iceland as a shared services destination

Copyright © 2015 ScottMadden, Inc. All rights reserved. Report _2015

Iceland as a Shared Services Destination

Study of Iceland’s Suitability and Advantages

Phase I – Report

June 24, 2015

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Copyright © 2015 by ScottMadden, Inc. All rights reserved.

1

ContentsProject Overview: Phase 1 Page

Project Objectives 3

Key Findings 4

Key Recommendations 5

ScottMadden’s Approach 6

Roles and Responsibilities 7

Tasks and Schedule 8

Shared Services Overview

What Is Shared Services? 10

Why Companies Offshore Their SSCs 11

Doing Business In Iceland

SWOT Analysis 13

Iceland Location Assessment: Strengths and Weaknesses 14

Reykjavik’s Competitiveness 15

Shared Services Providers and Outsourcers in Iceland 16

Quality of Life in Iceland 17

Shared Services and Outsourcing Business Cases Page

Business Case 1: Icelandic Company, New SSC 20

Business Case 2: Foreign Company, New SSC 22

Business Case 3: Icelandic Company, New R&D Center 24

Business Case Outcomes Summary and Overall Takeaways 26

Summary and Recommendations for Shared Services in Iceland

Research Summary and Takeaways 28

Opportunities for Shared Services and Outsourcing in Iceland 29

Recommendations 30

Appendices

Appendix A: Detailed Location Criteria Assessments 31

Appendix B: Business Case Scenarios (Detailed) 49

Appendix C: Summary of Interviews/External Business Contacts 81

Appendix D: SSC Outsource Providers Marketing Assessment 87

Appendix E: Responses to Promote Iceland’s Questions 90

Appendix F: How to Improve Iceland’s Competitiveness 97

Appendix G: Promote Iceland’s Support of Local Industries 99

Project Overview: Phase 1


Project Objectives

Phase I

Determine capabilities and advantages of Iceland as a destination for:

￭ Shared services operations within companies (captive)

￭ Shared services operations provided by a second company (outsourced)

Investigate current businesses in Iceland to determine:

￭ Support operations structures

￭ Existence of shared services operations

￭ Relationships with companies in other countries that might be candidates for setting up shared services in Iceland


3


Key Findings


4

Iceland’s Strengths and Challenges Perspectives of Icelandic CompaniesShared Services and Outsourcing in

Iceland

Strengths:

Talented labor force

• Well-educated

• Problem solvers

Strong work ethic (culture)

Well-developed infrastructure

Challenges:

Limited labor supply

High labor cost for transactional services

High corporate tax rates

Feedback from 11 Icelandic companies:

Very talented labor force

Scalability is a challenge due to limited

labor supply

Transactional shared services offerings

will be challenging in Iceland

Shared services offerings can be

successful in niche markets

Existing SSC Examples in Iceland:

Icelandair Finance and Accounting (F&A)

Shared Services Center (SSC)

• Serves 40 domestic and foreign

companies

• Targets aviation and hospitality

industry clients and larger

domestic companies in various

sectors

Advania

• Offers IT shared services to

complement its core IT and data

center business

Takeaways

Selective shared services in niche markets are succeeding in Iceland

Opportunities exist for expanding shared services as outsourced offerings in

similar markets

Shared services in Iceland should focus on complex (analytical and consultative),

non-transactional services to overcome high labor costs and limited labor supply


Key Recommendations


5

Recommendations:

￭ Icelandic businesses should use targeted approach for outsourcing and shared services offerings

• Focus on niche markets

• Focus on complex (analytical and consultative), non-transactional services

• Leverage core competencies to add value to shared services offerings

• Target shared services to small and mid-size business

￭ Build marketing plan in Phase 2

• Focus on shared services and outsourcing offerings that fit within Iceland’s competitive strengths

• Develop potential branding message for Iceland and identify marketing opportunities

• Identify target markets and competitive Icelandic service suppliers

• Identify specific companies that match specific strengths


6

ScottMadden’s Approach


Confirm Objectives and Work Plan

Assess Business Environment in

Iceland

Benchmark Iceland with Other Locations

Finalize Recommendations and Target Markets

￭ Confirm project objectives

￭ Develop tentative work plan

￭ Request/review information on Iceland

￭ Review marketing information from other countries/locations

￭ Present plan to stakeholders

￭ Refine information collection templates and interview guides

Review information and interview executives of companies operating in Iceland

Gather information on Icelandic business relationships outside of Iceland

Compile information on business environment in Iceland and potential for shared services

Develop current strengths and opportunities for Iceland

Summarize market positioning for Iceland

Refine factors to be compared with other locations/countries

Based on Iceland’s capabilities, develop likely external location/company criteria

Gather information on other locations for benchmark comparisons

Compare factors highlighting Iceland’s strengths and weaknesses

Investigate areas of significant advantage or disadvantage

Test conclusions with outsourcing companies and target companies in less advantageous locations

Finalize advantages and disadvantages of Iceland for hosting both outsourced and captive shared services

Identify target markets with characteristics

Recommend branding that highlights Iceland’s advantages for shared services

Deliverables

￭ Work plan

￭ Kickoff presentation

Deliverables

Matrix of companies operating in Iceland

List of external business contacts

Tentative advantages and potential of Iceland for hosting shared services

Deliverables

Comparison of factors from Iceland and other locations

Results from selected outsourcing companies and target companies for captive shared services

Deliverables

Final report explaining advantages/disadvantages, target market characteristics, and potential branding for Iceland

Phase I Phase II


Team Roles and Responsibilities


7

Name Role Responsibilities Contact Information

Andri Marteinsson

Director,Trade

Representation, Export

Service

Sponsor Set objectives for project

Provide guidance on project direction

and plan

Make resources available to support

project

[email protected]

Þórður H. Hilmarsson

Director, Invest in Iceland

Sponsor Set objectives for project

Provide guidance on project direction

and plan

Make resources available to support

project

[email protected]

(+354) 511-4000 (office)

(+354) 824-4461 (mobile)

Arnar Gudmundsson Project Manager Support ScottMadden with Iceland

“Location Criteria” and arranging

meetings with Iceland ministries

[email protected]

(+354) 822-5924 (mobile)

Erna Bjornsdottir Project Manager Support ScottMadden with arranging

meetings with domestic companies and

associations

[email protected]

(+354) 824-4370 (mobile)

Doug Utley

Partner, ScottMadden

Engagement

Partner

Plan and manage project

Provide guidance to Provide Iceland

Develop analysis and recommendations

[email protected]

919-714-7631 (office)

919-349-1504 (mobile)

Mark Ladisch

Associate, ScottMadden

Consultant Assist with gathering and organizing

information

Assist with analysis

Draft deliverables

[email protected]

(404) 564-7366 (office)

(765) 491-6778 (mobile)

mailto:[email protected]




Tasks and Schedule

Phase 1:

￭ May 18–June 16, 2015


8

1 2 3 4 5 6 7 8 9 10

Confirm Objectives and Work Plan

Confirm project objectives

Develop tentative work plan

Request/review information on Iceland

Review marketing information from other countries/locations

Request/review information on Iceland

Review/modify work plan

Present plan to stakeholders

Refine information collection templates and interview guides

Assess Business Environment in Iceland

Review information and interview executives of companies

Gather information on Icelandic business relationships outside of Iceland

Compile information on business environment in Iceland and potential for shared services

Develop current strengths and opportunities for Iceland

Summarize market positioning for Iceland

Refine factors to be compared with other locations/countries

Benchmark Iceland with Other Locations

Based on Iceland’s capabilities, develop likely external location/company criteria

Gather information on other locations

Compare factors highlighting Iceland’s strengths and weaknesses

Investigate areas of significant advantage or disadvantage

Test conclusions with outsourcing companies and target companies

Finalize Recommendations and Target Markets

Finalize advantages and disadvantages

Identify target markets with characteristics

Recommend key branding elements

Complete and present final report

Sub-Tasks

Month 1 Month 2 Month 3

Phase

Phase I

Phase II

Major Task


What Is Shared Services?


10

Shared Services:

￭ Back office services where multiple divisions of the same

company share a central service provider that is held outside of

the individual business units

￭ Services include HR, finance and administration, supply chain,

procurement, IT, etc.

￭ One SSC may host a single, or many, shared services

offerings

￭ SSC’s range in size from 10 to 500+ employees

Types of SSCs:

￭ Captive SSCs

• SSCs that are held as a separate entity within that same

company

￭ Outsourced SSCs

• Third-party centers that provide shared services to other

companies (e.g., Accenture)

￭ Onshore SSCs

• SSCs located in the same country as the company’s

offices

￭ Offshore SSCs

• SSCs located in a country that is distant from the

company’s offices

￭ Nearshore SSCs

• SSCs located in a neighboring country to where the

company’s offices are located

Business

Unit A

Business

Unit B

Business

Unit C

Business

Unit DSSC

Business

Unit E

Business

Unit F

Diverse Examples of Shared Services

1. Iceland-based company places onshore SSC in Reykjavik to

handle F&A processes

2. As their front-office business, an IT service provider supplies

IT shared services to other companies. The IT company

outsources its shared services needs for HR, F&A, and supply

chain services to another shared services provider

3. HR shared services supplier in India offers only high-

transaction HR shared services like payroll processing and

does not offer complex, consultative HR services like

executive compensation

4. German-based company sets up an offshore SSC in Poland to

handle highly transactional shared services, including payroll

and IT help desk


Why Companies Offshore Their SSCs


11

Sources:

1. “Where Will Shared Services Go Next,” Deloitte, 2014

2. “Centralized Operations,” EY, February 2014

3. “A structured Approach to Shared Services,” Infosys, 2010

5. “Setting Up an Offshore SSC,” SSON, 2012

6. “Learning from the Masters,” Accenture, 2009

Top Three Reasons Considerations Advantage Provided

Cost

Lower wages, salaries, and benefits

Lower corporate taxes

Lower real estate costs

Labor arbitrage

Talent

Larger quantity of available workers

Higher education level of workers

Lower worker turnover rate

Scalability and access to talent

Location

Alignment of time zones to operations and clients

Language needs and cultural fit

Accessibility and convenience of travel

Convenience and access to operations and clients

Doing Business in Iceland


SWOT Analysis*


13

Strengths Weaknesses

Highly educated labor force


Flexible workforce

Stable political climate


Low-cost, renewable energy resources

Competitive corporate income tax rate

High labor rates

Small labor force

Limited college graduates from IT and engineering fields

Limited economic stability

Opportunities Threats

Demand for niche market, analytical, and consultative

services

Demand for low-cost, renewable energy

Large shared services industry that can compete with

local Icelandic companies

International reputation for environmental disturbances

(volcanic eruptions)

*For the detailed analysis on each of Iceland’s strengths and weaknesses, see the detailed location factor comparisons in Appendix A.


Iceland Location Assessment: Strengths/Weaknesses


14 Footnote: See Appendix A for detailed analysis.

Methodology (in brief) Summary

Reykjavik was compared to Prague, Kuala Lumpur, Miami,

and San Jose, Costa Rica using 17 criteria

A ranking of 1 is a strength, a ranking of 2 or 3 is neutral,

and a ranking of 4 or 5 is a weakness

Strengths: infrastructure, political stability, and natural

disaster frequency, corporate income tax

Weaknesses: labor rates, labor supply, and economic

stability

1 2 3 4 5

Political Stability Index 1 - 100 Reykjavik - 92 Prague - 84 San Jose - 67 Miami - 66 Kuala Lumpur - 48

Crime Rate Index 0 - 7 Reykjavik - 6.3 Prague - 5.4 Kuala Lumpur - 4.9 Miami - 4.5 San Jose - 3.9

Logistics / Convenience Index 0 - 7 Reykjavik - 5.9 Miami - 5.5 Kuala Lumpur - 5.4 Prague - 4.7 San Jose - 2.9

Electricity Reliability Index 0 - 7 Reykjavik - 6.8 Prague - 6.5 Miami - 6.0 Kuala Lumpur - 5.9 San Jose - 5.5

Water Reliability Penetration Reykjavik - 100% Prague - 99.8% Kuala Lumpur - 99.6% Miami - 99.2% San Jose - 96.6%

Telephone Penetration Penetration Reykjavik - 58% Miami - 48% San Jose - 32% Prague - 21% Kuala Lumpur - 15%

Internet Penetration Penetration Reykjavik - 95% Miami - 78% Prague - 73% Kuala Lumpur - 61% San Jose - 42%

Disaster Frequency^ Index 0 - 10 Reykjavik - 1.45 Prague - 2.03 Kuala Lumpur - 3.38 San Jose - 4.85 Miami - 7.58

Tax Breaks & Incentives Index 0 - 1 Reykjavik - 0.96 Prague - 0.80 Kuala Lumpur - 0.78 San Jose - 0.38 Miami - 0.2

Real Estate Costs^ $/Sq. Ft. San Jose - $4 Reykjavik - $10 Prague - $30 Kuala Lumpur - $32 Miami - $40

Education Levels Tert. Grad % Miami - 94% Reykjavik - 81% Prague - 64% San Jose - 47% Kuala Lumpur - 37%

Language Capabilities English Fluency Miami - High Reykjavik - High Kuala Lumpur - High Prague - Moderate San Jose - Low

Ease of Doing Business^ Ranking 1 - 189 Miami - 7 Reykjavik - 12 Kuala Lumpur - 18 Prague - 44 San Jose - 83

Staff Turnover Rate^ Percentage Miami - 2.4% Prague - 12.7% Reykjavik - 13.0% San Jose - 15% Kuala Lumpur - 15.7%

Labor Costs^ Tot. Emp. Cost Kuala Lumpur - $23k Prague - $32k San Jose - $53k Reykjavik - $56k Miami - $75k

Labor Supply Index 0 - 1 Kuala Lumpur - 0.90 Miami - 0.62 Prague - 0.56 San Jose - 0.48 Reykjavik - 0.00

Economic Stability Index 0 - 7 Kuala Lumpur - 5.3 Prague - 5.2 San Jose - 4.7 Miami - 4.0 Reykjavik - 3.7

Key: Strong Neutral Weak

^ Low score is more competitive

RankingCriteria Units


ImportanceReykjavik's

Competitiveness

Labor Supply High Weak

Labor Costs High Weak

Education Levels High Neutral

Language Capabilities Medium Neutral

Staff Turnover Rate Medium Neutral

Political Stability Medium Strong

Economic Stability Medium Weak

Logistics / Convenience Low Strong

Ease of Doing Business Low Neutral

Real Estate / Facility Costs Low Neutral

Tax Breaks & Incentives Low Strong

Crime Rate Low Strong

Electricity Reliability Low Strong

Water Reliability Low Strong

Telephone Penetration Low Strong

Internet Penetration Low Strong

Disaster Frequency Low Strong

Cultural Acceptance Low Neutral

Criteria

Reykjavik’s Competitiveness


15

Description:1,2

￭ Companies that are identifying a location for a

SSC weigh each criteria by level of importance

when narrowing down locations

￭ The most critical criteria are labor supply, labor

costs, and education levels, respectively

￭ The lowest weighted criteria are infrastructure,

government incentives, and convenience

Summary:

￭ Reykjavik’s competitiveness is neutral or weak for

six of the seven highest-weighted criteria

￭ Reykjavik’s strengths are in the lowest weighted

criteria of infrastructure and political stability

Takeaways:

￭ Reykjavik’s low labor supply and relatively high

labor costs pose significant challenges in

attracting traditional SSCs to the city

￭ Iceland is not in a competitive position for large

share services centers or for high-transactional

shared services offerings

￭ Iceland must leverage its strengths to compete as

an outsourcing destination for shared services

Sources: 1. “Global Shared Services Survey Results,” Deloitte, 2013; 2. “Services Offshoring Ranking,” Towers Watson, 2013


Shared Services Providers and Outsourcers in Iceland


16

Icelandair Advania

Core Business:

Commercial aviation

Hotel and hospitality management

Shared Services Offerings:

Finance and accounting, HR

Target Clients for Shared Services:

Airline and hospitality industry clients

Large domestic businesses

International Clients?

Yes: airline and hospitality industry clients

Core Business:

IT services: Data center hosting and operation, software

development, project management, IT consulting

IT equipment reseller

Shared Services Offerings:

IT help desk, application development, application support

Target Clients for Shared Services:

Existing IT equipment and data center services clients

Selective medium-to-mid-large sized businesses

Sectors: retail, warehousing, and distribution and professional

services

International Clients?

Yes: North American and European clients

Opportunities exist for SSCs in Iceland

Iceland can be an outsourcing destination for targeted services offerings

Shared Services Providers Iceland Customers of Shared Services Captive SSCs

Advania (IT)

Attendus (HR)

Icelandair (HR, F&A)

KPMG (HR, IT, F&A)

Attendus (payroll, F&A)

Icelandair (IT – helpdesk)

Meniga (F&A, software development)

Ossur (F&A)

Skipti/Siminn (Communications, legal,

F&A)

Icelandair (HR)

Ossur (IT)

Examples of shared services providers and outsourcers in Iceland:

Company Profiles: Examples of shared services providers in Iceland


Quality of Life in Iceland

Companies that might consider sending employees to Iceland to manage aspects of operations will find it has many attractive features,

including a high quality of life.

Icelanders are a open and welcoming people who are proud of their island, Nordic heritage, and many accomplishments. They are a

resilient, enthusiastic society and are inspiring to those around them. Most are fluent in English and Icelandic. A very high percentage of

Icelanders attain advanced educational degrees and many have more than one. Most travel outside of the country at one time or another to

broaden their education. Thus, the population is very familiar with other lands and cultures making interactions all the more interesting.

The population in Iceland has a strong sense of community and is family friendly. Those employees who would bring their families to Iceland

would find a strong educational system (but no international schools), many sports and cultural activities, plentiful parks and recreation

facilities, and safe, secure neighborhoods. Schools and facilities often are located within neighborhoods fostering stronger neighborhood

relationships. Children can attend schools close to their homes.

Physical fitness and outdoor activities are possible during much of the year in Reykjavik. There are many walking and bike paths along with

hiking trails in the surrounding mountains. Tourist and Icelanders take advantage of these public paths and trails frequently, even when the

weather is marginal.

In Reykjavik, restaurants are varied and plentiful offering a range of cuisine including Scandinavian, German, Greek, French, Italian, and

many others. Of course, many menus carry a wide variety of fish that are harvested from waters around Iceland.

The climate in Reykjavik is quite moderate for its latitude. In the summer, temperatures average 10–13°C (50–55°F), and in the winter,

temperatures average 0 (32°F). While the weather can be rainy, windy, and cold in the winter, relatively little snow falls in the lower

elevations due to the moderating influence of the Gulf Stream. Icelanders maintain an active schedule throughout the year despite the long

hours of light in the summer and darkness in the winter.


17

Shared Services and Outsourcing Business Cases


Case 1: Icelandic Company, New SSC Case 2: Foreign Company, New SSC Case 3: Icelandic Company, New R&D Center

Sample Companies Energy Engineering, Inc. Tech Distribution, Inc. Energy Engineering, Inc.

SSC/Outsourcing Function Captive Shared Services Center Captive Shared Services Center Geothermal Energy R&D Services

Headquarters Location Reykjavik, Iceland New York, USA Reykjavik, Iceland

Number of Employees 25 100 25

Real Estate (sq. ft.)1

6,500 26,000 10,000

Real Estate Description Rent: Urban, Modern Rent: Urban, Modern Rent: Urban, Modern

Implementation Cost $800,000 - $1,500,000 $1,500,000 $1,500,000

Annual Revenue (USD) $3,250,000 $9,000,000 $4,000,000

CategoryScenarios

Labor, Real Estate, Operations

Company Attributes

Layout of Business Cases


19 Source: 1. “Revisiting Office Space Standards,” Haworth, 2015

Purpose/Description:

￭ The three business cases are designed to provide a look at Iceland’s competitiveness in attracting SSCs and in outsourcing niche

services, which are both potential sources of economic development for Iceland

￭ Cases 1 and 2 are comprised of companies looking to establish a SSC and are considering domestic and foreign locations. One of the

companies is based in Iceland (Case 1). The other company is a foreign company (Case 2)

￭ Case 3 is comprised of an Icelandic company looking to develop a new offering to sell to firms interested in outsourcing their R&D

services. Given the different needs of an R&D operation versus a SSC, the evaluation criteria are weighted differently in Case 3

￭ Key assumptions and exact weighting of criteria are outlined in each business case


Business Case 1: Introduction and Relevancy


20

Company Profile and SSC Specifications

Company*: Energy Engineering, Inc. (EEI)

Business: EPC and Engineering Consulting

Firm

Industries: Energy, Industry, and Infrastructure

Headquarters Location: Reykjavik, Iceland

Number of Employees: 400

Annual Revenues: $37,000,000

SSC Specifications:

25 employees

6,500 square feet

Rental space: modern, urban

Project Introduction

Introduction:

EEI, a Reykjavik-based company, is looking for the best location to establish a captive

SSC for F&A.

The priorities for EEI are to find a location that will help limit recurring costs as well as

a location that has a strong supply of high-quality labor.

Selection Process:

EEI’s site selection was comprised of a two-stage process. First, EEI completed a

location assessment that compared five plausible cities. The location assessment

used criteria that compared each city’s infrastructure, labor supply/quality, geopolitical

factors, labor costs, real estate costs, and tax rates. Second, EEI conducted a

financial assessment to compare the costs of starting and operating the SSC between

two of the cities.

Business Case Relevancy

One source of new SSCs is Icelandic companies that have an interest in developing new revenue streams through shared services

offerings, which would require the firm to set up an SSC.

This case represents a developing Icelandic firm that has decided not to outsource its shared services to another company and keep them

captive. However, the decision the Icelandic company must make is to determine where to place its shared services operations. The

company must identify if Reykjavik, where EEI is headquartered, can meet the demands of the company’s location criteria assessment and

if Reykjavik can be financially competitive with some of the traditional, low-cost SSC destinations.

*An invented Engineering, Procurement, and Construction (EPC) company and energy engineering consultancy modeled after the Icelandic

company Mannvit.


Business Case 1: Findings and Takeaways


21

Rank City Weighted Score*

1Kuala Lumpur,

Malaysia68

2Prague, Czech

Republic62

3 Miami, United States 61

4 Reykjavik, Iceland 52

5 San Jose, Costa Rica 32

*100-point scale

Location Criteria Score

Summary:

Location Criteria Score:

Low labor supply and high labor costs are the primary driver

for Reykjavik’s low location criteria score

Financial Comparison:

Compared to Kuala Lumpur, Reykjavik has significantly less

competitive labor rates, which leads to the lower IRR and

payback period

Takeaways:

Reykjavik is challenged by its relatively high labor rates, high

tax rates, and limited labor supply

The limited opportunities for labor arbitrage and the ability to

scale up/scale down quickly due to the small labor force are

difficult factors for Iceland to overcome as a large SSC

destination

Key Assumptions:

Annual Income: $3,250,000

Discount Rate: 7.7%

Implementation Costs: Kuala Lumpur: $1,500,000

Reykjavik: $800,000

Financial Comparison

* Taxes, Labor, and Real Estate Represent Year 1 Costs

Reykjavik Kuala Lumpur

Labor (Yr 1) $1,453,639 $607,082

Real Estate (Yr 1) $152,780 $212,633

5-Yr NPV $3,177,408 $4,474,412

IRR 57% 64%

Payback Period 1.8 1.6




22

Company Profile1 and SSC Specifications

Company*: Tech Distribution, Inc. (TDI)

Business: IT Equipment and Services

Headquarters Location: New York, United

States

Number of Employees: 3,000

Annual Revenues: $4,000,000,000

SSC Specifications:

26,000 square feet

100 employees



Introduction:

TDI, a U.S.-based company, is looking for the best location to establish a captive SSC

for F&A.

The priorities for TDI are to find a location that will help to limit recurring costs of

operating the SSC as well as a location that has a strong supply of high-quality labor

to allow TDI to scale up and scale down quickly with seasonal demand.

Selection Process:

TDI’s site selection was comprised of a two-stage selection process. First, TDI

completed a location assessment that compared 5 plausible cities. The location

assessment used criteria that compared each city’s infrastructure, labor

supply/quality, geopolitical factors, labor costs, real estate costs, and tax rates.

Second, TDI conducted a financial assessment to compare the costs of starting and

operating the SSC between two of the cities.

*An invented technology distribution and services company modeled after the New York-based company Westcon Group.

Sources: 1. Inc.com/profile/Westcon-group


One source of new SSCs is foreign companies that have an interest in developing new revenue streams through shared services offerings,

which would require the firm to set up an SSC.

This case represents a large American technology distribution and services company that has decided not to outsource its shared services

to another company and to keep them captive. However, the decision the American company must make is to determine where to place its

shared services operations. The company must identify what locations can meet the demands of the company’s location criteria

assessment and which of those top locations are the most financially competitive.




23

Summary:


Low labor supply and high labor costs are the primary drivers

for Reykjavik’s low location criteria score



competitive labor rates, which leads to the lower IRR and

payback period


Key Assumptions:


Discount Rate: 7.7%

Implementation Costs: $1,500,000 (Equivalent for all cities)

Takeaways:



The limited opportunities for labor arbitrage and the ability to

scale up/scale down quickly due to the small labor force are

difficult factors for Iceland to overcome as a large SSC

destination

*100-point scale


1Kuala Lumpur,

Malaysia68

2Prague, Czech

Republic62







Labor (Yr 1) $6,695,000 $2,428,328

Real Estate (Yr 1) $611,120 $850,533

5-Yr NPV -$3,394,686 $11,484,119

IRR 10% 72%





24


Introduction:

EEI, a Reykjavik-based company, is looking for the best location to establish a

geothermal R&D services center. The geothermal R&D service is a complex offering

that can be sold as an outsourcing offering.

The priorities for EEI are to find a location that has high-quality labor, reliable

infrastructure, and a competitive cost structure.

Selection Process:





financial assessment to compare the costs of starting and operating the R&D center

between three of the cities.


Companies leveraging their core competencies that use the unique resources in Iceland, like geothermal energy sources, can create

opportunities for new outsourcing offerings.

This case represents a growing Icelandic firm that is developing a new, renewable energy R&D facility. However, the decision the Icelandic

company must make is to determine where to place the R&D operation. The company must identify if Reykjavik, where EEI is

headquartered, can meet the demands of the company’s location criteria assessment and if an R&D center in Reykjavik can be financially

competitive with R&D centers in other top-rated cities identified in the location assessment.

Company Profile



Firm





SSC Specifications:

10,000 square feet

25 employees


*An invented Engineering, Procurement, and Construction (EPC) company and energy engineering consultancy modeled after the Icelandic company Mannvit.




25

*100-point scale

Summary:


Criteria weightings significantly changed due to needs

focused on quality of labor and quality of infrastructure

Reykjavik benefits from a reduced importance of labor cost


Reykjavik is more competitive than Miami, due to Miami’s

high labor costs

Prague is the most financially competitive of the viable cities,

primarily due to its low labor rate

Takeaways:

Reykjavik falls short on cost alone, but because of Reykjavik’s

significant advantage in specialized expertise, Reykjavik wins

over Prague





3 Prague, Czech Republic 57

4 Kuala Lumpur, Malaysia 51


Key Assumptions:


Discount Rate: 7.7%

Implementation Costs: Miami: $1,500,000

Reykjavik: $1,200,000

Prague: $1,500,000



Reykjavik Miami Prague

Labor (Yr 1) $1,453,639 $2,549,983 $1,186,753

Real Estate (Yr 1) $235,046 $412,000 $306,528

5-Yr NPV $4,546,151 ($1,870,869) $5,750,079

IRR 58% 8% 70%

Payback Period 1.8 6.9 1.5


Business Case Outcomes Summary and Overall Takeaways


26

Takeaways:



Financially, Reykjavik can be more competitive when attracting

local Icelandic companies than attracting international firms that

are considering offshoring their SSCs

Reykjavik cannot offer the labor arbitrage opportunities and the

labor force supply to help companies scale up and down

quickly, which also makes it difficult for Reykjavik to compete

for transactional SSCs

Reykjavik is at a greater disadvantage with larger shared

services operations due to Reykjavik’s high labor costs and

small labor supply

Services that leverage the unique advantages of Iceland focus

on niche markets and require specialized and small labor forces

that can be competitive in Reykjavik

Business Case Outcomes:

Case 1: Icelandic Company, New SSC

Company: Energy Engineering, Inc. (EEI)


Reykjavik Competitiveness:

Location Criteria Assessment: Reykjavik uncompetitive

due to low labor supply and high labor costs

Financial Comparison: Reykjavik uncompetitive due to

relatively high labor costs and tax rates

Case 2: Foreign Company, New SSC

Company: Tech Distribution, Inc. (TDI)

Headquarters Location: New York, United States


Location Criteria Assessment: Reykjavik uncompetitive

due to low labor supply and high labor costs

Financial Comparison: Reykjavik uncompetitive due to

relatively high labor costs and tax rates

Case 3: Icelandic Company, New R&D Center

Company: Energy Engineering, Inc. (EEI)



Location Criteria Assessment: Reykjavik competitive

because focus is on labor and infrastructure quality

Financial Comparison: Reykjavik somewhat competitive

because competing with higher cost locations


Research Summary and Takeaways


28

Iceland’s Strengths Iceland’s Weaknesses Iceland’s Opportunities/Threats

Talented labor force

• Well-educated

• Problem solvers

• Underemployed



Low-cost, green energy

Competitive corporate income tax rate

Limited labor supply

High labor cost for transactional services

Opportunities:

Demand for low-cost, green energy

Demand for analytical and consultative

services

Threats:

Large shared services industry that can

compete with local Icelandic companies

Economic destabilization

Business Case Takeaways Perspectives of Icelandic Companies Existing SSCs in Iceland

Limited labor supply and high labor costs

hinder Iceland’s competitiveness for high

transaction SSCs

Icelandic firms more likely to keep SSC in

Iceland than foreign firms to move to

Iceland

Very talented labor force in Iceland

Scalability is a challenge due to limited

labor supply

Transactional shared services offerings

will be challenging in Iceland

Shared services offerings can be

successful in niche markets

Existing SSCs in Iceland:

Icelandair (HR, IT, F&A)

Advania (IT)

Attendus (HR)

KPMG (HR, IT, F&A)

Ossur (IT)

Takeaways

Selective shared services in niche markets are succeeding in Iceland

Opportunities exist for expanding shared services as outsourced offerings in

similar markets

Shared services in Iceland should focus on complex (analytical and consultative),

non-transactional services to overcome high labor costs and limited labor supply


Opportunities for Shared Services and Outsourcing in Iceland


29

Core Competency:

Fisheries and Marine Transportation

Areas of Focus:

Fishery and food processing technology

services

Fishery management and shared

services

Marine transportation industry shared

services

Marine transportation consultation and

analytical services

Strengths for Iceland:

Local market demand for services

Strong expertise in fisheries and global

transportation

Challenges for Iceland:

Limited supply of college graduates with

relevant degrees for shared services

roles

Core Competency:

Geothermal/Hydro Power

Areas of Focus:

R&D services for geothermal and hydro

power

Energy industry shared services (HR,

F&A, IT, etc.)


Local market for services

Low-cost, renewable energy

Well-educated labor force

Expertise in renewable power


Limited supply of engineers and college

graduates with relevant degrees for

shared services roles

Other Shared Services and

Product/Service Offerings

Energy-Intensive Offerings:

Cement manufacturing

Data storage (data centers)

Metals smelting

Steel manufacturing

IT Services*:

Data storage

Medical imaging services

IT/software development


Low-cost, green energy

Convenient location between the United

States and Europe for limited shipping

distances

Flexible, well-educated labor force


Limited supply of low-cost labor

Limited supply of IT and engineering

expertise

Enhanced shipping costs

*IT services can be applicable to all public and private sectors. Examples of IT services include: IT helpdesks, data storage, IT security

operations, corporate IT governance, power and automation controls services, application maintenance, systems administration, software

development and support, web development and hosting, productivity/communications systems services, and more.


Recommendations


30

Where to Focus

Where to Focus:

Geography:

Icelandic companies as shared services providers

• Attracting foreign SSCs to Iceland will be difficult due

to labor supply and labor rates

Services:

Complex, low transaction, niche services

• Focus on analytical and consultative offerings

• Leverage strengths of the educated workforce

• Targeted to small-to-medium sized operations

Focus on core competencies of workforce and where

Iceland’s resources can be leveraged

• Fishery services, transportation, energy, IT, and

pharmaceutical services

• Low-cost, green energy resources

Clients:

Target clients from the niche markets where the shared

services providers in Iceland have expertise

• Fishery and food processing

• Geothermal and hydro power

• Shipping and transportation

• IT and healthcare/pharmaceuticals

Where Not to Focus

Recruitment of foreign companies to Iceland to establish

SSCs

• First, build more success stories with local Icelandic

companies to help bolster reputation

Large shared services providers

• Labor supply is too limited for the required scale of

operations

Large businesses as clients

• Labor supply is limited for needed scalability

• Cost pressures and competition may be greater with

larger clients

Phase 2: How to Go to Market

Identify Iceland’s target market for shared services and

outsourcing opportunities:

Specify Iceland’s target market for shared services

More specifically define what services can leverage those

advantages

Develop shared services and outsourcing marketing plan

Match company needs to Icelandic competitive advantages

Identify what Icelandic companies can provide valuable

offerings for shared services and outsourcing

Identify clients and regions to focus target-marketing efforts

Develop marketing approach

Evaluate how to find the right clients

1 2

3

Appendix A: Detailed Location Criteria Assessments


Location Criteria and SSC Descriptions

Appendix A: Detailed Location Criteria Assessment

32

Criteria Criteria

Costs Geopolitical

Labor costs Salaries, wages, benefits Political stability World risk index

Political parties, business positions, and

likelihood of change

Real estate/facility cost Cost per square meter, utilities,

other

Economic stability GDP per capita

Economic history

Stability of tax base, debt, exchange rate

stability

Security of intellectual property

Offsetting tax breaks or other

investment incentives

Deferred corporate taxes,

VAT/GST, property taxes, and

others

Crime rate Crimes and rates of crime in various

locations

Labor Supply/Quality Cultural

Education levels Percentage of doctoral, masters,

and secondary equivalent

degrees

Cultural acceptance with other

locations, regions, countries

Diversity in population

Attitudes toward diversity

Fair hiring, housing policies

Labor supply (schools,

businesses, etc.)

Population and demographics

Growth rates

Educational institutions

Logistics/Convenience Cities served by airport

Availability of flights by destination

Language capabilities Language fluencies and

percentages

Assessment of highway/road

infrastructure

Local turnover rate Average staff turnover rates in

business by occupation

Availability of other means of

transportation


Location Criteria and SSC Descriptions (Cont’d)


33

Criteria Criteria

Infrastructure Other

Power and water reliability Sources of power and water Ease-of-doing-business index1 Index that evaluates the factors

considered when starting, operating, or

discontinuing a business

Telecom/internet reliability Telephone access (landlines and

cell phone accounts)

Internet access (internet

accounts)

Broadband providers and

available bandwidths

Natural disaster frequency History, frequency of volcanic

activity and other natural threats

Options for business

continuity/disaster response

1Ease-of-doing-business index ranks economies from 1 to 181 using a ranking on the average of its percentile rankings on each of the following 10

topics: starting a business, protecting investors, dealing with construction permits, paying taxes, employing workers, trading across borders,

registering property, enforcing contracts, getting credit, and closing a business.

SSC Type Work Description

Tier 1 Transactional services (call center, payroll processing)

Tier 2 Complex services (analytical and consultative services)

SSC Descriptions:


Iceland Location Assessment: Labor Costs


34

Labor Cost Assessment:

According to a 2013 survey of 277 business, the third most important factor for

the location of a SSC is labor cost. Labor costs consist of not only the

employee salary, but also the employer’s mandatory contributions that are in

addition to the base salary. These contributions include social security,

pensions, healthcare, worker’s compensation, and unemployment insurance.

The salaries for relevant shared services positions in Reykjavik are among the

highest of the benchmark cities. However, Iceland’s low mandatory employer

contributions help to improve Reykjavik’s labor cost competitiveness. While the

low employer contributions improve Reykjavik’s competitiveness, the high total

employer cost will limit Reykjavik’s competitiveness in attracting Tier 1

(transactional) SSCs. The total employer cost in Reykjavik may be more

competitive for the Tier 2 (complex) SSCs that require fewer and higher

educated employees.

Reykjavik Kuala Lumpur Prague San Jose Miami

Wages/Salaries $47,439 $20,636 $23,873 $23,873 $57,305

Mandatory Emp. Contribution (%) 18% 14% 34% 28% 32%

Total Employer Cost* $56,452 $23,576 $32,539 $53,926 $75,568

Footnote:

*Mandatory employer contribution is the additional percentage of the base wages that is contributed to social security, pensions, healthcare, etc.

Salaries consider only relevant occupations, including technical services, IT, engineering, accounting, finance, customer service/call center,

purchasing, and HR

Sources: European Union – Eurostat, KPMG, AccountingCoach, Payroll-Taxes.com, U.S. Bureau of Labor & Statistics, Malaysian Investment

Development Authority, HSBC, U.S. Social Security Administration, KPMG, Costarica.com, U.S. Embassy, Salary Explorer, Statistics Iceland,

U.S. Census Bureau

Key Findings:

Wages and total employer costs for SSC

positions in Reykjavik are at the higher end

of the scale

Mandatory employer contribution

percentage is competitive

Takeaways:

High employer costs will challenge

Reykjavik’s competitiveness in attracting

Tier 1 SSCs

Total employer cost is still competitive with

some benchmark cities and may allow

Reykjavik to compete for Tier 2 SSCs that

demand higher end services


Iceland Location Assessment: Real Estate Facility Costs


35

Real Estate and Facility Cost Assessment:

The importance of real estate costs can vary depending on the function and

size of the SSC. With 57% of SSCs employing less than 100 employees, real

estate costs will not often be a heavily weighted criteria. Some SSCs, such as

data centers and the 15% of SSCs with greater than 500 employees, will

require large amounts of real estate and may strongly consider real estate

costs.

Reykjavik’s commercial/office real estate cost is very competitive compared to

the benchmark cities. This lower real estate cost can be a great advantage for

large SSCs or data centers, which have large square footages for the number

of supporting employees.


Real Estate Cost $10.20 $31.76 $29.76 $4.11 $40.00

Footnote:

U.S. Dollar per square foot of commercial/office real estate

Sources: Deloitte 2015 Shared Services Survey, Costa Rica Link SA, Colliers International, Cushman & Wakefield

Key Findings:

Reykjavik has competitive

commercial/office real estate costs

Takeaways:

Low real estate costs in Reykjavik will

provide a competitive advantage compared

to the benchmark cities for large SSCs


Iceland Location Assessment: Tax Breaks and Incentives


36

Tax Breaks and Incentives Assessment:

Included in corporations’ overall cost assessment of shared services locations

are tax breaks and incentives. The corporate income tax rate and tax credits

and allowances are all considered. One common challenge is double taxation

on foreign firms when they are taxed both by their native country and the

foreign country. These double taxations are often overcome, or reduced,

through tax treaties between countries as well as through foreign tax credits

provided by the foreign country.

Reykjavik has a competitive corporate income tax rate with the benchmark

countries. Reykjavik has the second most competitive tax structure behind

Prague, which is only 1% lower at 19%. This competitiveness is supported by

the low corporate income tax rate as well as the Foreign Tax Credits and tax

treaties with foreign countries.


Corp. Income Tax 20% 25% 19% 30.3% 40.5%

Tax Credits or Allowances Yes Yes No No Yes

Footnote:

Tax credits or allowances include foreign tax credits and income and expense deductions

Sources: PWC, TaxAdmin.org, Iceland Ministry of Industry and Innovation, Costa Rican Investment and Trade Development Board

Key Findings:

Reykjavik has a competitive corporate

income tax rate

Iceland does offer foreign tax credits and

has foreign tax treaties to offset double

taxation

Takeaways:

Reykjavik has the second most competitive

tax structure behind Kuala Lumpur


Iceland Location Assessment: Education Levels


37

Education Levels Assessment:

SSCs are comprised of two different classes: Tier 1 and Tier 2. Tier 1 SSCs,

like call centers, conduct transactional work and leverage low-cost labor with

less advanced education levels. Tier 2 SSCs conduct analytical and

consultative services and leverage highly-educated labor and are the central

operations for corporations’ high-level functions including finance, accounting,

HR, procurement, and IT.

Iceland’s tertiary enrollment percentage is a great strength for serving high-

level SSCs compared to the benchmark countries. Strong enrollment

percentages suggest that a large portion of the available workforce may be

qualified to support Tier 2 SSCs. However, with a limited supply of students

enrolled in tertiary education compared to the benchmark countries, Iceland’s

challenge with supporting high-level SSCs will be scalability.


Tertiary Edu. Enrollment % 81% 37% 64% 47% 94%

Annual Tertiary Graduation (#) 4,099 261,819 107,773 44,575 3,308,494

Footnote:

Statistics based on enrollment following five-year period after completing secondary education

Tertiary education enrollment is equivalent to college enrollment

2012 enrollment statistics

Sources: United Nations Educational, Scientific, and Cultural Organization, The World Bank, World Economic Forum, U.S. Census Bureau

Key Findings:

Tertiary enrollment percentage in Iceland

very strong compared to benchmark

countries

Tertiary graduate quantity is limited

compared to benchmark countries

Takeaways:

Strong enrollment percentages are an

advantage for Iceland and its capability to

supply high-quality talent to high-level

services centers

Scalability of high-level SSCs may be

limited due to quantity of students annually

enrolled in tertiary education


Iceland Location Assessment: Labor Supply


38

Labor Supply Assessment:

According to a 2013 Deloitte shared services survey of 277 businesses, the

second most important factor for the location of a SSC is labor supply. The

number of employees in SSCs range from 10 to more than 500. It is critical for

the companies to be able to staff the positions with employees that have

relevant training for these positions. For Tier 1 services centers, completion of

secondary education may be adequate; however, Tier 2 services centers may

require completion of tertiary education in relevant fields including science,

engineering, technology, math, and business.

With a total labor force of less than 200,000 and only 2,159 annual graduates

with relevant tertiary degrees, Reykjavik has a limited labor supply. With other

industries competing for this same labor force, there is a very limited supply for

SSC roles. Also, despite the low unemployment rate in Iceland, many people

are underemployed and could be readily available for the complex shared

services roles. Even with underemployment helping the labor force availability

issue, the labor force remains relatively small.

Reykjavik Kuala Lumpur Prague San Jose Miami*

Total Labor Force (‘000s) 178,800 11,620,000 5,370,000 2,170,000 7,400,000

Relevant Labor Force 2,159 152,076 59,166 19,654 69,445

Unemployment Rate 4.3% 2.9% 7.9% 8.5% 6.2%

Key Findings:

Reykjavik’s overall labor force is small

compared to benchmark cities

Reykjavik has a small labor force with

relevant tertiary degrees compared to

benchmark cities

Takeaways:

Reykjavik may be challenged in trying to

attract large SSCs for Tier 1 or Tier 2

operations

Footnote:

Relevant labor force is the count of annual tertiary education graduates in relevant fields

*Miami figures consider only the state of Florida. All other figures are national

Iceland emigration is 1%, with net immigration of 0.3%

Sources: U.S. Bureau of Labor & Statistics, Statistics Iceland, The World Bank, United Nations Educational, Scientific,

and Cultural Organization, World Economic Forum, Deloitte 2013 SSC Survey


Iceland Location Assessment: Language Capabilities


39

Language Capabilities Assessment:

Language capabilities was the fourth most important criteria of the 2013

Deloitte shared services survey of 277 companies regarding selecting locations

for their SSCs. The need behind the criteria may change depending on the

location of the headquarters of the prospective company; however, the English

language has become an internationally recognized language of business and

English fluency is an important consideration.

A strength of Reykjavik is the high level of English fluency compared to some

of the benchmark countries. Additionally, its population’s fluency in other

European languages may further support Reykjavik’s competitiveness with

international corporations.


English Proficiency High High Moderate Low High

Languages Spoken Icelandic,

English, German

Bahasa Malaysia,

English, Chinese

Dialects, Tamil,

Telegu,

Malayalem,

Panjabi, Thai

Czech – 95.4%

Slovak – 1.6%

Other – 3%

Spanish, English English – 79.2%

Spanish – 12.9%

European – 2.8%

Asian – 3.3%

Other – 0.9%

Footnote:

English proficiency may be substituted with alternative languages in further analysis, based on specific client needs

Sources: CIA World Fact Book, Education First (EF), Deloitte 2013 SSC Survey

Key Findings:

Reykjavik’s population has a high level of

English fluency

Reykjavik has a higher level of English

fluency than some of the benchmark

countries

Takeaways:

Strong English fluency among Reykjavik’s

population is a competitive strength


Iceland Location Assessment: Local Turnover Rates


40

Local Turnover Rate Assessment:

Corporations often consider voluntary turnover rates (quit rates) in their

selection of SSC locations because of the significant costs that high employee

turnover rates create. These costs include repetitive recruitment and training

expenditures and reduction of employee efficiency.

At 13%, Reykjavik has a relatively high quit rate compared to several of the

benchmark countries. This relatively high quit rate is a weakness for Reykjavik

in attracting SSCs.


Annual Quit Rate 13% 15.7% 12.7% 5% 2.4%

Footnote:

The quit rates are based on relevant fields, including financial services, professional and business services, IT/communications, and service

centers

Sources: Towers Watson, U.S. Bureau of Labor and Statistics, Organizational Behavior and Talent Management - H. Oskarsdottir 2015,

Reykjavik University, GE Consult, PWC, EKA

Key Findings:

Reykjavik’s voluntary turnover rates are

relatively high compared to most

benchmark countries

Takeaways:

Reykjavik’s high voluntary turnover rate is a

weakness in attracting Tier 1 or Tier 2

SSCs


Iceland Location Assessment: Political Stability


41

Political Stability Assessment:

Political stability is considered because it is important for the effectiveness of

the SSC and the center’s ability to support the corporation abroad. Considered

in this criteria are government effectiveness, rule of law, corruption, violence,

and terrorism.

A great strength for Reykjavik is its political stability, rated highest amongst the

benchmark cities. With an effective government and a safe environment,

Reykjavik can leverage this strength to attract SSCs.


Political Stability 92 48 84 67 66

Footnote:

Ratings between 0– 00: 0 = unstable, 100 = stable

Source: Political stability and Absence of Violence and Terrorism Index –The World Bank

Key Findings:

Rated the highest amongst the benchmark

cities

Takeaways:

Reykjavik has a comparatively high

government effectiveness


Iceland Location Assessment: Economic Stability


42

Economic Stability Assessment:

Economic stability considers the economic factors, including past due debts,

fiscal deficit limits, and inflation. These factors support the government’s

investment in creating a more competitive environment, sustainable economic

growth, and competitive and secure operating environments for corporations.

Following the 2008 economic crash, economic stability in Reykjavik has

become a weakness. Significant debt is still owed to the IMF and labor wage

disputes could threaten economic stability. While the economic environment is

improving as debt repayments are ahead of schedule, economic stability is a

weakness for Reykjavik.


Economic Stability 3.7 5.3 5.2 4.7 4

Footnote:

0–7 scale: 0 = unstable,7 = stable

Source: The Global Competitiveness Report 2012–2013 – World Economic Forum

Key Findings:

Reykjavik rated the lowest of the

benchmark countries

IMF debt load and labor wage disputes

among the concerns for continued

economic stability

Takeaways:

Economic stability has been improving;

however, the economic environment in

Reykjavik is currently a weakness

compared to the benchmark countries


Iceland Location Assessment: Crime Rate


43

Crime Rate Assessment:

Crime rate is an assessment of the overall crime rate, independence of the

judicial system, corruption, and organized crime. High crime levels can

increase corporate costs and hurt investor confidence.

A strength of Reykjavik is its low crime rate as well as the lowest business

costs of crime and violence, compared to the benchmark countries. The low

crime rate and business costs due to crime provides a competitive, safe, and

trustworthy business environment.

Reykjavik Kuala Lumpur* Prague San Jose Miami

Homicide Rate 1 70 18 55 69

Business Costs of

Crime and

Violence

6.3 4.9 5.4 3.9 4.5

Footnote:

Homicide Rate = homicides per 100,000 residents

Business Costs of Crime and Violence Index: 0–7 scale, 7 = lower business costs of crime and violence

*Kuala Lumpur stopped reporting homicide and crime rates after 2006; all other city data from 2012

Sources: United Nations Office of Drugs and Crime, City-Data.com, Global Competitiveness Report 2012–2013; World Economic Forum

Key Findings:

Reykjavik has the lowest homicide rate of

the benchmark cities

Reykjavik has the lowest business costs of

crime and violence compared to the

benchmark cities

Takeaways:

Low crime rate and low cost of crime in

Reykjavik is an advantage compared to the

benchmark countries


Iceland Location Assessment: Logistics/Convenience


44

Logistics/Convenience Assessment:

The logistics and convenience criteria can be important to companies that want

ease of travel from their operating locations as well as cultural, language, and

time zone similarities that would serve the operating locations well. The current

assessment only includes the transportation infrastructure (roads, railroads,

airports, and airline seats per week). Once a specific company and its

headquarters and operating locations are identified, then the travel

convenience, cultural, language, and time zone considerations should be

assessed.

A great strength for Reykjavik is its transportation infrastructure. Rated the

highest amongst the benchmark cities, the overall transportation infrastructure in

Reykjavik can serve as an advantage for attracting SSCs.


Quality of Infrastructure Index 5.9 5.4 4.7 2.9 5.5

Footnote:

Based on quality of transportation infrastructure, including roads, railroads, airports, and available airline seats per week

0–7 scale: 0 = low quality of infrastructure, 7 = high quality of infrastructure

Source: Global Competitiveness Report 2012–2013 – World Economic Forum

Key Findings:

Highest rated infrastructure among the

benchmark cities

Takeaways:

Transportation infrastructure is a strength

for Reykjavik and can serve as an

advantage for attracting SSCs


Iceland Location Assessment: Power and Water Reliability


45

Power and Water Reliability Assessment:

Availability of reliable power and water is critical to the operations of Tier 1 and

Tier 2 SSCs. This criteria measures the percentage of the population that has

access to clean water as well the availability and reliability of the electrical

system.

With 100% of the population having access to clean water and the highest rated

electric supply quality, Reykjavik’s power and water reliability is a competitive

strength compared to the benchmark countries.


Quality of Electric Supply 6.8 5.9 6.5 5.5 6.0

Access to Clean Water (%) 100% 99.6% 99.8% 96.6% 99.2%

Footnote:

Electricity quality measured on supply and disruptions

Quality of Electric Supply Index: 0–7 scale: 0 = low quality, 7 = high quality

Source: Global Competitiveness Report 2012–2013 – World Economic Forum, The World Bank

Key Findings:

100% of the population of Reykjavik has

access to clean water

Reykjavik has the highest rated electric

supply of the benchmark countries

Takeaways:

The accessibility and reliability of the water

and electric supply is a strength for

Reykjavik


Iceland Location Assessment: Telecom and Internet Reliability


46

Telecom and Internet Reliability Assessment:

For SSCs to be effective offshore from a company’s operations, the lines for

communication must be accessible and reliable. This criteria considers the

penetration of telephone lines to the population as well as the percentage of the

population with access to the internet.

Reykjavik is rated the highest in both categories among the benchmark cities.

This accessibility and reliability of the telecom and internet systems are a

strength for Reykjavik compared to the benchmark cities. Additionally,

Reykjavik’s bandwidth per user is another strength with considerably higher

bandwidth than the benchmark cities.


Fixed Telephone Lines 58.4 14.7 20.9 31.5 47.9

Population Using Internet (%) 95% 61% 73% 42% 78%

Bandwidth Per User (kb/s) 287.1 10.7 91.1 36.2 47.2

Footnote:

Fixed Telephone Lines: Count of number of lines per 100 people

Source: Global Competitiveness Report 2012–2013 – World Economic Forum

Key Findings:

Reykjavik has the highest penetration of

telephone lines compared to the

benchmark cities

95% of the population in Reykjavik has

access to the internet, the highest among

the benchmark cities

Reykjavik’s bandwidth per user is at least a

factor of three greater than the benchmark

cities

Takeaways:

The telecom and internet penetration in

Reykjavik is a strength in attracting SSCs


Iceland Location Assessment: Natural Disaster Frequency


47

Natural Disaster Frequency Assessment:

Natural disasters can raise business costs, lower efficiency, and reduce the

reliability of a city’s infrastructure. Considered in this assessment is the natural

disaster frequency including floods, wind, mudslides, earthquakes, and

volcanoes as well as each country’s ability to effectively respond to and recover

from natural disasters.

Despite the recent press coverage of volcanic eruptions in Iceland, Reykjavik

has the lowest natural disaster frequency of the benchmark cities. This low

natural disaster frequency may serve as an advantage for Reykjavik.


Natural Disaster Frequency 1.45 3.38 2.03 4.85 7.58

Footnote:

INFORM Hazard Risk Index: Scale of 1–10: 1 = low risk, 10 = high risk

Source: The United Nations Office for Disaster Risk Reduction – Prevention Web

Key Findings:

Reykjavik has the lowest natural disaster

frequency of the benchmark cities

Takeaways:

The low natural disaster frequency in

Reykjavik can serve as an advantage in

attracting SSCs


Iceland Location Assessment: Ease of Doing Business


48

Ease of Doing Business Assessment:

The World Bank Group’s Ease of Doing Business Ranking evaluates the

process of starting and conducting business in each country. Criteria considered

in these rankings are availability of credit, ease of starting a business,

permitting, ease of property acquisition, investor protections, international

trading, tax burden, ease of contract enforcement, and ease of insolvency

resolution.

Iceland ranks 12th out of 189 countries evaluated and ranks second among the

benchmark countries. This rankings speak to the general business environment

of Reykjavik among many critical business areas that new, offshore, SSCs

would consider in site selection.


Natural Disaster Frequency 12 18 44 83 7

Footnote:

Ease of Doing Business rankings from 1–189 (1 = best, 189 = worst)

Source: World Bank Group

Key Findings:

Reykjavik is ranked 12th out of 189

countries

Among the benchmark cities, Reykjavik’s

ease of doing business ranking is second

only to Miami

Takeaways:

Reykjavik has a supportive environment for

new and operating businesses

Appendix B: Business Case Scenarios (Detailed)

Business Case 1: Icelandic Company Developing a SSC


Introduction and Relevancy


51

Company Profile



Firm






Introduction:

EEI, a Reykjavik-based company, is looking for the best location to establish a captive

SSC for F&A.

The priorities for EEI are to find a location that will help limit recurring costs as well as

a location that has a strong supply of high-quality labor.

Selection Process:





financial assessment to compare the costs of starting and operating the SSC between

two of the cities.


company Mannvit.


One source of new SSCs is Icelandic companies that have an interest in developing new revenue streams through shared services

offerings, which would require the firm to set up an SSC.

This case represents a developing Icelandic firm that has decided not to outsource its shared services to another company and keep them

captive. However, the decision the Icelandic company must make is to determine where to place its shared services operations. The

company must identify if Reykjavik, where EEI is headquartered, can meet the demands of the company’s location criteria assessment and

if Reykjavik can be financially competitive with some of the traditional, low-cost SSC destinations.


Service Center Description and Location Selection Criteria


52

SSC Specifications

Facility Size: 6,500 square feet

.

Number of On-site Employees: 25

Building Requirements:

Modern space

Rental Space

Urban environment

The weights suggest that critical location characteristics for the SSC are labor costs, labor supply, and

labor quality.

Site Selection Criteria Criteria Weight (of 100%)

Labor Supply 28%

Labor Quality 26%

Labor Cost 16%

Location 15%

Risk 12%

Other 3%

Location Options Opportunity

Reykjavik, Iceland Convenient location, multi-lingual population

Kuala Lumpur, Malaysia Low labor costs, close to Asian operations

San Jose, Costa Rica Low labor costs

Miami, United States High-quality labor, English-speaking population

Prague, Czech Republic Low labor costs


ScoreNormalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

Score

4.0% Political Stability 92 100.00 4.00 48 0.00 0.00 67 43.18 1.73 66 40.91 1.64 84 81.82 3.27

4.0% Economic Stability 3.7 0.00 0.00 5.3 100.00 4.00 4.7 62.50 2.50 4 18.75 0.75 5.2 93.75 3.75

2.0% Crime Rate 6.3 100.00 2.00 4.9 41.67 0.83 3.9 0.00 0.00 4.5 25.00 0.50 5.4 62.50 1.25

14.0% Labor Costs^ 56452 46.89 6.56 23576 100.00 14.00 53926 50.97 7.14 85480 0.00 0.00 32539 85.52 11.97

2.0% Real Estate / Facility Costs^ 10.20 83.04 1.66 31.76 22.96 0.46 4.11 100.00 2.00 40.00 0.00 0.00 29.76 28.54 0.57

2.0% Tax Breaks & Incentives 0.96 100.00 2.00 0.78 75.61 1.51 0.38 23.54 0.47 0.20 0.00 0.00 0.80 78.66 1.57

12.0% Education Levels 0.81 77.36 9.28 0.37 0.00 0.00 0.47 16.72 2.01 0.94 100.00 12.00 0.64 47.26 5.67

28.0% Labor Supply 0.00 0.00 0.00 0.90 100.00 28.00 0.48 53.57 15.00 0.62 69.41 19.43 0.56 61.87 17.32

8.0% Language Capabilities 2.00 100.00 8.00 2.00 100.00 8.00 0.00 0.00 0.00 2.00 100.00 8.00 1.00 50.00 4.00

6.0% Staff Turnover Rate 0.13 20.30 1.22 0.16 0.00 0.00 0.15 5.26 0.32 0.02 100.00 6.00 0.13 22.93 1.38

2.0% Cultural Acceptance 3.00 100.00 2.00 2 66.67 1.33 0 0.00 0.00 3 100.00 2.00 1 33.33 0.67

3.0% Logistics / Convenience 5.87 100.00 3.00 5.43 85.24 2.56 2.88 0.00 0.00 5.48 86.91 2.61 4.73 61.84 1.86

2.0% Electricity Reliability 6.80 100.00 2.00 5.90 30.77 0.62 5.50 0.00 0.00 6.00 38.46 0.77 6.50 76.92 1.54

2.0% Water Reliability 100.00 100.00 2.00 99.60 88.24 1.76 96.60 0.00 0.00 99.20 76.47 1.53 99.80 94.12 1.88

2.0% Telephone Penetration 58.40 100.00 2.00 14.70 0.00 0.00 31.50 38.44 0.77 47.90 75.97 1.52 20.90 14.19 0.28

2.0% Internet Penetration 0.95 100.00 2.00 0.61 35.73 0.71 0.42 0.00 0.00 0.78 67.67 1.35 0.73 58.41 1.17

2.0% Disaster Frequency^ 1.45 100.00 2.00 3.38 68.52 1.37 4.85 44.54 0.89 7.58 0.00 0.00 2.03 90.54 1.81

3.0% Ease of Doing Business 12 93.42 2.80 18 85.53 2.57 83 0.00 0.00 7 100.00 3.00 44 51.32 1.54

52.53 67.73 32.82 61.10 61.51

Other

Overall Weighted Score

Prague, Czech Republic

Geopolitical

Costs

Labor Supply / Quality

Cultural

Infrastructure

Weights* Criteria

Reykjavik, Iceland Kuala Lumpur, Malaysia San Jose, Costa Rica Miami, United States

Location Selection Criteria Scoring Sheet


53

Methodology:

Step 1:

The raw data for each city is collected for

each criteria and placed into the “Score”

column. The data sources are noted on

the “SSC Location Assessment” pages.

Step 2:

The criteria scores for each city are

normalized on a 0–100 scale. The

worst-scoring city is given 0, the

highest-scoring city 100. The scores of

the other cities are given a normalized

score based on their position between

the best and worst scores in the

category.

Step 3:

The weights for each criteria are then

multiplied by the “Normalized Score” for

each category. These are the “Weighted

Scores” in the right-side column for each

city. Each cities’ “Weighted Scores” for all

of the criteria are then summed to give

the final “Overall Weighted Score.”


Initial City Selection – Location Criteria Scores

Completed quantitative analysis on the five selected cities:


54

Kuala Lumpur has the best fit with EEI’s location selection criteria.







*100-point scale


Financial Evaluation: Inputs and Assumptions


55

Inputs and Assumptions Description

Annual Total Cost per Employee Kuala Lumpur: $23,576

Reykjavik: $56,452

Real Estate Costs ($/sq. ft.) Kuala Lumpur: $31.76

Reykjavik: $10.20

Annual Travel Costs from HQ (15 Round Trips – Airfare)1

(Business Class)

Kuala Lumpur: $135,000

Reykjavik: $0

Corporate Tax Rate (Income Tax and VAT) Kuala Lumpur: 25.0%

Reykjavik: 20.0%

Average Staff Turnover Rate (for SSC roles) Kuala Lumpur: 15.7%

Reykjavik: 13.0%

Annual Expatriate Employee Cost2

(3 expatriates at 2 X Icelandic employee cost)


Reykjavik: $0

Setup Costs (Assumptions for Travel, Hiring, etc.) Kuala Lumpur: $1,500,000

Reykjavik: $800,000

Revenue and Cost Growth Rate and Discount Rate3 Growth Rate: 3.0%

Discount Rate: 7.7%

Annual Revenue (Assumption) $3,250,000

Sources:

1. Kayak.com

2. “Expatriate Pay – Keeping Up with the Changing Paradigm.” ECA International, 2012

3. “Cost of Capital by Sector (US),” NYU Stern, 2015


Icelandic Company - Captive SSC: Kuala Lumpur, Malaysia

0 1 2 3 4 5

2015 2016 2017 2018 2019 2020

Revenue

Income $0 $3,250,000 $3,347,500 $3,447,925 $3,551,363 $3,657,904

Total Revenue $0 $3,250,000 $3,347,500 $3,447,925 $3,551,363 $3,657,904

Taxes

Taxes

Corporate Income Tax $568,766 $585,829 $603,404 $621,506 $640,151

Value Added Tax $0 $0 $0 $0 $0

Total Taxes $0 $568,766 $585,829 $603,404 $621,506 $640,151

Recurring Costs

Labor

Salary/Wages & Employer Contrib. $928,112 $607,082 $625,294 $644,053 $663,375 $683,276

Turnover $15,700 $16,171 $16,656 $17,156 $17,670 $18,201

Real Estate / Facilities

Real Estate (Rental Property) $206,440 $212,633 $219,012 $225,583 $232,350 $239,321

Other

Management Travel $135,000 $139,050 $143,222 $147,518 $151,944 $156,502

Total Recurring Costs $1,285,252 $974,936 $1,004,184 $1,034,310 $1,065,339 $1,097,299

Implementation Costs

One-time Costs $1,500,000

Total Implementation Costs $1,500,000 $0 $0 $0 $0 $0

Total Annual Costs $2,785,252 $1,543,702 $1,590,013 $1,637,714 $1,686,845 $1,737,450

Net Cash Flow ($2,785,252) $1,706,298 $1,757,487 $1,810,211 $1,864,518 $1,920,453

-2,785,252 $1,584,306 $1,515,168 $1,449,046 $1,385,810 $1,325,334

Cumulative Cash Flow ($2,785,252) ($1,078,954) $678,533 $2,488,744 $4,353,262 $6,273,715

0 0 1 1 1 1

5-Yr Net Present Value $4,474,412

5-Year Internal Rate of Return (IRR) 64%

Payback Period (Years) 1.6

Financial Evaluation: Kuala Lumpur, Malaysia


56


Icelandic Company - Captive SSC: Reykjavik, Iceland

0 1 2 3 4 5

2015 2016 2017 2018 2019 2020

Revenue

Income $0 $3,250,000 $3,347,500 $3,447,925 $3,551,363 $3,657,904

Total Revenue $0 $3,250,000 $3,347,500 $3,447,925 $3,551,363 $3,657,904

Taxes

Taxes



Total Taxes $0 $326,100 $335,883 $345,960 $356,338 $367,028

Recurring Costs

Labor

Salary/Wages & Employer Contrib. $1,411,300 $1,453,639 $1,497,248 $1,542,166 $1,588,431 $1,636,084

Turnover $12,700 $13,081 $13,473 $13,878 $14,294 $14,723



Other

Management Travel $0 $0 $0 $0 $0 $0

Total Recurring Costs $1,572,330 $1,619,500 $1,668,085 $1,718,127 $1,769,671 $1,822,761


One-time Costs $800,000

Total Implementation Costs $800,000 $0 $0 $0 $0 $0


Net Cash Flow ($2,372,330) $1,304,400 $1,343,532 $1,383,838 $1,425,353 $1,468,114

-2,372,330 1,211,142 1,158,288 1,107,741 1,059,399 1,013,167


0 0 1 1 1 1




Financial Evaluation: Reykjavik, Iceland


57


Financial Evaluation Summary


58

Financial Evaluation Summary:

Labor costs, taxes, and real estate costs are the most significant

elements of the financial analysis

Compared to Kuala Lumpur, Reykjavik has more competitive

commercial real estate prices


competitive labor rates

Given the significant advantages in the IRR and payback period,

Kuala Lumpur is a more competitive SSC destination than

Reykjavik




Labor (Yr 1) $1,453,639 $607,082

Real Estate (Yr 1) $152,780 $212,633

5-Yr NPV $3,177,408 $4,474,412

IRR 57% 64%



Business Case Summary and Takeaways


59

Business Case Summary

Optimal City: Kuala Lumpur, Malaysia

SSC Profile:

Multifunction SSC

Rental Space Size: 6,500 square feet

Employees: 25

.

Location Criteria Assessment:

Reykjavik has an advantage in real estate rental prices,

infrastructure, and logistics compared to Kuala Lumpur

Kuala Lumpur has strong advantages in labor costs, labor

supply, and economic stability

Financial Analysis (Reykjavik vs. Miami):

Labor costs, taxes, and real estate costs are the most

significant cost elements in the financial evaluation

Given Kuala Lumpur’s advantages in both labor costs the

SSC in Kuala Lumpur has a much greater IRR and

payback period than the operation in Reykjavik

Takeaways

Reykjavik is challenged by its relatively high labor rates

and limited labor supply

The limited opportunities for labor arbitrage and the ability

to scale up/scale down quickly due to the small labor force

are difficult factors for Iceland to overcome as a large SSC

destination

Business Case 2: Foreign Company Developing a SSC




61

Company Profile1

Company*: Tech Distribution, Inc. (TDI)

Business: IT Equipment and Services

Headquarters Location: New York, United

States

Number of Employees: 3,000

Annual Revenues: $4,000,000,000

Sources: 1. Inc.com/profile/Westcon-group

*An invented technology distribution and services company modeled after the New York-based company Westcon Group.


Introduction:

TDI, a U.S.-based company, is looking for the best location to establish a captive SSC

for F&A.

The priorities for TDI are to find a location that will help limit recurring costs of

operating the SSC as well as a location that has a strong supply of high-quality labor

to allow TDI to scale up and scale down quickly with seasonal demand.

Selection Process:

TDI’s site selection was comprised of a two-stage selection process. First, TDI

completed a location assessment that compared five plausible cities. The location

assessment used criteria that compared each city’s infrastructure, labor

supply/quality, geopolitical factors, labor costs, real estate costs, and tax rates.

Second, TDI conducted a financial assessment to compare the costs of starting and

operating the SSC between two of the cities.


One source of new SSCs is foreign companies that have an interest in developing new revenue streams through shared services offerings,

which would require the firm to set up an SSC.

This case represents a large American technology distribution and services company that has decided not to outsource its shared services

to another company and keep them captive. However, the decision the American company must make is to determine where to place its

shared services operations. The company must identify what locations can meet the demands of the company’s location criteria

assessment and which of those top locations are the most financially competitive.




62

SSC Specifications


.



Modern space

Rental Space

Urban environment


Labor Supply 28%

Labor Quality 26%

Labor Cost 16%

Location 15%

Risk 12%

Other 3%

The weights suggest that the critical location characteristics for the SSC are labor costs, labor supply,

and labor quality.


Reykjavik, Iceland Convenient location between Europe and North America

Kuala Lumpur, Malaysia Low labor costs, close to Asian operations

San Jose, Costa Rica Convenient time zone for U.S. operations

Miami, United States Convenient location, English-speaking population

Prague, Czech Republic Low labor costs




63

Methodology:

Step 1:





Step 2:








category.

Step 3:








ScoreNormalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

Score



2.0% Crime Rate 6.3 100.00 2.00 4.9 41.67 0.83 3.9 0.00 0.00 4.5 25.00 0.50 5.4 62.50 1.25

14.0% Labor Costs^ 56452 46.89 6.56 23576 100.00 14.00 53926 50.97 7.14 85480 0.00 0.00 32539 85.52 11.97




28.0% Labor Supply 0.00 0.00 0.00 0.90 100.00 28.00 0.48 53.57 15.00 0.62 69.41 19.43 0.56 61.87 17.32










3.0% Ease of Doing Business 12 93.42 2.80 18 85.53 2.57 83 0.00 0.00 7 100.00 3.00 44 51.32 1.54

52.53 67.73 32.82 61.10 61.51

Other



Geopolitical

Costs


Cultural

Infrastructure

Weights* Criteria






64

Kuala Lumpur has the best fit with TDI’s location selection criteria. Reykjavik’s competitiveness is

challenged by its low labor supply and high labor rates.

*100-point scale








Financial Assessment: Inputs and Assumptions


65


Annual Total Cost per Employee Kuala Lumpur: $23,576

Reykjavik: $56,452

Real Estate Costs ($/sq. ft.) Kuala Lumpur: $31.76

Reykjavik: $10.20

Annual Travel Costs from HQ (25 Round Trips – Airfare)1

(Business Class)


Reykjavik: $75,000

Corporate Tax Rate (Income Tax and VAT) Kuala Lumpur: 25.0%

Reykjavik: 20.0%

Average Staff Turnover Rate (for SSC roles) Kuala Lumpur: 15.7%

Reykjavik: 13.0%


(5 expatriates at 2 X U.S. benefits cost) $854,800

Setup Costs (100 Round Trips, Hiring, etc.)1

Assumed setup costs are the same in both cities based on

travel costs being lower to Reykjavik, but employee costs

and labor availability are advantages for Kuala Lumpur


Discount Rate: 7.7%


Sources:

1. Delta.com

2. “Expatriate Pay: Keeping Up with the Changing Paradigm”, ECA International

3. “Cost of Capital by Sector,” NYU Stern, 2015


Foreign Company - Captive SSC: Kuala Lumpur, Malaysia

0 1 2 3 4 5

2015 2016 2017 2018 2019 2020

Revenue

Income $0 $9,000,000 $9,270,000 $9,548,100 $9,834,543 $10,129,579

Total Revenue $0 $9,000,000 $9,270,000 $9,548,100 $9,834,543 $10,129,579

Taxes

Taxes

Corporate Income Tax $1,356,176 $1,396,862 $1,438,767 $1,481,930 $1,526,388


Total Taxes $0 $1,356,176 $1,396,862 $1,438,767 $1,481,930 $1,526,388

Recurring Costs

Labor


Turnover $62,800 $64,684 $66,625 $68,623 $70,682 $72,802



Other







Net Cash Flow ($5,825,960) $4,068,529 $4,190,585 $4,316,302 $4,445,791 $4,579,165

-5,825,960 $3,777,650 $3,612,794 $3,455,133 $3,304,352 $3,160,151

Cumulative Cash Flow ($5,825,960) ($1,757,431) $2,433,154 $6,749,456 $11,195,247 $15,774,412

0 0 1 1 1 1




Financial Evaluation: Kuala Lumpur, Malaysia


66


Foreign Company - Captive SSC: Reykjavik, Iceland

0 1 2 3 4 5

2015 2016 2017 2018 2019 2020

Revenue

Income $0 $9,000,000 $9,270,000 $9,548,100 $9,834,543 $10,129,579

Total Revenue $0 $9,000,000 $9,270,000 $9,548,100 $9,834,543 $10,129,579

Taxes

Taxes



Total Taxes $0 $312,861 $322,247 $331,915 $341,872 $352,128

Recurring Costs

Labor


Turnover $50,800 $52,324 $53,894 $55,511 $57,176 $58,891



Other







Net Cash Flow ($8,719,120) $1,251,445 $1,288,988 $1,327,658 $1,367,488 $1,408,513

-8,719,120 1,161,973 1,111,265 1,062,770 1,016,391 972,036

Cumulative Cash Flow ($8,719,120) ($7,467,675) ($6,178,686) ($4,851,028) ($3,483,540) ($2,075,028)

0 0 0 0 0 0

5-Yr Net Present Value -$3,394,686





67


Optimal Location Assessment


68




Compared to Kuala Lumpur, Reykjavik has more competitive

commercial real estate prices


competitive labor rates

Given the significant advantages in the tax and labor rates, Kuala

Lumpur offers a better IRR and shorter payback period




Labor (Yr 1) $6,695,000 $2,428,328

Real Estate (Yr 1) $611,120 $850,533

5-Yr NPV -$3,394,686 $11,484,119

IRR 10% 72%





69


Optimal City: Kuala Lumpur, Malaysia

SSC Profile:

F&A SSC


Employees: 100

.


Reykjavik has an advantage in real estate rental prices,

infrastructure, and logistics compared to Kuala Lumpur

Kuala Lumpur has strong advantages in labor costs, labor

supply, and economic stability



significant costs elements in the financial evaluation

Given Kuala Lumpur’s advantages in both labor costs the

SSC in Kuala Lumpur has a much greater IRR and

payback period than the operation in Reykjavik

Takeaways

Reykjavik is challenged by its relatively high labor rates

and limited labor supply

Financially, Reykjavik can be more competitive when

attracting local Icelandic companies than attracting

international firms considering offshoring their SSCs

Reykjavik is at a greater disadvantage with larger shared

services operations due to Reykjavik’s high labor costs

and small labor supply

The limited opportunities for labor arbitrage and the ability

to scale up/scale down quickly due to the small labor force

are difficult factors for Iceland to overcome as a large SSC

destination

Business Case 3: Icelandic Company Establishing New R&D

Outsourcing Offering



Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering

71

Company Profile



Firm






Introduction:

EEI, a Reykjavik-based company, is looking for the best location to establish a

geothermal R&D services center. The geothermal R&D service is a complex offering

that can be sold as an outsourcing offering.

The priorities for EEI are to find a location that has high-quality labor, reliable

infrastructure, and a competitive cost structure.

Selection Process:





financial assessment to compare the costs of starting and operating the R&D center

between three of the cities.


Companies leveraging their core competencies that use the unique resources in Iceland, like geothermal energy sources, can create

opportunities for new outsourcing offerings.

This case represents a growing Icelandic firm that is developing a new, renewable energy R&D facility. However, the decision the Icelandic

company must make is to determine where to place the R&D operation. The company must identify if Reykjavik, where EEI is

headquartered, can meet the demands of the company’s location criteria assessment and if an R&D center in Reykjavik can be financially

competitive with R&D centers in other top-rated cities identified in the location assessment.


company Mannvit.




72

SSC Specifications


.



Modern space

Rental Space

Urban environment

The weights suggest that critical location characteristics for the R&D engineering services center are

labor quality and location (including infrastructure).


Labor Supply 8%

Labor Quality 33%

Labor Cost 12%

Location 32%

Risk 11%

Other 2%


Reykjavik, Iceland Convenient location, high-quality labor

Kuala Lumpur, Malaysia Low labor costs

San Jose, Costa Rica Exposure to Latin American energy market

Miami, United States High-quality labor

Prague, Czech Republic Low labor costs, convenient European location


ScoreNormalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

ScoreScore

Normalized

Score

Weighted

Score



2.0% Crime Rate 6.3 100.00 2.00 4.9 41.67 0.83 3.9 0.00 0.00 4.5 25.00 0.50 5.4 62.50 1.25

6.0% Labor Costs^ 56452 46.89 2.81 23576 100.00 6.00 53926 50.97 3.06 85480 0.00 0.00 32539 85.52 5.13




8.0% Labor Supply 0.00 0.00 0.00 0.90 100.00 8.00 0.48 53.57 4.29 0.62 69.41 5.55 0.56 61.87 4.95










2.0% Ease of Doing Business^ 12 93.42 1.87 18 85.53 1.71 83 0.00 0.00 7 100.00 2.00 44 51.32 1.03

74.15 50.86 19.68 68.17 57.27

Other



Geopolitical

Costs


Cultural

Infrastructure

Weights* Criteria




73

Methodology:

Step 1:





Step 2:








category.

Step 3:












74

Reykjavik, Miami, and Prague have the best fit with EEI’s location selection criteria.







*100-point scale


Financial Evaluation: Inputs and Assumptions


75


Annual Total Cost per Employee

Miami: $85,480

Reykjavik: $56,452

Prague: $32,539

Real Estate Costs ($/sq. ft.)

Miami: $40.00

Reykjavik: $10.20

Prague: $29.76

Annual Travel Costs from HQ (15 Round Trips –

Airfare)1

(Business Class)

Miami: $45,000

Reykjavik: $0

Prague: $10,000

Corporate Tax Rate (Income Tax and VAT)

Miami: 41.0%

Reykjavik: 20.0%

Prague: 19.0%

Average Staff Turnover Rate (for SSC roles)

Miami: 2.4%

Reykjavik: 13.0%

Prague: 12.7%


(3 expatriates at 2 X Icelandic employee cost)

Miami: $338,712

Reykjavik: $0

Prague: $338,712

Setup Costs (Assumptions for Travel, Hiring, etc.)

Miami: $1,500,000

Reykjavik: $1,200,000

Prague: $1,500,000


Discount Rate: 7.7%


Sources: 1) Kayak.com; 2) www.eca-international.com; 3) Stern.NYU.edu

http://www.eca-international.com/


Icelandic Company Engineering R&D Center: Miami, Florida USA

0 1 2 3 4 5

2015 2016 2017 2018 2019 2020

Revenue

Income $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035

Total Revenue $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035

Taxes

Taxes



Total Taxes $0 $400,624 $412,643 $425,022 $437,772 $450,906

Recurring Costs

Labor


Turnover $2,400 $2,472 $2,546 $2,623 $2,701 $2,782



Other







Net Cash Flow ($4,423,112) $588,571 $606,228 $624,415 $643,147 $662,442

-4,423,112 $550,066 $529,503 $509,708 $490,654 $472,312

Cumulative Cash Flow ($4,423,112) ($3,834,541) ($3,228,313) ($2,603,898) ($1,960,751) ($1,298,310)

0 0 0 0 0 0

5-Yr Net Present Value ($1,870,869)



Financial Evaluation: Miami, United States


76


Icelandic Company Engineering R&D Center - Reykjavik, Iceland

0 1 2 3 4 5

2015 2016 2017 2018 2019 2020

Revenue

Income $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035

Total Revenue $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035

Taxes

Taxes



Total Taxes $0 $447,287 $460,705 $474,527 $488,762 $503,425

Recurring Costs

Labor


Turnover $12,700 $13,081 $13,473 $13,878 $14,294 $14,723



Other







Net Cash Flow ($3,212,200) $1,789,147 $1,842,822 $1,898,106 $1,955,049 $2,013,701

-3,212,200 1,672,100 1,609,592 1,549,420 1,491,498 1,435,741


0 0 1 1 1 1






77


Icelandic Company Engineering R&D Center: Prague, Czech Republic

0 1 2 3 4 5

2015 2016 2017 2018 2019 2020

Revenue

Income $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035

Total Revenue $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035

Taxes

Taxes



Total Taxes $0 $471,834 $485,989 $500,569 $515,586 $531,054

Recurring Costs

Labor


Turnover $12,700 $13,081 $13,473 $13,878 $14,294 $14,723



Other







Net Cash Flow ($2,972,487) $2,011,504 $2,071,849 $2,134,005 $2,198,025 $2,263,966

-2,972,487 $1,879,910 $1,809,633 $1,741,984 $1,676,863 $1,614,176

Cumulative Cash Flow ($2,972,487) ($960,983) $1,110,866 $3,244,871 $5,442,896 $7,706,861

0 0 1 1 1 1




Financial Evaluation: Prague, Czech Republic


78


Optimal Location Assessment


79




Reykjavik has the advantage in real estate costs

Miami has an advantage in labor turnover rates; however, it is a

minimal financial consideration

Prague’s labor rate advantage is the strongest advantage and is

the primary driver for the operation in Prague having the highest

IRR and shortest payback period



Reykjavik Miami Prague

Labor (Yr 1) $1,453,639 $2,549,983 $1,186,753

Real Estate (Yr 1) $235,046 $412,000 $306,528

5-Yr NPV $4,546,151 ($1,870,869) $5,750,079

IRR 58% 8% 70%

Payback Period 1.8 6.9 1.5




80


Optimal Cities: Prague or Reykjavik

SSC Profile:

Multifunction SSC


Employees: 25

.


Reykjavik has a strong advantage in political stability,

cultural acceptance, logistics/convenience, and

infrastructure

Icelandic location takes advantage of local talent and

expertise in renewable technologies

Most optimal cities: Reykjavik, Prague, and Miami



significant costs elements in the financial evaluation

Prague has a significant advantage in labor rates

compared to Miami and Reykjavik

Miami has an advantage in employee turnover rates

The opportunity for labor arbitrage in Prague is the major

advantage over Reykjavik and Miami

The IRR and payback period for the operation in Prague is

better than those for the Reykjavik and Miami operations

Takeaways

Reykjavik falls short on cost alone, but because of

Reykjavik’s significant advantage in specialized expertise,

Reykjavik wins over Prague

Appendix C: Summary of Interviews/List of External Business Contacts


Completed Interviews/List of External Business Contacts

Appendix C: Summary of Interviews/External Business Contacts

82

Company/Ministry Interviewee Title Interview Date

Post and Telecom Administration Mr. Birgisson Specialist, Analytics June 3, 2015

National Energy Authority Mr. Einarsson Senior Advisor June 3, 2015

KPMG – Business Consultant Mr. Olafsson Project Manager, Business Consultancy June 8, 2015

KPMG – Tax ImplicationsMr. Gudmundsson

Mr. Bjornsdottir

Partner, Tax

Partner, TaxJune 9, 2015

Attendus Ms. Jjaltadotti Partner June 9, 2015

Icelandair Mr. Thorbergsson Senior Vice President June 9, 2015

Skipti Mr. Oskarsson Manager Communications June 9, 2015

Ministry for Foreign Affairs Mr. Magnusson Director International Trade Negotiations June 10, 2015

Realtor Mr. Skulason June 10, 2015

Advania Mr. Jonsson Manager Business Development and Operations June 11, 2015

Hagvangur Mr. Briem Executive Search Consultant June 11, 2015

Actavis Ms. Magnusdottir Executive Director R&D Iceland June 11, 2015

Ministry of Industry and Innovation Mr. Thorgrimsson Director General June 12, 2015

Ossur Mr. Solvason CFO June 12, 2015

Meniga Mr. Ludviksson CEO June 12, 2015


Interview Takeaways


83

Company/Ministry Interviewee Title Key Takeaways

Post and Telecom

Administration

Mr. Birgisson Specialist,

Analytics

Three marine fiber cables connect to the United States, England, and

Denmark

Huge unused internet capacity on cables

Very reliable, “hardened” system protected from outages

Opportunities for Iceland: medical imaging, online gaming, data centers

Highly educated workforce, strong work ethic, problem solvers

National Energy Authority Mr. Einarsson Senior Advisor Capacity is two to three times the demand

Volcanic threats limited to unpopulated areas

Cool climate and energy resources good fit for data centers

77% of energy production used in aluminum and silicone production

KPMG – Business

Consultant

Mr. Olafsson Project Manager,

Business

Consultancy

Provides shared services (HR, IT) to small companies that can’t afford their

own SSC and large companies that need support with executive

compensation and IT

Companies in Iceland usually move shared services offshore

Very educated workforce, out-of-the-box thinkers

Poles moving to Iceland and taking the low paying jobs

KPMG – Tax Implications Mr. Gudmundsson

Mr. Bjornsdottir

Partner, Tax

Partner, Tax

CI Tax = 20%, VAT = 24%

Expatriate likely needs to apply for specialist permit

Tax incentives: R&D incentives, fixed tax rate, increased depreciation of

assets, complex factory incentives

Attendus Ms. Jjaltadotti Partner Provides HR outsourced services, complex, non-transactional work only

Outsources payroll and bookkeeping services

For a business to take on foreign clients, need scale to succeed


Interview Takeaways (Cont’d)

Appendix C: Summary of Interviews External Business Contacts

84


Icelandair Mr. Thorbergsson Senior Vice

President

Icelandair Group is the parent company of a commercial airliner and airline

services, hotel and hospitality management, and shared services provider

Provides HR and F&A shared services to 150 domestic and international

business, primarily Icelandic businesses or airline/hospitality industry

Outsources desktop services, in part, to a local company

Suggests focus on energy intensive industries

Shared services offerings from Iceland must be niche knowledge and very

specific (primarily service offerings, not shared services)

Very educated workforce

Weakness of Iceland is the lack of engineers and computer scientists

Skipti/Siminn Mr. Oskarsson Manager

Communications

Provides telecom and IT services

Captive shared services (communications, legal, and F&A)

Limited opportunity for it to offer shared services due to scale, also need

unique market advantage

Iceland’s core competencies: fisheries technology and management, energy

engineering, data centers

Ministry for Foreign

Affairs

Mr. Magnusson Director

International

Trade

Negotiations

Three primary trade agreements, similar to GATT and agreement with Faroe

Islands

Deeply integrated through EU agreement

Mode 4 – strict rules for permissions to work in Iceland

Realtor Mr. Skulason Residential housing available, apartments available on high end

Residential prices vary, but less than high-end U.S. prices, 7% interest rates

Commercial real estate prices low, availability high




85


Advania Mr. Jonsson Manager

Business

Development and

Operations

Provides IT services, IT equipment, IT shared services, and runs 10MW data

center

Shared services offerings are light on labor and most of the work can be

done in Iceland

Recommends shared services be very focused and catered to the consumer

Has difficulty finding diverse knowledge in technologies from Icelandic

workforce

Bandwidth in Iceland is abundant, but expensive

Hagvangur Mr. Briem Executive Search

Consultant

Provides recruiting and headhunting services

Workforce is flexible and willing to work hard

Marketing and finance professionals abundant; engineers and IT specialists

are limited

Actavis Ms. Magnusdottir Executive

Director R&D

Iceland

Provides international pharmaceutical research and drug approval

applications

Potential for shared services offerings; many departed employees are now

selling consultative services

Workforce is flexible, problem solvers

Ministry of Industry and

Innovation

Mr. Thorgrimsson Director General Workforce is highly educated and broad-minded, practical thinkers, globally

educated

Growing entrepreneurship scene

Nordic welfare state: capitalistic but free education and healthcare

Relationship with China is growing stronger

Iceland in strategic location and not a threat to any country

Core competencies in niches: fisheries, energy, oil and gas exploration




86


Ossur Mr. Solvason CFO Manufactures prosthetics

Has captive IT shared services in Iceland

Outsources transactional F&A services to a SSC in Poland

Labor pool for shared services in Iceland is too small, not cost competitive,

and does not view back office jobs highly

Polish labor with college education is half the cost of labor in Iceland

IT is a good fit for Iceland, since labor is half the cost of United

States/California

Niche functions can work: IT, fishing and food processing, IT development,

and pharmaceutical R&D

Meniga Mr. Ludviksson CEO Provides personal financial management software (PFM) similar to Quicken

Workforce very talented, but very small pool

Sales and marketing hard to do from Iceland; must build marketing closer to

market

Labor is not cheap, but less expensive than Boston and Silicon Valley

Needs from Promote Iceland: Bring expert advisors for start-ups, lobby for

regulatory changes, ease immigration permit restrictions

Kodi Mr. Thordarson Financial sector services and solutions provider

Financial products and services are sold in the Nordic countries

Universities in Iceland only graduate 100 – 150 computer science majors per

year

Little variation in programmers' salaries based on talent

Appendix D: SSC Outsource Providers Marketing Assessment


Marketing Assessment: SSC Outsource Providers

Appendix D: SSC Outsource Providers Marketing Assessment

88 Sources: 1. Accenture.com; 2. Capgemini.com; 3. Wipro.com; 4. Infosys.com; 5. TCS.com; 6. IBM.com

Accenture1

Capgemini2

Wipro3

Infosys4

TCS5

IBM6

Services Offered

Strategy services, digital

services, technology &

operations services (includes

BPO, shared services,

consultative services)

IT services, consulting, off-shore

engineering services,

BPO/shared services (F&A,

procurement, supply chain)

Business process services (F&A,

HR, procurement, legal,

analytics, CRM, sales &

marketing, tech solutions),

project engineering, IT services,

asset management, analytics

IT services, business services,

outsourcing services (IT

application outsourcing, BPO,

customer service, F&A, HR,

procurement)

Supply chain analytics,

engineering services, IT

managed services (cloud

computing, servers, etc.)

BPO (HR, procurement,

recruitment, F&A, supply chain,

customer care, marketing)

Packaged Solutions, One-Off, Both? One-Off One-Off / Both One-Off One-Off / Both One-Off One-Off / Both

Description of Solution/Package

Advertised as individual

solutions and geared more

toward business process

outsourcing (BPO)

Advertised as discrete

BPO/shared service offerings;

however, describes as suite of

available services

Promotes discrete offerings in

BPO/shared services, IT, asset

management & analytics

"We combine engineering,

supply chain, and BPO

capabilities to expand our role"

Promoted as discrete offerings

in IT and consulting solutions

Advertised as a set of services

that IBM can support

Marketing Sales Line

Global reach & scale, deep

industry expertise, long-term

experience

Expanded capabilities, top-

notch talent, and powerful

analytics

Multiple, global Fortune 500

clients

Over 8000 engineers to support

the entire lifecycle of offering

-Engineering Services: reduced

cost and improved agility

- Consulting Services:

commitment to clients,

expertise, and global network of

innovation and delivery centers

Higher quality of services,

worldwide scale, and localized

expertise

Market Discriminators

-Quantity and convenience of

locations

- Labor force: retention rate,

quality of training

- R&D Services: Reduced cost,

increased speed to market,

improved performance

- Rated as top 3 F&A provider

- Number of employees focused

on a particular function/industry

- Experience level (e.g.: Dollars

of procurement transactions

managed each year)

- Experience with large, global

clients

- Focused industry expertise

- Global Locations in 11

countries and supports all

languages

- Standardized, global services

- BPO: Reduces costs

- Speeds up time to market

- Engineering Services: faster to

market, faster innovation,

improves operational

efficiencies

- Talented employees (well

trained)

- Analytics capabilities and

analytics driven methodologies

- Geographic breadth

Where are solutions located?

- 16 global F&A centers

- 5 global HR centers: Bangalore,

Dalian, Mumbai, & San Antonio

- Life sciences R&D centers:

India, China, Philippines, &

Europe

- Engineering Services: 800

Engineers & 42,000 consultants

in India

- BPO Center in Bangalore:

Global Research Center,

Analytics, F&A Operations, Data

Management, Procurement

Operations

- 40 global locations, 11

countries, 40+ languages

- F&A Centers: India, China,

Brazil, Mexico, Philippines,

Czech Republic, Poland

- BPO Centers: India, Poland,

Costa Rica, Brazil, Mexico, USA,

China, Philippines, Australia,

Czech Republic

- Tata Technologies in France &

Romania (engineering services)

- Other services in India,

Thailand, Mexico, US, Canada,

Singapore, Argentina, Uruguay,

Brazil, Chile, Columbia, Ecuador,

Peru

41 Global Delivery Centers: USA,

Canada, Uruguay, Brazil,

throughout East & West EU,

India, Africa, India, throughout

Asia, and Australia

Comments

- Leverages Bangalore because

of availability of talent and

concentration of other BPO

facilities in the city

More packaged solution

marketing than any other

company that was investigated

- Very IT focused and business

process focused compared to

the other companies

Appendix E: Responses to Promote Iceland’s Questions


Promote Iceland’s Follow-Up Questions


90

Question 1: Can you lay out the arguments for the recommendations provided on slide 30?

Question 2: Are the Nordic countries engaged in shared services?

Question 3: The Nordic countries and the United Kingdom have high labor costs, would Iceland be competitive with Norway, Sweden,

Denmark, Finland and the United Kingdom?

Question 4: The European Union has a free flow of labor from all 27 European Union countries. Does the opportunity to import talent

from other European Union countries help Iceland overcome its small talent pool?

Question 5: A liberal Expat legislation with speedy expedition of applications for foreign specialists and considerable tax benefits for up

to 5 years is on the way and will probably go through Parliament this fall. Does this impact the foreign direct investment (FDI)

opportunities?

Question 6: How important is Iceland’s location on the globe in regards to shared services opportunities?

Each of the questions are addressed on the following slides in Appendix E

Sources: PWC Tax Summaries, salaryexplorer.com


Question 1: Arguments for Recommendations?


91Sources: PWC Tax Summaries, salaryexplorer.com

Recommendation Rationale

Focus on Icelandic companies as shared services providers

Small labor supply challenges ability to attract foreign companies

Relatively high costs compared to traditional shared service

destinations

Icelandic companies can leverage unique competencies

supported by Icelandic geography and talent

Develop complex, low-transaction, niche services

High labor costs uncompetitive for highly transactional services

Niche services provide opportunity to provide value from unique

competencies

High labor costs and low labor supply (scalability challenges)

limit Iceland’s capability to supply a broad range of shared

services through a single provider

Target niche clients

Clients in niche markets are more likely to see value of shared

services offerings from Icelandic companies with strong

experience in that same niche market

Recruiting foreign shared services companies will be challenging –

focus on developing local, Icelandic companies

The top three reasons companies offshore shared services

centers are labor cost, labor talent, and labor availability

Iceland’s labor availability will make recruitment of foreign

companies challenging (need readily available talent)

Target small-to-medium scale shared services providers Iceland’s labor supply is very limited compared to the recruitment

needs of a large-scale shared services operation

Target small-to-medium sized clients for shared services offerings

Large clients will likely seek broader set of service offerings than

those provided by niche suppliers

Cost pressures and competition are likely to be greater with

larger clients

Question 1: Can you lay out the arguments for the recommendations provided on slide 30?


Question 2: Nordic Countries with Shared Services?


92

The Nordic countries have attracted shared services and FDI investment – primarily

in IT services. IT labor supply is supporting this development

Sources: Fugro.com, LinkedIn, newsinenglish.com, runway.com, EY, HCLtech.com, Deloitte 2013 Shared Services Survey

Question 2: Are the Nordic countries engaged in shared services?

Examples of Shared Services in the Nordic Countries

SSC Attractiveness: U.K, Sweden, & Finland in Top 10 locations

for new shared services centers

Captive Shared Services Centers:

Captive Shared Services in Norway:

• Fugro: payroll and engineering services

• Telenor: IT, payroll, HR and procurement

• Centers in Norway, Pakistan, and Bangladesh

• Moving much of Norway shared services to Asia

to reduce costs

• HCL Technologies: New IT service center in Oslo in

2015

Shared Service Providers in Nordic Countries:

HCL Technologies – 2015 put new IT service center in Oslo,

Norway

• Other Nordic Service Centers in Finland and Stavanger,

Norway

CGI – IT outsourcing – Sweden, Finland, Norway, France, UK,

Portugal, Spain, Canada, US, Brazil, and Australia

Shared Service Providers to the Nordic Countries:

Runway – All back-office services and call center to serve

Nordic countries

• Service centers in Spain, Latvia, Estonia, Lithuania, and

Ukraine

Finland Foreign Direct Investment Analysis

FDI Attractiveness:

Rated 9th in Europe for foreign direct investment projects in

2014

FDI Investment Areas:

IT research and development

Software sales and marketing

Data centers

• Microsoft, Yandex, Google, Huawei (since 2012)

Drivers for FDI:

Trained and available labor force

• 2011 Nokia restructuring freed up large supply of IT

talent

Energy tax cuts for data centers

Strict data privacy protection laws

Impact to Finland:

2013 foreign direct investment projects: 108

Total jobs created: 648

Average jobs created per FDI: 6

• Many investments for IT sales and marketing offices,

which provide few jobs per investment

• European Union average of jobs per investment was 42

in 2013


Question 3: Iceland Competitive with Nordic Countries?


93

Total Employer Cost:

Total employer cost includes salaries for relevant shared

services roles and mandatory social contributions/taxes

Iceland is competitive with the Nordic countries, USA, and

U.K. on employee cost

Finland and Iceland have most competitive employer costs of

the group

(Limited salary data available for Sweden and Denmark)

Corporate Tax Rates:

Iceland’s tax rates are competitive with European countries

Corporate income tax in Iceland is 20%, along with Finland

and U.K.

Iceland is cost competitive with the Nordic countries and the U.K.

Sources: PWC Tax Summaries, salaryexplorer.com

Question 3: The Nordic countries and the United Kingdom have high labor costs. Would Iceland be competitive with Norway, Sweden,

Denmark, Finland and the United Kingdom?


Question 4: Impact of Free Flow of Labor in EU?


94

Shared Service Provider Expectations:

Shared service providers expect readily available labor in the

country

Effect of EU Free Flow of Labor on Iceland’s Competitiveness:

Free flow of talent in European Union would not likely change

companies’ perspectives on Iceland’s small labor pool

Question 4: The European Union has a free flow of labor from all 27 European Union countries. Does the opportunity to import talent

from other European Union countries help Iceland overcome its small talent pool?


Question 5: Impact of Expat Legislation in Iceland?


95

Impact of Expat Legislation on FDI and shared services in Iceland:

Benefit to recruitment of new shared services centers may be limited

Expat legislation would not likely be enough to overcome the limited labor

supply in Iceland – Expats would be an expensive alternative to local labor

Sources: United Nations Education, Scientific, and Cultural Organization

Question 5: A liberal Expat legislation with speedy expedition of applications for foreign specialists and considerable tax benefits for up

to 5 years are on the way and will probably go through Parliament this fall. Does this impact the foreign direct investment (FDI)

opportunities?


Question 6: Impact of Iceland’s Location?


96

Impact of Iceland’s Location

According to the 277 companies in Deloitte’s Global Shared

Services Survey, companies’ shared services centers tend to

be onshore or nearshore to the operations the centers serve

Regional Targets:

Iceland should target companies in the surrounding regions

Europe, Middle-East, and Africa (EMEA)

Eastern United States

Eastern Canada

Source: Deloitte 2013 Global Shared Services Survey ResultsSource: Google Maps

Source: Deloitte 2013 Global Shared Services Survey Results

Question 6: How important is Iceland’s location on the globe in regards to shared services opportunities?

From what countries are shared services centers

supporting India and Russia?

Appendix F: How to Improve Iceland’s Competitiveness


Improving Iceland’s Competitiveness for Shared Services

Appendix F: Promote Iceland’s Support of Local Industries

98

Recommendation Rationale

Increase tertiary graduates in computer science, information

technology, and engineering

Demand for shared services in the Nordic countries is driven by

demand for IT services

Educated talent in Iceland can provide complex IT and

engineering services that are less cost-sensitive than the highly

transactional shared services offerings

Would further support burgeoning data center industry

Ease Expat and immigration restrictions

Breadth of education and expertise limited due to limited labor

supply

Would improve ability for industry specialists to support local

Icelandic companies and operations

Could support growth of labor supply

Promote quality of living and geological stability of Iceland

Perception of cold climate and volcanic activity may pose a

challenge when recruiting foreign direct investment

Iceland is rated in top-10 for quality of life in OECD’s Better Life

Index

Iceland has a relatively temperate climate for it’s latitudinal

location

Iceland has the lowest natural disaster occurrence of the

benchmark countries

Appendix G: Promote Iceland’s Support of Local Industries


Recommendations for Promote Iceland

Conduct focus groups with representatives from companies successfully selling services outside of Iceland to

￭ Determine services for which there is a market

￭ That Icelandic companies can most likely be successful providing

￭ Build a coalition to increase sales of existing services and expand sales of services by all Icelandic companies

Make a list of Icelandic companies with services that are in demand by companies outside of Iceland. Subdivide this list into

￭ Companies currently providing services outside Iceland

￭ Companies that have potential but are operating only in Iceland.

Share this report with Icelandic companies providing products and services that have potential for sales to other countries.

Examples include

￭ IT desktop support

￭ Application development and maintenance

￭ Data center hosting and management

￭ Geothermal engineering

￭ Hydro-electric engineering

￭ Pharmaceutical dossier compilation for FDA and other regulatory authority approvals

￭ Others

Analyze all companies to determine their strengths and potential for expanding existing services

Leverage existing customers of Icelandic companies to sell Icelandic companies’ potential

￭ Develop marketing campaigns for target markets that use testimonials from these companies

￭ Coordinate with relevant industry conference organizers to showcase presentations of customers using Icelandic company services

Develop an incubator capability for companies seeking to start new companies or market services in other countries. Identify

relevant experts such as professional international marking consultants who can help jump-start business.

Appendix G: Promote Iceland’s Support of Local Industries

100

iceland as a shared services destination

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