IBM Global Business Services Plant Location International

IBM - Plant Location International Global Location Strategies

Location selection for SSCs
July 2008

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IBM Global Business Services Plant Location International

1. Introduction 2. SSC Location Trends in Europe 3. Location Decision Making 4. Final Observations 5. Reference case studies

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IBM Global Business Services Plant Location International

1. Introduction

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Plant Location International: a global IBM service offering for Global Location Strategies
Plant Location International (aka as IBM-PLI) is a global service offering within IBM Global Business Services (and previously PwC Consulting) exclusively specialised in global location strategies Our area of expertise focuses on analyzing international business locations for expanding or consolidating companies to select the optimal location (country/region/community/property) against best shareholder value IBM-PLI is independent from government authorities or other organisations with local interests and fully objective and unbiased in its advice; no conflicts with real estate, tax, incentives or other interests Unique and unrivalled experience as dedicated corporate investment strategy and location consultant: Over 45 years active in this consulting area; over 2,000 corporate projects conducted Multinational, multi-cultural and multilingual team of location experts in key practices for EMEA, Americas, and Asia-Pacific; local satellites in key markets, contact persons in selected markets Functional, regional and industry specialists within IBM in major locations around the world Experience with all types of facilities: manufacturing, distribution, shared services, R&D, call centers, data centers, headquarters, etc.

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Global resources of Plant Location International

Global hub Local resources Research back office

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IBM-PLIs experience with shared services

Trendsetting in location choices for SSCs, recognizing opportunities in unexplored locations which later developed into hot spots. Maintaining SSC Monitor, a unique in-house database tracking and profiling SSCs around the globe. Assisted over 200 companies with location analysis for a variety of SSCs. Example clients include:
AGFA AGFA AstraZeneca AstraZeneca Avaya Avaya Aventis Pasteur Aventis Pasteur Avery Dennison Avery Dennison Bayer Bayer Baxter Baxter Belgacom Mobile Belgacom Mobile BP Mobil BP Mobil Bristol Myers Squibb Bristol Myers Squibb Citibank Citibank Concert (AT&T+BT) Concert (AT&T+BT) Debenhams Debenhams Deutsche Bank Deutsche Bank DHL DHL Diageo Diageo Dresdner Private Banking Dresdner Private Banking Duty Free Shoppers Duty Free Shoppers Emap Emap Gillette Gillette Henkel Henkel IBM IBM Ingersoll Rand Ingersoll Rand International Paper International Paper John Deere John Deere JP Morgan JP Morgan KPN Orange KPN Orange Kraft Kraft Medtronic Medtronic Nestle Nestle Nike Nike Paramount Paramount PepsiCo PepsiCo Philips Philips Philip Morris International Philip Morris International PricewaterhouseCoopers PricewaterhouseCoopers Reckitt & Colman Reckitt & Colman Reuters Reuters Siemens Siemens Sony Sony Standard Chartered Bank Standard Chartered Bank SwissCargo SwissCargo Tetra Pak Tetra Pak Thomson Travel Group Thomson Travel Group UBM UBM Unilever Unilever Vaillant Vaillant WL Gore WL Gore

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2. SSC Location Trends in Europe

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Global trends in SSC establishment

SSC establishments worldwide
80 Not specified National Sub-regional Regional Global

70

60

50

40

30

20

10

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source : IBM-PLI SSC Monitor

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Typical center size

Distribution of SSCs by size

Wide variations exist in sizes of SSCs, depending on Company & industry Processes & number of processes in scope Geographical coverage & continent Number of clients that need to be served. The majority of centers ranges between 50 and 500 employees, with close to one third having a headcount between 100-250. 20 of the 48 large centers (>1,000 FTE) operate from India.

0 10-24 25-49 50-99 100-249 250-499 500-749 750-999 >1,000

25

50

75

100

125

150

175

Source : IBM-PLI SSC Monitor

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Split by geographical market coverage

Global 8%

The early adopters of SSC often started with the establishment of national centers, with initial focus on USA, and large European countries such as UK, France, Germany, as well as Australia in AsiaPac. In a second stage, regional centers were implemented : pan-European, pan-Asian, panAmerican. Particularly in Europe, a sub-regional model also developed due to complexity of the market and overall smaller labor pools. In recent years, transactional processes are increasingly being transferred to global centers, largely concentrated in low cost offshore locations.

National 25%

Subregional 10%

Regional 57%

Source : IBM-PLI SSC Monitor

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Functional split
Functional coverage
0% 20% 40% 60% 80%

Shared services emerged in financial services, which still represent the vast majority of services. The range of functions has broadened and still is expanding :
Finance, Accounting & Treasury Information Technology Human Resources Customer Support Supply Chain Management Marketing Purchasing Tax & legal issues Decision support

Finance

IT Customer support HR

Logistics

Purchasing

Marketing

It is very common for SSCs to perform multiple functions.

Source : IBM-PLI SSC Monitor

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From on-shore to near-shore options

Traditional locations Second wave locations Third wave locations Fourth wave locations Glasgow Manchester Amsterdam Maastricht Brussels Budapest Lisbon Madrid Barcelona
Switzerland Portugal 2% Other Poland 2% Czech 5% 3% Republic 3% Hungary 3% Germany 3% Belgium 3% Sweden 4% France 4% Denmark 5%

Dublin London

UK 30%

Ireland 15% Netherland s 8% Spain 10%

Source : IBM-PLI SSC Monitor (TOTAL = 625 SSCs in Europe registered in IBM-PLI SSC Monitor, August 2006)
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Examples of SSCs in first, second, third and fourth tier locations:

First wave
Amsterda m Emery NCR Nike Unisys

Second wave
Mancheste r Bristol Myers Squibb AstraZeneca Kelloggs TetraPak Damova Eaton Polaroid Shell Agilent Bayer Citibank General Motors Boston Scientific DHL Mercedes Benz Sony Apple Computer Avery Dennison Black & Decker Pepsi Cola Prague Lisbon

Third wave
IBM-BTO Bratislava

Fourth wave
Kraft Foods IBM Lenovo

Krakow

Glasgow

IBM-BTO Lufthansa Philip Morris ACS Shell Diageo IBM EDS GE Capital ExxonMobil Inbev Accenture Rhodia ExxonMobil SAP DHL ExxonMobil Inbev Regus Grafton

Bucharest

Accenture

Dublin

Citibank Colgate / Palmolive Fujitsu Consulting Philips Whirlpool

Budapest

Barcelona

Lodz

Accenture Philips GE

Maastricht London American Express Getronics GE Lighting Japan Airlines Kodak

Poznan

Carlsberg GSK

Cork

Sofia

Microsoft

Belfast

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3. Location decision making

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Typical location selection process for SSCs

1. Define Project Assumptions and Long List of Location 1. Define Project Assumptions and Long List of Location Options Options De-select less attractive locations: - Many location options - High level, quick analysis - Based on desk research - Focus on key cost & quality drivers - Confidential - High level business case Select best location solution: - Detailed analysis of many factors - Forward looking - Field work to understand dynamics and identify pitfalls - Assess implementation risks - Interviews and negotiations - Full business case - Few locations only (short list)

2. Analyze Long-list of Candidate Locations 2. Analyze Long-list of Candidate Locations Identify Shortlist Identify Shortlist

3. Evaluate Short-listed Locations 3. Evaluate Short-listed Locations Select Preferred Location Select Preferred Location

4. Site Search & Negotiations 4. Site Search & Negotiations Select Preferred sites and Select Preferred sites and start negotiations start negotiations

5. Implementation 5. Implementation

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Defining key location assessment criteria

An initial list of location candidates (countries, regions or communities) is typically screened on a broad range of location factors. Both financial and qualitative factors are identified based on strategic, geographical, industry, and corporate context. High level financial analysis focuses on key financial performance drivers. Qualitative analysis assess all key non-financial factors, each weighted on their importance (see to right). Locations are scored on each location factor. Overall weighted analysis identifies best quality candidate locations. Cost-quality maps are developed to identify locations that best meet project requirements (see next page).

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Assessing the trade off between cost and quality to shortlist best location options

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Detailed qualitative analysis of short listed options Different techniques to assess business risks

City Risk Assessment Presence of technical skills Presence of manufacturing workers Knowledge of the industry Competition for similar skills Tightness in labor market Unions & social climate Mastery of English Logistics Local support environment Working time practices On- & off-boarding flexibility

Location A A

Location B B

Location C C

Location D D

Low Risk

Moderate Risk

High Risk

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4. Final Observations

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Observations on Central and Eastern Europe

Low cost base makes CEE an attractive area to consider for new establishments or relocations Business environment in CEE-countries is quickly developing, not just for manufacturing also for services Young generation has right qualifications and is eager to work with international companies

But:
Not all requirements for SSCs are easily met: Languages is still a major risk factor Familiarity with SSCs is still limited (implementation support) Growing interest in CEE poses a threat for quick and unexpected overheating of labor markets And labor costs increase yearly by higher rates than in Western Europe Large differences between main cities and rural areas leaving the options limited

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Observations on Western Europe

Traditional locations are currently relative safe bet for shared services centers (mature markets with reasonable costs) Implementation risks are lower For higher end shared services centers, and language sensitive centers these are still strong options

But:
The trade off will be a higher operational cost Watch out for signals indicating overheating of labor market

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Examples of Major Mistakes in Location Selection

The Hot Spot Syndrome : Everybody is going to XXX. So thats where we need to be Result: Companies suffer from tight labor markets and further intensify such tightness It may be better to avoid hot spots than to join them Too much focus on cost reduction and/or choice mainly driven by taxation and/or incentives Result: Companies suffered from poor availability of skilled staff There is always a trade off between cost and quality of a location Companies looking only at some general statistics to select locations Result: clear signals for future risks are neglected Risk analysis via field verification is always needed Result: no clarity why certain locations were not selected or not even considered Make sure you follow a logical thought process (not necessary long and intensive!) and have answers to the Why not ..question

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5. Reference case examples

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Food & Beverages Industry Location strategy for 2 new regional Financial Services Centers to serve North American and European operations
Business Challenge
The main drivers for the SSC were availability of financial and multilingual skills at low cost, living environment, international access and avoidance of competition for staff in locations that had not yet developed into SSC locations Functions included Finance, Customer services, HR and Procurement. The client wanted to take advantage of being a first mover to an untapped, low cost location and had projected a very tight timeline for location selection and implementation.

Project Approach
In a preliminary phase of the assignment, IBM-PLI performed a quick comparative analysis of operating costs in existing client locations versus representative SSC locations in Europe, the Americas and Asia (as offshore options). The analysis showed major cost savings could be achieved in lower cost, non traditional SSC-locations. As a result, a dozen cities were evaluated both in the Americas and in Europe, through desk research on cost and qualitative business criteria. This analysis led to a shortlist of two cities in the Americas and three cities in Europe - all in Central and Eastern Europe. By means of field research, a thorough analysis was made in these short-listed cities focusing mainly on HR and property issues. In Europe, joint visits with the client team were organized in the two preferred locations
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Client Benefits
Based on IBM-PLIs recommendations, the client was able to select the most suitable location for their SSC operations, taking into account the limited timeframe and their specific requirements. In Europe, given the market conditions in the shortlisted Central and Eastern European locations, and the very strong linguistic requirements for the customer service function, IBM-PLI recommended to separate this language sensitive function from the processing functions to avoid recruitment risks at the most attractive locations for the finance center. Within a timeline of 3 months from initial discussions on location selection, the client was able to start implementation at the new location As a pioneer in a new market, full advantage of labor arbitrage was secured for various years.

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Consumer Products Manufacturer Global shared services location strategy covering Europe (West, Central and East), Latin America and Asia-Pacific (East AsiaPac, China and Central Asia Middle East / India)
Business Challenge
In Europe alone, the shared services operation would represent more than 1,200 FTEs. Key success factors to implementing shared services included the contribution to cost reduction, maximum retention of present key staff, potential for a fresh start as well as tax optimization potential.

Project Approach
With the client project team, IBM- PLI identified an initial long-list of locations, with countries in Europe and LatAm, and cities for Asia given more limited location options. Based on the most critical success factors, a high-level location screening reduced the number of candidate locations to a shortlist. For the short-listed countries in Europe and Latin America, a second round of high-level screening was performed, this time on a city level, to come to a short-list of cities for all three regions. IBM-PLI investigated various scenarios for servicing the different regions from a sub-regional perspective based on headcount and language requirements, business unit or functional split. For all sub-regions identified , the most critical operation requirements were thoroughly studied by means of intensive field research and with most of the emphasis on HR issues. Validation visits for the client project team were organized in the preferred locations.

Client Benefits
IBM-PLI suggested on how to best service the various regions from a sub-regional perspective based on headcount, language requirements and regulatory constraints. Based on these recommendations, the client opted for a three-center approach in Europe based on linguistic split, a three-center approach in Asia due to size and regulatory issues in terms of data transfer, and a one or two-center approach in Latin America based on accounting regulations and tax issues. IBM-PLI recommended two to three best location options in each sub-region.

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Roel SPEE Global Leader +32 2 416 5928 roel.spee@be.ibm.com

Patsy VAN HOVE Manager +32 2 416 5925 patsy.van.hove@be.ibm.com

IBM Global Business Services Plant Location International Woluwedal 22 1932 Sint-Stevens-Woluwe Belgium Web-site: www.ibm.com/bcs/pli

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