Special Report for Shared Services and Outsourcing Network Members Next Generation Shared Services Doing The Right Tasks, With The Right Skills, In The Right Places Each year IBM publishes its Global Location Trends report, which provides the latest insights on how industries are expanding their operations and which regions around the world are benefiting from these establishments through job creation and economic growth. Data from 2014 indicates that after several years of subdued investment and gradual declines (since 2010) global foreign direct investment (FDI) activity has returned to moderate growth, with an increase of 6% in FDI measured by projects and associated job creation. Technological advances, new and emerging consumer markets, changing cost structures, and political and social upheavals are some of the dynamics that, individually or in combination, are triggering companies to improve and transform their global operating models and footprint of activities. This article assesses the implications of these transformative shifts on the scale, scope and nature of shared services establishments. Shared services investment not yet returning to growth While global FDI has been slowly recovering, projects and jobs created in shared services (including both foreign and domestic establishments) have continued to decrease to levels that represent less than half of the record job creation attained in 2006. Shared services center investment is likely to continue, but the overall volume is expected to be more moderate and focused on further optimizing activities for particular functions or geographies. Figure 1 - General trends in announced shared services jobs by world region (2003-2014) 1 Copyright IBM Corporation 2015
While overall investment and job levels in shared services have remained comparable to the previous year, it is interesting to zoom in on differences from a geographic and functional perspective. The severe dip in global shared services investments in the past three years is mostly caused by the substantial decline in shared services jobs in Asia. While this continent generally accounted for 40 to 50% of all newly announced shared services positions, its share halved to only a quarter of new employment in 2013, and did not pick up again in 2014. The spread of shared services investments seems better balanced from East to West, but the Asian continent continues to attract the largest size centers with an average headcount of some 750 FTEs in 2014. Shared services jobs into North America in 2014 reduced by nearly 50%, to 22% of global employment creation in the sector. A vast majority of these 22,000 jobs are being created by North American companies on their own continent, and less than 5,000 generated by foreign investors into the region. A good share of the investments into the Americas seems to have shifted south to Latin America, which in 2014 attracted one out of three shared services jobs created worldwide. Average center size in Latin America has also increased significantly, from 300-400 FTE in the past decade, to a current average headcount of nearly 650. While Europe continues to attract the lion share of shared services projects worldwide (in 2014 accounting for more than 40%), it only accounts for 20% of the associated jobs as average center size is smaller in this continent. The Middle East has not yet been able to position itself strongly on the shared services location decision makers map, and was absent from the rankings in 2014. Africa on the other hand continued to secure 3% of shared services jobs, and increased its average center size from 300 to 400 positions. Figure 2 Average center size (2014 versus 2003-2013) 2 Copyright IBM Corporation 2015
Despite its significant decline, the United States maintains its position as the world s primary destination for shared services jobs, most of which are created by US companies in their domestic market. When only considering foreign investment, Brazil and the Philippines top the list, each accounting for 11% of all shared services jobs announced in 2014. After a dramatic dip in 2013, investment into India is improving again, but it far from equals its typical performance, which over the past decade accounted for five times the current job creation level, on average. The top twenty prime SSC destinations in 2014 clearly highlight the success of Latin America, with 7 countries rising in the global rankings. The slowdown in Asia on the other hand is illustrated by the fact that next to India and the Philippines only two other Asian countries continue to occupy the global rankings, with Malaysia dropping out of the top 20. In Western Europe, the UK, Ireland, and France maintain their position in the global top 20, while Germany and Spain lost ground. The traditional Central & Eastern European destinations, Hungary, Poland and Romania continue to attract new shared services jobs, and Lithuania enters the global ranking. Morocco is the only country on the African continent that has attracted a significant number of shared services jobs in 2014, mainly due to the establishment of various large size call center operations. Figure 3 Top- ranking SSC destinations by estimated jobs (2014 and 2013 compared to 2003-2013) Where the global city rankings in the past decade were heavily dominated by Asian agglomerations, the geographical spread across continents has become more balanced when considering the past three years of shared services activity. 3 Copyright IBM Corporation 2015
Figure 4 Top- ranking SSC agglomerations by estimated jobs (2012-2014) Asia For the past eight consecutive years, Metro Manila has been dominating the list with job creation that is double the size of the next best locations. Three other cities in the Philippines now feature in the top 20, together representing a similar employment level as Metro Manila, demonstrating that the government s efforts to geographically spread SSC investment across the country into next wave cities have materialized. In India, the country s initial shared services hotspots the so- called tier 1 destinations such as Bengaluru, Mumbai, and New Delhi all have dropped out of the global top 20 list. Among the second- tier destinations Chennai and Pune have been able to maintain a strong foothold for new shared services investments and expansions, and among the multiple third tier alternatives that have been trying to position themselves for such activities, Indore and Trivandrum account for the most recent successes. While Chinese cities disappeared from the global city ranking, China still occupies a position in the lower end of the top 20 country list. The overall decline in China based shared services in the last couple of years also slowed down the geographical expansion of shared services implementations across the country. Elsewhere in Asia, Colombo (Sri Lanka), and Melbourne (Australia) both also managed to secure 1,000+ shared services jobs in 2014, the largest projects in both cities being announced by Indian BPO player Aegis, with an IT solutions facility in Colombo and an Asia Pacific hub for Analytics, Social Media and Multilingual Capabilities in Melbourne respectively. 4 Copyright IBM Corporation 2015
Latin America In Latin America, Brazil has been climbing up the global rankings in the past couple of years, and in 2014 recorded an all time high job creation level in shared services, due to various call center establishments across the country, expected to mostly be serving the domestic market. The traditional Latin American hotspots for shared services Costa Rica, Colombia, Mexico have been able to maintain their successes in the industry, although Chile has been absent from the rankings for several years in a row now. This phenomenon may be linked to the fact that an increasing number of players are also starting to cover North American customers from Latin America, where Chile is more remotely located. After moderate growth in shared services activity in the past decade, El Salvador, Guatemala and Honduras in 2014 all made their entry into the global top 20. The Dominican Republic is a noteworthy newcomer in the industry with the opening of a large- scale call center by Alorica. The significant growth of shared services establishments on the continent also is illustrated by the fact that four Latin American cities now have paved their way among the world s top 20 recipient cities. North America The USA has consistently ranked among the two prime shared services destinations worldwide. It is, however, important to note that this position is predominantly influenced by domestic investments of US companies in their home country, while only one out of five SSC jobs were accounted for by foreign players. Out of all shared services job announcements into North America registered since 2003, not more than 10% settled in Canada. The country s contribution to the region s shared services jobs has clearly been suffering from a slowdown in the past half decade, with hardly any new shared services jobs announced in the past two years. As a result, only US states currently compose the North American state / provincial rankings, while Ontario used to occupy the top 5 until 2008. Except for Ohio, which tops the list in 2014, prime destinations for shared services projects are mainly concentrated in Southern States, including Kentucky, North Carolina, Florida, Virginia, Utah, Texas, Georgia and Tennessee. One quarter of the top 20 agglomerations worldwide is made up of US cities, namely Phoenix (AZ), Dallas and Austin (TX), Orlando (FL) and Charlotte (NC). Except for the latter this list is consistent with last year s ranking. Europe Over the last decade employment announcements in shared services have been evenly split between Western and Central & Eastern Europe. While in recent years mature markets in Western Europe accounted for a slightly larger share of jobs, this tendency now has been reversed again in favor of Central 5 Copyright IBM Corporation 2015
& Eastern Europe, particularly in proven destinations such as Poland, Hungary, Romania and Bulgaria. For two years in a row, the Czech Republic has been missing from this list. Lithuania on the other hand had a very successful year 2014, due to the establishment of various shared services operations, particularly by European financial services companies. After two decades of success in shared services establishments, the UK and Ireland continue to account for one out of three shared services jobs announced in Europe in 2014, whereas the other Western Europe players from the early days such as the Netherlands and Spain at present seem to have lost some of their appeal. In sizeable markets with multiple student pools, investment tends to be spread across various cities which explains why the two prime shared services countries in 2014 (UK and Poland) do not have any of their cities listed in the global top 20 ranking. Africa & Middle East Overall investment activity has been picking up again in Africa and the Middle East in 2014 after several years marked by political instability and violent upheavals which had put most FDI into Middle East and Northern Africa on hold. Nevertheless, the region s results in terms of new shared services establishments and expansions remain weak. With several call center announcements, Morocco and South Africa are the only countries that attracted shared services last year, whereas in previous years the list of options in the region being considered by companies was far more extensive. Who invests in shared services? US companies compose the dominant source for overall global FDI, and are responsible for half of the shared services investments (both measured in terms of projects announced and associated job creation). Companies from the largest economies in Europe (British, German and French) account for approximately 30%. Shared services investments by Asian companies has slowed down in recent years, dropping from levels of 20-30% half a decade ago, to just over 10% of global shared services projects and jobs. Japanese companies, which compose the second largest outward investment economy globally, have not started moving down the shared services path in large scale yet, to date representing only 1% of all shared services employment created around the world since 2003. Brazil has made a particularly strong appearance as generator of shared services roles in 2014, mostly in the form of call center activities established on the Brazilian domestic market. 6 Copyright IBM Corporation 2015
Figure 5 Top ranking origin countries for SSCs by estimated jobs (2003-2013 versus 2014) Industry and main players Just over half of the shared services jobs announced in 2014 stem from the Business Services sector, followed by the ICT industry and the Financial Services sector accounting for 20% and 10% respectively. These three sectors are the key industries, which historically were the first to start centralizing activities into shared service operations and/or providing third party support to other companies in doing so, although the sectoral map has since been widening to include multiple other industries. Most shared services centers and jobs are being created by major IT and Telco companies, outsourcing players and contact center operators, as well as large banking institutions including the likes of Teleperformance, IBM, Verizon, AT&T, Accenture, General Electric, Bain Capital, Citigroup, JP Morgan Chase. Cross- tower and front- end services Insights into the functional split of shared services activities demonstrate a sharp increase in multifunctional centers combining greater functional scope across global business units, and a marked reduction in pure IT and help desk centers. Also, call center activity is expanding in the age of social media, interactive experience and the internet of things: this may be linked to the emergence of changing customer dynamics and preferences, more demanding and technologically enabled, but potentially less loyal customers, which require an efficient operating model focused on real- time front- office engagement with customers (whether external or internal). As a result, customer services now stretch far beyond the traditional contact center activities of answering the phone or supporting the customer through an online chat session. This in turn also implies a change in the talent requirements, from the traditional technical or customer support skill centric profile to a collaborative workforce composed of millennial profiles capable of providing higher- value, knowledge- intensive services in a context of service level optimization. 7 Copyright IBM Corporation 2015
The increased focus on flexibility and reduced time to market resulted in more geographically dispersed delivery capability, encompassing global, regional and domestic centers in offshore, nearshore and onshore destinations in a so- called best- shoring operating model. In that context, the great rush to set up large centers in low cost destinations has been winding down in recent years, and corporate strategies are increasingly focused on establishing centers in key markets, thereby accepting a different operating cost structure. In doing so, companies are favoring locations with a combination of relevant, often multi- functional talent pools and attractive operating costs coupled with greater proximity to clients and/or key business operations. Conclusion While overall investment levels in shared services activity continue to decline in absolute number of projects and volume of associated jobs, companies are constantly adapting their approach to shared services, which we believe is an operating model that will remain relevant to further drive organizational efficiencies and improve operational effectiveness. To keep up with transformational shifts in business dynamics, shared services will need to position themselves as flexible, agile, collaborative and technologically smart support organizations to drive high- end value creation. 8 Copyright IBM Corporation 2015
Methodology This article is based on analysis derived from IBM s proprietary Global Location Trends database (GLT). GLT records investment project announcements around the world on an ongoing basis, allowing detailed analysis on global trends in corporate location decision- making. The GLT database is maintained by IBM- Plant Location International (IBM- PLI), a specialized services within IBM s Global Business Services, Strategy & Analytics practice. IBM- PLI is a global market leader in providing advice to companies on their corporate location strategies, covering all sectors and types of business functions. IBM- PLI has extensive expertise in global shared services network strategies, having advised on over 300 shared services establishments in the past decade. IBM's Global Location Trends report provides information on global location strategies. Main highlights from this year's report: 6 percent increase in job creation around the world from foreign investment. The United States ranks first, with a record job creation performance from foreign investment in 2014. Ireland continues to lead the world in attracting high- value projects. Macedonia ranks first in job creation per capita London is the leading global city for attracting foreign investment projects Further findings: Global supply chains are becoming increasingly complex, particularly for manufacturing activities, with combinations of reshoring, nearshoring and offshoring strategies used by companies. Companies are continuing to adapt their approach to shared services centers The emergence of the Internet of Things will further transform global footprints as it provides new opportunities for companies to operate complex networks of production, distribution and sales across multiple locations, leveraging the power of data to drive value creation. This transformation will have significant ramifications for labor markets and corporate skills requirements. Government leaders must improve alignment between supply and demand of skills and prioritize educational programs that better serve the skills needs of industries. The full Global Location Trends report can be downloaded at www.ibm.com/gbs/pli. The data underpinning the trends and summarized in a detailed report titled "Global Location Trends. Facts & Figures", can be purchased via the same link. For more information, contact IBM- Plant Location International (IBM- PLI) Patsy VAN HOVE, Senior Manager IBM- PLI, patsy.van.hove@be.ibm.com www.ibm.com/gbs/pli 9 Copyright IBM Corporation 2015