2010: Return to Growth in Foreign Investment
"North America is responsible for 20-25% of employment generated by shared services investment projects globally, although it is important to note that a vast majority of these jobs is created by American companies centralizing shared services activities in their own continent."
"With only a quarter of the globally launched shared services projects in 2010, Asia attracts half of the jobs created in the sector worldwide, which indicates that the continent hosts by far the largest size operations, with an average announced headcount of more than 850 in 2010, versus a global average of just over 350 FTE."
"Despite the fact that it only represents 1% of the Asian shared services jobs announced, Vietnam has been identified as one of the fastest growing newcomers on the continent."
Where the early Shared Services model focused primarily on transactional processes with the aim of gaining efficiency, achieving headcount savings, and labor arbitrage – next generation shared services (in the outsourcing industry often referred to as KPO – Knowledge Process Outsourcing) are oriented towards the higher value chain activities. Most recent developments have been in Centers of Excellence, which are smaller in size than the traditional shared services centers, and where a specific capability is captured and deployed from a pinpoint of knowledge in a best-in-class location that provides most optimal access to unique subject matter expertise.
These organizational transformations often also involve considerations of whether and which activities to maintain in-house, and for which processes and functions outsourcing to a third party service provider could be an option.
The new global economy is, therefore, increasingly characterized by more fragmented internal operations that seek to leverage talent pools and cost advantages across the globe. In this context, 2010 marks a notable upswing of the number of shared services projects that companies announced around the world, while job creation involved remains relatively stable, confirming the growing share of next generation operations and centers of excellence.
This article zooms in on the locations that have been the main beneficiaries of these trends.
Figure 1 - General trends in announced shared services jobs by world region (2003-2010)
Although the highest number of recent shared services centers was launched in Europe and North America, Asia Pacific stands out as prime destination for employment creation in the sector, accounting for half of the new global shared services jobs in 2010. This is mainly explained by the multiple and large size center establishments in India, followed by the Philippines and China.
North America is responsible for 20-25% of employment generated by shared services investment projects globally, although it is important to note that a vast majority of these jobs is created by American companies centralizing shared services activities in their own continent.
The share of Middle East and Africa remains marginal, although shared services establishments and associated employment has been on the rise for the past 3-4 years.
While the top 5 ranking of major shared services destinations has been quite consistent over the past years, various emerging economies have been making their introductions into the global ranking, as well. The geographical shared services footprint has been widening in Latin America and the Caribbean, with newcomers including Nicaragua, Argentina, and Peru.
Figure 2 – Top ranking SSC destinations by estimated jobs (2010 compared to 2003-2009)
Largest centers reside in Asia Pacific
With only a quarter of the globally launched shared services projects in 2010, Asia attracts half of the jobs created in the sector worldwide, which indicates that the continent hosts by far the largest size operations, with an average announced headcount of more than 850 in 2010, versus a global average of just over 350 FTE.
Although in 2009, the Philippines had for the first time overtaken India’s leading position in the shared services job creation ranking, India in 2010 again secured 60% out of all jobs announced in Asia Pacific in this sector, versus 30% in the Philippines. Metro Manila did remain the prime global agglomeration that attracted more than 20,000 shared services jobs in the sector in 2010. In parallel, multiple so-called next wave cities are successfully being profiled across the country.
The remainder of the global city ranking is heavily dominated by Indian agglomerations. The traditional Indian hotspots in the country’s first and second tier metros continue to attract shared services and BPO projects. In parallel, so-called third tier cities which have been positioning themselves as lower cost solutions throughout the country are gaining investor confidence, with cities such as Kolkata, Thiruvananthapuram and Kochi as most successful examples in 2010.
The only other Asian country that benefited from a significant share of shared services jobs in 2010 is China, good for 7%. The diversification into second tier cities in China is a recent phenomenon. After Dalian, cities that are appearing on companies’ radar include Chengdu, Xiamen, Shenzhen, Nanjing, with multiple others likely to following in the coming years.
Finally, despite the fact that it only represents 1% of the Asian shared services jobs announced, Vietnam has been identified as one of the fastest growing newcomers on the continent. Other Asian countries that had secured various shared services projects in recent years, such as Sri Lanka, Thailand, Pakistan, were less successful in extending this trend into 2010.
Scope in Latin America widening
After Asia, which continues to be characterized by a high concentration of the most labor intensive shared services projects, Latin America is also home to quite sizeable operations, with on average 350-450 announced jobs.
Of the quartet of traditional destinations for the first shared services establishments in Latin America – Colombia, Chile, Costa Rica and Brazil – particularly Colombia and Costa Rica continue to lead the rankings in 2010 as well, representing 22% and 14% of the regional shared services job announcements. Interesting newcomers in the rankings -- which demonstrate a further widening of confidence across the continent -- include Nicaragua and Peru. They both secure several thousands of shared services jobs in 2010, worth a respective 20% and 10%. Other key countries include Argentina, Mexico and Brazil, where various cities have been popping up as strong alternatives to the capital cities.
The global ranking of most successful agglomerations in terms of job creation in 2010 includes 4 Latin American destinations: Bogota, San Jose, Lima and Guadalajara.
North America heavily dominated by US locations
In 2010, shared services projects in North America created on average 200-250 FTE, which is 100 below the level that applied in the first half of the decade (2000-2005).
The US attracts considerably more shared services projects than Canada, although this number is heavily influenced by projects launched by American companies in their own home base. Even when considering only foreign investment, Canada accounts for only 20% of jobs and projects on the continent, which is a more explicit underrepresentation compared to previous years. Shared services projects and associated job creation in Canada have been subject to a clear dip in the past couple of years, whereas the USA experienced more stability.
Where Ontario used to score very well in the North American state & province rankings for shared services job creation, this top 10 ranking now is exclusively dominated by US states, and led by Texas and Arizona. Phoenix, Detroit and Austin are part of the global top agglomerations for shared services job announcements in 2010.
Western & Eastern Europe in balance again
Europe attracted the largest share of shared services projects in 2010. However, despite the fact that 1 out of 3 centers globally are established in this region, job creation associated with these projects represents only 15% of the global employment. The continent experienced a considerable drop in the average size of shared services projects, from an average of 200 FTEs up until 2006, to 135-150 today, which is the lowest number across all continents (with the exception of the Middle East).
With 23% of shared services jobs announced in Europe in 2010, the UK manages to maintain its number one position, which was only once traded with Poland (in 2008). Also Ireland, which seemed to have lost some of its appeal for shared services investments in 2007 and 2008, has been coming back strongly, now occupying the fourth European rank with just under 10% of jobs. Dublin ranks second on the European agglomeration list with respect to shared services job creation in 2010, and 21st globally, both clear illustrations of its revitalized success.
Romania climbed up to the second European position, accounting for 16% of announced jobs, and pushing Poland one rank down with 13%. Bucharest in Romania by the way is the only European city that makes it into the global agglomerations ranking.
The other Central European countries that were among the first destinations within their sub-region to house shared services, including both Hungary and the Czech Republic, also continue to attract new investments in the sector, although their share in the European context has decreased. In 2010, mature markets in France, Germany and Spain were successful in securing a good portion of the new shared services positions, together representing 15% of the European total. Noteworthy is also the recent rising interest in the Baltic States, with Estonia closing the European top 10.
Growth opportunities in Africa & Middle East
Although representing only a modest 5% of globally announced shared services jobs in 2010, Africa and the Middle East are increasingly being recognized as lands of opportunity to cater to further growth in the industry.
Morocco, Egypt and newcomer Nigeria have all earned a spot among the global top 20 destinations for shared services jobs in 2010. They each represent approximately 20% of the region’s SSC employment creation that year. Tunisia and South Africa complete the regional top 5.
Casablanca and Cairo are among the 20 most successful global shared services agglomerations.
The only country in the Middle East that attracted more than one shared services project in 2010 are the United Arab Emirates, worth another 7% of the region’s job announcements.
Prime destination of Shared Services also becoming second largest source of SSC jobs
What is particularly noteworthy is that the move towards global footprint optimization is truly a global phenomenon. North American and European companies have been embracing the shared services concept for several decades now. It is only more recently that global operations, which optimize supply chains and internal operations, are being adopted by companies from across the world. For example, companies from emerging countries used to mainly focus on market entry and servicing investment, but are now also starting to implement global shared services center strategies.
This is particularly evident where Indian-based companies are concerned. Their share in global shared services job creation has quadrupled – from less than 5% in the early 2000s, to close to 20% today. More than 40% of these jobs have been created outside of India.
Other Asian companies, such as Japanese, Chinese and Korean, have only recently started to move down the path of shared services. The modest 2% of globally announced shared services jobs they represent today entails a promise for enormous potential further growth of the industry from these markets.
Figure 3 – Top ranking origin countries for SSCs by estimated jobs (2003-2010)
Mature locations and emerging destinations are appearing side-by-side in our global rankings. This confirms that corporate considerations are no longer predominantly driven by cost containment objectives (which was a heavy emphasis during the years preceding and during the economic downturn, in 2008 and 2009).
At the same time, an ever-increasing spread of companies, both from mature and emerging economies, have engaged in the process of balancing their shared services footprints by relying on highly experienced profiles in traditional shared services destinations on the one hand; while tapping into new sources of talent and moving closer to emerging-market customers with increasing purchasing power, on the other hand.
These dynamics inspire confidence that shared services will remain a hot strategic corporate consideration, for yet another generation.
This article is based on analysis derived from IBM’s proprietary Global Investment Locations Database (GILD). GILD records investment project announcements around the world on an ongoing basis, allowing detailed analysis on global trends in corporate location decision making.
The GILD database is maintained by IBM-Plant Location International (IBM-PLI), a specialized services within IBM Global Business Services, Strategy & Transformation consulting. IBM-PLI is a global market leader in providing advice to companies on their 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.
For more information or a copy of the full report, contact IBM-Plant Location International (IBM-PLI)
Roel SPEE, Global Leader IBM-PLI, firstname.lastname@example.org
Patsy VAN HOVE, Senior Manager IBM-PLI, email@example.com
IBM's Global Location Trends report, and the new detailed Facts and Figures book, provide information on global location strategies. Some of the key findings from this year's report:
- 2010 marked a return to growth in foreign investment activities by companies.
- With the return of foreign investment growth, we also witnessed a deepening of the new pattern of global footprint optimization.
- Global investment in 2010 was of a more strategic nature than the more tactical and cost reduction focused investment activity in preceding years.
- Although many countries have managed to benefit from increased inward investment and job creation, it is also evident some countries are positioned to take greater advantage from foreign investment activity than others.
- The primary beneficiaries of the growing foreign investment in 2010 have been the emerging economies, with the BRIC countries performing particularly well.
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.