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Looking for the perfect location to set up a shared service centre? You're spoiled for choice, and that could be a problem.
Bennett Voyles and Janet Kersnar, CFO Europe Magazine
October 6, 2008
Poznan 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."
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.
Invensys, a £2.6 billion (€3.3 billion) UK industrial automation, transport and controls company, launched a four-year hybrid project in 2006 to centralise finance, HR and other support functions. According to Sujit Mukherjee, the firm's director of global business services, the aim is not only to "look into the fat" to see where costs can be cut, but also find out which processes throughout the group's "highly fragmented" finance function can be consolidated into SSCs and which can be outsourced to Genpact under a global "master service agreement." Like other major outsourcers, Genpact operates centres in a number of locations, including several sites in India, not far from Mukherjee's base in Hyderabad.
A cornerstone of Invensys' project is turning its existing SSCs — in Massachusetts and Brussels — into "centres of excellence." In addition to managing the outsourcing relationships, these centres will offer consulting services to business units to help decide whether it's more efficient for processes to stay in-house or be outsourced. Having already led two multinational SSC projects — at Honeywell and Bechtel — Mukherjee reckons that "selective outsourcing" is a good route for a decentralised company such as Invensys to take, but concedes that because of the complexity of the project, he's treading carefully. "I can see how companies start off with an idea of an SSC, and it backfires," says the shared-services veteran.
Yet whether a CFO is considering a captive or hybrid model, the factor that almost always tips the scales in favour of one location over another is cost. Consider wages, which can account for more than half of an SSC's overheads. A study by Mercer Human Resource Consulting shows that white-collar professionals in Belgium, for example, earned around €35,000 on average in 2007; their equivalents in the Czech Republic, Romania and Poland earned about one-third less. While annual wage inflation is running as high as 12% in some parts of central and eastern Europe, compared with around 4% in the West, the gap between the two regions will still take years to narrow significantly. (See "Head Counts" at the end of this article.)
Of course, it's not all about pay when it comes to wooing local workers. Ambitious graduates, in particular, are concerned about career prospects and building their CVs, says Glaudemans of Buck Consultants. (See "Service with a Smile" at the end of this article.) It's for this reason that a company with a well-known name in a particular location will find it easier to recruit more qualified staff. "The attractiveness and awareness of a brand can be a big differentiator," she says. Her firm recently provided site advice for a finance SSC to SpecSavers, a Guernsey-based, privately owned optician with more than 1,000 stores in Europe and a budding business in Australia. Low-cost locations in central and eastern Europe beckoned, but the tough labour market was a big consideration for CFO Karen Dicks and her team. It helped influenced their decision to stay closer to SpecSavers' main market in the UK, where the brand is well known, and set up an SSC later this year in Nottingham.
SSCs that are concerned about brand awareness, says Glaudemans, need "to create some noise." Building relationships with local universities and participating in local job fairs are good ways, as are using local press or awards programmes. Each showcases the SSC as an attractive employer that provides enticing career opportunities beyond the dead-end, manual-intensive processing of many shared-service jobs.
Making noise is what SAP, a €10.2 billion German software house, has been doing in Prague since Claus Heinrich, its executive board member in charge of HR, and Martin Jahn, the Czech Republic's deputy prime minister, cut the ribbon for its new SSC in the city's Avenir Business Park three years ago.
Before placing its HR and finance SSC in the Czech capital, SAP undertook "a very long and detailed" site search, which whittled down a list of 16 locations to two finalists — Prague and Budapest. While the two cities had similar labour markets and infrastructure, Tamara Braun, SAP's global SSC head, says the deciding factor was convenience — namely the physical proximity of Prague to SAP's headquarters in Germany. This made onsite visits easier for senior management, something that was particularly important during the critical 12-month start-up phase when they wanted to spend time at the site.
Nearly doubling in size to 230 full-time employees since the launch, SAP's centre now handles 90% of all document volume for EMEA and 55% worldwide. As the local labour market tightens, Braun says that SAP's reputation is key to the success of the SSC, with word-of-mouth recruiting becoming more important. "We can't simply say SAP is the best employer," she says. "It's a story that we have to live, by showing employees that we have a flexible working model, providing a real variety of ways to let them align their private lives with work and really showing them that they have a future. That's pretty unusual in the Czech Republic."
As job prospects improve in popular SSC locations, Glaudemans of Buck Consultants predicts that SSCs will benefit from reverse migration as young nationals return home after working abroad.
Carlsberg is already benefitting from this trend, says CFO Jensen. The company's former UK finance director, who is Polish, returned to his home country to run the Poznan SSC. More may follow, especially if the SSC evolves, as Jensen envisions, to include more analytical services along with the current controlling work. But first things first. As Jensen says, for Carlsberg and other SSC adopters, "it's still early days."
Bennett Voyles is a freelance writer and Janet Kersnar is editor-in-chief at CFO Europe.
Service with a Smile
Sometimes it takes soft skills to win a war. A war for talent, that is. Just ask Michael Cullen, who helped set up Marriott International's first shared service centre, in 2000, on the outskirts of Knoxville, Tennessee. The initial aim, says Cullen, senior vice president of business services at the $13 billion (€9 billion) Washington, DC-based hotel chain, was to serve 180 hotels in North America. This meant finding a location that satisfied language, cultural and time-zone requirements. Staying relatively close to home was also important. With such a large transformation effort to a decentralised finance function, the company thought hard about "the amount of change we wanted to introduce," he says.
These issues were revisited as the SSC grew and plans for an additional site were drawn up. "In 2007, before doubling our size — from 300 to 600 employees — we did consider both offshoring and outsourcing, and talked to a lot of other companies and economic development boards," he says. "But there was a strong economic value [at the existing Tennessee site] — even though this isn't a major or even secondary city. We wanted to leverage the operating model that we have here. Not that we're not open to moving somewhere else."
And more expansion lies ahead. Cullen says head office has just given the green light to expand Marriott's SSC, as services for around 50 non-US hotels will be added to the model over the next 12 to 18 months. "Once we reach critical mass, we'll start looking outside of the US," he says.
When that happens, Cullen will undoubtedly want to replicate Tennessee's success, which will be no small feat. "Our reputation over the past seven years is that we've become the employer of choice," he says, noting that attrition is in the low-to-mid teens and two local job fairs this summer attracted 170 applications. A recent benchmarking project also showed that the centre is among the best in terms of efficiency and cost effectiveness.
There's another reason why the centre is attractive. Cullen says that because finance was so decentralised, if someone wanted to move up the career ladder it required picking up and regularly relocating from one office to another, something he's done eight times in the 25 years that he's been with the hotel company. Though there are still opportunities at headquarters or at any of Marriott's hotels, "now people can be promoted without having to change their address," he says. "That's a pretty powerful, motivating factor."