Relocation and outsourcing of services activities to Hungary

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Relocation and outsourcing of services activities
to Hungary

• Magdolna Sass
• Institute of Economics of the Hungarian Academy
  of Sciences and ICEG EC

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Outline of the presentation

• What is BPO? What are its main characteristics?
• Hungary as a host to BPO
• Research on location advantages and impact on
  the host economy
• Relocation
• Conclusion
• Research on BPO in ECE is based on company
  interviews
• Presentation based on the project "Foreign
  Direct Investment in Central and Eastern Europe
  What Kind of Competitiveness for the Visegrad
  Four?" and OTKA no. 68435 (Hungarian research
  fund).

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Business process outsourcing1
Location of production Internalised Externalised (outsourcing)
Home country Production kept in-house at home Outsourcing (at home)
Foreign country (offshoring) Intra-firm (captive) offshoring Offshore outsourcing

• Induced and facilitated by technological
  development fragmentation in services and
  transferability (IT) intense competition
  liberalisation of services trade
• Certain services activities affected (not all)
  (IT, business process services, etc.), very
  diverse activities with various skill contents
• Further growth in BPO is expected due to various
  factors
• Relocation a process, in which either there is a
  transfer of production capacities from another
  country, or there is a capacity extension in one
  affiliate parallel with a capacity reduction in
  another, or there is a capacity extension in one
  affiliate, while other affiliates capacities do
  not change.

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East Central Europe and Hungary as a new location
for BPO

• Movements of jobs/related FDI mainly between
  developed countries and India (started out from
  English-speaking countries, continental Europe
  only followed)
• Though methodological problems of measurement
  (FDI, foreign trade, prices -market shares,
  number of jobs etc.),
• in East Central Europe, especially the Czech
  Republic, Hungary and Poland are the main hosts
  to BPO projects, though their share is much lower
  than expected on the basis of media reports
• On the basis of the number of projects 1400-1500
  in Europe, 150-180 in the three countries in CEE
  (India, other Western European locations),
  distributed approx. equally (biggest project to
  India)
• Combined market share of CEEs globally less
  than 1 per cent (McKinsey (2006)

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Hungary as a host to BPO
Service centres receiving financial incentives in
Hungary
Company Home country Location in Hungary Number of jobs (actual or planned)
ExxonMobil USA Budapest 1200
IBM ISSC USA Budapest 1300
Diageo United Kingdom Budapest 600
Getronics Netherlands Budapest 510
Jabil USA Szombathely 719
SAP Germany Budapest 600
Tata India Budapest 450
Convergys USA Budapest 282
EDS USA Budapest, Szeged 1150
InBev Belgium Budapest 380
Budapest Bank USA Békéscsaba 530
Morgan Stanley United Kingdom Budapest 450
Citigroup USA Budapest 302
Vodafone United Kingdom Budapest 746
British Telecom United Kingdom Budapest, Debrecen 700
T-Systems Germany Budapest, Debrecen 1750
Source ITDH
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Hungary as a host to BPO

• Approx. 50 centres
• Approx. 20-22 thousand people, 99 white collar,
  between 80 and 90 with university diploma and
  multiple language knowledge
• Going to the countryside now (university towns
  close to the border)
• Dynamic growth in output, exports (high share in
  EU27 comparison, turnover centred on the EU,
  share of other services /other business services
  grew in services exports, specialisation indices
  show a relative specialisation on other business
  services though methodological problems)
• Various activities (often more activities in one
  project)

Common corporate functions Knowledge services and decision analysis Research and development
Transaction processing Document management Data entry Data processing Call centres HR Accounting Administrative Financial services IT call centres and other IT services Quality management Program and project management Financial program management Integration engineering Supply chain management Analytical accounting services Business performance analysis Cost analysis Software development
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Research questions and method

• Locational advantages determining the choice of
  the new location (inside CEE)
• Impact on the host economy
• Method questionnaire based company interviews (5
  in Hungary 2 captive, 3 non-captive) and as a
  basis for comparison 3-3 interviews in the Czech
  Republic, Poland and Slovakia

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Location advantages 1

• determine which countries are chosen as hosts to
  new or relocated service centres
• similar to those of efficiency seeking
  investments (costs and availability of
  appropriately trained or trainable skilled work
  in the required quantity) specific
  infrastructure (telecom)
• Additional availability of certain services
  (financial etc.), good regulatory and business
  environment, IP, office space, geographical
  proximity/same/similar time zone in some cases
  (nearshoring), different time zone in others,
  language knowledge (specific other than English
  European languages, small languages)

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Location advantages 2 inside the region

• Specific advantage knowledge of smaller
  languages, good geographical position
• Inside CEE
• Poland stands out with its size (bigger
  projects), location (NE, Baltics)
• Czech Republic central location, best flight
  connections, specialisation on IT
• Hungary minor languages (minorities in
  neighbouring countries), good location (CEE)

• Choosing among the three countries is based on
• Earlier presence of the company
• Previous good (or bad) experience with the
  country
• Choice is influenced by the relative dynamism,
  success of local affiliates
• Special language requirements
• Active lobbying of the local affiliate
• Quality of life, culture, English schooling etc.
  in the target city, especially in cases when
  expatriates are involved
• Very limited role of incentives (mainly for
  bigger projects)

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Impact on the host economy 1

• Companies with foreign participation have the
  potential to impact upon positively on the
  business environment, on local companies in the
  host country, though this impact is not automatic
• Analysed in the literature almost exclusively in
  manufacturing, though it is relevant for services
  sector FDI as well
• While the share of the three analysed countries
  is not high, from the host economy point of view,
  these are big projects and have a potentially big
  impact on the local economy
• Various fields of impact on the local economy is
  analysed on the basis of company interviews
• Job creation
• Linkages and other local contacts
• Impact on the business environment and
  infrastructure
• Spillovers through trained employees

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Impact on the host economy 2

• Job creation
• Significant impact in Hungary approx. 20-22
  thousand people working in BPO (incl. captive)
• Medium to high skilled jobs (very little
  unskilled) for young university graduates,
  usually with (multiple) language knowledge
• Activities carried out table (overtrained),
  though VA/output among the highest in services
• Shortage of properly trained employees in all 3
  countries
• Spreading out to the countryside (from the
  beginning in Poland, now in the Czech Republic
  and Hungary)

• Linkages and other local contacts
• (Very) limited backward linkages (cleaning,
  security, cafeteria, etc., little substantial
  outsourcing)
• Forward linkages come as local companies become
  more mature, as competition is more intense (in
  Hungary seems to be more important compared to
  the other two countries)
• Contribution of linkages to raising the level of
  competitiveness/productivity of local companies
  very limited

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Table 16 Activities carried out in the companies
interviewed in Hungary
Back office Customer contact Common corporate functions Knowledge services and decision analysis Research and development
Transaction processing Document management Data entry Data processing Call centres HR Accounting Administrative Financial services IT call centres and other IT services Quality management Program and project management Financial program management Integration engineering Supply chain management Analytical accounting services Business performance analysis Cost analysis Software development
Source own compilation based on company
interviews
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Impact on the host economy 3

• Impact on the business environment,
  infrastructure
• Competition for appropriately trained employees
  is intense companies are more active locally,
  than ordinary FIEs (participation in local
  business associations, links with universities)
• Intense use of local infrastructure in some
  cases results in better services

• Spillovers through trained employees
• This seems to be one of the most important local
  impacts
• Trained employees in certain cases set up their
  own enterprises or go to work to domestic
  companies
• Not only skills, but business culture, business
  ethics are transferred

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Impact on the host economy 4
Graph 1 Balance of trade in computer services and
Other business services, 1995-2006, million euros

• BOP, FDI, FT, other
• Methodological and data problems
• Relatively high share in FDI stock (10 )
• Increase in services trade, especially in other
  services and other business services
• Balance of trade turned positive (graph)
• Specialisation indices and RCA show change in
  business services towards relative specialisation
  and RCA

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Relocation

• Even more methodological problems
• Case by case analysis is needed
• In Hunya, Sass (2005) company cases of
  relocations in the period between July 2003-
  September 2005
• 9 of 61 cases affected business services
  (declared relocations)
• Affected locations (from which the activity was
  transferred) mainly Western Europe (Germany, the
  Netherlands, Austria, UK, Ireland, non-specified
  Western Europe) and the US
• Owners of companies mainly US and UK
• Activities various, more than one per project,
  but not all activities of a firm are relocations
  (company interviews)
• Location in Hungary mainly Budapest

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Declared relocations in business services, July
2002-September 2005
Company Activity Foreign location affected Munkahely-teremtés vagy -veszteség
GE Capital (USA) Regional call centre Other Western European locations 400-500
Renault Nissan (French-Japanese) Regional logostocs centre Austria 60-80
Electronic Data Systems (USA) Regional centre Western Europe and the US 350-400
Avis (UK) Financial administrative centre, regional call centre, financial-informatics services Germany, (Belgium) 400
Diageo (UK) Extension of capacities of service centre, new activities (accounting) UK 60
Electronic Data Systems (USA) Capacity extension for new activities, call centre Western Europe, USA 400
Avis Europe Plc. (UK) Extension of financial services centre Western Europe 135
Maxtor Group (USA) African, European and Middle-Eastern service centre relocation (leaving call centre and financial planning there) Ireland Approx. 20
Marsh (USA) European accounting and administrative activities (except for UK, Ireland and the Netherlands) UK 12
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Conclusion

• From a competitiveness point of view BPO projects
  in CEE
• Contribute to the formation of a better domestic
  business environment, in some cases availability
  of high quality services for domestic companies
  (forward linkages)
• Local contacts- backward linkages (suppliers)
  minimal, though, esp. forward linkages increasing
  over time
• Job creation for medium to high skilled, (though
  overtrained, partly due to the language knowledge
  requirement) spillovers through employees
  (skills, culture, ethics, own SMEs)
• Significant impact on the BOP, though due to
  methodological problems, it is difficult to
  quantify separately for these projects (FDI,
  FT-balance, profit repatriation etc.)
• (Inside EU movements) Importance from the point
  of view of raising the competitiveness of overall
  EU-27

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Thank you for your attention!