Global Report: Digitally Reinvented SSOs Drive "Smaller but More" Trend
Analysis of global foreign direct investment in SSO jobs and Centers
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Marked Shift in Foreign Direct Investment
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 eleventh annual report on global investments trends shows greater volatility in foreign direct investment (FDI).
This volatility is evident both overall and for specific activities as companies are adapting to Globalization 4.0. Digital technologies are transforming industries and global value chains at an unprecedented rate, with significant implications for how and where value is generated, giving rise to a new data-driven global economy.
As a result, global foreign investment activity, measured by the number of jobs created, declined moderately in 2017, while in contrast, the number of foreign investment projects increased by almost 10% to record levels, suggesting a shift toward smaller-scale projects on average.
This move towards increased but smaller-scale projects is also seen in services activities, where companies are increasingly looking to apply automation to improve operations and efficiency. As automation technologies and artificial intelligence capabilities become widely adopted in the future, the changing nature of shared service centers will likely become more evident in corporate investment activity.
The current article assesses how these transformative shifts are impacting the scale, scope and nature of shared services establishments.
More centers – smaller in size – closer to main markets
2017 was a fairly good year for shared services investment. The number of FDI projects* that were announced in captive centers as well as BPO organizations reached nearly 400, responsible for more than 100,000 estimated new jobs globally.
However, while these figures illustrate consistent moderate growth in the past 5 years, they only represent half the volumes of jobs the sector generated in the previous decade. From these observations it is evident that the shared services operating model has been undergoing continuous transformation for a number of years, with still exciting times ahead of them as companies continue to reshape their delivery capabilities, making increased used of Robotic Process Automation and advanced analytics.
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As a result of such automation, shared services activities have become less labor intensive, evidenced by an average center size that has dropped well below 300 in the past 3 consecutive years.
Particularly emerging markets such as Asia and Latin America have been attracting less large-scale operations primarily in search of labor arbitrage.
Interestingly, average headcounts in Europe and North America on the other hand lifted considerably (reaching record levels in the past decade), as companies are increasingly prioritizing proximity to these main markets, or to their head offices and other existing operations. Each of these geos accounted for nearly one third of the shared services jobs announced globally in 2017, the remaining third being distributed across more emerging markets in Asia and Latin America.
IBM's Global Location Trends report provides information on global location strategies. Main highlights from this year's report:
- Global foreign investment activity showed very mixed results in 2017: the number of foreign investment projects increased by 10 percent, but the expected job creation from these projects decreased by 5%
- United States reclaimed the top position as FDI destination country after a few percent growth
- Many of the key emerging markets experienced decreases in job creation. The decrease was most evident in production activities
- Africa is an exception. The continent shows continued growth, a lot of which is driven by Chinese investment.
- Technology investment drives a lot of the growth in mature markets: ICT has become a leading sector in multiple countries and digital technologies are disrupting investment across many industries.
- Ireland continues to lead the world in attracting high-value projects, but its dominant position is challenged by various countries
- Similarly, London continues to be the leading global city for attracting foreign investment projects; but Paris has become a strong contender
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, have been reduced to minimal levels again in recent years, picking up only 1% of the global shared services job announcements in 2017, mainly generated through call center activity.
For 6 consecutive years the Unites States has been topping the list of shared services destinations of choice, attracting 30% of all SSC related jobs created globally.
This ranking in 2017 is largely influenced by domestic establishments by US companies, confirming the emphasis on proximity to their home market described above.
Also in India, which after a very weak performance in 2016 now ranks third again, more than half the shared services jobs were generated by Indian third party service providers.
Notwithstanding a severe dip in shared services employment into the Philippines in 2017, the country continues to attract the largest volume of SSC jobs created by foreign investors.
Elsewhere in Asia, China and Malaysia which both had dropped out of the top 20 in 2016, in 2017 re-entered into the global shared services rankings as only other Asian destinations.
In Europe, shared services investments in the past decade were quite evenly distributed between Western and Eastern Europe. In the past two years however, investor’s interest clearly shifted eastwards, while Western Europe maintains only 30% of SSC jobs created in Europe in 2017.
Among the traditional hotspots in Central and Eastern Europe, and despite reductions in their overall (cross-sectoral) volume of FDI jobs attracted in 2017, Poland, Hungary and Romania all registered growth in shared services employment creation. The most noteworthy growth however was observed in the Baltic countries which were particularly successful in securing nearshore ICT related centers for Scandinavian organizations, and in Turkey, which came on the radar as call center destination.
The UK slips down the rankings but remains the Western European destination to attract most SSC related jobs in 2017, with Portugal as very close second. Also when considering the wider UK inward investment context, other types of contestable projects serving international operations (such as headquarters and manufacturing) declined considerably in 2017, suggesting that international companies are reshaping their operations to the future reality of a United Kingdom outside the European Union.
Accordingly, while there may be a greater need for dedicated UK market-serving operations, the country is perhaps becoming less attractive for activities serving the wider European market.
This trend may have been to the benefit of countries such as Germany, which in 2017 put down a strong performance after having been absent from the global top 20 rankings for 3 consecutive years.
Latin America seems to have lost the momentum it created over recent years, with shared services job announcements dropping considerably across the continent, except for El Salvador which paved its way up. Most severe declines versus their record years were noted in Brazil, Colombia and Costa Rica.
Despite this dip, Latin America continues to be well represented in the global city rankings, which in the past decade was considerably more heavily dominated by Asian agglomerations.
Metro Manila nevertheless maintains the prime position it has been occupying since we started monitoring these trends over a decade ago, and Bangalore regained interest. The city rankings also illustrate the successes in Central and Eastern Europe and the Baltics.
Shared services investment scene dominated by US and Indian players
Companies from the Unites States and India have been most active in establishing or expanding their shared services footprint in 2017, jointly accounting for more than two thirds of all newly announced jobs.
Investment originating from India predominantly stems from BPO players, while US investors include a more balanced mix of third party service providers and captive players.
Even if in both cases a large share of these jobs is generated in the companies’ own domestic market, they also represent the largest outward shared service investors.
The remainder of shared services jobs is primarily generated by large mature economies in Europe, and Japanese investors have been growing their share in recent years.
Towards new digitally enabled shared services footprints
Digital disruption associated with the Fourth Industrial revolution is already significantly affecting global corporate investment patterns.
Accelerated use of technology innovation and robotics process automation are changing the nature and scale of investment projects, shifting away from large-scale shared services projects toward less labor-intensive operations closer to key markets allowing greater responsiveness to local end-customer needs. This results in more regional or domestic versus less global centers, improving the geographical balance in shared services operations and enhancing business continuity risk mitigation.
Digitally enabled shared services also become increasingly knowledge intensive, expanding their value creation and functional scope while allowing faster, more frequent, complex and seamless customer interactions.
Shared services professionals working in such an environment, therefore, will require significantly different skill sets, including big data and advanced analytics, cognitive innovation, user-experience expertise, digital collaboration, ability to operate in an agile business environment – skills that may not be in ample supply in traditional talent pools.
For companies and locations to continue to lead the way in shared services it will be essential to ready their workforce to accommodate these new ways of working by reskilling and upskilling their staff that is freed from pure transactional tasks to become data savvy specialists adopting digital solutions to generate high value insights.
Grasping these opportunities in the digital era of Globalization 4.0 will be key to the success of the shared services industry going forward.
* For selected countries such as Australia, Brazil, Canada, China, India, the Unites States, IBM-PLI’s Global Location Trends database also captures inter-state or inter-region investment projects.
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.
Note: The full Global Location Trends report can be downloaded at ibm.biz/GLTR2018 (The data underpinning the trends and summarized in a detailed report titled "Global Location Trends. Facts & Figures", can be purchased via the same link).