Outsourcing Captures Europe's Imagination
Europe, slowly but surely, could become one of the leading markets for offshore contracts.
Nov 20, 2005
Some will cringe at, though others may delight in, a dictionary that defines historic monuments as `fixed assets' and lemons as `defective capital goods'. One of the most useful and entertaining dictionaries online is the OECD Glossary of Statistical Terms - worth the hefty download of nearly 800 pages.
The glossary goes beyond clarifying the arcane jargon and other technical terms for which the OECD and other organisations are well known.
Within its 6,000 entries there are indeed 17 different definitions for `value-added', and 10 for words dealing with income, but only one definition of the term `offshoring' - used to describe a business (or a government) decision to replace domestically supplied service functions with imported services produced offshore.
Europe, slowly but surely, could become one of the leading markets for offshore contracts.
For instance, from the moment Michael Jameson became head of the Paris-based multinational subsidiary of AXA, with multiple specialisations in the field of asset management, he discovered the importance of business processes by focusing on the value chains most relevant to the company. AXA IM decided to outsource the entirety of its back-office activities. The company has since grown by leaps and bounds.
Michael Jameson and many like him in European companies are beginning to realise that they cannot continue to compete effectively on a global scale without leveraging the increased efficiency and flexibility they can gain through offshoring or outsourcing.
The value of major outsourcing contracts awarded by European companies last year was a record $58 billion worldwide.
Despite some companies being sold on outsourcing, however, for most firms in Europe, there's no place like home. Although the offshoring model has captured the imagination, it is yet to produce the wholesale transformation of corporate Europe.
What's more, if companies do go offshore, they would prefer to do so either through a service provider they have worked with, rather than start a new relationship with an offshore outsourcing specialist or set up camp offshore.
That could be bad news for India's big outsourcing providers, who will continue to struggle wooing Europeans - unless Indian companies quickly manage to establish their brands and a critical installed base in Western Europe.
Western European firms' spending with Indian IT service providers accounted for just 1 per cent of the total IT services market in 2004.
Even the largest of Indian offshore service providers is a distinctly third-tier player in Europe. Is India's period of competitive advantage waning? Among the three common reasons stated are: India `s terrible Infrastructure, Indian wages rising at a 20 per cent annual clip, and other countries who are maturing and getting involved with the global economy becoming more attractive.
There also, seems to be a strong herd instinct among European firms looking offshore. The greatest influence on choice of location, after benchmarking hard facts such as costs, skills and time zones, was "following competitors".
When a large German Bank was searching for a place to house its software development centre, it considered geographical and cultural proximity to the EU important.
After looking at the more traditional outsourcing venues in Asia, the German bank decided to build its state-of-the-art development centre in the Belarusian capital, Minsk, which is within a two-and-a-half hour flight from Frankfurt.
So, just what was the lure? Minsk isn't the most forward, wealthy or democratic of cities, but hey, it's safer than London, cheaper than Frankfurt, less hectic than Rome and a darn sight cleaner than India. And that is where a rival Nordic bank had set up its offshore centre.
This is just one instance of several West European manufacturing and service companies that are beginning to take the path less travelled when setting up an offshore outsourcing operation. For progressive European companies, EU enlargement presents unique opportunities for European business.
Value chains can be reorganised across the continent to benefit from the current competitive advantages of new member-states. This may enable companies to keep production within the EU that would otherwise have been transferred to Asia, and to maintain their competitiveness.
The savings enjoyed by companies that move labour-intensive service industry work from the Europe to countries in the East with lower labour costs have triggered an exodus of business-processing jobs. It is estimated that by 2015 roughly 10 million of them will have moved into the enlarged EU countries.
Companies that send their back-office jobs offshore often cut their labour costs by as much as half, and save billions of dollars by moving to East European countries, where labour is cheap. The savviest operators redesign business processes to exploit automation and take full advantage of the new environments potential.
Lets take a look at where else the Western European companies are looking. Russia is proving a convenient location for Nordic companies looking for inexpensive, high-skilled labour. Further, French firms are opening call centres in North Africa, Mauritius and Vietnam.
South Africa is also an outsourcing destination to watch - its popularity is actually forecast to grow faster than India's over the next few years.
European companies are beginning to have no qualms about shipping out large parts of their finance departments to East Europe and Asia, including India. They have a good sense of the talent out there - and what it costs, reaping big savings.
A host of functions are being uprooted. Among them, accounts payable, invoicing and accounts receivable, general ledger, management reporting, payroll and local statutory compliance, etc. Yes, language can be an issue but not an insurmountable one.
France, Germany and the UK have voiced major concerns about companies favouring better and cheaper conditions outside Europe. The German Chancellor, Gerhard Schröder, recently attacked employers such as Siemens as "unpatriotic" for planning to close or downsize operations in Germany.
The offshore market now offers a much broader spectrum of services, challenging perceptions of where you can go. Needless to add, there are a combination of concerns about service quality, loss of internal know-how and lack of control over the arrangement.
If companies are outsourcing finance at all, they are mostly doing so piece by piece. Most companies are still getting comfortable with the idea of process outsourcing as an option.
I would describe it as `toe-dipping'. And, I do not expect this to change. People are starting with the little contracts they have signed, and using that as a base to grow. Nobody gets thanked if a BPO project goes right, but everyone notices when it goes wrong.
Many West European companies are already investing in R&D, in East Europe and Asia. Many of them are going international in R&D to strengthen their competitiveness in innovation.
In Germany, despite its reputation as a place for innovation and technology, more than half of the companies that have invested in R&D abroad have reduced their research capacities at home.
The main reason for offshoring R&D is to support the companies' production facilities abroad. Another important decisive factor for offshoring are better conditions for R&D: lower labour costs, especially for R&D-employees, less regulation, the availability of qualified employees and more flexible working hours.
European managers who, at one time, were glossing over the glitches, are understanding the economic logic behind outsourcing, as compelling for survival.
They are accepting the fact that a large, vertically-integrated finance model will not survive.
At the end of the day, European companies are realising that they simply cannot afford to be doing everything at high-cost headquarters. And despite the stuttering growth of the outsourcing market in Europe, there are signs that that the message is getting through.
The glossary goes beyond clarifying the arcane jargon and other technical terms for which the OECD and other organisations are well known.
Within its 6,000 entries there are indeed 17 different definitions for `value-added', and 10 for words dealing with income, but only one definition of the term `offshoring' - used to describe a business (or a government) decision to replace domestically supplied service functions with imported services produced offshore.
Europe, slowly but surely, could become one of the leading markets for offshore contracts.
For instance, from the moment Michael Jameson became head of the Paris-based multinational subsidiary of AXA, with multiple specialisations in the field of asset management, he discovered the importance of business processes by focusing on the value chains most relevant to the company. AXA IM decided to outsource the entirety of its back-office activities. The company has since grown by leaps and bounds.
Michael Jameson and many like him in European companies are beginning to realise that they cannot continue to compete effectively on a global scale without leveraging the increased efficiency and flexibility they can gain through offshoring or outsourcing.
The value of major outsourcing contracts awarded by European companies last year was a record $58 billion worldwide.
Despite some companies being sold on outsourcing, however, for most firms in Europe, there's no place like home. Although the offshoring model has captured the imagination, it is yet to produce the wholesale transformation of corporate Europe.
What's more, if companies do go offshore, they would prefer to do so either through a service provider they have worked with, rather than start a new relationship with an offshore outsourcing specialist or set up camp offshore.
That could be bad news for India's big outsourcing providers, who will continue to struggle wooing Europeans - unless Indian companies quickly manage to establish their brands and a critical installed base in Western Europe.
Western European firms' spending with Indian IT service providers accounted for just 1 per cent of the total IT services market in 2004.
Even the largest of Indian offshore service providers is a distinctly third-tier player in Europe. Is India's period of competitive advantage waning? Among the three common reasons stated are: India `s terrible Infrastructure, Indian wages rising at a 20 per cent annual clip, and other countries who are maturing and getting involved with the global economy becoming more attractive.
There also, seems to be a strong herd instinct among European firms looking offshore. The greatest influence on choice of location, after benchmarking hard facts such as costs, skills and time zones, was "following competitors".
When a large German Bank was searching for a place to house its software development centre, it considered geographical and cultural proximity to the EU important.
After looking at the more traditional outsourcing venues in Asia, the German bank decided to build its state-of-the-art development centre in the Belarusian capital, Minsk, which is within a two-and-a-half hour flight from Frankfurt.
So, just what was the lure? Minsk isn't the most forward, wealthy or democratic of cities, but hey, it's safer than London, cheaper than Frankfurt, less hectic than Rome and a darn sight cleaner than India. And that is where a rival Nordic bank had set up its offshore centre.
This is just one instance of several West European manufacturing and service companies that are beginning to take the path less travelled when setting up an offshore outsourcing operation. For progressive European companies, EU enlargement presents unique opportunities for European business.
Value chains can be reorganised across the continent to benefit from the current competitive advantages of new member-states. This may enable companies to keep production within the EU that would otherwise have been transferred to Asia, and to maintain their competitiveness.
The savings enjoyed by companies that move labour-intensive service industry work from the Europe to countries in the East with lower labour costs have triggered an exodus of business-processing jobs. It is estimated that by 2015 roughly 10 million of them will have moved into the enlarged EU countries.
Companies that send their back-office jobs offshore often cut their labour costs by as much as half, and save billions of dollars by moving to East European countries, where labour is cheap. The savviest operators redesign business processes to exploit automation and take full advantage of the new environments potential.
Lets take a look at where else the Western European companies are looking. Russia is proving a convenient location for Nordic companies looking for inexpensive, high-skilled labour. Further, French firms are opening call centres in North Africa, Mauritius and Vietnam.
South Africa is also an outsourcing destination to watch - its popularity is actually forecast to grow faster than India's over the next few years.
European companies are beginning to have no qualms about shipping out large parts of their finance departments to East Europe and Asia, including India. They have a good sense of the talent out there - and what it costs, reaping big savings.
A host of functions are being uprooted. Among them, accounts payable, invoicing and accounts receivable, general ledger, management reporting, payroll and local statutory compliance, etc. Yes, language can be an issue but not an insurmountable one.
France, Germany and the UK have voiced major concerns about companies favouring better and cheaper conditions outside Europe. The German Chancellor, Gerhard Schröder, recently attacked employers such as Siemens as "unpatriotic" for planning to close or downsize operations in Germany.
The offshore market now offers a much broader spectrum of services, challenging perceptions of where you can go. Needless to add, there are a combination of concerns about service quality, loss of internal know-how and lack of control over the arrangement.
If companies are outsourcing finance at all, they are mostly doing so piece by piece. Most companies are still getting comfortable with the idea of process outsourcing as an option.
I would describe it as `toe-dipping'. And, I do not expect this to change. People are starting with the little contracts they have signed, and using that as a base to grow. Nobody gets thanked if a BPO project goes right, but everyone notices when it goes wrong.
Many West European companies are already investing in R&D, in East Europe and Asia. Many of them are going international in R&D to strengthen their competitiveness in innovation.
In Germany, despite its reputation as a place for innovation and technology, more than half of the companies that have invested in R&D abroad have reduced their research capacities at home.
The main reason for offshoring R&D is to support the companies' production facilities abroad. Another important decisive factor for offshoring are better conditions for R&D: lower labour costs, especially for R&D-employees, less regulation, the availability of qualified employees and more flexible working hours.
European managers who, at one time, were glossing over the glitches, are understanding the economic logic behind outsourcing, as compelling for survival.
They are accepting the fact that a large, vertically-integrated finance model will not survive.
At the end of the day, European companies are realising that they simply cannot afford to be doing everything at high-cost headquarters. And despite the stuttering growth of the outsourcing market in Europe, there are signs that that the message is getting through.