Market Talk: Pandemic Adds Extra Heat to Service Centers Competition
The COVID-19 pandemic may have triggered a new golden era for the services center market, be it shared services (SSC), business services (BSC), or global business services (GBS), analysts tell the Budapest Business Journal.
Evermore companies are investing in digital transformation, especially in the process of consolidation. In this environment, Hungary remains attractive amongst Western European companies as a location for their BSC operations; indewed, the sector has become one of the leading contributors to the national economy. The country remains an attractive investment destination due to its skilled workforce, good infrastructure, and favorable tax environment, but this is a fiercely competitive field.
Southern Europe and North Africa are developing as new locations for services centers. Nevertheless, Central Europe, including Hungary, remains a preferred location for Western European countries to base such near-shore operations.
“Strong contenders to the established Eastern European countries are Portugal and Lithuania, but we also see smaller countries further east like Serbia and Moldova entering the market for BSCs with a young and hungry workforce,” Markus Martens, executive director of business consulting at EY Hungary, tells the Budapest Business Journal.
Services centers account for a significant share of Central Europe’s office space takeup, as headcount growth rate typically ranged between 10-15% year-on-year throughout the previous decade. The COVID-19 pandemic changed that trend, however.
“The BSC industry associations across CEE project that, year-on-year, job creation is expected to vary between 5% and 7% in 2021-2022, which is a significant decrease compared to the pre-pandemic figure (12-15%),” Tamás Steinfeld, head of research at Colliers Hungary, tells the BBJ.
“Still, around 850,000 employees are working in the sector across the region, which implies that, by yearend 2022, around 100,000 additional employees will potentially require office space. Assuming, of course, they will need to use a corporate facility, for two to three days per week at 10 sqm per person, it still means a large potential for office demand for the future,” Steinfeld adds.
Interest in Central and Eastern Europe actually grew during the pandemic. “There was increasing demand for the region due to the disruption of services for certain Asian markets which were temporarily transferred to other destinations due to the lack of working from home infrastructure. [...] As a result, this issue could mean further growth and potential possibilities for business services in CEE as companies revisit their business continuity plans,” Steinfeld explains.
Hungary has become an internationally recognized destination in the services sector over the past decade and has continued to attract new investments and create high value-added jobs through a good business environment. More than 130 companies now employ something like 60,000 people in the sector.
“In addition to the commitment and the excellent and flexible work of our employees, the favorable business environment is also a driving force for the continuous growth of the Hungarian center,” Jeroen Kirschbaum, lead country manager at ExxonMobil Hungary, says of his own BSC.
“In the coming years, we will also further increase the number of our staff and the size of our headquarters, and gradually expand the range of activities with which we contribute to the day-to-day operations of ExxonMobil,” Kirschbaum adds.
The principal driving factor for Hungary’s competitiveness remains its skilled workforce. However, a slowdown in companies selecting Hungary as their preferred location has been experienced in an increasingly tough war of talent in the markets. That is down to increasing labor costs which are only partially offset by the weakening of the Hungarian currency, the Forint, according to Martens of EY.
“Amongst the Visegrád Four countries, Poland comes out as a clear leader with a continuous incoming stream of top international companies building up new BSC operations. Besides its significantly larger size, one of the success factors is the availability of a large number of Tier 2 and even Tier 3 cities that can provide the industry with an experienced workforce. In contrast, Hungary has its focus mostly set on Budapest. While we do have cities like Debrecen and Szeged that have made some ground in the past, we see huge potential in the Hungarian countryside with a large graduate and multilingual workforce,” Martens adds.
Kevin Turpin, regional director of research for CEE at Colliers, names another V4 country as his club leader, though. “The Czech Republic is a proven leader in the GBS sector in CEE with over 310 centers and rapidly approaching 130,000 people employed in the sector,” Turpin tells the BBJ. “In Hungary, the migration of services out is growing slowly by a few percent annually, representing the fact that the Hungarian SSC industry has reached its maturity level. With 205 service centers and more than 73,800 employees, the sector has a track record of steady growth,” Turpin adds.
Nevertheless, the number of employees at centers in Poland in H1 2021 was 355,300, a 3.9% year-on-year growth rate, according to Turpin.
“However, the employment growth rate has slowed down, which is a symptom of the sector entering the mature phase. This trend is also supported by the decreasing number of new centers being established in the last three years,” Turpin says.
In Slovakia, while there are new arrivals, the majority of the expansion in the market is triggered by established centers. Here, the sector, dominated by large companies originating from the United States and Western Europe, employs more than 37,000 employees with the potential for the market to increase further.
In such a fiercely competitive market, Hungary still has some competitive advantages. “Thanks to high value-added activities and positions and a highly skilled workforce, this competitive advantage can be maintained and strengthened in the future,” ExxonMobil’s Kirschbaum insists.
“To adapt to a rapidly changing environment, significant resources need to be allocated to training and continuous improvement, especially in the field of digitalization. We are glad that the satisfaction of our employees has remained steady and that they see perspective and vision in the work we are doing,” he concludes.
There is room for improvement, though. According to Steinfeld, reaching a higher level on the EF English Proficiency Index could contribute to expanding the services center sector in the country.
Sifting Through the Service Center Alphabet Soup
Shared Services Centers (SSCs) typically provide transactional activities. Due to relative task simplicity, simple activities are easily transferred to the center and allow for quick economies of scale. Business Services Centers (BSCs) are more complex. They provide end-to-end services across various processes and functions with a higher degree of ownership and accountability. Global Business Services (GBS) are even more complex and challenging and can be used as an engine to transform the business. It is seen as the next step of the SSC evolution. For the scope of the present article, for simplicity reasons, the BBJ uses the generic terms “services center” or “center.”
This article was first published in the Budapest Business Journal print issue of November 19, 2021.
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