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SSCs drive big demand for office space

The growing number of companies seeking to locate back office services in the capital is one of the main reasons why the city is currently suffering from a lack of office vacancies.

The Green House, home of Avis Budget Group.

One of the main causes behind Budapest’s current shortage of vacant office space is the success of shared services centers (SSCs) and business process outsourcing (BPO) in the city.

Through these operations, multinational companies and organizations are seeking to off-shore the operational elements of companies to countries such as Hungary that are able to provide quality office accommodation, a skilled labor force and good business infrastructure at a price significantly lower than Western Europe. In recent years, Hungary and other Central and Eastern European countries have successfully promoted themselves as advanced but cost-effective business destinations for SSCs. From a real estate perspective the basic requirement is that there is a stock of well-located class “A” office space, with a premium on public transport links.

“This should be regarded as a completely new industry that is specific to CEE, as SSCs/BPOs require a skilled labor force direct from universities,” said Tim Hulzebos, managing director of Colliers International Hungary. “The number of corporations establishing SSCs make this the main driver of the office development market in Budapest. This is as central to the real estate industry as production facilities are to the industrial sector.”

In 2014-15, close to 6,000 new jobs were created and there are now more than 90 companies operating in the sector, employing approximately 40,000 people according to SSC Heroes, an online service that seeks to promote and publish data on the SSC industry in Hungary. “SSC firms employ a large number of people, already around 37,000 in Hungary, out of which approximately 80% are employed in the capital,” commented Kata Mazsaroff, director of occupier services at Colliers International. “The overwhelming majority of these people are young and educated, who require a modern and comfortable working environment. The significance of these companies is highlighted by the fact that in the Budapest office market they currently occupy approximately one-quarter of the total “A” class office stock. Additionally, more than one-fifth of all lease transactions in the class “A” segment were closed by SSC firms in 2015.”

Definitions of SSCs and BPOs

Definitions of what constitutes an SSC vary. It is, however, widely defined as the entity in an organization responsible for the handling of specific operational tasks such as accounting, human resources, IT, legal, compliance, purchasing and security. Essentially it is the spin-off of corporate services in order to separate operational tasks from the corporate headquarters.

This process is seen as cost sensitive in terms of head count, labor costs and local selection criteria. And locating these services in CEE offers a substantial discount on core Western European business centers.

According to SSC Heroes, the difference between BPOs and SSCs is mainly the question of for whom the services are provided. In business process outsourcing, a third party provides specific services to a company on a contract basis. However, the spread of the internet and global communication has led to the creation of aggregated back-office functions in the form of shared services centers. SSCs are not third party service providers but service providers to their mother companies. In the CEE region, these companies have started to become more than a back-office division providing standard activities; they have become strategic centers that have extended their portfolios to include more complex customer-facing roles and remote sales, as well as the core activities of the mother companies.

“Comparing the two, BPOs involve contracting an outside vendor, with the appropriate skills and resources to carry out the work, while shared services is a single, autonomous business unit within the company – both are usually built in a low-cost location,” said Zsolt Kelliar, managing director of SSC Heroes. “In general, BPOs is credited as generating greater productivity due to more advanced technology, systems and processes thanks to higher volumes and specialization. However, if you have the skills, resources and time to carry out the work in-house, you will get more control and save transition and supplier’s margin costs.”

 Gábor Borbély, head of research and consultancy at CBRE Hungary, argues that SSCs/BPOs tend to move to multi-tenanted buildings rather than establishing headquarters. “Companies look for the best buildings available as landmark and visibility both matter for them. Central locations are preferred, and easy public transport (metro access) is key and more important than parking ratio. Air quality is crucial, due to a relatively high number of employees per sqm, and proximity to an education center with the need for an educated labor force,” he said.

What kind of space do they need?

The largest current Budapest office project is Váci Greens by the Atenor Group, a phased project that will deliver 135,000 sqm of office space on completion. GE Healthcare has established a sales and service center for CEE and a software hub in addition to a laboratory area at the center.

The complex has BREEAM accreditation, easy access to green areas and large floor plates in addition to two restaurants, a gym, a medical center and a conference center. Developers are increasingly designing projects with a view to securing SSC tenants with a dense person per sqm ratio and the need for amenities such as bike racks and changing room facilities, cafe and restaurant facilities, and green spaces that also act as informal meeting areas. The concept is that staff will be happy to spend time at the complex, often working irregular hours and taking the opportunity to utilize the leisure facilities.

Although the initial image of SSCs as essentially call centers was less than glamorous, SSCs/BPOs are now promoting more dynamic life-styles and ways of working. “Companies need to create an environment where people are motivated to work,” added Hulzebos of Colliers International. “This can be a challenge where 1,000+ staff could be doing a similar job. Companies need to retain staff and therefore an interesting environment needs to be created.”

According to Mazsaroff, SSCs usually have an office requirement of 6-10 sqm per employee, which is less than the average requirement by tenants from other industries. Efficient floor plates, supported by adequate systems allowing dense seating requirements, are therefore key. On the other hand, more space is provided for social and informal activities like larger kitchens, phone booths and social areas to compensate for the direct dense working environment. This eventually increases office space requirements, but shows that the wellbeing and productivity of the employees is a higher priority for these companies, even at the expense of real estate cost saving. So the aim is to achieve real savings in overall costs by increasing the productivity and engagement of employees, with companies prepared to invest in a better working environment and implement an active design and layout that could increase employee productivity.

The Váci Corridor is generally regarded as an excellent SSC location. Wing will deliver its 12,000 sqm V17 office center this summer, with an 8,500 sqm pre-lease with E-On already concluded. The Avis Budget Group has established a 7,200 sqm SSC on three levels for around 600 employees at the 17,800 sqm Green House by Skanska. The office is responsible for finance and accounting, debt management, IT, database management, fleet administration and customer services. According to Avis, the center was chosen due to a combination of its location adjacent to a metro station and other public transport links, and what it defines as a “modern and healthy work environment”.

One brake on increased SSC market activity is that office developers are reluctant to develop outside of the capital in secondary cities with large universities such as Debrecen without pre-leases. In contrast, regional cities in both Poland and Czech Republic have attracted developers such as Skanska who have leased buildings to SSCs.

 “The tendency of these shared service centers is to move towards more value-added activities,” according to SSC Heroes. “Thus the complexity of the service grows and a so-called center of excellence emerges. These centers continuously attract reinvestments and more and more companies start to operate in the countryside as well. Outside of Budapest, cities with a strong university background are valued as possible locations for such investments thanks to the availability of young and skilled workforces.”