Spain: the Next Opportunity for Services Delivery?

With competition-driven wage escalation in Asia, Latin America and Eastern Europe, and an increased interest in near-shore services delivery models, Spain – the gateway to mainland Europe, Africa, and Latin America – may find itself at just the right juncture of geography and wages to present itself as an attractive option. While the world, and Europe in particular, is still showing signs of economic weakness, a recent Everest report shines a thin ray of hope onto an otherwise bleak landscape: Service delivery is growing. In fact, more than 70% of respondents to a recent Everest survey indicate that they plan to grow services faster this year than they did last year [13% significantly so, 58% marginally so; Source: Everest Report 2013]. So: we can expect to see growth in services delivery centres across the board. The question is: where will these investments take place? Two Decades of Sourcing Spain has always offered attractive opportunities for European companies, long before East European countries emerged from behind the Iron Curtain. Twenty years ago, companies like HP and General Motors set up large support centres in Spain to take advantage of comparatively low labour costs and proximity to their European operations. In the early 2000s , this trend waned somewhat as East European locations emerged on the scene, offering lower wage costs with equally advantageous geographic positioning vis-Ã¡-vis Europe. India, and then a number of its neighbours, subsequently entered the market with, by now, well-publicized results. A number of companies opted to set up captives in Asia, or leverage the multitude of BPO operators that developed in those markets. Now we are witnessing yet another shift. The global crisis that started five years ago has impacted markets around the world. East Europe has suffered from inflation and the cost of doing business in the region has risen accordingly, along with wage increases. The crisis has also created a lot of second-guessing within multinationals about offshoring their business services to far off locations. More and more, the term "nearshore" is mentioned when it comes to making sourcing decisions. This is playing well to Spain's strengths; and while the international press would imply a country in near chaos, most domestic business leaders speak of a stable environment with a strong and steady talent base. In fact, the crisis may have served Spain's labour market in more ways than one. A number of practitioners quote Spain's labour force as now being on a par with, or below, the cost of labour in East Europe and even Latin America. And that is capturing the attention of the international business community. Shared Services Growth Shared services growth, where it is happening, is being driven to a large extent by Asian markets, but also by Latin America, which is still relatively untapped. The overall trend is towards maximizing the potential capability of in-house centres [captives], but there is still a lot of interest in leveraging the offerings of increasingly sophisticated BPO vendors, frequently in niche areas specific to industries [industry verticalisation]; there is also a parallel shift, however slight, towards moving BPO operations back on shore, or at least nearshore. This goes hand-in-hand with the shifting of transactional processes into the BPO courts, while recognizing that those processes remaining inhouse tend to be more customer-focused or -facing, necessitating proximity to VIP clients. What's certain is that as companies’ growth (or survival) engines slowly crank back into gear, optimizing services delivery will become a core strategy. Indeed, we are already seeing this happen, most notably in the US and UK, and we can expect mainland Europe to take note. Spain: A Global Gateway to South America, Africa and Europe Spain stands at an interesting juncture. Having attracted significant interest as a near-shore location for European and African operations some dozen years ago, the intervening time period has seen a drop-off in activity. However, given the lower labour costs presented today, the relative economic stability, and the impressive talent pool on offer – along with the trends identified above – Spain may well find itself at the cusp of a renaissance as a service delivery location. Devi Kencki, Outsourcing and Shared Services expert at PricewaterhouseCoopers, agrees that despite the dramatic Eurozone crisis, Spanish cities have held onto their positions. Madrid, for example, maintained its 2011 spot in the middle of the rankings, and its top 10 position across nearly half of the leading indicators and a third of the core variables. Madrid also ranks 10th in terms of proportion of population with higher education, just below London and above Los Angeles. Spain generally finds itself in the upper levels of rankings across a broad range of variables, from literacy and enrolment, to Housing, public park space, cost of living and consumer price index. (Source: PwC’s 2012 Fifth Annual Analysis of Cities of Opportunities). As the nearest European market to North Africa and the Mediterranean, Spain enjoys an advantage endowed by its geographical footprint, positioned, as it is, as a gateway to these markets, as well as Latin America to the West, and mainland Europe to the East. Eastern Europe is still the SSO centre of choice for northern European countries, but for South Europe Spain is very attractive. The Spanish Canary Islands special economic zone is also ideally situated as a near-shore hub for business with Africa, and offers tax advantages for special zone entities [Europe's most advantageous tax regime with 4% corporate tax rate]. Sergi Lemus, a Senior Manager coordinating the Shared Services activities for Deloitte Spain, including Consulting and BPO says that, while certainly not a newly discovered hotspot, there is increasing chatter about Spain’s "warm spot" status. In fact, he says, a number of leading shared services, consulting firms, and BPO practitioners operating in-country speak of a quiet tidal wave that is gathering momentum; across the board, all expect to see significant movement within the Spanish service delivery market over the next two years. The situation is made more interesting because much of the BPO growth in Latin America has been as a result of demand for Spanish language services. These could very possibly be moved closer to home, encouraged by Spain’s large, well-educated talent pool on the one hand, and, in due course, confidence in the European markets, on the other. Spain’s geography and cost base have brought companies like Ericsson to Spain. Javier Peinado, Acting Finance Director for the company’s Spanish SSC, located in Madrid, explains that providing services in the right time zone was a crucial determinant for locating the centre in Spain. Ericsson runs five global services centres for Finance, to cover the 10 regions of its world-wide operations. The centres are located in Stockholm, Mexico, New Delhi, Beijing and Madrid. The Madrid centre covers three of the global regions, namely the Mediterranean, Western and Central Europe, and Saharan Africa. With 95 staff, and including 20 nationalities the Madrid centre is the largest of Ericsson’s finance centres, and covers 70 countries. The extent to which this consolidation has transformed the finance operations is made clear, when Peinado explains that only 10 years ago, finance operations were run in each of the 200 countries Ericsson operates in. The current strategy is to grow the value-add chain and to provide more analytical expertise to business unit customers within the main focus areas of cost centre accounting [cost control] and proactive cash collection [receivables]. While part of the decision, for Eriksson’s team, involved cost and time zones, another part was its operating markets. "We took into account business volumes within Europe," explains Peinado. Ericsson’s largest operations in Europe are Spain and Italy which together account for 80% of sales within the Mediterranean region. Being close to the customer is important in this business, so although Romania might have offered a cheaper option Eriksson set up its services centre close to its most important European markets. Latin American Engine Drives Renewed Interest in Spanish Operations According to Kencki, next to its many language capabilities and large talent pool, Spain also has similar cultural behaviours (multi-active) and communication patterns to Latin America, which puts the country into a strong position for both offshoring and nearshoring on the BPO landscape. Cultural analysis based on Power Distribution, Individualism, Masculinity / Femininity, Uncertainty avoidance and long-term orientation. (Source: Professor Hofstede) Given Latin America's positive growth prognosis for shared services, some of Spain's advantages may be its common historical, cultural, and linguistic roots to this region. Spanish-based centres may provide a great opportunity for leveraging the skill set and knowledge the Latin American market requires. In fact, multinational companies appear to be increasingly choosing Spain as a base for their Latin American headquarters. Spain also ranked second in the world, at 9% [behind the US with 23%] in terms of investing in Latin America [Source: Invest in Spain] Spain’s Digital Frontier Spain, along with many other countries, has recognized the potential of the digital industry, and has more than 80 technology parks, which host more than 6,000 companies, across the country. Spain encourages inward investment through a number of tax and financial incentives to multinationals setting up shop. Some of the centres sponsoring these investments include the Centre for Industrial Technological Development, the Centre of Innovation, and Invest in Spain. Spain also offers the second-most favourable fiscal incentives for R&D among OECD countries [Source: Invest in Spain]. Some companies who use Spain as their location for their Shared Services Operations. As is the case for a number of other countries eager to attract job creation industries in services, Spain provides financial incentives to companies setting up. There are incentives for hiring and training staff, including a reduction in employer Social Security contributions. Spain also offers favourable tax rates on corporate income [below US and OECD average], an attractive allowance and deduction system for corporate tax [19.4% of effective rate], and a fixed rate for foreign workers [Source: Invest in Spain]. Business services are listed of as one of the seven top investment sectors, alongside energy, finance, life sciences, aerospace, IT, and logistics/retail/hospitality. The USA leads inward FDI investment with 21% of the total, followed by Italy [13%], France, 11%], and the UK [9%]. Invest in Spain also cites increased interest from Asian companies, especially from China, India, Korea, and Japan, as well as Mexico and Brazil in Latin America, and the Middle East. Talent A trend that is benefiting shared services investment in Spain, according to an article in El Pais, is the fact that Latin America is suffering a relatively inflationary wage environment, given the strong interest in expanding services delivery for the region. Another trend is that companies headquartered in Spain are considering moving their Latin American service delivery operations to Spain. This is partly because of the effects of accelerated growth in Latin America, and partly because across the country, Spain offers high talent availability and especially second and third tier cities with very competitive salaries. In fact, given the dramatic fall in Spanish salaries, Spain may be competing with some of the East European locations. According to some sources, entry-level IT jobs have dropped 40% from the €25,000. That brings Spain into the range of the East European salaries and should act as an incentive for start-ups. The number of customer-facing activities based in Spain are increasing, explains Sergi Lemus, Senior Manager for SSO & BPO activities at Deloitte in Spain, who attributes this in part to the country’s advantage in supplying native language speakers, a key differentiator. Most of this language talent is attracted to Barcelona and Madrid. Spain also has an advantage in offering languages linked with international business awareness, and familiarity, Lemus says: "If you want to find a multi-lingual accountant with an understanding of Swedish practices, you'll find that here in Spain. You won't find that so easily in Poland." This sentiment is echoed by Anita Lettink of Northgate Arinso (NGA), who covers North European clients for this HR outsourcing services specialist. NGA operates a 600-seat centre in Granada, in the south of Spain, and is one of that city’s largest employers. This was an important factor in setting up, explains Anita: "We wanted a highly qualified, multi-lingual talent pool, lower costs and an understanding of European culture within the European time zone." The company has found that in Granada, Lettink says. And while nearby Malaga hosts a couple of IT centres, she believes that NGA is, to date, the only HR shared services centre in Granada. [eventpdf] The Spanish centre, one of seven global centres for NGA, was opened in 2004 to cover European operations. Today, it offers 15 languages and supports more than 50 clients across 70 countries. Back then, as now, the need for a client-facing, local presence for HR BPO services, as well as local language requirements, were the main drivers for NGA: "What we noticed was that while most local salaries across Europe were increasing, some regions of Spain were still operating at wage levels lower than the rest of the continent," explains Lettink. A key factor for NGA’s talent requirements was the fact that Granada is the largest Erasmus University in Europe. This programme, funded by the European Union, guarantees any EU student a year of subsidized study at another university within the EU. This means a lot of foreigners are attracted to Granada to study, and many want to stay, providing the critical language skills NGA is looking for [you can check out NGA’s YouTube channel for on-the-ground feedback]. For NGA, now as then, Granada has proved a winning strategy. PricewaterhouseCoopers’ Kencki agrees that Spain holds an advantage over its European neighbours when it comes to talent and language capabilities, especially when it comes to customer service, which he describes as a natural attribute for Spaniards. "A typical business process job in Spain costs around €400 a day depending on the location," estimates Kencki. "That is above the €300-350 you’d probably pay for the same position in Portugal or Poland, and almost similar to what you would pay in Latin America – but for that you get more value-add and a better understanding of customers needs, both vital to stay ahead in the services game." Spain’s greatest advantage compared to other European "hotspots" is its climate. "Most 20 to 30 year-olds would rather live in Barcelona than Dublin or Krakow," says Kencki, "so it’s natural that companies are considering following the trend." He also points to Spain’s relative neutrality vis-Ã¡-vis many other European countries, which tends to work in the country’s favour, even today. BPO and Consultancy Support Given Spain’s long track record of supporting service delivery (the earliest SSOs were set up two decades ago), the market is well supplied with small, domestic, boutique-type consultancies and BPO providers, as well as outposts of some of the big four firms that have shifted their focus to BPO. This, and the support of a number of government sponsored regional development associations means that anyone setting up a centre in Spain will find all the support they need for implementation. The main source of business process outsourcing in Spain today tends to come from smaller, domestic firms, or the discreet centres set up by the big four accountants, like Deloitte. With an average headcount of 30 to 50 people, these boutique BPO providers are enjoying a steady stream of work, explains Deloitte’s Lemus who sees "big things coming down the pipeline" as far as inward investment in Spanish delivery centres goes. Deloitte heads an informal networking group consisting of the heads of shared services for about 60 companies, located in both Madrid and Barcelona, and as such, has taken the lead in monitoring opportunities and developments in the Spanish market. In Deloitte’s case, Lemus explains, the BPO offering is not part of the strategic business line, but nevertheless employs 700 staff out of a total of 5,000 in Spain. Known as BPS [Business Process Solutions], this group is not seeking to compete with the muscle of established Indian providers, but instead is targeting the midmarket, where its services are being very well received. Of the larger, well-established consultants and BPO providers, Accenture, HCS, ICG, Genpact, Convergys, HP and Deloitte are perhaps the most notable in this market. For its BPO/BPS services, Deloitte has branded itself "local" through its S2G denomination, an approach that seems to work well for Spain, says Lemus, as domestic perspective and awareness are valued above international brands. Another firm that has made headway in this market is the German/Spanish collaboration consultancy/BPO provider Sellbytel, which offers Finance and Customer-facing BPO through its centres in Barcelona and Madrid. Everis, a consultancy specializing in Spain and South America, is now moving to BPO offerings and has had significant success in doing so. Other examples of BPO providers include Indra (a consulting, technology and innovation company with complete BPO services) and Atento (call centres and BPO CRM), both Madrid based and enjoying a global presence. IBM, and HP Enterprise Services as well as Xerox (ACS) and ADP also have important operations in Spain. Another trend we are seeing in Spain is that of existing shared services moving to commercialize their operations. TelÃªfonica, for example, one of the world’s largest telecommunications operations, has moved into enterprise support services. It's worth noting that many BPO firms located in Spain enjoy strategic alliances/ partnerships with companies based in South America and Eastern Europe, which may prove significant key to future growth. The movement of the domestic BPO sector in is as good an indicator as any that something is shifting in the Spanish services delivery market. Barcelona Works for Bayer Bayer operates a 350-seat F&A services centre in Barcelona, set up 12 years ago, covering Western Europe and the US. At the moment, Bayer’s captive shared services model is going through a transformation, with the focus on retaining, in regional front offices, higher-value-add services, while moving transactional, back office operations to its centre in Manila in the Philippines. At the same time, Bayer is extending the scope of its shared services to legal entities across Europe and Latin America, also providing control and decision support. According to Erik Schonebeck, Managing Director of Bayer’s SSC in Barcelona and global Transition Manager for the Accounting Shared Services Organization, there's a trend amongst the more mature shared services in Spain of doing just this: focusing on higher value-add services, especially when languages and voice components are part of the service. Schonebeck highlights Barcelona’s attraction to international students and the good talent pool he has access to: From 2011 to 2012, he observed more than 1,400 shared services jobs advertised through the media in Barcelona alone. "The Spanish market for shared services and BPO is not dead," he says, "no matter what the current perception in the international public might be." Spain's attractiveness for Shared Services operations capacity to attract talent gateway to Latin America geographical location and footprint proven track record financial and tax incentives Some of the companies running Shared Services from Spain GM, HP, Michelin, Mango, Daimler, Vestas, Colt, Coca-Cola, Fluidra, Checkpoint Systems, Air Products, Ricoh, Almirall, Agilent Technologies, Bayer, Brightpoint, Techdata, Chep, Daimler, Desigual, Ericsson, Tui, Schlinder, Seat, Abertis, Telefonica, TOYS-UR-US, Pepe Jeans, Vistaprint, Citi, Gamesa, Iberdrola, Wincor Nixdorf, Adecco Manpower, Alstrom, Aspentech, Avis Europe, Citygroup, Danone, Endesa, Ericsson, Fiat, Fonoservice, General Motors, H1, Honeywell, Iberphone, Indra, Menari, Sara Lee, and Transcom. We want to hear from you: is Spain a convincing opportunity for services delivery? Click yes, no, or undecided in our poll, and see the results immediately.

Spain: the Next Opportunity for Services Delivery?

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