Bpo/ssC opportunities in central and EastErn EuropE. perspektywy sektora Bpo/ssC w EuropiE Środkowo-wschodniEj

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1 Bpo/ssC opportunities in central and EastErn EuropE perspektywy sektora Bpo/ssC w EuropiE Środkowo-wschodniEj

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3 Foreword This has been one of the most interesting, and perhaps most important studies I have been involved in for some time. Although Business Process Outsourcing has evolved significantly over the last ten to fifteen years, my first real exposure to the phenomena was over six years ago whilst working on the London Office Policy Review on behalf of the GLA/Mayor of London, with Geoff Marsh. Back then, we identified that the London market could lose up to at least 500,000 sqm of back-office functions to India alone, at current outsourcing rates. In addition, UK central government was set to shed ca. 350,000 sqm of London office space as jobs were moved on-shore to the more cost-effective UK regions. It was clear that the occupational base of the world was changing and this was happening during a period of strong global economic growth. Concurrently, CEE markets have been growing as net recipients of BPO/SSC activity, for at least six or seven years, as a result of possessing the fundamental ingredient (relatively) low-cost, highly skilled labour. This activity has helped to drive the demand for new office space across the region. As we head into 2010, we are faced with very different economic times. Although the shock and turbulence of 2009 has passed, the prospects for European-wide economic (and thus sales/revenue) growth look very thin especially when compared to recent years. This is placing much more pressure on the cost-side of existing businesses. As a result we envisage some significant changes in our occupational markets in the short and medium term as companies consider how best to improve their bottom line via improved operational efficiencies rather than targeting higher sales/revenues. Whilst this will increase overall demand for BPO services and shared service functions, this consolidation trend brings a new challenge to BPO organizations in particular. Many BPO service providers will find it difficult to compete and survive in the current economic climate. An A.T. Kearney analysis of surveyed BPO/ SSC companies has shown that the BPO/SSC operations already in situ have consolidated from 148 to 79 countries after they first began offshoring. In turn, however, this will create more efficient labour and property markets thus making room for a further wave of BPO/SSC activity from donor markets in the west. So, over the short and mid-long term the CEE region will be able to continue to offer a full package of cost (labour and real estate) and BPO/SSC experience advantages to the west. As a starting point, CEE markets still represent a significant cost saving of around 50% to western Europe. Over the long term we feel that the overall employment cost advantages of CEE markets outweigh the shortterm benefits unemployment brings these donor markets. Although this region may be more costly, thus less attractive for investors than say MENA or some Asian countries, culture clashes and a lack of required European language skills will in many cases outweigh the cost factors. In summary we continue to believe that BPO/SSC activity will continue to be a very strong driver of occupational demand in the region for a long time to come, especially in the next two to three years. Finally, I would like to thank all of the local Colliers offices for their vital contribution to this report. In particular, the Polish Research and Marketing team for their hard work, support and making this happen. Equally, I would like to thanks the Polish A.T. Kearney team for their invaluable role in developing this study, most notably in terms of their input to create and develop the comparative city matrix. Damian Harrington Regional Director of Research Services I Colliers International

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5 Making it happen - together A.T. Kearney s Global Services Location IndexTM study has raised some questions related to Central and Eastern Europe s future as BPO destination. The study showed a global offshoring space where balance shifts quickly and under current conditions the Central and Eastern European locations advantage facing prospect of fading in favor of other parts of the world like China, India, Far East, Latin America. Through this region-specific report developed together with Colliers location location location experts we try to answer questions from Clients: Is the region still in the game? How do individual locations compare to global alternatives and how important is cultural proximity factor? What are the drivers of BPO activity in the region? What are key trends going forward? Our joint regional deep-dive research, which is the first of its type quantifying detailed hard costs and soft knowledge and infrastruture factors based upon combination of complementary knowledge bases of A.T. Kearney and Colliers, shows that Central and Eastern Europe is still in the game: - still significant financial reward of at least 30-40% lower processing costs than in Western Europe and North America, - at same time cultural proximity to these donor markets, - stable business and legal environment ( most countries part of EU), and - availability of qualified resources and modern office infrastructure. The comparison to global alternatives shows the region as a predictable BPO route and its competitiveness increases as there is a long list of contenders to major historic locations to date like Budapest, Krakow, Prague with higher financial attractiveness and much improved people skills available. The region appears least risky in terms of culture clashes, which in some cases brought some companies back from far offshore. A.T. Kearney alongside Colliers Team is at your service for further insights on the topic across over 30 locations and close to 400 Business Process Outsourcing and Shared Services centers in Central and Eastern Europe we cover together for You. Aleksander Kwiatkowski Partner, Eastern Europe BPO Area Leader A.T. Kearney 3

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7 Foreword 1 Executive Summary 7 Future Drivers of BPO/SSC Activity Occupier Location Decision Making Factors 9 Key Success Factors Messages for Developers 9 Purpose of Report 10 Methodology 11 Introduction 12 Global Competitive Context 12 CEE GLSI Positional Context Currencies 12 Is CEE Still in the Game? 13 Other Key Factors Getting a Grip on Culture 14 Cost and Capacity Index 16 Summary Findings 17 Labour Market Analysis 18 Office Market Analysis 20 Bpo/Ssc Player Analysis 23 Conclusion 24 Labour and Unemployment Context 24 Key Occupational Business Drivers 24 Real Estate Context 25

8 6 The term CEE markets in this document includes: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovakia, Ukraine.

9 Executive Summary At Colliers we believe the region is set to benefit from the expansion/introduction of more BPO/SSC activity. The question is, which markets are likely to benefit and which markets are likely to suffer from changing occupational demand, notably from growth and rationalization in BPO/SSC activity? To help answer this key question we have conducted some highly in-depth and original research on the CEE region, in conjunction with A.T. Kearney. This has allowed us to better understand the market positioning of individual CEE cities in terms of their current and future ability to absorb BPO/SSC functions. In order to compare a range of capital and secondary cities from the region we have analysed each market according to a range of operational cost and BPO/SSC experience/critical mass factors allowing for their positioning in the matrix below: The most significant finding of our research is that each city/market has something to offer in terms of attracting and retaining BPO/SSC functions of one form or another. This is the direct result of the evolution of BPO/SSC activity shifting toward including higher value-added business functions in addition to the typical low-cost, low-complexity functions which the region initially absorbed. For example, cities such as Prague, Budapest, Bratislava and Krakow the most experienced, yet most costly, locations have the ability to attract higher value-added functions such as customer relationship management and business analysis/ forecasting. Cities such as Bucharest, Sofia, Cluj and Varna, with lower BPO/SSC experience but at the same time a lower cost base have the ability to attract lower complexity tasks such as basic IT support, call centres and transactional processing. Legend: City population level : 4+ million 2-4 million 1-2 million million <0.5 million (1) Costs attractiveness is based on BPO/SSC location ranking reflecting estimated costs base for respective general BPO/SSC operating model. (2) BPO/SSC experience is based on the level of current BPO/SSC operations (rented office space, estimated FTEs). Source: A.T. Kearney/Colliers 7

10 Table 1: City Positioning v BPO/SSC Functions POSITIONING BPO/SSC FUNCTIONS CITIES INCLUDED Bottom- Left Top-left Top-Right Low-Cost, Low-Complexity: Transactional & Payroll Processing, Desk-Top Publishing, Customer Interaction Centres Low-Cost, Mid-Complexity: Enterprise Resource Planning, Claims Management, General Shared and Hosting Services, Net Design Mid-Cost, High-Complexity: Customer Relationship Management, Human Recources and Recruitment, Business Analysis and Financial Reporting, Risk Analysis, Digital Learning and Product Training, Enterprise Support Services, Integration Services Kiev, Lublin, Torun, Rzeszow, Bydgoszcz, Olsztyn, Cluj, Szczecin, Riga, Belgrade, Varna, Vilnius St Petersburg, Bucharest, Sofia Prague, Budapest, Bratislava, Warsaw, Krakow, Wroclaw Bottom- Right Mid-Cost, Low-Complexity: relative to other cities, these locations offer the least attractive option from an experience or cost perspective and will need to offer better engagement strategies/ additional incentives to be able to compete on either cost or critical mass. Zagreb, Lodz, Gdansk, Brno, Poznan, Katowice, Tallin Source: Colliers/A.T. Kearney Table 1 summarises the current positioning of each CEE city in the matrix with respect to the type of BPO/SSC functions they are currently most suited to. This does not mean cities will always attract the jobs and functions they are suited to. Local and national government initiatives will be one major factor playing a role in the retention and attraction of employers to one location over another. This could be by way of better engagement and/or incentives a major driver of activity in the past. There is also a strong role for Universities to help develop the skills which will be needed to attract future jobs. Moreover, many low-cost/low-complexity functions in higher cost/experienced markets may move to lower cost locations in the east. It has been interesting to read the discussion notes of the recent Modis International/Aspire roundtable event in October 2009 What draws the BPO community to Kraków where market practitioners met to discuss the future of the BPO/SSC business in Krakow over the next 10 years. The panel recognised that Companies will need to offer higher skilled work as much of the transactional work will no longer exist in the city, having been rendered not commercially viable in the area by either technology or lower cost locations elsewhere. The only certainty is that the positioning of cities within the matrix will change in light of market dynamics and the extent to which business location decisions become ever more complex. It is our task to remain ahead of those changes and events. 8

11 Future Drivers of BPO/SSC Activity Occupier Location Decision Making Factors Our research has identified four factors which will have a critical importance to the future of BPO/SSC activity in the region. The success of one company and/or location over another will be driven by the ability of occupiers to understand the city positioning of each market and address the following key drivers: Long-Term Strategy A Global Footprint To align BPO/SSC location decisions with the longterm enterprise strategy of the company. Trying to succeed in the long-term offshore strategy, a company should always think holistically, by building a global delivery model rather than setting up single offshore destinations. The optimal mix of future locations should be part of a global long-term strategy, giving the opportunity to coordinate the activity of various centres and minimize management costs in future. Understand job complexity Relative to work-force, and current/future competition for labour Select the type of services to be outsourced and understand the sensitivity to business continuity. For instance, centres for low complexity business transactions may be pure cost players, while those for high complexity activities will depend on the quality, culture and availability of the work force. Similarly, certain functions will be sensitive to service disruptions so should not be placed in high risk areas. Locations that can multi-task, And Multilocations which can single task Ensure the right design for the global footprint. The global footprint model requires choosing locations based on their ability to handle multiple tasks well and address changing needs with enough flexibility. Functions should be assigned to multiple locations properly, so that the company can make cost and benefit trade-offs and adjust the functional mix over time as costs and the availability of people varies. Do not rule out the outliers be flexible in decision making Consider additional needs such as language, time zones, regional coverage. While one city might be the ideal location for a particular function, the second- or third-best location could still work if it can support a wider range of functions or allow for regional coverage. Key Success Factors Messages for Developers This will include an understanding of whom and what the next likely BPO/SSC donor markets and companies will be and how these occupiers interrelate with the tied occupiers already in situ within a market. By tied occupiers we mean companies and organizations which are tied into the local economy be they lawyers, accountants, real estate advisors or local government and thus are dependent upon the success of a local economy in order to do business. These organizations tend to expand and contract in line with local/national economic growth. For instance, a simple analysis of the existing Prague office occupier market highlights that space savings of at least 20% could be made through tied occupier rationalisation, space planning and changing working conditions. This would lead to an increase in availability, keeping vacancy above the long-term average (and thus maintaining downward pressure on rents) up to mid This does not, however, take into account the idiosyncratic impact BPO/SSC occupiers can have on a market. Choice-based or footloose occupiers, such as those operating BPO/SSC functions tend to be contracyclical to local/national economic growth. By this we mean that when economies are shrinking and unemployment is rising, this actually deepens the labour pool and availability of real estate. Such a rise in capacity will minimize cost inflation, if not 9

12 cause cost deflation, thus inducing further BPO/ SSC activity into a market. Therefore, as a result of varied economic performance across CEE markets (something which is likely to diverge to a greater extent over the next three years as the continued impact of the current recession filters through) we may see an increase in BPO/SSC activity in some locations which will help fill some of the occupational gaps created by weakening demand from tied occupiers. Thus not all CEE city office markets will shrink in terms of the existing occupational base. They will, however, change. National government agencies will have a big part to play in how this picture pans out. As the recession filters into the real economy, greater economic divergence may create surprising results by actually boosting office demand in some locations more than others, as a result of attracting BPO/SSC functions. Colliers BPO/SSC Team This report is the beginning of a process to develop a greater knowledge and understanding of our markets, including our interpretation of anticipated change to assist clients in their occupational and development decision making. Purpose of Report The following points highlight the key trends and findings we wish to extrapolate from this study and report: To understand the extent to which BPO/SSC activities are prevalent across chosen cities in the CEE region. To understand the extent to which these facilities and operations have grown over time. To understand what types of facilities have been established i.e. what types of functions and to service what types of industry? To understand the extent to which these operations have capacity to grow and expand across the chosen CEE locations. To establish which types of operations/functions may grow, thus driving further the expansion of BPO/SSC activities in existing centres. To establish which potential new destinations offer the best prospects for growth. To understand the real estate and labour cost differential between CEE city markets. To understand the impact these operations have on local office markets. We have developed a regional BPO/SSC strategy to focus on this work and, naturally, we will be more than happy to use the results of our analysis to help explain what this may mean for your development/ investment/occupational portfolio moving forward. 10

13 Methodology We have devised a series of analytical tools and matrices to help quantify and objectify the various different location and functional drivers an organization would consider in their BPO/SSC decision making process. The key matrix, at the heart of this report, is the CEE BPO/SSC Services City Matrix which takes into account the following three sets of drivers to help position each city according to its cost base, BPO/ SSC experience and overall city/agglomeration (in case of Warsaw, Katowice and Tricity in Poland) population. rented/occupied office space and the estimated full-time equivalents (FTEs) in every location. This is based on Colliers International systematic analysis of office occupiers over 500 sqm, and those occupiers otherwise known by Colliers International and A.T. Kearney to be providing BPO/SSC services in any given location. CITY POPULATION - the size of the city dot The third factor taken into account is the city population size, based on the following scale (where 5 = the largest dot possible, 1 = the smallest dot). OPERATIONAL COSTS: X-AXIS The first criterion included in the matrix is the cost base presented on the horizontal axis, making it possible to clearly present and compare the cost attractiveness of a specified location. This cost base represents the total cost of establishing and running a Shared Services or BPO Centre in the selected location. It is a weighted composite of the following cost components: 4+ million = Rank million = Rank million = Rank million = Rank 2 <0.5 million = Rank 1 Operational start-up costs Labour Costs: The average wages of different job levels across the areas of Finance and Accounting, HR and IT. This includes additional on-costs of the employer. Additional cost positions affecting the total result include attrition, recruitment and training costs as well as travel and expenses. It also includes costs associated with the rental, facility and parking costs of real estate to reflect total infrastructure costs in a particular location. BPO/SSC EXPERIENCE & CRITICAL MASS: Y-AXIS The second component of the matrix presented on the vertical axis relates to overall BPO/SSC experience. This is based on the level of BPO activities in a particular location. It reflects the number and scope of current BPO/ SSC operations, measured by the volume of 11

14 Introduction Global Competitive Context While global leaders India, China and Malaysia remain strong as the key offshoring destinations worldwide, the world s volatile economic environment was reflected in the remainder of the ranking. The findings of the latest (2009) A.T. Kearney Global Ser vices Location Index (GSLI) representing an analysis and ranking of the top 50 countries worldwide as the best locations for servicing business process outsourcing functions highlighted a substantial reshuffle across the competing countries from the index presented in Countries within CEE, which not long ago emerged as one of the leading global hubs for offshoring, especially for Western Europe, fell substantially down the rankings. This was due to a rapid increase in costs, driven predominantly by currency appreciation against the major global currencies the US$, GBP Sterling and the Euro. It was also due to wage inflation. 12 Figure 1: Global Services Location Index India 2 China 3 Malaysia 4 Thailand 5 Indonesia 6 Egypt 7 Philippines 8 Chile 9 Jordan 10 Vietnam 11 Mexico 12 Brazil 13 Bulgaria 14 USA (Tier II) 15 Ghana 16 Sri Lanka 17 Tunisia 18 Estonia 19 Pakistan 20 Romania 21 Lithuania 22 Latvia 32 Czech Rep. 33 Russia 37 Hungary 38 Poland 40 Slovakia 42 Ukraine 0,47 2,59 3,13 2,76 2,41 2,48 2,18 2,06 1,74 3,05 3,23 3,07 3,19 2,99 3,21 2,83 3,26 3,13 2,86 2,63 2,31 2,28 1,95 1,82 2,39 2,05 2,63 3,12 2,71 1,14 0,93 1,01 1,22 0,81 0,86 0,94 1,20 Financial Attractiveness 1,24 1,50 1,83 0,91 0,89 0,91 0,91 1,45 0,97 People Skills and Avaliability 2,33 1,30 1,20 1,47 1,17 1,02 0,70 0,95 1,08 2,48 2,15 2,20 1,99 1,96 2,07 1,92 1,73 1,75 0,99 1,89 1,59 1,97 1,41 1,37 1,24 1,24 1,45 1,37 1,62 1,36 1,17 1,45 1,58 1,08 0,93 0,99 1,37 1,30 Business Environment Source: A.T. Kearney On the contrary, some Middle East and North African (MENA) countries emerged as new hot destinations for offshoring. In particular, Egypt and Jordan made significant gains due to their low cost base, proximity to Western Europe and strong connection between their currencies and US$. CEE GLSI Positional Context Currencies In the case of CEE markets, the primary reason for the worsening of the competitive position was a decrease in the financial attractiveness of the region. For a long time compensation costs in CEE markets have been around half of the European/ UK/American equivalent. Although in many markets this cost advantage has been eroded by continually appreciating currencies, as highlighted by Figure 2 overleaf. The most severe falls in country attractiveness, according to the GSLI, have been in Slovakia (now the Euro) and Poland due to their accelerated increase in compensation costs as a result of the currency appreciation which has occurred since This is also the case for established CEE leaders like Hungary and the Czech Republic, despite the fact that all currencies depreciated markedly in 2008 as a result of the financial and economic crisis. Looking forward, currencies in most of these markets look set to stabilise, if not appreciate marginally, in the near future.

15 Figure 2: Local Foreign Currency Fluctuation v US$ ( ) - The significant financial reward on offer i.e. at least 30-40% lower processing costs than in Western Europe and North America Bulgaria Czech Republic Hungary Poland Romania Russia Slovakia Ukraine - A stable business and legal environment, especially as most CEE countries are now in the EU. - Cultural proximity to donor markets in Western Europe and North America (close cultural ties, availability of skilled workforce and language skills). - The availability of suitable modern office space able to support a range of business functions. Source: Colliers/FocusEconomics Not all CEE countries have lost out in terms of currency appreciation, however. This is most noticeable in Romania, Russia and Ukraine where currency depreciation has occurred since This is especially the case from 2007, including some depreciation in Bulgaria. This has allowed Bulgaria and Romania, both of which recently joined the EU, to maintain their GLSI positions compared with other European Union members. Figure 2 highlights that these currencies are forecast to continue to depreciate into 2010 and 2011, making these markets more attractive than their CEE counterparts, at least from a foreign exchange position. Is Cee Still in the Game? Despite this shift in the global positioning of many CEE countries, what conditions need to be met in future in order for CEE markets can continue to be attractive destinations for further BPO/SSC operations To be successful, every off-shoring decision requires a specified mix of conditions and factors, and these go down to the city, rather than country, level. Our in-depth analysis of CEE markets shows that the CEE region continues to be a competitive BPO/SSC destination globally due to the following factors: Moreover, this study reveals that there is a growing list of new locations in less known cities across CEE acting as contenders to the more mature BPO/SSC city leaders. These new locations offer financial attractiveness and people skills availability in competition to their more mature CEE counterparts such as Krakow, Prague, Budapest and Bratislava. Whilst the more mature CEE cities may no longer seem as attractive from a purely cost basis, it is worth noting that financial attractiveness criteria is crucial only in low complexity BPO activities. More complex activities take other factors into account and some CEE cities have already acquired unique niche capabilities, providing them with the opportunity to maintain stable, diversified positions and attract further BPO/SSC functions in the future. The Morgan Stanley mathematical modelling centre in Budapest, Hungary, is one example of such a niche activity amidst the range of IT, finance and accounting BPO functions in the city. This is the positive growth story. The condition of global markets, and the recession which has taken hold in North America and Europe in particular, adds new dynamics to the whole business process outsourcing equation. Rising unemployment and greater levels of protectionism in Western Europe and the US, as much as in emerging Europe, may act to counterbalance the offshoring/nearshoring trend. The recent British Telecom example is such a case in point 13

16 In July 2009, it was reported that British Telecom (BT), the UK S biggest telecoms firm, will cull around 4,000 call centre jobs outsourced to Indian service providers, as the company seeks to ensure more employment opportunities for British workers and protect the jobs of those employed directly by the company. Explaining the reasons for bringing jobs back to the UK, a BT spokesman was quoted in the Budapest Business Journal as stating that with improved customer service, fewer support staff are required by BT. Some work will, however, be moved back to the UK and given to full-time BT employees who have been affected by cuts elsewhere in these challenging times. BT has a responsibility to find work for its permanent workforce and this is just one measure it is taking to protect its direct workforce. With pressure on many companies to improve their bottom line in this new age of thrift, when combined with the reality of very sluggish growth in sales and revenue the main way to improve profitability is through a strategic approach to cost reduction. So, whilst we know emerging Europe is not the only global contender to attract and develop more BPO/SSC functions. The overall stability, diversification, low cost base and cultural ties offered by markets in the region mean it is still in a strong position. We feel the market will continue to attract a healthy proportion of the low, medium and even high complexity functions which will continue to be outsourced by companies globally. Other Key Factors Getting a Grip on Culture Every offshoring project is strongly connected to the cultural environment of the donor country. Establishing a BPO or Shared Services Centre requires a deep understanding of the differences in approach to completing tasks and in attitudes toward conflict and decision-making styles. This is why many offshoring projects fail or run into problems cultural differences are not considered as an essential issue from the start. Making an effort to avoid miscommunication and cultural shock, senior executives must understand, manage and control cultural differences throughout the whole implementation and management process just as they do in a cross-border merger, acquisition or joint venture. Figure 3: Offshoring Problems Best performers Poorest performers 100% 83% 100% 83% 66% 50% 33% 66% 33% 66% 0% 50% 0% 50% 17% 33% 0% 17% Source: A.T. Kearney 14

17 Cultural issues cannot be ignored when going offshore. According to a study conducted by A.T. Kearney*, the most often mentioned offshoring problems are: internal resistance to change and cross-border culture and communications issues. Both of these issues were mentioned by 100% of the best performing and 83% of the poorest performing companies surveyed. In the opinion of A.T. Kearney, there are four key components constituting culture which are of utmost importance to creating successful offshore operations: Relationships, Context and environment, Communication style and Working norms. The combination of all of these factors is what makes the offshoring project a cultural challenge for both the client and the service provider. Figure 4 below shows how national and corporate cultures collide in offshoring if, for instance, communication or relationship styles differ. Additionally, to achieve success in offshoring companies need to address specific cultural distance and working norms. What then are the conclusions for Central and Eastern Europe? Although this region may be more costly, thus less attractive for investors than say MENA or some Asian countries, culture clashes may in many cases outweigh the cost factors. When offshoring to countries with substantial cultural differences, a company might have to face a more significant cultural clash which is more difficult to manage by distance. In the case of CEE, cultural issues will be a less important sticking point as culture in this region is more closely related to that of North America and Western Europe. Figure 4: National and Corporate Cultures Collide in Offshoring Source: A.T. Kearney * The Offshore Culture Clash, A.T. Kearney

18 Cost and Capacity Index The CEE BPO/SSC Services City Matrix analyzes and ranks over 30 Business Process Outsourcing and Shared Services Centre locations across the region. Our experiences inform us that since the decision concerning finding the best location is a choice between cities, rather than countries, it is crucial to evaluate all the various cost, critical mass and attractiveness components on a city level. The CEE BPO/SSC Services City Matrix was built in order to assemble three criteria affecting the total competitiveness of the city: - Operational Cost base (x-axis) - BPO/SSC experience (y-axis) - City population (represented by 'dot' size of each city) Each of the four segments in the matrix are created by the dividing matrix lines which are based on the average values of the key x and y axis parameters (i.e. average operational cost and average level of experience). So, for instance, the top-right segment represents cities which comprise a combination of high levels of BPO/SCC experience, but with relatively high operational costs. In terms of city population, St Petersburg is the largest dot on the matrix, followed by Warsaw, Budapest, Bucharest and Kiev. These cities represent the most potentially attractive options from a labour force availability perspective. Figure 5: CEE BPO/SSC Services City Matrix Legend: City population level : 4+ million 2-4 million 1-2 million million <0.5 million 1) Costs attractiveness is based on BPO/SSC location ranking reflecting estimated costs base for respective general BPO/SSC operating model 2) BPO/SSC experience is based on the level of current BPO/SSC operations (rented office space, estimated FTEs) Source: A.T. Kearney/Colliers 16

19 Summary Findings As mentioned, the historic leaders in terms of BPO/ SSC presence are Prague, Budapest, Bratislava and Krakow, represented in the top right section of the Matrix. The study also shows that there is a long list of future contenders offering higher financial attractiveness and much improved people skills availability. This includes cities such as Bucharest and Sofia which offer higher financial rewards than the more mature principal cities of Central Europe in countries which joined the EU much earlier. There remain many other cities across CEE providing interesting alternatives for companies in search of new BPO/SSC centres in diverse locations such as St Petersburg, Kiev, Belgrade, Vilnius, Riga, Szczecin and Bydgoszcz. These cities are attractive not just in terms of total costs. They also provide a solid business environment and are able to provide the required skills set for outsourced operations to function efficiently and financially for the selected companies present in these regions. Figure 6: Evolution of Outsourcing Functions It is worth remembering that the current combination of cost and critical mass does not mean that current historic leaders or some of the more expensive cities cannot continue to be selected as attractive destinations for offshoring. Other factors must be considered as part of the proven approach to match locations with companies outsourcing demands. For instance, companies should start by undertaking a complete offshore assessment including an analysis of the existing presence of company operations, an update on people skills requirements for different functions, an overview of the overall business environment and target financial savings. This will help to: Assess and prioritize the company s business functions that could be moved offshore either into existing locations/centres or to help establish new centres. To identify and prioritize those functions that can quickly realize value for the company considering their ease of 'outsourcing implementation'. This approach is of more and more relevance given the increase in higher-value added functions which are now being outsourced globally, as highlighted by Figure 6 below. 1) Proven offshore models are activities that have a successful track record of being implemented offshore 2) Value to customer: Cost and productivity benefit that a customer can gain from off-shoring an activity 3) Ease of implementation: Company s ability to migrate offshore and manage risk Source: A.T. Kearney 17

20 This means that for some functions, a city with extensive BPO/ SSC operations could eliminate offshoring risks while still bringing relevant savings. In other cases companies might select a city with a limited BPO/SSC presence but gain higher financial savings, long-term, with a quality people skills set. workforce employed in agriculture and industry, rather than in the service industry. Figure 8: Long-term Employment Capacity Labour Market Analysis Labour Costs Given that labour represents around 70% of total operational costs, outsourcing decisions are ultimately driven by the availability of good quality, cost-effective labour. All CEE markets continue to boast a major cost advantage of around 30-50% to their western European and North American counterparts. This despite recent CEE wage inflation and the currency appreciation which, by and large, has come hand-inhand with economic maturity in recent years. Figure 7: Offshoring Opportunities Cost * Cost per FTE varies depending on the location of the facility and the nature of work performed (includes labour, benefits, telecom & overhead) Sources: Company reports; A.T. Kearney client experience & analysis Whilst the present cost scenario highlights that the positioning of CEE markets is very solid, the mid and long-term future is also bright. Long-term Capacity Over the long-term all CEE markets have a positive depth of labour, given the large proportion of the Source: Colliers/CIA Despite historic outward migration trends reducing the overall population base over the last 10 years or so (bar the Czech Republic and Slovakia), the potential labour pool still has significant untapped capacity, thus reducing pressures on wage inflation. A continued improvement in economic growth and maturity should also help reverse the recent population decline over the longer-term as CEE markets become more capable to offer a wider range of employment opportunities, notably in the services industry. Whilst the long-term, by which we mean the next years, is positive from a position of maintaining wage inflation, a current rise in unemployment levels should also help to deepen the immediate pool of labour in the short-term. Unemployment Trends Through the course of 2009, there has been a noticeable rise in unemployment across each major CEE country, with the trend continuing into 2010, albeit not as sharply, bar Ukraine and Russia. Unemployment is, of course, rising in most parts of the western world notably in the Anglo-Saxon markets of the UK and USA where labour laws support the more rapid hire and fire approach 18