Back in 1994, shared service centres (SSCs) were virtually unknown. Embarking on a gamble that appeared to offer cost benefits, Eastman Chemical Co (then a new spin-off of Eastman Kodak) decided to consolidate its finance functions under one roof.
“We wanted to see if we could operate that way, but at the time we were shooting in the dark,” recalls Michael Hamilton, former Eastman Chemical director of finance of Europe, the Middle East and Africa (EMEA) and now a lecturer at the University of Georgia.
The concept seemed impossible due to cultural differences in each European country. But the company was operating within tight margins, so operations needed to be trimmed and efficiencies introduced. Eastman Chemical decided to consolidate all of its finance departments that were scattered around the EMEA region in a single Rotterdam base and to hire a multilingual workforce. The staff worked long hours trying to smooth out all the glitches, Dr Hamilton says.
The company was soon able to halve its finance head count and cut the cost of its finance operations by two-thirds. “We even cut our fees to PriceWaterhouse by 50%, something we did not anticipate,” adds Dr Hamilton.
Since then, Eastman Chemical has expanded its SSC operations to a 6503 square-metre purpose-built office complex in Capelle aan den Ijssel, where it combines the senior management for Eastman’s EMEA region, the customer service centre and a financial SSC with human resources, information technology, legal and other functions.
“The location allows us to focus even more on our customers,” says company spokesperson Corinne van Iersel. “It is important for us to have a good infrastructure and the new headquarters is equipped with the latest technology."
What Eastman Chemical found is true of many companies across Europe. By establishing SSCs, companies can embrace new technologies that allow management to gain better control of finance operations, streamline redundant processes and systems, and reduce back-office costs and functions by 20% or 30%. IBM Plant Location International (IBM-PLI) reports that one of the major corporate trends of the past decade has been the development of SSCs driven by internationalisation of business, and an increased emphasis on efficiency. According to experts, SSCs can deliver cost savings of 30% to 60%.
While the US has led the way in introducing the SSC concept, UK, Dutch, Irish and Nordic-based companies have been early adopters in Europe. Yet IBM-PLI points out that as many as 100 of the Fortune 500 companies have yet to adopt this business approach. As the industry matures, countries across Europe are in hot pursuit of investors establishing or expanding SSCs.
Andre Rampat, research director at the Brussels-headquartered Shared Services and Business Process Outsourcing Association (SBPOA), contends that European countries are too small to keep up with the demand. Fuelling the competition are the operations that have moved offshore to locations such as India where cheap labour and a well-educated workforce abound.
Against this backdrop, western European countries are as eager as ever to attract SSCs. In England, the Yorkshire and Humber region bills itself as the call-centre capital of the UK, with its highly developed telecoms infrastructure and competitive costs.
Wales has 158 companies – among them are Unilever, Tesco, Laura Ashley and Logica CMG – employing some 27,000 workers. Welsh capital Cardiff and its surrounding area is attractive, given its broadband network, and companies can draw on an educated workforce locally without incurring high costs. Turnover in Wales is also low. Figures released by Mitial Research International show that annual attrition rates for Swansea and Cardiff hover around 13.4% and 17%, respectively (compared to Glasgow’s rate of 29% and Manchester’s of 27%). This means lower training and development costs. Studies indicate a low ratio of supervisors to workers (1:16) in Wales, one of the lowest in the UK. Besides that, 84% of the workers are full-time employees.
Scotland has attracted a number of front and back-office activities, including accounts payable and receivable, general ledger, cash management, credit control, payroll, inbound customer service and support, human resources and IT. Overall, attrition rates are between 9% and 18%; the UK average is 20%. A recent survey by IBM-PLI ranked Glasgow among the top three locations for SSCs worldwide. The sector has grown by 25% since 2000 in Scotland.
In Northern Ireland, companies such as Halifax, Prudential and Abbey National run highly efficient customer support operations. The range of functions has now broadened considerably, with HR and customer support gathering strength alongside traditional finance and accounting.
Prudential runs its SSC from Belfast, which is one of its main administration centres. “It works closely with sister operations in Reading and Stirling in the UK and Mumbai in India to handle queries form the company’s 7 million life insurance and pensions customers in the UK,” says Linda McInerney, senior operations manager at Prudential’s Belfast SSC.
Ireland scores high in the EMEA region for attracting centralised European support functions, and more than 70 of the world’s leading organisations have international contact centres in the republic. A key attraction is its world-class telecommunications infrastructure, into which more than £7.3bn has been invested over the past decade to enable both national and international links. Ireland’s telecoms market is fully deregulated and more than 20 companies compete on the basis of value-added services.
The country also has the youngest population in Europe, with 45% aged 28 years or under, and it ranks first of all the EU countries in the IMD World Competitiveness Yearbook (2004) for its educational system and how it meets the needs of a competitive economy.
In France, the estimated growth rate for call centres is more than 10% a year, and Datamonitor predicts that 150,000 jobs could be created there in the next three years. Call-centre operators represent only 0.5% of the workforce, compared with 1.5% in the UK. An estimated 3300 call centres employ more than 10 operators (including the Paris region), of which 800 belong to France Telecom.
Denmark, meanwhile, has become a natural choice for headquarters and SSCs in the Nordic region. When Parfums Christian Dior decided to open a headquarters and SSC to serve the Nordic and Baltic regions, it chose Copenhagen. Danish laws make it easy to establish a new company, particularly its flexible labour rules. Denmark is also geographically at the crossroads of Europe and the Nordic region.
“Copenhagen is a very pleasant continental city, offering our international employees a high quality of life,” adds Bart de Boever, Nordic managing director at Parfums Christian Dior. “Moreover, the tax regime is favourable for foreign expatriates on assignment in Denmark.”
Many companies find Switzerland competitive for SSCs for similar reasons. Switzerland’s liberal labour laws allow employers a large amount of flexibility and, with an average of 1856 annual working hours a year, the country’s employees work longer than in all the other European countries.
These are among the reasons that led Advanced Digital Information Corporation (ADIC), a manufacturer in data storage systems, to establish an SSC in Zurich. It expects to employ 30 or more professionals there in finance, sales operations, service sales and service logistics and is hiring locally as well as transferring staff from other EMEA locations and offices around the world.
The company had considered new locations in Ireland or the Netherlands, or expanding existing operations in France or Germany. “But a number of factors specific to ADIC led us to Switzerland,” says ADIC vice-president Linda Breard. “On the labour front, for example, costs are in line with average global costs, but there are no compulsory payments. Moreover, there is a strong work ethic, and the workforce is well trained and multilingual, which are important considerations for a company such as ours.” Other factors included an excellent transportation infrastructure, lower travel costs and close proximity to EMEA markets.
“In Zurich we also found both a business-friendly environment and one friendly to expatriates,” Ms Breard adds. “There is an established global business community, competitive real estate costs, logistics support and excellent manufacturing capabilities. Switzerland offers us the flexibility to meet future business needs – including an easy exit strategy, should the need arise.”
While a recent trend in Europe is for sub-regional SSCs, the most overwhelming change (and potential threat for western European regions) is the growing competition from eastern Europe and, increasingly, from ‘offshore’ locations such as India, South Africa and Malaysia.
“The only SSC announcement made in the Netherlands last year came from Unilever,” says SBPOA’s Mr Rampat. “Eastern Europe is by far becoming more popular.”
Adam Breeze, a UK-based inward investment consultant, concurs. “The past few years have seen established cities such as Manchester, Barcelona, Stockholm and Dublin joined by Warsaw, Prague and other emerging centres,” he says.
Budapest, for example, is building a reputation for high-quality operations, including the Diageo Business Centre, which employs about 300 people in financial and administrative functions on behalf of 13 different business units for the international drinks group. Since locating in Budapest in 2001, the centre has saved Diageo more than £800,000 in direct costs as well as a further £50m in efficiency improvements in the UK alone. The centre was recently recognised as the best new shared services organisation in Europe by the Shared Services and Outsourcing Network, a first for central Europe. A major reason was cost efficiency.
Hungary also offers a wide choice of finance professionals with foreign language skills, reasonable rents, good infrastructure, excellent telecoms facilities and a positive business climate, coupled with geographic accessibility.
Other multinational companies that have located or relocated their shared services functions to Budapest in recent years include Oracle, Alcoa and General Electric.
Despite the developing trends of ‘nearshoring’ and ‘offshoring’, site selection decisions are more complex than headlines might imply, Mr Breeze contends. “Companies are seeking a balanced portfolio of facilities based on managing risk and reward,” he says. “Some actively pursue a global footprint that includes facilities in established west European countries, a nearshoring’ option in central and eastern Europe together with a more remote solution in India, Malaysia or South Africa, for example.”
And business doesn’t run all one way. Several Indian companies are looking to tap into European locations to expand. TCS of India, for example, has recently taken over the Pearl Assurance facility in Peterborough, England, and will be offering call and IT support from there.
“As some European capitals become crowded with foreign investors, secondary cities become evermore appealing,” Mr Breeze says. Indian software company Progeon (a division of Infosys) has a 100-person centre speaking 13 languages in Brno, the Czech Republic. Similarly, Oracle has opened back-office operations in Timisoara, Romania.
IBM-PLI expects the tide of investments to continue to focus strongly on central and eastern Europe (especially Hungary, Poland and the Czech Republic), but maintains that Ireland is still a strong contender. The group expects more strategic functions to be retained in traditional centres. After all, the decision to utilise an SSC is mostly about corporate strategy. Choosing the location of an SSC is about as individual as the companies themselves.