CEE’s No. 1 Office Tenants Drawn by Problem Solving, Costs and Efficiency
SSCs are a key component of demand in the office sector and a vehicle for inward investment across CEE. Gary Morrell spoke with Thom Barnhardt, founder and CEO of CEE Business Media Inc., who has operated in CEE for 25 years. The firm organizes awards events for investors into the region, including the CEE Business Services Awards and CEE X-Tech Awards in Warsaw, the USA-CEE Investment Awards in New York, and Tokyo’s Japan-Europe Investment Awards.
Corning Hungary accepts its USA-CEE Business Services Award in New York.
BBJ: Could you define an SSC in the CE context?
Thom Barnhardt: Shared services centers are always subsidiaries of the parent holding company, and provide services to their global HQ and offices located worldwide. The idea is that by centralizing commonly-used internal services that all subsidiaries use (such as Finance & Accounting, HR services, IT/Technology), the company can save lots of money by streamlining these processes, and delivering them from a lower-cost location.
So for example, ExxonMobil decided years ago that instead of having separate F&A functions in every country in Europe, it could centralize this process in Budapest. Then the services naturally expand into common HR services, technology, etc. And inevitably, as the companies’ managements get comfortable with the quality of the services delivered, the SSC (also referred to as a captive service provider or business services center, center of excellence, or global business services) begins to provide more value-add services. We see this in companies like Morgan Stanley or State Street in Poland, who are providing hedge-fund accounting, and pension funds services.
BBJ: Are companies establishing headquarters with SSC functions in addition to R&D and more complex functions?
TB: Absolutely. And it is a natural progression, as the “local” SSCs prove their capabilities and build trust internally in the organization. CEE’s disadvantages coming out of “communism” were poor marketing and sales skills, for example. But their advantages were very strong mathematics, problem-solving, engineering, languages, etc., which are a perfect fit for global corporations which can now hire these services globally. Internet and digital connectivity has made this possible.
BBJ: What percentage of office take-up and estimated demand comes from SSCs in Hungary and CE?
TB: I don’t have the exact numbers, but in cities like Krakow, the number is well over 60%. I think in bigger cities like Budapest or Warsaw, the percentage is lower, but still might be in the 30-40% range. Clearly and with no doubt, the SSC/BPO sector is the number one tenant across CEE.
BBJ: What do you see as the pull factor for companies in the region?
TB: Highly-educated workforces in the skills that they need (IT/technology, European languages, mathematics/analytics, etc.) I strongly believe that Hungary’s early embrace of foreign direct investment has driven this subsequent wave of SSC investment, since the global accounting firms and global corporations have incubated and trained large numbers of Hungarian management to top, international standards.
By contrast, the region’s biggest competitor is India, but CEE wins when companies need to have French or Swedish or German speakers. And CEE also wins when companies need management teams to solve problems; in Poland, the skill of “kombinowac”, to find an extraordinarily creative solution when no resources are available, is wonderful in this environment. I know that Hungarians and certainly Russians have this too!
BBJ: What proportion of this is down to financial reasons and what proportion is due to issues such as skills and languages etc.?
TB: Yes, Budapest and Gdansk and Cluj are lower-cost locations than San Francisco, London, and Copenhagen. So partially it is driven by so-called “cost arbitrage”, but that’s only possible because the skills are also there. As well as the supporting eco-systems of SSC centers; new investors can come in and poach well-trained staff from other SSCs, and we see this all the time.
BBJ: What needs to be provided in an office environment to facilitate a functioning SSC?
TB: In short, whatever leads to better retention of staff, such as the quality of the office interior and the quality of the location with regard to access to transportation links and public amenities. The next generation wants to be part of the global green solution, so sustainability is important.
BBJ: What are the locational requirements for an SSC?
TB: Easy access via public transport; a “cool” area to work in, with services and a certain style to the area. We can see in Warsaw that some of the locations that were hot office development centers 15 years ago are now way out-of-fashion, and office valuations there are suffering.
And from the perspective of international investors choosing locations for their new SSCs, air access is key. They need academic centers, they want cities with international schools, they want places that can draw workers from across the globe. Luckily, Budapest fits the bill nicely. (As an aside, I think Wizz Air deserves a medal for opening up so many additional CEE cities to more foreign investment.)
BBJ: Are SSCs facilitating the development of and providing employment in cities outside the capitals?
TB: Absolutely. There were questions (silly questions, in my opinion) about five-seven years ago about whether “secondary” cities can attract the investment. And this is clearly proven as cities like Gdansk and Poznan in Poland have been very successful bringing in SSC investors, as well as cities in Romania like Cluj and Iasi, and Brno in Czech Republic. In Hungary, cities like Debrecen and Szeged are much smaller population centers, so they won’t get big SSC investments, but they will get quite a few and the impact is big. Debrecen won “Top Emerging City of the Year CEE” at our awards event two years ago.
BBJ: How central is your event to promoting the SSC sector and what does it say about the development of the sector in CE?
TB: Our CEE Business Services Summit & Awards is the leading such event in the region. We have sold out every year, and it is becoming more international every year; last year we had guests from 27 countries. While each year someone says the SSC market in CEE can’t keep growing as much, it continues a steady growth of about 8-10% per year. The sector now employs more than 500,000 people across CEE, and these are at above-market wages, so it’s an aspirational sector.
BBJ: What is the criteria upon which the Corning office in Budapest won at the recent USA-CEE Business Services Awards in New York?
TB: Corning is just a world-class company. They started their SSC in Budapest more than 10 years ago, and it has evolved into a strategically key center for the company. For example, from Budapest, they are providing Treasury management to their whole group, they are on the leading-edge of implementing Robotic Process Automation, and they have been able to increase transaction-volume by 50% while decreasing transaction-costs by 25%. I think the jury recognized this.
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