There are several shifts impacting the back-office service delivery landscape. The first is an evolution from the traditional single-function shared service and outsourcing model to global business services (GBS). The new GBS organizations are multifunctional, centrally governed service center networks focused on end-to-end process delivery across the globe. According to Deloitte’s 2019 Global Shared Services Survey, 59 percent of respondents’ shared services centers (SSCs) have global coverage, and 46 percent of SSCs are supporting three or more functions (63 percent supporting two or more). This broader GBS functional scope has heightened the need for talent with wide-ranging functional and linguistic capabilities, thereby narrowing the list of viable hub locations.
We’ve also seen an evolution beyond transactional shared services toward value-add/enabling operations, which has had geographic implications as well. Cost reduction was historically the primary driver for shared services. Unsurprisingly, traditional shared services/BPOs were often clustered together in low cost locations capable of delivering transactional activities. As companies sited operations in the same cities, competition often eroded labor arbitrage, prompting an interest in frontier cities offering a value play. Investment slowly shifted away from the more mature, relatively expensive cities to new destinations as companies chased arbitrage on transactional services. However, as GBS organizations matured, customers internalized the value of GBS and began transitioning to more complex, knowledge-based processes. At the same time, long-standing operations in mature markets were compelled to move beyond transactional service delivery to justify the relatively higher costs of service.
The landscape has continued to evolve. Robotic process automation (RPA) is playing an increasingly pivotal role in GBS organizations, requiring employees who are knowledgeable in process design and automation software, and reducing the need for high volumes of transactional support. In addition, with the shift to a GBS model, the market is seeing more knowledge-based process- ing and broader functional breadth, including the expansion of the GBS remit into automation and advanced data analytics upon which important decisions that organizations face can be made. As more companies seek talent with these deeper technical and functional skills, the more mature (and expensive) shared services locations are re-emerging as candidates for the next generation of investment.
These shifts in the industry are giving rise to a series of executive-level considerations:
1. What trends will have the greatest impact on my GBS delivery footprint?
2. What is the right operating model for my business?
3. How many captive centers do I need, and where?
4. How should service center location decisions be made?
All of these shifts drive complexity in operating model and, critically, location decisions. The relative success of GBS operations is highly correlated with the amount of market due diligence and market entry planning conducted in advance of a location decision. Companies should carefully evaluate the types of services they plan to deliver in the immediate, medium, and long term, which can lead to the selection of a more sustainable and cost-effective location. In addition, familiarity with the location helps in crafting a tailored market entry strategy to support the company brand, establish a local culture, and ultimately attract and retain employees in increasingly challenging talent markets.
Global hubs are generally charged with providing both 24/7 low-cost transactional and, increasingly, value-added services in English. This mandate can be supported by a relatively narrow list of candidate cities across India and the Philippines.
Manila is widely regarded as the location for global customer service/voice activities, though political unrest, strained infra- structure, and traffic congestion are considerations. India, on the other hand, is at present, known for greater functional depth and higher-value processing. Despite a sizeable, well-educated workforce in many cities across India, not all locations are created equal at the functional level. While one must be cautious with generalization, Southern cities, such as Hyderabad and Bangalore, are more aligned with technology activities, while the Northern and Eastern cities such as Kolkata and the National Capital Region (NCR) are traditionally considered stronger in finance and accounting competencies. Several Tier II cities are emerging as pressure valves for competition, though these are less proven and less well-known, and rarely selected as first-move global hubs. Tier II Indian cities being considered as alternatives to the Tier I “usual suspects” include Mangalore, Indore, and Chandigarh. Often stood up as a supplemental hub, rather than the primary service delivery node, they offer further cost arbitrage and ability to spread risk, but lack the depth of the Tier I locations.
The location question becomes more convoluted when solving for regional centers, especially in EMEA. Europe, with its broad set of language requirements and multiple high-cost locations from which arbitrage can be wrung, yields, perhaps, the most complex set of location selection questions. Multiple established Tier II cities have, in recent years, proven that shared service and GBS centers can be successfully scaled and operated beyond capital cities, leaving new entrants with a seemingly plethora of cities to choose from.
For EMEA-focused services, Central & Eastern Europe continues to see the greatest volume of shared service and GBS investment. Along with cost, language capability is a key constraint and, therefore, driver of location decisions. German, English, French, Italian and Spanish are common requirements across most Pan-European centers, driving increased demand and subjecting markets across the region to elevated pressure. With the escalating talent war, companies are now driven to identify locations where they can coexist with incumbents versus own a talent market (For more information, see “The Case for Collaboration,” Chief Executive Magazine, December 2018).
Some organizations have sought greater arbitrage and talent access in Tier II and III cities as their primary locations reached saturation – be it real or perceived. This strategy often requires a pivot from a “buy” model, where trained, experienced talent is sourced from the market, to one where companies “build” talent using experiences and expertise gathered in other centers.
Locations adopted early by shared services and GBS organizations (Krakow, Prague, Budapest) have typically been considered as higher cost. A slow-down in greenfield investment in those markets resulted in a convergence of costs across the region, as other locations were pioneered, and costs escalated accordingly. Arbitrage does, however, still exist in the region with a 10-25% differential observable between highest cost markets and cheaper regional options such as Sofia and Bucharest.
Poland and Romania are somewhat unique in possessing several Tier II cities with a demonstrable track record of shared services and GBS operations. Poland has the broadest set of established markets an investor could reasonably seek to enter or sustainably grow in – Warsaw, Krakow, Wroclaw, Katowice, Lodz, Tricity, Poznan, Szczecin, Rzeszow, among others. Outside, the capital of Bucharest, Cluj-Timisoara, Iasi, and Brasov are viewed by many as viable Tier II Romanian cities depending on the size and scope of the shared services or GBS remit and specific language requirements.
The Baltics (Lithuania, Latvia, and Estonia) are often over- looked when conducting shared services and GBS site selection assessments due to their lower profile, smaller talent pools, and perceived physical and cultural proximity to the former Soviet Union. These countries are often eliminated from consideration unless their deeper low-cost Nordic language capabilities necessitate consideration. However, at the right scale and with the right target language mix, they can offer attractive business environments and quality talent. Vilnius in Lithuania has been particularly successful in the recruitment and incubation of shared services and GBS centers, particularly those in the financial services sector. Lithuania’s capital city has proven to be one of the few locations across the region, along with TriCity, that can cost effectively scale and sustain Scandinavian languages.
The Iberian Peninsula, including Lisbon, Porto, and Barcelo- na, in particular, are of interest to companies looking for native or near native speakers from across the continent. Companies requiring English, Spanish, French, German, and Italian look to these two cities, though it can be more difficult to source Polish, Dutch, and Nordic languages, and the cost structures are higher than Central/Eastern Europe.
Asia Pacific presents unique challenges and has a relatively small set of locations typically considered for shared services and GBS regional operations. While English capabilities are prevalent in select cities, the location selection process becomes materially more challenging when seeking to source a full suite of Asian languages with functional and technical expertise.
As previously mentioned, the two regional behemoths, India and the Philippines, offer compelling cost profiles and multiple locations within each that have proven scalable into the thousands of resources. However, neither country is relatively well-suited for large-scale provision of languages beyond English. Though it is possible to find a limited number of resources with regional language capabilities in either country, the cost premium required to attract and retain can make a dent in any business case, while introducing talent acquisition and service delivery risk.
The location that continues to see strong inward shared service and GBS investment is Malaysia, specifically Kuala Lumpur. While it comes at a cost premium of 30-50% over India and the Philip- pines, the country’s pan-Asian workforce offers regional language capabilities, making Malaysia a viable option if regional languages are required. Japanese and Korean, the two languages typically with the greatest demand versus supply deficit across the region, can be found in the Kuala Lumpur market, although competition is high and intensifying, while overall presence is limited.
China for China remains a notable trend, although some companies have successfully used Tier I cities such as Shanghai, and the northern port city of Dalian as locations from which to serve the entire APAC region, including Japan and Korea. Demand for Mandarin, in addition to regulatory challenges associated with serving China from outside the country, often dictates the need for a Mainland China operation. With sizeable population centers scattered throughout the country, and many cities offering significant labor and real estate arbitrage opportunities over Tier I cities such as Shanghai, Beijing, and Guangzhou, the location strategy question is no longer clear cut. Companies are increasingly chasing cost reduction opportunities by considering the interior of the country. Cities such as Chongqing (population: 15.5M1) and Chengdu (population: 9M1) offer sizeable workforces and real estate at a significant cost savings over their better-known brethren to the East of the country.
Despite a notably higher cost structure, Singapore remains a leader for higher value added, more complex Center of Excellence type activities. However, as the rest of the region continues to mature and develop more advanced capabilities, and despite its well documented expat friendliness, scrutiny is being placed on the cost and talent constraints of the Singapore market for operations that do not demand adjacency to the many regional HQs in the market.
While the U.S. has been a recipient of sizeable shared services and GBS investment, recent trends suggest the tide is slowing as companies look beyond the US for significant cost savings. Companies are finding benefit in the consolidation of not only Central and South American processes into regional GBS hubs, but through the folding in of North American services, and the associated head- count. Cost arbitrage can be as high as 50% for activities driven into Latin America from North America.
Sizeable multi-lingual operations have established in Argentina, Costa Rica, Mexico, and Panama, primarily in the capital cities. In addition, several Tier II Mexican cities such as Queretaro and Guadalajara have proven themselves capable of supporting multi-lingual operations at scale. However, although most locations have a demonstrable precedent for tri-lingual (English/Spanish/ Portuguese) operations, scalable operations continue to be a challenge outside of Argentina and Uruguay. When delivered outside of Brazil, Portuguese service provision is often made possible via intensive language training for high performing employees, rather than the sourcing of native speakers.
Mature destinations, such as San Jose, Mexico City and Buenos Aires demonstrate depth of functional capabilities and continue to be the recipient of higher value-add services such as financial planning and analysis (FP&A) and data analytics. Costa Rica’s popularity as a destination has resulted in competition for labor and upward pressure on salaries. The labor market has benefitted from some relief provided by RPA, which reduces the need for transactional language skills and allows companies to better align English-speaking functional experts, having little taste for repetitive processing activities, with higher and better uses for their skills. Mexico is home to many shared service centers, historically serving LATAM, but transitioning to a wider geographic scope. Argentina, with deep finance technical capabilities and strong language skills was an early beneficiary of shared services and GBS investment. However, political and financial upheaval and instability, most notably characterized by hyperinflation, has seen companies look elsewhere in the region for talent and regional language capabilities.
Despite a large labor force and strong talent pool, Brazil’s high labor costs, restrictive labor laws, complex withholding tax environment, and relative scarcity of English and Spanish language capabilities, make it a challenging location from which to serve the Americas. These constraints lead many organizations to continue serving Brazil from Brazil. However, the dynamic is shifting somewhat as Portuguese becomes more widely taught and encouraged in other shared services and GBS locations across the region, and companies take on the training of employees as a performance related benefit/bonus.
With support and encouragement from the national government, Colombia, most notably Bogota, Medellin and Cali, is working to transition its depth in multi-lingual call centers and customer service to shared service capabilities, and has proven a strong competitor to Costa Rica and other regional powerhouses in recent years. Strong English capabilities exist in the market, though companies often still face a trade-off in hiring for language or functional knowledge, as it can be difficult to source for both.
Panama City has attracted several multinational shared service operations over the years and is notably the most accessible and connected LATAM location from the US. However, the talent market has increasingly relied on immigration from neighboring Venezuela and Colombia to support operations. For many companies, the squeeze is felt primarily at the leadership level, which is reflected in the largely foreign-born managerial staff.
Chile has strong shared service capabilities but has tended to be solicited for Spanish speaking regional operations, due to relatively lower English language skills. The long distance from the US also makes Chile (along with Argentina, Uruguay, and Brazil) relatively less attractive.
Given the political upheaval, Venezuela continues to see a brain drain with talent departing for SSC operations in Colombia, Panama, and Costa Rica.
The GBS location decision is complex, emotional, and often highly politicized. The GBS concept itself often necessitates revision of re- porting relationships, rewriting of organizational charts, shifting of influence, and loss of real or perceived power at country, business, and individual levels. These factors suggest that a robust, method- ical, and data-driven approach is imperative in the selection of these increasingly mission critical centers.
According to the more than 300 respondents to Deloitte’s 2019 Global Shared Services survey (who represented more than 700 shared services and GBS centers), the criteria typically cited as driving the location decision are:
Cost of labor continues to be, by far, the largest cost component of shared services and GBS operations and an area of great opportunity for organizations seeking to drive savings. However, labor is a double-edged sword, as it also represents the greatest one-time cost associated with the migration of operations. The payment of labor related to one-time costs such as severance and stay bonuses is significant and often drives longer payback periods.
As shared services and GBS markets continue to mature, the volume of demand for quality talent is increasing, as are expectations. The expanded remit and increasing complexity of shared services and GBS operations requires broader functional knowledge and additional language capabilities. As GBS organizations push toward new service delivery frontiers, locations must clearly demonstrate an ability to move with them. The greater organizational complexity and breadth of services delivered in a typical GBS operation have also made it increasingly important to locate in a city with a talent base experienced in the stand-up and operation of shared services and GBS centers.
Location decisions are often driven by regulatory and legal constraints. For example, Europe’s restrictive data res- idency and privacy laws often make it impossible to process certain information outside of the European Union, making membership of the EU a key criteria.
In particular, for those companies new to shared services and GBS or those embarking on an expanded functional remit, proximity to company headquarters is a notable preference. This manifests itself in a number of ways, with some organizations preferring cultural and language proximity (as evidenced by decisions to select US locations), or time zone and access proximity (often cited by companies selecting Central and South American locations for their shared services and GBS operations).
Additional considerations requiring structured and thoughtful assessment include, but are not limited to:
Infrastructure
Risk
Access
Strategic impact
Expat suitability
While cost efficiency remains the primary driver behind location selection, increasingly, a thoughtful process that positions the company not only for cost savings, but to access talent that meets the needs of the future organization is critical.
The role of shared services and GBS within the business is changing. Increasingly, GBS leaders are reporting into CXOs – a testament to the elevated role they are playing in the organization. The shared services and GBS capability set and remit is expanding into automation and analytical roles that are driving insights and decision making at the broader enterprise level, rather than a limited focus at the functional level.
Considering this, the shared services and GBS location decision is no longer a race to the cost basement, rather it takes on a greater importance that must incorporate an understanding of its shifting roles and associated refinement of skills. No longer is cost arbitrage for transactional activities alone enough to drive a location decision. The future of GBS lies in the ability to source people with the experience and skills to develop and operate the automation to which companies increasingly turn to unlock value, and with the analytical capabilities that drive critical insights for the business. For companies with their eyes on the horizon rather than their shoelaces, only once the presence of these ever-advancing capabilities has been established can cost be considered the primary decision criteria.
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This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.
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