Service offshoring takes off in Europe In search of improved competitiveness ADVANCE COPY Summary of survey results June 14, 2004 EMBARGO The contents of this summary and the related survey must not be quoted or summarized in the print, broadcast or electronic media before 14 June 2004, 14:30 São Paulo (17:30 GMT, 19:30 Geneva, 23:00 New Delhi) 1
Service offshoring is taking off in Europe In search of improved competitiveness Summary The first comprehensive survey on services offshoring by European companies has been conducted by UNCTAD and Roland Berger Strategy Consultants Companies in Europe are increasingly shifting service processes abroad to improve competitiveness British companies are leading the trend Back office services are most often offshored, but most service processes are candidates for future offshoring Offshoring provides various benefits cost reduction is the main driver Most offshoring projects remain within Europe, but larger projects tend to go to Asia, notably India More than 80% of companies with experience of offshoring are satisfied with the results The selection of target countries is also influenced by both hard and soft factors Policy influences location-related decisions as well as the impact of offshoring 2
The first comprehensive survey on service offshoring by European companies has been conducted Scope Core questions Why do companies consider offshoring and why might they oppose it? What are the associated benefits and risks for both firms and countries? Which business models do companies use to go offshore? What types of services are affected? Which are (potential) target countries and how are they selected? Approach Interviews with decision makers at European companies More than 100 interviews with key decision makers at European top 500 companies Personal in-depth interviews with selected key decision makers as follow-up Additional expert interviews Interviews with members of the academia and selected RB partners What role should policy play? 3
Four out of ten companies have experience with offshoring 44% are considering (further) future activities Offshoring activities [% of companies] Experience Future activities 61 Consider offshoring: 44 56 39 Have offshored Have not offshored Within next year After next year Don't know when Will not offshore Offshoring experience No offshoring experience 4
The focus is on back office services for both conducted and planned projects Offshoring projects by types of service [% of companies] 1) 57 64 43 27 24 26 FRONT OFFICE, e.g. Call centre Communication in written form BACK OFFICE, e.g. Finance/accounting IT Services HR Purchasing INDUSTRY-SPECIFIC, e.g. R&D Claims handling Engineering Projects conducted Projects planned 1) Multiple answers possible; examples given are ranked by number of mentions 5
Captive and third-party models are applied equally often purely internal solutions and local companies from abroad are preferred Scope of business models [% of answers given] Business models CAPTIVE OFFSHORING: Provision of services from within the company Purely internal: internal business unit or 100% subsidiary Joint Venture: joint subsidiary Strategic Alliance: no extra organizational entity THIRD-PARTY OFFSHORING: Provision of services by an external service provider Local company abroad Foreign affiliate of another company, not headquartered in target country Models realized Foreign affiliate Local company abroad Strategic Alliance Purely internal Joint Venture 6
The UK, Germany, and Benelux account for almost 90% of the number of jobs offshored Jobs offshored by home countries [% of total number of jobs offshored] Other 11 Benelux 14 Germany 14 61 UK 89% 7
Asia and Europe are comparably often the region of choice but Asia has attracted larger offshoring volumes Mentioning of target region [% of all projects] Asia Western Europe Eastern Europe Latin America 1) 8 India 22 other 29 37 EUROPE: 51 Asia has attracted large offshoring projects, e.g. Software development offshored to India by Dutch company (1,100 jobs) Various services (incl. payroll, billings, software development) offshored to India by British company (650 jobs) Other 2) 4 1) Brazil, Carribbean, and Mexico 2) Middle East, North America, and Africa 8
Financial Services stand out in terms of size of offshoring projects mentioned Projects mentioned by industry Industry Financial Services Electronics/ Technologies Oil/Gas/Mining Automotive IT/Telecomm. Transportation/Airlines Chemicals/Pharma Consumer Goods Engineering Average number of jobs offshored ~ 2,000 ~ 1,000 200-500 100-200 Examples British bank offshored 2,500 jobs (billings, human resources and other back office services) to India and Malaysia British oil and gas company offshored 1,000 jobs (billings, account management, helpdesk) to Poland, Portugal, and Greece German transportation company offshored 450 jobs (request/complaint handling, order processing) to India Swedish consumer goods company offshored 200 jobs (back office IT services) to India Retail < 100 British retail company offshored 30 jobs (helpdesk) to South Africa and Brazil 9
Cost reduction is the prime driver for offshoring Expected benefits from offshoring [% of companies that have offshored] 1) Benefit Mentioned Reduce labour costs 70 Reduce other costs 59 Improve service quality Focus on core activities Speed up process cycles React to lack of internal staff or capabilities Extend scope of services Strengthen own affiliate in target country Access better technology and/or infrastructure 43 41 35 30 30 27 22 1) Multiple answers possible 10
Actual cost savings are considerable actual benefits often exceed expectations Achievement of benefits from offshoring [% of companies that have offshored] Actual cost savings Benefit Expectation exceeded 44 39 Strengthen own affiliate in target country 50% Improve service quality 33% Extend scope of services 30% 12 Speed up process cycles 27% 5 Focus on core activities 23% 10-19% 20-29% 30-39% 40-49% Access better technology and/or infrastructure 10% React to lack of internal staff or capabilities 8% 11
Over 40% of companies include soft factors when selecting a country in addition to the benchmarking of hard facts Approach for country selection [% of companies] 1) Following competitor's best practice 47 BENCHMARKING OF HARD FACTORS Costs Skills Time zone Etc. 59 41 INFLUENCE OF SOFT FACTORS Political situation Offer of a business partner Internal lobbying by affiliate in target country Promotion by target country officials 27 20 20 20 Experience with target country 20 1) Multiple answers possible 12
Decline of service quality and loss of control of services are considered to be the main risks Risks related to offshoring [% of companies] 1) Risk Mentioned Decline of service quality 51 Loss of control of services 49 Loss of institutional knowledge Loss of flexibility 39 42 Public backlash for pursuing offshoring 29 Failure to meet privacy standards 27 Loss of control of costs 19 Unpredictability of costs 18 1) Multiple answers possible 13
About 80% of companies experienced in offshoring consider their past activities successful Overall success of offshoring [% of companies] Too early to judge Not successful 3 14 Partly successful 22 (Very) 61 successful 14
The majority of companies that have offshored see benefits for home countries in contrast to companies without experience Effects on home country's economy [% of companies] Companies with offshoring experience Companies without offshoring experience Benefits mentioned Increased competitiveness and lower prices Positive feedback from target country repatriated earnings in captive models increased market share of exports from home country Labour redeployment on higher paid jobs Home countries benefit from offshoring activities Home countries do not benefit from offshoring activities Risks mentioned Increased dependence on services imports Job losses Downward pressure on wage levels due to increased competition 15
Almost half of all companies polled think that offshoring should be further facilitated Policy regarding offshoring [% of companies] Should be more restricted Don't know SHOULD BE FURTHER FACILITATED Less national boundaries (legal/tax entities) Overall less protection of local markets Development of basic infrastructure 9 11 33 Current framework is just right Support on identifying adequate target countries No specific suggestion 4 43 16
Requests for further information may be directed to UNCTAD or Roland Berger Strategy Consultants Contacts UNCTAD Karl P. Sauvant or Torbjörn Fredriksson UNCTAD Palais des Nations 1211 Geneva 10 Switzerland Phone: +41-76 588 09 44 (K. Sauvant) +41-22 917 2143 (T. Fredriksson) E-Mail: karl.sauvant@unctad.org torbjorn.fredriksson@unctad.org Roland Berger Strategy Consultants Thomas Eichelmann or Fred Schneidereit Roland Berger Strategy Consultants Arabellastr. 33 81925 Munich Germany Phone: +49-89 9230 8910 (T. Eichelmann) +49-89 9230 8383 (F. Schneidereit) E-Mail: Thomas_Eichelmann@de.rolandberger.com Fred_Schneidereit@de.rolandberger.com 17