Offshore, Nearshore, Re-shore? The evolution of Enterprise Footprint optimisation

Transcription

1 Offshore, Nearshore, Re-shore? The evolution of Enterprise Footprint optimisation

2 Shoring strategies on the agenda David Cameron s comments at the 2014 World Economic Forum in Davos on the rise of re-shoring to the UK have re-energised the debate about location strategy in boardrooms and the media. The UK Prime Minister spoke of a chance for Britain to become the re-shore nation, highlighting a recent survey of small and medium-sized businesses, which revealed more than 1 in 10 has repatriated at least some production back to Britain in the last 12 months 1. But it is not only in the UK that re-shoring has been in the news. A further poll of leading, American-based manufacturers reflects the re-shoring trend; with over a third of those questioned saying they are planning or actively considering to shift production from China to the United States 2. The headlines may make good news for UK plc, but they rarely delve into the often complex reckoning behind decisions, for instance, to relocate customer call centres from Asia to Britain. In this short report we explore some of the latest trends in offshore, nearshore and re-shore decision-making. 1 The Telegraph, January 24, Taunton Daily Gazette (Massachusetts), November 8, 2013

3 UK Re-shoring from ripple to wave? The 1990s witnessed significant growth in offshoring location strategies with companies choosing to relocate various operations (such as manufacturing production, call centres, or back office functions) to locations such as India, China, the Philippines and Eastern Europe. Recent changes in the global economic and business landscape have resulted in an apparent reversal of this trend with a number of companies electing to move operations back to the UK. In the US the phenomenon is even more visible with companies including GE, Whirlpool, Apple and Ford all choosing to re-shore mostly manufacturing activities. However such reappraisals are not just confined to manufacturing. Re-shoring and particularly nearshoring is also impacting the services sector, with a range of companies in financial and professional services exploring ways of expanding their enterprise footprint in lower-cost UK locations, in some cases to complement a larger hub in London. The evolution of Enterprise Footprint Optimisation The process by which companies analyse and optimise the deployment and configuration of their global operations to maximise revenue, margin and efficiency opportunities Enterprise Footprint Optimisation (EFO) demands a subtle balancing act. And it is one that should consider a mix of on-shore, near-shore, offshore and outsourced functions. On the demand side, there is an abundance of factors at play that dictate good EFO practice. They range from identifying existing geographies of demand for products and services, alongside future growth markets, to harnessing opportunities to improve margin through optimising tax structure, rebalancing supply chains and recalibrating structural costs. Other key considerations include investing in technologies, right sizing facilities, reducing lead times and maintaining lean inventory. These can all improve efficiency and help meet innovation goals. But a deep understanding of supply-side factors is equally vital, because a successful shoring strategy hinges on the availability of skilled labour. Figure 1 Re-shoring: Some companies have taken the plunge. Businesses that have decided to shift some of their operations back to the UK include: Symingtons, a food producer, brought 50 jobs from its Chinese operations back to Leeds 3. Jaeger luxury clothes brand plans to move 10% of its production back to the UK 4. The RDM Group is beginning production at a new Coventry factory, thereby enabling it to bring back production of aluminium rechargeable torches for Jaguar Land Rover from China which it had previously outsourced 5. Hornby, the toy train manufacturer is relocating some production from India back to Britain 6. Raspberry Pi computers recently moved its manufacturing from China to Wales 7. 3, 4 Foreign Direct Investment, February 1, Birmingham Post, November 27, The Daily Telegraph (London), January 25, Agence France Presse, January 24, 2014 Offshore, Nearshore, Re-shore? 3

4 Access to Talent and Risk Management Availability of talent is one factor propelling companies to consider solutions closer to home, along with labour cost escalation and currency appreciation in offshore locations like China and the Philippines, plus high levels of attrition in India. Savvy multinationals are questioning whether advanced production facilities fit offshore locales, because despite a rise in engineering and science graduate numbers from local universities doubts remain over the quality of this pool of talent. Risks to global supply chains and operating conditions can change dramatically without warning as witnessed by the devastating impact Japan s 2011 tsunami inflicted on automotive supply chains. Political risk and stability is a further factor and was highlighted as the most significant risk to growth according to a recent McKinsey 8 survey of global executives. Combined, these factors can conspire to erode returns from offshoring and are causing both domestic and international companies of various sizes to reassess how and where they deploy global operations. Figure 2 below examines some of the key considerations for successful location evaluation. Figure 2 Framework for successful location evaluation Risk Revenue Forecast by Product Forecast by Country Competitive Strategy Selling Price Margin Requirements Inflation Political Economic Natural Disasters Intellectual Property Insurance Natural Disaster Mitigation Added Construction Government Support & Incentives Government & Judicial Corruption Contract Enforcement Bureaucracy Investment Support Inflation Currency Exchange One Time & Recurring Financial Incentives Supply Chain & Logistics Proximity to Suppliers Proximity to Market Interstate/ Highways Rail Port Air Cargo Inbound Transportation Outbound Transportation Transportation Inflation Duties & Fees Capital Investment Encouraged Status Ability to Import Used Equipment Local Sourcing Requirements Sourcing Restrictions Depreciation Taxation Considerations Duties and Fees Impact on Margin Key Location Considerations Labour Ability to Scale Ability to Sustain Skill & Language Capability Regulation Unionisation Labour Benefits Labour Arbitrage Expatriate Utilities & Infrastructure Electricity Natural Gas Water Wastewater Telecom Reliability Excess Service Capacity Utility Infrastructure Extension / Upgrade Utility Inflation Sales Tax Rates Real Estate Site Size Configuration Topography Permitted Use & Restrictions Environmental Constructability Title / Ownership Site Purchase Site Preparation Total Leasing Business Incorporation & Taxation Treaties Incorporation Options Permitted Business Structures Advance Rulings Direct Tax (Income) Indirect Tax (VAT, Property taxes) Treatment of Losses Tax on Gross Revenue Deed Tax Non-Financial Factors Financial Factors 4 Offshore, Nearshore, Re-shore? 8 Economic Conditions Snapshot, McKinsey, Sept 2014

5 A growing case for the UK? The case in favour of the UK is not exclusively driven by concerns about offshore locations. For a number of years advanced manufacturing and R&D clusters have flourished around UK university hubs, such as Oxford, Cambridge and Manchester. The UK s high level of transparency, its increasingly competitive corporate tax regime and business-friendly environment continues to drive growth in the number of international companies choosing Britain as their corporate base. Government Support and incentives more widely available in Scotland, Wales and Northern Ireland than England add impetus to encouraging corporate investment in the UK. It is not just multinational companies that are assessing the balance of offshore and onshore locations. Recent research from Warwick Business School and GE Capital has indicated that up to 36% of UK mid-market firms expect to bring some or all of their offshore operations back onshore in the next 3 years. The rewards of a successful shoring strategy can be significant Balfour Beatty estimated their recent creation of a nearshore shared service centre in Newcastle saved them around 15 million over an initial 12 month period, leading them to expand the facility. Financial and Professional services turning to nearshoring There is evidence that a growing number of financial services and professional services companies are examining lower cost nearshore hubs. In banking, the pressure on costs and margins wrought by the financial crisis has seen this come into particular focus. BNY Mellon, Morgan Stanley, JP Morgan and Citigroup are among the international banks that have explored nearshore UK regional locations to supplement a larger presence in London 9. The type and scope of functions placed in nearshore hubs is also evolving, with banks placing functions ranging from call centres to back office and even middle office and trading operations in regional centres. Figure 3 provides a case study exploring some of the decisionmaking involved in such a move. The wider professional services sector is also increasingly exploring this approach. In the wake of investments in nearshore centres over recent years by law firms such as Allen & Overy and Herbert Smith in Belfast and Ashurst in Glasgow, a range of other law firms are currently planning to open similar operations. 9 Bloomberg, May 19, 2014 Offshore, Nearshore, Re-shore? 5

6 Figure 3 Global Footprint Strategy for Investment Bank Reconfiguring Global Footprint for Back Office / Technology Situation Global bank looking to reshape operating model, reduce structural costs and improve access to talent by targeting deployment of back office, support functions and technology. JLL was employed to assist in the analysis of existing and new candidate locations across Europe, Americas and Asia. Overall Evaluation Financial, Non-Financial and Risk performance of each candidate location were compared on a single analytical framework in order to understand the trade-offs between candidate locations Goals Profile and analyse candidate locations, provide insight into Financial and Non-Financial strengths, weaknesses and risks. Determine the locations offering the optimal mix of Financial, Non-Financial and Risk conditions, and best overall alignment with the bank s operating objectives. Conducted in-field due diligence of operating conditions in leading candidate geographies. Outcomes JLL identified and validated over $150 million of structural cost savings to be achieved through redesigning the bank s footprint by extracting high cost functions and consolidating them into lower cost hubs / Centres of Excellence. Financial Performance (5 year geographically variable Recurring Cost) Highest Cost Lowest Cost 100 M Best Quadrant 300 M New Delhi, India Manilla, Philippines Chennai, India 500 M Kluj, Romania 700 M Bratislava, Slovakia Krakow, Poland Gdansk, Poland Glasgow, UK 900 M 1100 M Pittsburg, US Budapest, Hungary Paris, France 1300 M Worst Quadrant London, UK 1500 M Worse Better Financial & Non-Financial Assessment Candidate locations were evaluated on an extensive set of Financial, Non-Financial and Risk criteria and measured against the bank s operating preferences and objectives. Fatal flaws were identified for each candidate location where they could not meet the bank s stated preferences. Ease of Doing Business Employee Business Environment Risk Occupancy Other Scalability Government Incentives Financial & Non-Financial Human Resources Sustainability Competency Regulation Other Telecomm & Physical Infrastructure Social & Physical Environment Infrastructure Disaster Quality of Life Real Estate Availability / Flexibility Company Presence Pioneering Company Presence Major Considerations Sub-Considerations Other 6 Offshore, Nearshore, Re-shore?

7 The End of Offshoring as we know it? The UK is now showing the highest number of Shared Service Centres projects globally in 2013, and is ranked 3rd in the number of jobs created by those projects. This is shown in figure 4. Figure 4 US 29 UK 32 7 Lithuania Ireland Poland Spain 8 Mexico 7 7 Costa Rica India Philippines Destination Country Rank No. of projects in 2013 No. of jobs created in 2013 UK ,377 United States ,986 Philippines ,911 Poland ,751 Ireland ,416 Destination Country Rank No. of projects in 2013 No. of jobs created in 2013 India ,784 Spain 7 8 1,610 Costa Rica 8 7 1,300 Mexico 9 7 2,346 Lithuania ,697 Explanatory note: Figure 4 highlights the top destinations for Foreign Direct Investment in shared service centres, customer contact centres and technical support centres in The ranking is based on the number of projects over the time period. In our original research in 2007, and later analysis in 2012, JLL argued that while there had been some consistency in the drivers of shoring activity - there were also signs of an evolution and growing sophistication in the way companies were making location decisions. This evolution continues today. So is this the end of the offshoring phenomenon as we know it? The answer is no. As companies seek to enter and exploit new markets, an international supply chain and operational infrastructure will remain critical to many, with existing offshore centres crucial and efficient low cost business hubs. Enterprise Footprint Optimisation (EFO) demands a subtle balancing act. It is one that should consider a mix of on-shore, near-shore, offshore and outsourced functions. What is clear is that a growing number of companies are reassessing their enterprise footprints, with many UK companies of different sectors and sizes reshoring operations, and others exploring lower cost UK nearshore hubs. While this balance of nearshore and offshore operations will remain fluid - the pressure to deliver greater productivity and efficiency from enterprise footprints will only increase. Offshore, Nearshore, Re-shore? 7

8 Contact Tom Carroll Director - EMEA Research +44 (0) Tom.Carroll@eu.jll.com Shelley Frost Head of Consulting +44 (0) Shelley.Frost@eu.jll.com Matthijs Weeink Director - Business and Location Consulting +44 (0) Matthijs.Weeink@eu.jll.com jll.co.uk COPYRIGHT JONES LANG LASALLE This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.