finance director Mike McKeon reveals that the company had considered a variety of locations, but found Glenrothes ideal.

“In the long run, moving to Fife will make this part of our business more competitive and efficient, which is vital for major organisations such as ours,” he says. Novar, which employs 14,000 staff worldwide, will serve its five UK business units from the site.

Spreading out

In a recent trend, increasingly companies are using multiple centres rather than regional centres to handle their global needs.

“As SSC functions become more mature, they are more able to take on conflict resolution and complicated processes because it is internal to the organisation,” says Cliff Justice, multishore practice lead for Equa Terra, a multinational outsourcing and insourcing advisory firm. “Consequently, these centres are shedding transactional processes to the next low-cost area like India or China.”

Companies are taking activities that require more local language and interaction at a regional basis, and shifting these activities to serve the countries themselves. As a result, companies are going to various locations to fit this model, as opposed to one particular place.

The Gillette Company, headquartered in Boston, is a good example. In 2002, Gillette opened an HR SSC outside of New Delhi, India, to support its 900-plus employees in India, Nepal, Bangladesh, Bhutan and Sri Lanka. The project was so successful that a year later the company decided to build a regional HR SSC to serve not only those employees, but also those in Russia, the CIS republics, central and eastern Europe, Turkey, the Middle East and Africa. Gillette engaged Hewitt Associates, a global provider of HR outsourcing and consulting service, to help identify the appropriate location.

Decisive factors

“Given the fact that eastern Europe, the Middle East and south Asia are now potential candidates for delivering cost-effective work, making our decision was not easy,” explains Arun Sehgal, director of Africa, the Middle East and eastern Europe (AMEE) HR shared services at Gillette. “We had to consider several factors in addition to costs, such as talent availability, IT infrastructure, HR bench strength and vendor base.”

To date, results have been impressive. By 2004, the AMEE Learning and Development team had delivered 105 programmes across 25 locations in four languages, covering 1300 employees, with an overall satisfaction rating of 4.5 out of 5. Throughout 2004, Gillette made process improvements and cost savings in compensation and benefits, talent acquisition, learning and development, and employee communication. Due to the immediate success, in November 2004, Gillette expanded the scope of the AMEE global service centre to include China and Japan.

Likewise, international internet provider America Online (AOL), based in Dulles, Virginia, made a significant SSC investment at the Clark Special Economic Zone in the Philippines. the company has been operating a 24-hour customer service facility at Clark since 2000 and the facility has been so successful that AOL now plans to transfer to the Philippines its support service facilities that are currently in the UK, Austria and Hong Kong.

“The offshore locations are the true global, low-cost hubs where people are putting the transactional work that does not require higher level issues and resolution,” says Bob Cecil, Equa Terra executive vice-president and shared services practice lead.

Much press has also been given to how India and the Philippines have risen to the forefront as key locations for offshore activities. For example, IBM recently announced plans to increase its offshore outsourcing functions in India by 14,000 workers as it cuts up to 13,000 jobs in Europe and the US. Yet, although India has been portrayed as the poster child of outsourcing by promoters and critics alike, some economic pundits now view it as a short-term phenomenon because it has outpriced itself in many ways.

Now places such as the small island nation of Mauritius can be regarded as contenders for SSCs, particularly for low-end processes, thanks to the fact it has become the world’s first nation with coast-to-coast wireless internet coverage. “For example, data entry, which does not require language skills, may shift to low-cost places where workers are skilled for this type of work,” Equa Terra’s Mr Justice says.

India rules

India is expected to remain the preferred outsourcing destination for more sophisticated processes that require English language skills, although a number of American SSCs that were originally located in India have since moved to the Philippines due to language (primarily, accent) and cultural challenges.

Many companies that choose to be in India are moving away from the higher priced hubs of Mumbai, Bangalore and Delhi to secondary, lower-cost cities such as Sangli, Pune and Hyderabad. Monsanto, a US-based agricultural products company, for example, has set up a dedicated offshore development centre in Hyderabad in a joint venture with Yash Technologies to handle all its IT requirements.

Likewise, First Indian, the Indian subsidiary of US-based data services provider First American, is expanding its operations from 2500 to 4200 employees by setting up a new software development facility in Hyderabad. The company is also evaluating locations for its third facility in India.

Other low-cost destinations for global SSC hubs are Vietnam and Cambodia. “As wages go up in one country, SSC operations move on to the next low-cost location,” Mr Cecil comments.

Judging criteria

So what makes a company choose one location over another for its SSC? “Factors include business strategy, where its offices are located at the moment, and where customers are,” The SBPOA’s Mr Rampat says.

While companies have varying criteria for site selection, one of the big factors companies look for in identifying a hub is political stability. “This was the case when moving a large oil and gas company’s SSC out of Kuala Lumpur [in Malaysia] to Thailand due to post-9/11 concerns and the fact Kuala Lumpur is largely Islamic,” Mr Cecil says. “There was pressure to move critical operations to areas that were more agnostic to Western companies. It may have been a knee-jerk reaction but political stability is a talking point for any location.”

However, Malaysia is becoming popular again, along with Middle Eastern locations such as Oman and Dubai. The latter is developing its Dubai Internet City, as well as Dubai Technology Park, designed to attract foreign investment in research in oil and gas, desalination and environment management. Both are located in a free trade zone. “Dubai Technology Park offers multiple tax incentives and infrastructure incentives,” Mr Justice says. “Oman is doing similar activity.”

Other major criteria are infrastructure and employee skills. A subset of skills, depending upon the process, is language. If functions require multiple European languages, for example, companies will probably choose a European location over a low-cost Asian location. Other important factors are cost of labour, availability of space, regulatory environment, tax system, quality of telecoms infrastructure and property rights. “Countries that offer generous foreign ownership rights are at the top of the list as are those with a stable currency,” Mr Justice says.

Red-flag issues to look out for are inflation (which is often driven by labour availability), wages and staff turnover. Ireland, which was promoted heavily in the mid-1990s, is such an example. “Back then Ireland did not have a large enough labour pool to meet the demand that came with the promotion,” Mr Cecil recalls. “So wages became inflated. Now it is no longer the darling of Europe for these centres.”

The east appeals

As once-popular locations in western Europe become more expensive, eastern Europe becomes more appealing, particularly Prague, Warclaw in Poland, and Bratislava. “Costs and incentives vary from city to city. There is a great deal of competition between cities within the countries. We are also seeing recruiting subsidies,” says Mr Cecil.

Even in countries such as India, where telecoms costs dropped dramatically, companies must be wary. With India experiencing 12%–14% wage inflation since 2002 and telecoms costs now levelling off, the country’s advantages are questionable. Even Indian companies are starting to establish centres in China and other locations to spread their risk.

In a reversal in trends, India-based IT services company HCL Technologies is expanding a call centre in Belfast, Northern Ireland. The company will receive £920,000 in state aid through Invest NI, Northern Ireland's economic development organisation, for its £1.9m investment.

SSC DEMAND:

International Data Corporation forecasts global demand for outsourcing services will reach $180bn in 2010, broken down as follows: