Shared Services: Digitized and Disrupted
Each year, IBM publishes its Global Location Trends report which provides the latest insights in corporate location selection and the extent to which today’s global dynamics influence where companies locate or expand their businesses and create jobs around the world.
Our latest report on global investments trends illustrates the global economic landscape is fundamentally being altered by the dual impact of changing trade regimes and digital disruption. The former is impacting companies’ capability to leverage global supply chains, while the latter is changing how and where value creation takes place. As a result, corporate activity and economic globalization are witnessing significant transformation, causing changes in patterns of global corporate investment activity and location decision making. In this context, global foreign direct investment continued to slow down in 2018, with the number of overall jobs created falling by 9% and the number of FDI projects declining by a more moderate 3%.
These numbers confirm a continued shift toward smaller-scale projects, caused by structural changes in investment activity, where companies respond to opportunities digital technologies and automation bring to improve operations and efficiency.
The impact of digital disruption in less job-intensive investment projects has been most evident in production activities as well as in shared service centers, where the adoption of new technologies and automation has been particularly pronounced.
The transition towards less labor-intensive operations, with often higher and different skills requirements, has had a major impact on investment in several emerging economies that have typically relied on their abundance of cost-competitive labor as a key source of competitive advantage. Some of these locations have seen their inward investment decline, while others have managed to identify new opportunities for investment and develop skills and capabilities to compete for higher-value investment projects. Meanwhile, mature economies are also benefitting from the greater emphasis on proximity to markets and availability of skills as key drivers of investment and location decisions – rather than a focus on labor costs.
This article describes in more detail how these transformative shifts are impacting corporate investment decisions related to shared services.
The false paradox between automation and jobs
While robotic automation may replace repetitive work, shared services jobs are on the rise again. Indeed, the 400 FDI projects* that were announced in captive centers as well as BPO organizations in 2018 were responsible for more than 110,000 estimated new jobs globally, representing a 4% increase over the previous year.
Notwithstanding this modest recent growth, the volume of jobs the sector generated during its golden years a decade ago was double, which clearly demonstrates that this delivery model has been undergoing tremendous transformation for quite some time now.
Figure 1 – Global shared services trends by world region (2003-2018)
In the past couple of years, transactional offshore centers in Asia have been suffering most from the impact of automation on job creation. In 2018, the geo slightly recovered from its dip, but less commonly attracted the type of large-scale centers that in the past used to be drawn to the region for reasons related to labor arbitrage.
While Europe and North America continued to secure the largest number of shared services related jobs created worldwide (each responsible for over a quarter), most of the growth in global SSC job creation stemmed from the significant boost in shared services activity into Latin America and the Caribbean, which managed to capture 26% of SSC employment generated in 2018.
Shared services investments in Africa and the Middle East, which between 2007 and 2011 succeeded in positioning themselves more strongly on the shared services map but had reduced to minimal levels of interest in recent years, slightly picked up again in 2018, mainly driven by activity into North Africa.
IBM's Global Location Trends report provides information on global location strategies. Main highlights from this year's report:
Global foreign investment activity showed a further decline in 2018: the number of foreign investment projects decreased by 3 percent, and the expected job creation from these projects decreased by 9%
United States continues to hold the top position as FDI destination country but also experienced a decline in project and job numbers
Chinese investment continues to increase, with China now being the main Asian outward investor (ahead of Japan for the first time)
Transport equipment (mainly automotive) lost its position as number 1 sector, after a considerable decline. Hospitality & Tourism (mainly hotels) is now number 1
UK sees a negative impact from Brexit-driven uncertainty. It lost market share and sees its leading position in Europe challenged, while the type of investment into the UK is transforming towards more domestic market focused operations
Paris has taken the lead from London as the global top ranking metropolitan area attracting most new investment projects
Serbia extends its number 1 position as FDI destination country in jobs created per million inhabitants
Netherlands is number 1 by average job value of investment projects. This is the first time that this ranking is led by a country other than Ireland
Export focused investment has decreased to 52% of global FDI (measured in Job creation). 10 years ago, this share was still 61%. Investment focused on serving a domestic market is now at 48%.
Figure 2 – Average center size by world region (2018 versus 2003-2012 and 2013-2017)
For the past ten consecutive years, the Unites States has consistently topped the list of shared services destinations of choice, in 2018 attracting a quarter of all SSC related jobs created globally. This ranking is, however, heavily influenced by domestic establishments set up by US companies. The particular trade reconfiguration pursued by the US Administration, along with the associated emphasis on national economic interests, may have further increased the emphasis US companies put on their home market in their investment decisions.
After a couple of weaker years in terms of shared services activity, India in 2018 managed to attract 15,000 new jobs created by foreign captive centers as well as outsourcing players (not yet including the considerable number of jobs created in-country by Indian third-party service providers). As a result, the country for the first time in a decade became the prime destination again for SSC jobs created through FDI.
This position was held for many years by the Philippines, which experienced a considerable decline in shared services and BPO investment on which the country has been excessively relying for many years. This decrease is partly caused by the fact that companies in the traditional areas of strengths for the Philippines (related to customer service and BPO) are the first to seek opportunities to restructure their services delivery capability by taking advantage of automation, but may also reflect a perceived greater risk and reluctance towards the country’s recent political environment.
Other Asian countries experienced similar declines, with China and Malaysia dropping out of the top 20 again in 2018, and no other Asian destinations occupying the global rankings.
In line with the above-mentioned boost in shared services activity in Latin America, this region, on the other hand, was very well represented in the global top 20, with El Salvador and Jamaica as most noteworthy countries that have been particularly successful in positioning themselves in the global SSC landscape in recent years, mostly by attracting various third-party contact center service providers.
Central and Eastern Europe attracted 55% of shared services jobs announced across the whole of Europe in 2018, although a larger number of Western European countries occupied the global top 20 rankings. Of the usual suspects in the East, only Poland, Bulgaria (recording the most significant growth) and Hungary remained on the latest list, while Czech Republic and Romania dropped out. The Baltic states which had gained interest in recent years no longer featured among the prime destinations worldwide either.
In the West, Portugal, Ireland and Spain all accounted for a comparable share. The UK, which consistently ranked among the top 10 performers since the emergence of shared services in Europe, slipped down the rankings, despite the successes North West, Scotland and Wales continued to prove. Also in other sectors, as a result of continued uncertainty caused by Brexit, investment activity into the UK shrank substantially in 2018, resulting in an overall decline of close to 30% of FDI related jobs across all sectors and activities. This reduction was particularly pronounced in contestable investment (such as headquarters and manufacturing), which also applies to shared services where job creation in 2018 represented only a third of the volumes achieved 3 years ago.
This trend may have been to the benefit of countries such as France, which for 3 consecutive years managed to increase its appeal for shared services projects. Most of its recent successes related to the expansion of existing contact centers in the Northern tip and in the Provence-Alpes-Cote d'Azur area.
In the Middle East and African region, Egypt in 2018 paved its way up the global rankings, particularly due to established players expanding tech support and BPO operations in country.
Figure 3 – Top ranking SSC destinations by estimated jobs (2018, 2017 and compared to 2003-2017)
Is the world getting smaller?
When considering the top metropolitan areas for shared services establishments over the past 3-year period, Metro Manila managed to maintain the prime position it has been occupying since we started monitoring these trends one and a half decades ago, despite severe drops in job volumes across the Philippines in 2018 and only a handful of projects announced in the country’s capital city area. In India, Pune marked a very strong year in 2018 due to the investment of Barclays in a large-scale Global Services Center, while interest in Bangalore faded to an all-time low level recently. No other Asian agglomerations featured in the latest top 20.
Confirming its recent strong performance, Latin America on the other hand is well portrayed in the global city rankings. Especially the wider San Salvador – La Libertad area was a genuine hotspot for numerous BPO players in 2018.
The city rankings also illustrate the continual appeal of Central and Eastern Europe, whereas the five North American metros on the list all showed a slowdown in 2018 versus their previous success level.
Figure 4 – Top ranking SSC agglomerations by estimated jobs (2016-2018)
While the globalized world on the one hand is getting smaller due to technological and supply chain related progress, it is interesting to note a certain tightening of location options that are being considered by foreign investors for their shared services operations. This is illustrated by the fact that the total number of metro areas that benefitted from shared services investment has been shrinking from 300-400 between 2005 and 2011, to less than 250 different cities in in the past five years, which seems to indicate companies have less appetite to test a variety of more exotic destinations as solutions for their shared services operations compared to half a decade ago. The rationale for this, in our view, is linked to the evolving nature of shared services, moving away from transactional processing to higher-end activities which require functional subject matter expertise that is in better supply in more mature destinations.
Shared services scene dominated by US and UK players
In spite of investment from the US across all sectors globally declining in 2018, the country remained the number one source of foreign investment, generating a similar volume of shared services jobs compared to the previous year, although their share among origin countries is slightly reduced.
Again, at a global cross-sectoral FDI scale, China for the first time ranked among the top 3 source countries for investment, replacing Japan as the prime Asian origin country for foreign investment. Even if China is becoming a dominant actor on the world economic stage, its outward investment remains heavily focused on key manufacturing sectors. Also in the shared services context, Chinese investments in 2018 reached a record level, although the associated employment did not exceed 1% of SSC jobs announced globally, highlighting Chinese companies thus far have not been implementing shared services in a big way.
Indian players (mostly third-party technology and support service providers), which were early adopters of the shared services model, on the other hand reduced their shared services activity, both in absolute and relative terms.
Of further interest, UK companies maintained a high level of outward investment, with jobs generated by UK based companies abroad increasing moderated across all sectors, and employment creation in shared services activities nearly tripling. In parallel with the considerable decline in inward investment into the UK as a result of Brexit uncertainty, the potential difficulties associated with serving international markets from the UK after Brexit are boosting outward investment activity by UK companies.
Figure 5 – Top ranking origin countries for SSCs by estimated jobs (2003-2017 versus 2018)
Outsourcers as frontrunners in replacing the people-based delivery model through automation
The Business Services industry, the ICT cluster and the Financial Services sector historically have been the first to centralize activities into shared services operations, and/or provide third party support to other companies in doing so. While the shared services concept has since been widening to all industry sectors (including both private and public), these three sectors continue to constitute the top 3 generators of shared services positions around the world, in 2018 accounting for 75% of the global SSC job creation.
Business services and ICT over the years jointly accounted for a consistent 60% of shared services projects, whereas their share in terms of job creation gradually decreased from 80% to 60% today. This indicates outsourced services centers are more rapidly becoming less labor intensive, caused by an accelerated use of technology innovation and more widespread adoption of process automation among third party providers versus captive players.
The highest growth in new shared services employment in 2018 was noted among Wholesale & Retail companies and in the Financial Services sector, with Amazon, Barclays and State Street as largest job creators.
Fundamental reconfiguration of digitized global operations and location footprints
Regardless the industry companies are in, all are subject to technological and other transformational shifts which form the basis an uncertain global economy with a variety of disruptive influences, and challenge corporate decision makers to continually adjust their ways of working, their global operating models and their associated location choices.
Digital disruption and global economic uncertainty drive companies to continuously monitor new risks and opportunities and think strategically about different scenarios for moving forward. In doing so they have access to more data and insights than ever before to support their strategic decisions and day-to-day operations, allowing them to create enterprise-wide architectures that allow them to respond to disruption.
In this context, delivery models (whether captive or outsourced) continue to evolve towards increasingly digitized shared services operations, moving up the value chain to become true centers of excellence as robotics and cognitive tools are being positioned to conduct end-to-end service delivery or provide business process-as-a-service.
Such operating models require significantly deeper subject matter expertise in a culture of continuous improvement, innovation, and analysis. The most optimal access to the talent competencies to accommodate this requirement can be obtained by means of best shoring, combining onshore, nearshore and offshore operations and supporting increased flexibility and reduced cycle time to market.
Perpetual scenario-based strategic planning will therefore be at the core of future value based operating models and optimized corporate footprints.
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 service 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.
* For selected countries such as Australia, Brazil, Canada and the Unites States, IBM-PLI’s Global Location Trends database also captures inter-state or inter-region investment projects.
The full Global Location Trends report can be downloaded at ibm.biz/GLTR2019