Service offshoring takes off in Europe

• Nearly half of Europe's top firms plan more offshoring in coming years
• British companies lead the way

Four of 10 European firms have begun to relocate service functions offshore. The first comprehensive survey on the offshoring strategies of leading European companies, conducted jointly by UNCTAD   and Roland Berger Strategy Consultants, polled a representative sample of Europe's top 500 companies, covering more than 20% of total revenues of the top 500.

It is especially those firms headquartered in the UK, Benelux, and Germany that have been offshoring parts of their service functions. Companies from those countries account for 90% of the number of service jobs already offshored. UK companies, which represent more than 60% of all service jobs offshored, lead in terms of total volume.

More offshoring is in the making, with close to half of all respondents planning to offshore more services in the next few years.

"Companies in Europe seem to fall into two categories where offshoring agility is concerned: A significant portion have already offshored in the past and is planning on further activities, whereas other companies neither have any experience in offshoring nor are they considering it for the near future", says Thomas Eichelmann, senior partner and member of the global executive committee of Roland Berger. "Basically, competition in their markets as well as availability, costs of skill patterns, and infrastructure are the root causes driving companies in deciding on whether to offshore and which target countries to choose."

Overall, the respondent firms are very satisfied with their experiences. About 80% of those that have actually offshored consider their projects successful, as opposed to less than 5% that deem them unsuccessful. While benefits go beyond the obvious cost savings to include extended and improved quality of services as well as access to skills and infrastructure, cost reduction is the prime driver. Realized cost savings from services offshoring are typically in the range of 20%-to- 40%,

often exceeding the companies' original expectations. Every third company that has offshored services also reports that improvements in service quality have surpassed their expectations.

The survey reveals that the selection of target countries goes beyond benchmarking of hard facts (e.g. costs, skills and time zone) and is influenced by such soft factors as following competitors, promotion by target countries and internal lobbying by a foreign affiliate. Soft factors influence decisions for more than 40% of the companies.

In terms of target destinations, more than half of all offshoring projects have been undertaken within Europe. The top European locations include such Western European countries as the UK, Ireland, Spain and Portugal, as well as Poland, Hungary and Romania in Eastern Europe. Almost four of every 10 projects go to Asia, and to India in particular. In job terms, Asia's share is much higher, since projects offshored to that region tend to be the largest ones.

For some companies, other regions are entering the radar screen. "We are currently checking potential locations in Middle and South America, namely Brazil and Mexico, to offshore front office services", says a representative of a company based in south western Europe. "We realized that huge efforts are being made to establish this region as attractive target destinations for service offshoring. This region is more attractive for us than Asia, especially regarding the language fit."

The full range of services from front office to back office functions is considered for offshoring. Finance, accounting, IT support and human resources and other back office services are involved in some 60% of all current or planned offshoring projects of the European companies interviewed. A third of the companies mentioned offshoring of front office services, such as customer call centres. Overall, there are no "sacred cows"; basically all kinds of services are potential candidates for future offshoring. No business process was explicitly excluded from offshoring considerations by more than 20% of the respondents. "We systematically revise our services on a regular basis, seeking opportunities to benefit from offshoring", said a representative of a large company in the transportation industry, "but we do what we can to avoid having our company's name publicly connected to offshoring so as to avoid a backlash from the public".

While European companies generally lag behind their US rivals in offshoring, more than 50% of the firms do not consider the US framework for offshoring to be applicable in Europe. The main perceived differences are the regulations and flexibility of the European labour markets, diversity of culture and the status of English as a world language.

From a policy perspective, countries need to identify the niches in which they can offer an attractive base for services exports. "The offshoring of services opens many opportunities for new jobs and exports in developing countries", says Karl P. Sauvant, Director of UNCTAD's Investment Division. "Whereas only a few countries already receive such services, the potential is there for others to benefit as well, provided they can offer the right mix of costs, skills and infrastructure, and that they market their locations effectively."

Companies that have offshored services are convinced that their home countries also benefit from offshoring, notably in the form of improved competitiveness and lower prices. This suggests that offshoring may be important for the overall competitiveness of European business as compared to their United States competitors.