CBI Trade Statistics:

CBI Trade Statistics: Business Process Outsourcing (BPO) CBI Market Intelligence Product Factsheet Cloves in Germany 1

Introduction EU companies are increasingly open to outsourcing business processes (BPO). Demand for BPO services is largest in the United Kingdom, the Netherlands, and Scandinavian countries. Due to language similarities, France offers opportunities for companies from North and East Africa, while Spain offers opportunities for companies from Latin America. The segments with the best opportunities for BPO providers from developing countries (DCs) are finance and accounting, contact centres, document management, human resources, and social media. Promising markets The EU market consists of 28 countries that all have different characteristics. Some countries are more promising for DC BPO providers than others. Three elements where your opportunities in the different EU markets stem from are: Openness towards international outsourcing; Market size; Language. Focus on one or two EU priority countries. Be aware that product, price, promotion, and distribution strategies might differ in each EU country, unless you target similar countries (Scandinavian countries, for instance). It is therefore important that you research your priority markets carefully. When deciding on your priority target market(s), keep in mind the openness towards international outsourcing, market size, and language. Northern EU countries are most open towards international outsourcing In general, Northern EU markets such as the United Kingdom, Scandinavian countries (Sweden, Denmark, Finland, and Norway) and the Netherlands are most receptive to international outsourcing (Figure 1). However, as the BPO market is maturing, other markets in western, central, and southern Europe are expected to become more open to international outsourcing as well, such as Germany, France, and Spain. Focus on the United Kingdom, Scandinavian countries and/or the Netherlands as these countries are most receptive to international outsourcing. Figure 1: Openness of EU countries towards international outsourcing, 2014 High Medium Low Source: Industry experts The United Kingdom and Germany have the largest markets The United Kingdom and Germany have the largest BPO markets in the EU (Figure 2) and therefore offer opportunities. Although German companies are quite open to international outsourcing, many prefer nearshoring (outsourcing to foreign providers within the region, for example in Poland or Romania) to offshoring (outsourcing to foreign providers outside the region, for example in Asia) due to language and cultural similarities. Medium-sized markets are Scandinavian countries, the Netherlands, Spain, and France. CBI Market Intelligence Trade Statistics Business Process Outsourcing (BPO) 2

When targeting Germany, approach the market through a German-speaking employee or a German contact person in order to minimise language and cultural differences. Figure 2: Level of openness towards international outsourcing versus BPO market size, EU regions, 2014 DACH United Kingdom (Germany, Austria, Switzerland) Scandinavia BeNeLux France Southern Europe (Norway, Sweden, Finland, Denmark) (Belgium, Netherlands, Luxemburg) Eastern Europe Low Medium High Source: TPI index (measures commercial outsourcing contracts with an annual contract value of 3.78 million or more) and interviews with industry experts France and Spain can offer good potential in case of language matches Language also plays an important role in BPO, especially in the contact centre, data-related services, and human resource segments. A language match can therefore also offer opportunities for DC BPO providers. Focus on markets with language matches, for example France for North African BPO providers or Spain for Latin American BPO providers. CBI Market Intelligence Trade Statistics Business Process Outsourcing (BPO) 3

Market developments EMEA has the largest outsourcing market The EMEA region (Europe, Middle East, and Africa) has the largest outsourcing market, representing 55% of the global annual services-outsourcing contract value according to TPI. This is a 70% increase since 2008, which shows that EMEA is clearly a high-priority target for outsourcing providers. The value of BPO outsourcing contracts with an annual contract value of 4 million or more signed in the EMEA region in the first half year of 2014 was 18% lower than in the previous half year, reaching a value of 0.9 billion. However, this is probably the result of an increase in the number of smaller BPO outsourcing deals (with a value below 4 million). More EU companies are adopting a multi-vendor model, which means they have several smaller contracts with different providers. Bear in mind that if you want to target the EMEA outsourcing market, you will face though competition. It is therefore important that you distinguish yourself from competitors, for example by specialising in a specific horizontal (a specific service, for example finance and accounting services, social media services or contact centre services), vertical (a specific sector, for example tourism, banking and insurance or healthcare) or niche market (a combination of both a horizontal and vertical market). Increased openness towards BPO As competition in the global market continues to rise, companies and organisations of all sizes are increasingly open towards outsourcing as a way to reduce costs and improve efficiency, particularly with regard to IT and business processes. EU companies and organisations outsource IT services the most. This underlines a more mature market for Information Technology Outsourcing (ITO) than for Business Process Outsourcing (BPO). However, in the most mature EU BPO markets, between 6-15% of BPO was outsourced in 2013 (Figure 3). This demonstrates that there is still a great potential for growth. Figure 3: Outsourcing of BPO for the EU markets that are most open to international outsourcing, in %, 2013 100% 95% 90% 85% Outsourced In-house 80% 75% Source: Ernst & Young CBI Market Intelligence Trade Statistics Business Process Outsourcing (BPO) 4

Outsourcing is forecast to grow The services outsourcing market including BPO, is expected to grow. Growth is expected to be highest in Norway (Figure 4). Most companies and organisations that are already outsourcing services indicate that they will extend their current outsourcing contract once it ends (45%). This shows that they are either satisfied with the services delivered or that the costs involved in switching providers are too high. Another significant proportion (41%) intends to execute a selection process in which their current service provider will be included. Furthermore, standardisation of services and solutions in the cloud will make it easier to switch providers. This means that there are possibilities for new entrants. Figure 4: Prediction of outsourcing for the EU markets that are most open to international outsourcing, in %, 2013 Norway Denmark Netherlands Germany UK Spain Increase Stay the same Decrease Sweden Finland Source: Ernst & Young 0% 20% 40% 60% 80% 100% Develop services/solutions that can easily be integrated with other services/solutions by means of an open (interface) standard. In this manner, you will be able to operate with multiple vendors in the IT environment of potential customers. Nearshoring is preferred over offshoring The majority of outsourced BPO services are outsourced to providers within the same country (onshoring). When outsourcing to foreign providers, nearshore locations (countries within the region, for example eastern EU countries) are preferred over offshore locations (countries outside the region, for example Asian countries), except for companies and organisations in the United Kingdom and Norway (Figure 5). Nearshore locations are generally preferred because of their proximity and language and cultural similarities. However, as prices in nearshore countries are rising, providers in these countries are becoming less competitive for offshore providers. CBI Market Intelligence Trade Statistics Business Process Outsourcing (BPO) 5

Figure 5: Location of BPO for the EU markets that are most open to international outsourcing, in %, 2013 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Offshore Nearshore Onshore Source: Ernst & Young If you are located offshore, try to limit the possible disadvantages of being offshore by providing excellent means of communication, availability in the required time zone, and good security and privacy measures. Partner with nearshore BPO providers, as Eastern European companies are driven to look for cheaper destinations. Many DC BPO providers have not yet recognised this opportunity. Differentiate yourself from nearshore BPO providers to remain competitive. Emphasize that difference in your marketing message. Do not only focus on the price difference but analyse what other advantages you can offer to EU buyers. You can promote, for example, your location as an advantage for round-the-clock operations or you can specialise in a specific vertical or horizontal market. Drivers and risks for outsourcing Cost reduction continues to be the principal driver for outsourcing The main reason for outsourcing in 2013 remains cost reduction, continuing a well-established trend (Figure 6). This is primarily driven by continued economic uncertainty. Efficiency improvements and the focus on core business are other main drivers. The search for cost reduction offers interesting opportunities for DC BPO providers, since they can generally offer their services at a much lower rate than providers in the EU. CBI Market Intelligence Trade Statistics Business Process Outsourcing (BPO) 6

Figure 6: Most important reasons for outsourcing for the EU markets that are most open to international outsourcing, in %, 2013 Improvement in cost level or reduction 42 Efficiency improvements 33 Improved focus on core business 26 Reduction in headcount objectives 24 Access to specific knowledge, expertise and tools 23 0 5 10 15 20 25 30 35 40 45 Source: Ernst & Young Emphasize in your marketing message how your company can comply with cost reduction, efficiency improvements, and a focus on core business. One of the main reasons for bringing services back in-house is the failure to achieve the expected cost savings. Therefore, consider working with flexible, output-based pricing models. Apart from cost reduction, focus on offering added value. Cost reduction is especially a driver for first generation outsourcers. However, second generation outsourcers are increasingly looking for added value. They are looking for providers that will act as business partners who will thoroughly familiarize themselves with the outsourcers business and help drive efficiency and development. Dependency on external service providers is seen as the main risk When companies and organisations outsource, a number of risks have to be addressed. Dependency on the external service provider is perceived as the most important risk, followed by loss of control and impact on quality (Figure 7). Although companies and organisations face many risks when outsourcing services, they are apparently capable of managing these risks, because they are continuing to outsource. Consider offering a trial project to potential EU buyers to showcase your capabilities and to gain trust. Make sure you obtain extensive knowledge of your customer s company, for example through knowledge transfer sessions at the beginning of a partnership. Study the business culture of your customer to better understand his local culture and avoid (cultural) misunderstandings. For example, let some of your staff work onshore side by side with your customer for regular periods to foster understanding and exchange cultural knowledge. Refer to http://www.kwintessential.co.united Kingdom/resources/country-profiles.html for free country guides on culture, customs, and etiquette. CBI Market Intelligence Trade Statistics Business Process Outsourcing (BPO) 7

Figure 7: Most important risks for outsourcing for the EU markets that are most open to international outsourcing, in %, 2013 Dependency on external service provider Loss of control Impact on quality Loss of confidentiality Loss of knowledge Source: Ernst & Young 0 10 20 30 40 50 60 Outsourcing destinations Continuing advances in technology and communication infrastructure are facilitating the access of companies and organisations to skills at locations across the globe that were previously inaccessible. The Global Services Location Index of A.T. Kearney tracks the contours of the offshoring landscape to deliver ITO and BPO in 51 countries across three categories: financial attractiveness, people skills, and availability and business environment (Figure 8). Figure 8: Country rankings A.T. Kearney Global Services Location Index, 2014 India China Malaysia Mexico Indonesia Thailand Philippines Brazil Egypt Bulgaria Poland Vietnam Chile Lithuania United States Sri Lanka Germany Romania United Arab Emirates Jordan Financial attractiveness People skills and availability Business environment 0 1 2 3 4 5 6 7 8 Source: A.T. Kearney Asia Asia is the dominant outsourcing region for ITO and BPO according to A.T. Kearney s Index, with 6 countries in the top 10, including India, China, Malaysia, Indonesia, Thailand, and the Philippines. Bangladesh is a new entrant who entered this year s index in 26 th place. South East Asia s maturing Outsourcing Brand, improving macro-economic environment, and CBI Market Intelligence Trade Statistics Business Process Outsourcing (BPO) 8

expanding domestic markets continue to draw the attention of EU services buyers, including BPO buyers. South East Asia is expected to remain the most important region for BPO. Latin America Latin America is also performing well, with 2 countries in the top 10: Mexico and Brazil. Other countries in the ranking are Chile (13), Costa Rica (24). and new entrant Colombia (40). Europe Especially Eastern European countries, such as Bulgaria, Poland, Lithuania, Romania, and Estonia, are popular outsourcing destinations for services. They are getting more attention as respective cities continue to develop their ITO and BPO landscapes, especially in Poland. Furthermore, for EU buyers, communication with Eastern European companies is perceived as easier than with offshore companies due to the small time difference and the number of cultural and language similarities. This is very important, as many offshored projects fail due to simple communication problems. Legal and financial issues are also much simpler, as many of those countries are EU members. Middle East and Africa some countries in the Middle East and North Africa are doing quite well, as they benefit from their proximity to Europe and a large talent pool. Egypt is a good example thereof, but it has dropped in popularity due to prolonged political turmoil. Benchmark your competitiveness against BPO providers from other countries, both nearshore and offshore, and analyse their best practices. Check the A.T. Kearney Global services Location Index for a complete overview of the top ITO and BPO destinations. Using your competitors as resources can help you discover what they are doing right or wrong. This can help you identify ways to differentiate yourself from them. Positive country branding is very important to increase awareness of your country as a BPO destination. However, you cannot do this alone. You need the public and private sector. You are therefore recommended to join forces with other BPO stakeholders in your country and together lobby for joint country-branding campaigns, infrastructure developments, human capital development programs, and good VISA arrangements to better position your country as a BPO destination. Success factors Bangladesh Between October 2010 and June 2013, the NTFII Bangladesh project was implemented by a partnership between ITC and CBI. The objective of this project is to brand Bangladesh as a Global IT Sourcing Destination. In 2014, Bangladesh surfaced on the A.T. Kearney list in 26 th place. Among the main success factors for this development are: Communicating positively: focus on strengths Implementing a branding roadmap to position Bangladesh Articles in newspapers Using consultancy companies (e.g. KPMG) -> Whitepaper Bangladesh Beckons, An emerging destination for IT/ITeS outsourcing Working with brand ambassadors Mobile marketing: Bangladesh exporter directory app Social media support Trade fairs: consistent use of logo and tagline CBI Market Intelligence Trade Statistics Business Process Outsourcing (BPO) 9

Promising segments Facilities management and legal services are the segments that are outsourced the most by business processes companies (Figure 9). However, legal services are mostly outsourced to onshore providers due to the knowledge of local legislation they requrie. According to industry experts, finance and accounting, contact centre services, HR services, digitisation services (part of document management), and social media are the segments that offer the best opportunities for DC BPO providers. Figure 9: Outsourcing of business processes for the EU markets that are most open to international outsourcing, in %, 2013 Legal services Facilities management Payroll services Logistics Call centre and customer support Design and engineering Production and development Marketing Finance and accounting HR services Knowledge processes Procurement Sales In-house Outsourced 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: A.T. Kearney Specialise in a specific BPO segment for a specific industry, for example contact centre services for the finance and banking industry or finance and accounting services for the retail industry. When selecting your focus segment and industry, do not only look at market size and (future) demand, but also at your company s own experience in this segment. Finance & accounting among the highest growth segments Finance and accounting is the BPO segment that is showing highest growth according to industry experts. Within finance and accounting outsourcing, accounts payable and receivable, transactional outsourcing, and general accounting are outsourced the most. Although innovation and analytical value are appreciated, the main reasons for adopting finance & accounting outsourcing have reverted back to cost reduction and standardisation of processes. Focus on transaction-intensive processes such as payroll and accounts payable and receivable as they are outsourced the most. Anticipate on the needs for cost reduction and standardisation of potential customers by offering finance & accounting solutions that comply with these needs. The contact services segment continues to grow The contact centre segment continues growing, driven by the rising interest in outsourcing as a way to reduce costs. Services offered include round-the-clock support services through e-mail, chat, and voice. Most outsourced services within the contact service segment are IT helpdesk and employee contact services. If you are located in a different time zone, use this to your advantage as time zone differences could mean extended availability for EU companies and their customers. Focus on language matches. If you have, for example, French-speaking employees, focus on France. CBI Market Intelligence Trade Statistics Business Process Outsourcing (BPO) 10

HR outsourcing is also awakening interest among smaller companies The emergence of cloud-based human resources platforms and Software as a Service (SaaS) have opened up human resources outsourcing to small and medium-sized enterprises (SMEs). Within human resources, payroll, benefits, recruitment, and learning are outsourced the most. Human resources outsourcing is expected to continue to evolve and grow. Have a clear understanding of national labour laws and regulations in your target segment. Digitisation services in saturation phase There are still EU companies that have a lot of information on paper needing digitisation. Furthermore, institutions such as libraries, museums, and archives are under great pressure to digitise cultural heritage. The EU digitisation services market offers opportunities for DC providers, as digitisation is labour-intensive work that generally can be done by DC providers at a much lower price than EU providers. However, this is a segment that is becoming saturated and is therefore seen more as a promising segment in the short term (1-2 years) rather than in the long term. It is therefore important to focus on promising services in the long term, such as social media services. Make sure you have a clear understanding of the copyright limitations and other important regulations on digitisation. Social media outsourcing is gaining market share A relatively new segment that is gaining market share is social media outsourcing. The volume of content on social media such as Facebook, blogs, and review sites is growing rapidly. Organising this content is a time-consuming process. As a result, an increasing number of companies are outsourcing social media services to specialised BPO providers. Asian countries such as India and the Philippines, for instance, are a popular destination for social media outsourcing by companies in the United Kingdom. Language skills in the language of your target market are quite important in case of social media outsourcing. Make sure you have the language skills available that are needed for social media-related services for your EU target market. Refer to CBI s Product Fact Sheets for insights into promising product-market combinations related to finance and accounting, contact centre services, digitisation, and social media. For all CBI s BPO-related market intelligence documents, go to CBI s Market Intelligence Platform for BPO. CBI Market Intelligence Trade Statistics Business Process Outsourcing (BPO) 11

CBI Market Intelligence P.O. Box 93144 2509 AC The Hague The Netherlands www.cbi.eu/market-information marketintel@cbi.eu This survey was compiled for CBI by Facts Figures Future in collaboration with CBI sector expert Harry van Geijn Disclaimer CBI market information tools: http://www.cbi.eu/disclaimer March 2015