VideoPoznan is described in travel guides as a quaint, historic university city with a population of less than 1m. Most visitors to Poland are lured instead by bustling Warsaw or trendy Krakow, with Poznan attracting attention only because it lies on the Paris-Berlin-Moscow rail route.
But Poznan's economic development officials weren't about to let location scouts from Carlsberg, a DKr45 billion (€6 billion) Danish brewer, bypass their town. A smattering of other western companies — GlaxoSmithKline and Wrigley, to name a couple — already had factories and offices there, but city officials wanted a slice of the growing business from companies setting up centres to house their back-office processes in central and eastern Europe.
Poznan's hearty welcome impressed Jørn Jensen, Carlsberg's CFO and deputy CEO, who first visited in 2006. Until then, the company ran only a small shared service centre (SSC) for its Nordic units, so there was a lot riding on making the project a success. Opening an accounting SSC to serve all its European operations offered a "huge opportunity" as part of a series of group-wide programmes to align and streamline processes at Carlsberg, Jensen says.
But why Poznan rather than a more tried-and-tested SSC site, such as Dublin or Brussels? Jensen says that Poznan met all the critical requirements — a regularly replenished pool of recruits from the local university, a low-cost operating environment, and a pro-business fiscal and regulatory regime.
What's more, it was off the beaten track. While companies have been facing rising costs in more popular cities, Jensen reckoned that Carlsberg would have an early-mover advantage in Poznan and wouldn't encounter much competition for staff and other resources. "We were one of the first companies to set up [an SSC] in Poznan, which makes it far easier when it comes to getting the right people in place at the right price," he says.
Jensen isn't the only CFO to take an SSC into uncharted territory recently. And the good news is that the list of cities wooing CFOs like Jensen — from Poznan to Timisoara in Romania to Brno in the Czech Republic — is growing by the day. "I'm seeing new countries, new locations coming up on the [SSC] map," says Steven Culp, managing director for finance and performance management in Europe at consultants Accenture. "At the same time, I'm seeing reinvention and specialisation in the countries that have been doing it for longer. Based on what an organisation is looking to achieve, I think now more than ever they have more options open to them."
Yet more options can also mean more worries. Armed with a decade's worth of lessons from SSC pioneers, CFOs now realise how a bad site decision can contribute to the demise of an SSC strategy. Choosing the wrong location could leave a company facing escalating costs, plummeting productivity and, for the CFO, a tattered reputation.
And there is more riding on SSC decisions than ever, as exceptionally lean teams with limited resources are expected to raise the bar in terms of the depth and complexity of the services that their centres provide. As Sachin Shah, a partner at Bain & Company, notes, "Ten years ago, one of the outputs of a finance transformation was to set up an SSC. Now it's turned around — one of the outputs of an SSC has to be enabling finance transformation."
Hot Spots
In Europe, companies initially played it relatively safe with their SSC strategies. Traffic flowed to places where SSC pioneers had established track records for slashing back-office costs — such as Whirlpool in Ireland and Alcoa in the Netherlands, Spain and Italy. As confidence grew, companies, in the words of Shah, "started to hedge their bets," setting up satellite SSCs in lesser-known cities, as US food firm Kraft did in Bratislava and Barcelona, and UK oil company BP in Krakow and Lisbon.
The rationale was straightforward, says Josefien Glaudemans, a partner at site-selection specialist Buck Consultants International. Traditional locations began "overheating," she explains. Robust local economies combined with growing labour shortages to fuel inflation, leading a number of companies to look east for lower-cost locations.
That was fine for a while, but the challenges have simply spilled over to the new locations. Thanks to a growing demand for SSCs — not to mention call centres and other support services — from all types of companies "the new places are already overheating," she contends. "No one is promoting Prague any more, the same with Warsaw and Budapest, and probably the same with other cities in a few years." That's why experts such as Glaudemans now discourage companies from pursuing SSC strategies based only on labour and cost arbitrage, forcing them to go on the search for new low-cost locations every few years. "It's just not sustainable," she says.
There are steps companies can take if they are concerned about falling into an arbitrage trap. For example, some companies are pursuing what they call a hybrid SSC model, running their own centres for some processes while sending others to outsourcers, which can more easily use their scale to shift services around the globe in response to changing labour and cost trends.
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